America has postponed the day of reckoning since the dollar crisis of the early 1970s when the soaring cost of killing Vietnamese in order to “save them,” along with other expenses of empire, became too high. The tab only rose when the US matched this imperial project with efforts to buy off its own poor through social spending designed to quell the democractic surge and rising expectations that followed World War II. The world balked at Americaâ€™s spending and central banks began cashing in dollars for the promised gold the American currency was backed by.
So the US ditched the dollar-gold standard in exchange for a purely fiat paper dollar standard.
The US managed a fantastic wealth transfer from the rest of the world to itself with this ploy. America barely managed to escape the run on its dollars, and the upsurge of democracy at home and abroad in the 1970s. But, the empire did strike back. The US jujitsued the crisis to its advantage by using a combination of experimentation, opportunism and planning. Rather than being sunk by high oil prices in the 1970s, the US Treasury Department turned this challenge to its advantage. It had no choice. By cutting a deal with the Saudis for weapons and secure investments for their oil wealth, the Saudis gave America a
monopoly: the paper dollar was elevated to the worldâ€™s currency of choice. This was not the market at work, but realpolitik statecraft to ensure dollar dominance, even though it would no longer be backed by gold. The nations of the world would have to pay dollars for Saudi oil and have to pay the US real goods for these paper dollars. The Saudis, in turn, and then other oil producers, would put their oil wealth in US banks and T-bills. The US further benefited by lending out this money to other nations and reaped huge interest payments ever since from the worldâ€™s poor countries.
Since the 1970s the US has merely prints dollars and T-bills and gets oil, minerals, manufactured goods, etc., in return. The only problem with this virtuous circle of paper for real goods is that at some point the rest of the world might refuse to play along and the dollar could collapse.
We are seeing the early signs of just that. The euro was designed to cut in on Americaâ€™s action, and Europeâ€™s gamble appears to be working. Indeed, one of Saddam Hussein’s cardinal sins was pricing oil in euros instead of dollars, for which if other oil producers followed suit would have been a major blow to the US. More menacingly, on Monday, Malaysian Prime Minister Mahathir Mohamad declared that in principle oil should be priced in euros. Iran too has made such noises in the past, but has cooled this rhetoric in light of recent US moves in Iraq and saber rattling directed at North Korea and Syria. Moreover, the Chinese, and other nations, are now hedging their bets by holding more of their currency reserves in euros, and not just dollars. That fiat money has to be paid for in real goods, and the less dollars nations held, the smaller the subsidy the US gets.
Rather than Weberian work ethics and other simple nostrums and bromides used to explain the “success” of the American economy in the 1990s–and even still today among a few Strangelovian types who declare the same even after the huge equity market losses of the new millennium–the dollar-standard racket allows the US to float a half-trillion dollar a year trade deficit with other countries, which the rest of the world pays for! Figure something like a global subsidy of 4k per year to every American. But of course, in this welfare scheme the goods are not distributed equally. The rich take the lionâ€™s share, while the rest can content themselves with inexpensive electronic toys and cheap consumer goodies that the global economy delivers to Americans as a substitute for quality health-care, education, or decent housing.
There is a major restructuring ahead on the horizon.
Indeed, it is already visible. So far the US has covered its prolifigate spending, in part, through the interest payments it extracts from the rest of the world, even though many poor nations have now already paid in interest many times the original amount of the principle on their loans. The Japanese pay for some of it by saving money and having it then invested in US T-bills. The Europeans, especially the Germans, who have also kept the US afloat by buying its government bonds, pay for another portion. And then the Chinese also help fill the gap by holding massive dollar reserves. Yet, all these states have their own problems and might need the resources they currently use to prop up the US economy and to pay for its massive deficit spending.
If this happens Americaâ€™s own leaders might administer conditionality, austerity, and the countless poisons dispensed to the rest of the world the past thirty years–largely with disastrous results–to the US with renewed vigor. To be sure, you can count on court intellectuals and pundits to tell us its all for the best and blame the victims for any ills that befall them. The elite brain trust at the US Treasury, and among the country clubs populated by American manufactures, have warned since the 1970s that American workers needed to get used to a lower living standards. Of course, this same public has also had to get used to the top 1% of the population ascending to heights of wealth and excess not scene since the Gilded Age and the 1920s. As usual, there would be increased socialism for the elite and capitalism for the rest.
Under this program the numbers of hours average Americans work has dramatically risen–surpassing even the Japanese. They made most Americans work harder and longer for less pay and benefits, and eliminated job security for good measure. Yet, up to now, Americans have only been gently going down hill in their decline. With a deflationary spiral and the collapse of the dollar standard, they will fall off a cliff as the global subsidy to the US is withdrawn if global investors lose confidence in the dollar.
The one out for the US might be to continue threatening Japan, Germany, and the Saudis with destruction of their US assets if they withdraw T-bill investments, or if the euro is advanced too far as an alternative currency to the US.
Yet, if global investors and central bank managers panic or if their own internal economic crises require them to pull out of US investments, Americans are in deep trouble.
This would be disastrous not only for Americans, of whom you can be sure capital would export as much of this crisis as possible onto the backs of average people in the US, but also for the rest of the world. An America in economic crisis would place the world in even greater danger of American military adventures by a government seeking both diversions from its domestic ills while it also sought means to shore up its empire.