[A-List] US fiscal crisis

[Anne Williamson]

Seth wrote:

>
> One question about the thread below.  Is the problem of capitalism in the
> U.S. caused by pinched profits or a result of a working class that can't
> absorb the surplus-value (SV) produced at home and abroad?  By the way, an
> economist friend has said that in the U.S. profits account for about
> one-fifth of the SV.
>
> What do you think?


Seth, I thought you - and perhaps others on the list - might find the
following piece
of interest, since it relates to your question to me above and the
importance of
national savings and other themes I mentioned in my response.  The analysis
is
certainly not Marxist, but the author's wry humor, I think, of universal
appeal.
Gary had a great one last week, "Alan Greenspan's Little Shop of Horrors,"
a "10+" on the snicker meter.  -Anne

************************************************************


                Gary North's REALITY CHECK

Issue 124                                    March 18, 2002


               ALAN GREENSPAN'S POT OF GREEN

     Yesterday was St. Patrick's Day.  When we think of
Irish myths, we think of little people dancing to the music
of tiny fiddles.  We think of rainbows leading to pots of
gold.  Above all, we think of green.

     Americans have imported and then re-worked these
myths, bringing them up to date.  The little people are
gone.  They stayed behind in Ireland.  The gold stayed with
them.  Here, rainbows lead to pots of green.

     Yes, there is a yellow brick road.  It leads to the
Emerald City of Oz, where the Wizard resides.  As soon as
you get inside the gates of the Emerald City, however, the
yellow bricks disappear.  Inside the Emerald City, yellow
is an unacceptable reminder of a barbarous relic.  Silver
slippers are not in fashion, either.  In the Emerald City,
one always wears green.  In the Emerald City, every day is
March 17.


THE RUN ON AMERICA'S GOLD BANK: 1958 UNTIL TODAY

     Prior to August 15, 1971, foreign central banks could
legally demand payment in gold for dollars they presented
to the Treasury.  The official exchange rate was fixed at
$35 per ounce.  From 1945 to 1957, central banks rarely
made the exchange.  A trade surplus had been America's
luxury, 1945-57.  West Europe was in no condition to
compete against us.  We loaned them the money, or else gave
it to them through the Marshall Plan.  Contrary to textbook
accounts, the Marshall Plan was a foreign aid program that
subsidized large-scale American export companies at the
expense of American taxpayers, whose money funded the
Europeans' purchase of American goods.

http://www.mises.org/freemarket_detail.asp?control=120&sortorder=authorlast

     In 1957, the U.S. government's official gold reserve
peaked in its number of ounces.  Gold began flowing out in
1958, the year the Eurodollar market began, and it kept
flowing out until 1971.  Gold's bargain price of $35/oz was
too much for central bankers to resist.  Central banks
started stacking up gold bars in their piles in the
depository at the Federal Reserve Bank of New York.
(Remember "Die Hard III"?)

     In the mid-1960's, gold began flowing out of the
United States' official stockpile of gold because of Lyndon
Johnson's decision to pay for his war on poverty and his
war in Vietnam without raising taxes officially.  He called
on the FED to buy U.S. debt, which it did.  The Chairman of
the FED at the time, William McChesney Martin, Jr., had
held this office since 1951.  In the late 1960's, he went
along to get along.  (Nixon replaced him with Arthur Burns
in 1970, and had tried to replace him in 1969.  He blamed
Martin's tight money policy in 1960 for his defeat by
Kennedy, which was probably an accurate assessment.)

     In early 1968, when gold's price in private markets
went above $35, central banks started selling their gold to
private buyers at prices higher than $35.  They would then
buy more gold from the Treasury at $35.  It was a sweet
deal for them.  A two-tiered gold price was imposed by
Johnson in March, 1968.  It failed to stop the outflow.  In
August, 1971, Nixon suspended gold redemption.

     Critics of the FED's monetary policy in the 1960's
pointed to this international "run on the gold bank" by
foreign central banks.  They declared that the cause was
monetary expansion.  An incipient hard-money movement began
to take shape in this period.  There were even a few
economists who sounded the warning: members of Walter
Spahr's Economists National Committee on Monetary Policy.
(In 1968, I was its newest and youngest member.)  But these
warnings went unheard in high places, or even middling
places.

     Critics of the hard-money camp adopted this slogan in
response: "You can't eat gold."  Quite true, as I admitted
at the time.  But I added this obvious point: you also
cannot eat Federal Reserve Notes.

     The FED has never wavered for very long in its
commitment to sacrifice its gold holdings for the sake of
expanding the monetary base.  There is increasing evidence
that the FED has quietly transferred most of its gold
holdings to the German Central bank, which has in turn
loaned the gold into the private markets.  By lending
physical gold rather than selling it, the central banks
have allowed themselves the right to keep on their books
the transferred gold, as if it had not been delivered to
the world's private gold market.

http://www.gata.org/gold_reserves.html

     Central bankers have had no more difficulty in lending
gold to the so-called bullion banks at about 1% per annum
than international money-center commercial bankers had
trouble lending money to Argentina's government.  The
bullion banks sold the borrowed gold, just as Argentina's
government spent the borrowed money.  The bullion banks'
difficulty will come in getting re-paid in the commodity
that was borrowed: in this case, gold bullion.

     Today, to keep from letting voters know what is
happening to their nations' gold holdings, central banks
lend the gold rather than sell it outright.  If James Turk
is correct, the game is still the same: a flow of U.S. gold
into foreign central banks as "swaps," and from there
through the bullion banks into the private markets.  This
time, however, there is no resistance from the FED.  In
fact, Turk believes, there is cooperation.


DIGITAL WEARING OF THE GREEN

     Since the beginning of 2002, the Adjusted Monetary
Base has risen at a rate of 15% per annum or higher.

http://www.stls.frb.org/docs/publications/usfd/page2.pdf

     The Federal Reserve System's policy of rapid money
expansion has produced mild economic recovery, matching the
mild recession of 2001, which was mitigated by the FED's
expansion of money at the time.  In January, business
inventories climbed by $2.1 billion, or 0.2%.  This was the
first increase in a year.  In the 4th quarter, business
inventories fell at an annual rate of $151 billion.

     Despite the recession of 2001, America's current
account deficit in the 4th quarter was $98.8 billion,
slightly above the $98.5 deficit of the 3rd quarter.  We
are seeing a steady expansion of the trade deficit in the
range of $400 billion a year, recession or no recession.
America's consumers are still buying foreign goods with
abandon.

     This is another way of saying that foreigners are
investing $400 billion a year in the United States.  This
can be viewed optimistically: foreigners like the prospects
of America's economic future.  They think the dollar will
keep rising in relations to other currencies.  They
continue to trade their goods for ownership of American
financial assets.  This seems to show confidence in the
dollar by America's trade partners.

     But this continuing trade deficit can also be viewed
pessimistically.  When the deficit finally ceases because
foreigners cease to buy American investment assets in
exchange for their exported goods, Americans will have sold
off a large portion of their capital assets to foreigners.
That portion of the net output of American capital that is
owned by foreigners will be repatriated by them to their
home countries.  Why would they do this?  To buy raw
materials.  They will finally decide to consume, as
investors eventually do.  They will enter the world's
markets for raw materials as consumers rather than
producers.

     Americans have ceased to save as individuals.  They
are net sellers of their own capital today, just as they
are net consumers of foreign goods.  They are trading their
inheritance for the trinkets supplied to them by foreign
producers.  They are in effect eating their seed corn.
They are sacrificing on the altar of present consumption
their personal financial futures as retirees.  In this
sense, they are becoming present-oriented.

     I cannot see this on-going development as anything but
pessimistic, long-term.  There was a prophecy to ancient
Israel that speaks to our situation as Americans.  It was a
"good news/bad news" prophecy.

     The LORD shall open unto thee his good treasure,
     the heaven to give the rain unto thy land in his
     season, and to bless all the work of thine hand:
     and thou shalt lend unto many nations, and thou
     shalt not borrow. And the LORD shall make thee
     the head, and not the tail; and thou shalt be
     above only, and thou shalt not be beneath; if
     that thou hearken unto the commandments of the
     LORD thy God, which I command thee this day, to
     observe and to do them (Deuteronomy 28:12-13).

     There was a parallel negative prophecy regarding
resident aliens:

     The stranger that is within thee shall get up
     above thee very high; and thou shalt come down
     very low. He shall lend to thee, and thou shalt
     not lend to him: he shall be the head, and thou
     shalt be the tail (Deuteronomy 28:43-44).

     Today, we don't need resident aliens.  Capital markets
are international.  An alien does not have to reside inside
the jurisdiction of America to be a lender to Americans.
All he has to do to secure a future economic return is to
make a purchase of a capital asset, or lend money to an
American debtor.  Consider this: foreigners now own almost
43% of U.S. Treasury-issued debt.

http://www.ustreas.gov/domfin/foreign.htm

     In 1998, the U. S. Trade Deficit Review Commission, an
official government commission, published a report on the
implications of the U.S. government's increasing reliance
on foreigners to fund the nation's official debt.  This
report drew no attention.  It laid out in no uncertain
terms where this development is leading.

     A central question, however, which should largely
     determine the substantive policy response, is
     whether it is in the interest of the
     international financial system for the United
     States to continue to run large if not growing
     current account deficits.  And more narrowly
     defined, because what the United States does will
     be critical to the future course of the system,
     is it in the U.S. interest to continue such large
     current account deficits?

     It is extraordinary how neglected or diverse the
     answers are to these fundamental questions.
     There has been little international discussion of
     the subject, while in the United States some
     leaders and experts claim that a large external
     deficit is a net benefit for the United States,
     others believe that it has a negative impact, and
     still others view it as of little significance
     one way or the other.  There are four largely
     independent reasons, however, which lead to the
     conclusion that continued large current account
     deficits could have substantial adverse impact on
     U.S. interests:

     1. Interest payments on the debt. The net
     external U.S. debt is rising toward $2 trillion
     by early in the next decade, which at 7 percent
     interest would equate to $140 billion per year
     indebt servicing, or about 1.5 percent of GDP, a
     significant cost for Americans now and in the
     future.

     2. Protectionist backlash.  A rising U.S. trade
     deficit will increase protectionist pressures
     which, however irrational, can have an adverse
     impact on the overall international economic
     system.

     3. Market volatility against the dollar.  The
     likelihood of a disruptive shift out of dollars
     by foreign holders of dollar-denominated
     financial assets grows as the volume of such
     assets increases rapidly and apparently without
     end.  The launching of the euro could generate
     additional speculative incentives to move in this
     direction.

      4. Foreign government leverage against the
     United States. During the 1990s, central banks
     have been tempted to buy rather than sell
     dollars, but this macroeconomic-based situation
     could change, in conjunction with a speculative
     run out of dollars as in (3), whereby some other
     governments with large dollar holdings -- China,
     for example -- could threaten the sale of
     official dollar holdings as leverage for foreign
     policy or other objectives.


http://www.ustdrc.gov/hearings/09sept99/ustrillion-preeg.pdf


A CURRENCY PLAY

     The reason why the dollar is stable or even rising in
relation to foreign currencies is that foreigners who
invest here keep thinking that it will outperform the
currency back home.  Foreign investors are not rushing to
buy stock market dividends of 1.5% or take advantage of a
federal funds rate of 1.75%.  They are buying (they hope)
the future appreciation of the dollar.

     Consider a Chinese exporter.  He is making a killing
on the exporting side of his business.  He can beat the
Japanese, Koreans, and surely the Europeans.  He can beat
the American manufacturer.  So, he gets a tremendous mark-
up on his sales.  He sells to rich Americans, not to poor
Chinese.  He thinks that he can stay even with his profits
by investing here.  This keeps him invested in the
financial markets here.  It is a form of risk-reduction
through currency diversification.

     But the money he invests here is not making much of a
return.  The dollar has performed well, but investments
inside the U.S. are not performing well.  The stock market
has fallen for two years straight.  Capital gains are gone.
Short-term interest rates have been cut by two-thirds.
This leaves U.S. bonds.  Their rates have held up.  And the
dollar has remained stable.

     If I were a Chinese exporter today, I would sell my
dollar-denominated investments, buy Chinese yuan in the
currency markets, and expand my operations at home.  I
could make a far higher rate of profit by expending my
business than by holding dollars in the United States.

     Why don't Chinese businessmen do this?  First, they
may fear that their own government is not reliable.  They
may think that it's safer to have money outside of China.
I can understand this motivation.  The rule of law of far
more entrenched here than in China.

     Second, there is still an aura of capitalism here.  To
invest in America is like investing in the mother country
of entrepreneurial capitalism.  Foreigners may think that
the faltering of the American stock market is temporary.
Most Americans think the same thing.

     Consider the future of capitalism.  There are some 1.2
billion Chinese.  They are now -- in certain regions,
anyway -- adopting private property and entrepreneurial
techniques.  The country is experiencing phenomenal
economic growth: 8% per annum, year after year.  The output
of the typical urban Chinese worker is rising, due to
capital flowing in from Taiwan, but mostly due to a freeing
up of China's economy.  Capitalism increases the rate of
capitalization.  These people are going to become more
productive.  This means that they will become consumers.
They are going to go from bicycles to motor scooters.

     A century ago, Europe was carving up coastal China int
regional trading spheres.  The Europeans saw China as this
huge market for European exports.  Surprise!  China now
sees the West as a giant prosperity sphere: a huge market
for China's exports.

     What is happening in China is also happening in India.
Indians speak English.  Their major problem is their
concept of time, which is still cyclical.  "Indian Standard
Time" is slow and unreliable.  Marxism made the Chinese
Western in their view of time.  India, like the Caribbean,
has only partially made the transition to a clock-run
society.  But this will change.  As India's population of a
billion people become more productive, they will become
competitors for the West's buyers.

     We should be able to see what is coming.  The pot of
green at the end of the rainbow will not look so alluring
as the home markets rise along with domestic productivity.
Americans will find themselves having to compete with
Asians for the world's natural resources.  The Asians will
nor be dependent on our lust to buy their goods.  They will
find large home markets because of capitalism's power of
wealth-creation.

     Americans are importing $400 billion a year, net, of
foreign products.  They are selling off ownership in
American industry.  The U.S. government is transferring
ownership of American debt to foreign holders.  This can go
on for many years, and has.  But the lure of American
financial markets is comparative.  Foreigner investors see
our capital markets are stable and reliable -- more immune
from government interference that their markets have been.
They are diversifying their holdings.

     But asset diversification comes at a price: lower net
returns.  As capitalism takes hold of foreign societies,
especially Asian societies, America's semi-monopoly of
reliable capital markets will find itself in competition.
The competitors will be able to offer far higher rates of
return on capital invested.

     Why?  Because when you are growing from a smaller
numerical base, you can sustain higher rates of growth than
you can with a larger numerical base.  It's easier to grow
from one to two than from a million to two million.  Today,
high rates of capital growth are available to domestic
producers in both China and India because the productivity
of capitalism is only just getting a toehold in those
gigantic societies.   Their capital base is still small.
Foreigners find it difficult to enter these family-
intertwined markets to participate.  The rate of return
stays high for those Asian insiders who are already part of
the system.  But, as capitalism spreads, and the rule of
law becomes a way of life, these Asian capital markets will
increase their productivity because capital flows in from
domestic and foreign investors.  The rate of return will
fall because risk will fall.  But output will remain high
because of the flow of capital.

     The American century cannot be maintained.  The secret
of America's prosperity has at last been discovered.  First
the Asian tigers learned after 1945.  Now mainland China
and India are learning.  World productivity will rise.  But
America's dominance cannot be maintained, any more than
Great Britain's 19th century dominance could be maintained.


CONCLUSION

     Growing world productivity will not impoverish all
Americans and Europeans.  West Europeans got richer after
1945 when Americans got even more rich.  Capitalism expands
wealth.  But it does not expand it equally.

     Americans should be realistic.  Asia's mainland
economies are going to grow at rates that dwarf America's
rates and, especially, Europe's rates.  Mainland Asia has
no unfunded, government-guaranteed pension systems to pay
off.  This alone gives Asian capitalists a huge advantage.
They suffer from heavy regulation, but this is being
reduced, not increased.  They are walking down the side of
regulatory mountain.  Americans are still climbing it.
(Just wait until Congress fixes the economy so that "there
will be no more Enrons.")

     Americans are going to pay more for raw materials.
Consider oil.  When all those Asian bicycles are traded in
for motor scooters, the demand for oil will rise.  That's
what the pipeline war in Afghanistan is all about:
supplying future demand for oil.  Call it "Pipelineistan."
See the two articles in the ASIAN TIMES (Jan. 25, 26).

http://atimes.com/c-asia/DA25Ag01.html

http://atimes.com/c-asia/DA26Ag01.html

     A March 7 article follows up on this theme.  It seems
that insurance companies are not willing to insure the
pipeline unless U.S. troops are there to protect it.

     The U.S. military deployment in Georgia is tied
     to the demands of the oil and insurance companies
     involved in the construction of the
     Baku-Tbilisi-Ceyhan pipeline, analysts say.

     According to experts, the insurance companies
     were demanding a security guarantee for the
     pipeline.

     Commenting that Georgia was the short-term route
     for Caspian oil reserves, while Afghanistan was
     the long-term route for energy reserves,
     authorities have stated that every step taken in
     these two states has been linked to oil-politics.

     The most important mission of the U.S. military
     deployment will be the enhancement of the
     security of the Baku-Tbilisi-Ceyhan route,
     analysts say, while the Armenian route for the
     pipeline has been completely shelved.

http://huknews.hoovers.com/fp.asp?layout=displaynews&doc_id=NR20020308670.2_
e94e0005c4fa1ba6

     This is taken from Hoover's UK site.  Hoover is one of
the most respected companies in the field of economic
reporting.  My only objection is the title of the article.
The headline guy missed a great opportunity.  It should
have been titled "Marching Through Georgia."  A follow-up
article should be titled, "The Long March."  American
troops with be in central Asia from now on.  It's about
terrorism, all right: terrorism against the long-planned
oil pipeline.

     Dollars won't help American consumers when two billion
Asians actively enter the world's markets for raw materials
-- not to sell finished goods to Americans for dollars, but
to consume at home.  Only one thing will allow Americans to
participate as equal competitors for the world's raw
materials: increasing productivity.  This will require
increases in thrift, liberty, and entrepreneurship.
America surely has the edge in entrepreneurship, but we are
steadily depleting our supply of the future-orientation
that is required to build a nation of voluntary savers.
Meanwhile, government regulations never decrease.

     There is no pot of gold at the end of the rainbow.
There will at best be a pot of green.

     You can't eat green.


* * * * * * * * * * * * * * * * * * * * * * * * * * * *