Tied to a drowning man

The interconnectedness of the world economy means that US economic woes will have severe effects on others.

The official US unemployment rate is 9.1 per cent, but the “real unemployment” rate is 22.6 per cent [GALLO/GETTY]

During the Tajik Civil War of the late 1990s, soldiers loyal to the central government found an ingeniously simple way to conserve bullets while massacring members of the Taliban-trained opposition movement. They tied their victims together with rope and chucked them into the Pyanj, the river that marks the border with Afghanistan. “As long as one of them couldn’t swim,” explained a survivor of that forgotten hangover of the Soviet collapse as he walked me to one of the promontories used for this act of genocide, “they all died”.

Such is the state of today’s integrated global economy.

Interdependence, liberal economists believe, furthers peace – a sort of economic mutual assured destruction. If China or the United States were to attack the other, the attacker would suffer grave consequences. But as the US economy deteriorates from the Lost Decade of the 2000s through the post-2008 meltdown into what is increasingly looking like Marx’s classic crisis of late-stage capitalism, internationalisation looks more like a suicide pact.

Like those Tajiks whose fates were linked by tightly-tied lengths of cheap rope, Europe, China and most of the rest of the world are bound to the United States, a nation that seems both unable to swim and unwilling to learn.

The collapse of the Soviet Union, a process that began in the 1970s and culminated with dissolution in 1991, had wide-ranging international implications. Russia became a mafia-run narco-state; millions perished of famine. Weakened Russian control of Central Asia, especially Afghanistan, set the stage for an emboldened and highly organised radical Islamist movement. Not least, it left the United States as the world’s last remaining superpower.

From an economic perspective, however, the effects were basically neutral. Coupled with its reliance on state-owned manufacturing industries to minimise dependence on foreign trade, the USSR’s use of a closed currency ensured that other countries were not significantly affected when the ruble went into a tailspin.

Partly due to its wild deficit spending on the gigantic military infrastructure it claimed was necessary to fight the Cold War – and then, after brief talk of a “peace dividend” during the 1990s, even more profligacy on the Global War on Terror – now the United States is, like the Soviet Union before it, staring down the barrel of economic apocalypse.

Cascading failures?

Unlike the Soviets, who had the good grace to implode pretty much alone, collapse of the United States could bring down the international capitalist system along with it.

Last week’s downgrading of sovereign US debt obligations by the major American ratings agency Standard & Poor’s could only have been triggered by a wildly dysfunctional pseudo-democracy. (A brazenly authoritarian regime like China, for example, would have simply eliminated a bureaucratic oddity like the US debt ceiling.)

Irony abounds. The deal struck between Democratic and Republican politicians, meant to avoid such a downgrading, came too late to assuage jittery financial markets. At that point, the US Treasury might as well have defaulted: the implications, in terms of higher interest rates paid to bond investors and indirectly by the American people, would have been the same. Like many such compromises, it made a bad situation worse by creating a precedent for the future dismantling of the last major social safety net programmes of the 1930s. The cure was worse than the disease.

Once again, the world is paying for the United States’ stupidity.

Beginning with the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994, the United States has aggressively accelerated the pace of globalisation in trade with numerous nations, including Jordan, Australia, Chile, Singapore, Bahrain, Morocco, Oman, Peru, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, Panama, Colombia and South Korea. Multilateral tariff-reduction schemes, such as the Transatlantic Free Trade Area with the European Union and the US-Middle East Free Trade Area, would intertwine whole continental zones with the US economy. Countless other nations have informal tariff-reduction and transit subsidy relationships to facilitate transnational trade with the United States.

Workers, especially in the developed nations, pay a high price for “free” trade agreements. Capital is fluid, moving effortlessly through borders in its quest for cheaper labor. People, on the other hand, are static. They cannot easily become citizens of or obtain work visas for nations that pay the highest wages. Even if employees were legally allowed to work anywhere in the world, most would stay where they are, trapped by ties of family, language, culture and poverty.

Globalisation has drastically tilted the balance of the struggle between labour and management in favour of trans-national corporations. In the US, the result has been five decades of falling median wages. (Total wages, on the other hand, have soared, with the rich and superrich raking in more than ever.) Easy credit provided a Band-Aid to rising income equality during the 1980s and 1990s. When the housing bubble burst and the credit markets froze in 2008, American consumers – who drive 70 per cent of economic activity – went from feeling poor to being poor. Un- and underemployed, they couldn’t earn money. Their credit lines cancelled and curtailed, they couldn’t borrow it. Forced to live within their increasingly limited means, the formerly middle class stopped spending.

And here we are. Gross domestic product would have to be at least 4 per cent on an annualised basis to start to bring down unemployment. The actual figure is 0.8.

This is hardly a situation in which the world wants to be a major stakeholder. Yet in addition to commerce, international currency arrangements have tied the fates of countless other nations’ economies to that of a United States over which they have little influence or control. The dollar is the official currency of seven other nations, including Ecuador, Panama, East Timor, the British Virgin Islands, and Palau. For example, it is pegged 1:1 to the Bahamian dollar, and both are accepted interchangeably. The dollar is the de facto currency of much of the Third World.

In addition, international lines of credit are usually dollar-denominated.

Dangerous dollar dependence

Central banks have become hopelessly addicted to the US dollar as a hedge against risk. “As emerging markets have integrated into the world economy, they have opened themselves up to foreign capital inflows and hence rendered themselves vulnerable to capital flight,” economics professor Moritz Schularick of the Free University of Berlin wrote in a February 2011 report for the Council on Foreign Relations.

“To insure against this risk, they have accumulated large stockpiles of dollar reserves to maintain liquidity and exchange-rate stability. In many respects, this has proved a wise policy. Countries with large reserve buffers weathered the financial storm of 2007–2009 relatively well. But precautionary reserve accumulation has a cost. It can make individual economies safer, but it contributes to macroeconomic imbalances and the mispricing of financial risks on a global level.”

Then there’s the bigger question, one placed in stark relief by S&P’s credit rating downgrade and the long-term outlook for the US economy (more on that below): What happens when the dollar goes all to hell?

Everywhere you look, there’s terror that the world, by tethering itself to the once-invincible US monolith, has handcuffed itself to a fat, drowning man—one who’s about to suffer another heart attack.

The central bank of China, the communist-in-name-only nation that holds $2tn in its foreign exchange reserves—more than two-thirds of the total—plus $1.2tn in US Treasury bonds and notes, is loudly demanding that the US cut its deficits.

The US national debt is now about $16.4tn.

Unlike the US, China poured billions in direct stimulus into the hands of its citizens and business during the 2008 global fiscal crisis. It was a prudent move, one that helped China recover relatively quickly. Now, however, they have exhausted that option – and the United States’ political wrangling, freewheeling spending and rampant militarism are threatening to drag the biggest economy in Asia into another recession.

The official Xinhua News Agency said: “The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.”

“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” added an editorial by the state-run New China News Agency, an official mouthpiece of the Chinese government as reported by The Los Angeles Times.

The statement was remarkable for its combination of candor, fear and anger.

“If no substantial cuts were made to the US’ gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.”

China also called for the US to “cure its addiction to debts” and “learn to live within its means.”

“This is going to get worse” for Venezuela, predicted president Hugo Chávez. “Venezuela has been preparing to divorce itself from the hegemonic world capitalist system, but we still are not divorced.”

Despite the downgrade, Treasury obligations continued to trade at similarly low levels. More irony: despite everything, the US remains a safe haven for investors seeking security during uncertain times … even when the uncertainties are caused by the US. “Where else are you going to put your money?” Joe Libin, a Salt Lake City mortgage banker, asked the Associated Press. “We’re growing anemically. We’ve got a debt problem. But at least we’re bobbing along. We’re best-looking of the ugly kids at the prom.”

Or, as George W. Bush might have said in a different context: You’re either with us or against us. In this case, however, everyone’s fate is attached to that of the US.

For the US (and thus the world) the big question is: what’s the way out of this economic mess?

At this point it’s hard to imagine a road back. As alcoholics know, the first step toward recovery is to acknowledge that you have a problem. But American officialdom won’t even admit that the US is in a recession, much less a depression.

The United States is in a depression

No question about it.

Unlike the Great Depression of 1929-1943, however, Americans are not only suffering from lower wages, but burdened with skyrocketing “real inflation” of over 10 per cent per annum. Again, the official inflation rate does not adequately consider the rising costs of housing, food or energy.

The Obama Administration pretends there’s no problem. It has been in office for two and half years, yet the president has never bothered to submit a jobs-creation bill to Congress. Faced with falling poll numbers and a reelection campaign next year, Obama’s “jobs offensive” entails calls for “extending the Social Security payroll tax break, investing in infrastructure and extending unemployment insurance”, according to The Associated Press. Those measures stand no chance of passage by the Republican-dominated Congress – which is fine, since they would fall woefully short of the trillions in direct stimulus needed to jumpstart the stalled economy anyway.

Where could economic growth come from?

Not from the US government.

In 2009 the Obama Administration might have pushed for a radical reorientation of the federal government’s priorities, shrinking the military, ending its foreign wars, and redirecting investment funds domestically. They instead chose to grease their banker buddies. Now the political landscape has worsened for the Democrats. “There is no political constituency fighting for direct job creation by government, either through federal aid to prevent layoffs in local government or through public works projects,” notes Stephen Foley of the UK Independent. “These ideas represent the fastest way to lower unemployment, but government is now out of the business of job creation. It is cuts, cuts, cuts all the way from here.”

Nor will the next boom come from corporations.

Companies aren’t hiring because there’s no demand. There’s no demand because companies aren’t hiring. So much for the magic of the marketplace.

Corporations are hoarding so much cash – cash that could drive recovery if it were invested in expanded and new lines of business – that even banks don’t want it anymore. Bank of New York Mellon Corp. took the extraordinary step of charging a fee on deposits of amounts over $50m. “Since the beginning of the year, US bank holdings of cash are up 83 per cent, or $890bn, to $1.98tn,” reports The Wall Street Journal. Banks have more money than they know what to do with. “Consumer loans, by contrast, have grown 0.2 per cent, or $1.7bn.”

During the recession of 1989-1993 there was this new Internet thing bubbling under the surface of the old manufacturing economy. Technology companies like Google and Apple would drive the boom of the 1990s, the greatest expansion in American – and thus the world’s – history.

Nothing like that is on the horizon. Some economists suggest that a new “green economy” that accompanies the switch from oil- and gas-based energy to solar and other alternative sources will fill the gap. But even their most generous estimates don’t come close to filling the hole left by 50 years of looting of ordinary citizens and workers by the giant corporations. Energy, after all, is mostly consumed by industrial production. There’s no need to switch to solar if no one makes enough to buy anything.

In 1992 I attended a forum at the University of California at Berkeley about NAFTA. The USSR had shut down months earlier. “Now capitalism will be everywhere. It will be undefeatable,” I remember thinking.

I was wrong. Nearly two decades later, as we’re seeing in Europe, globalisation looks less like a series of brilliant synergies than a two-edged sword. If one major capitalist economy tanks, they all do.

The system’s pervasiveness may prove to be its downfall.

Ted Rall is an American political cartoonist, columnist and author. His most recent book is The Anti-American Manifesto. His website is rall.com.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.

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