"The symptoms that now beleaguer the US economy today are apparent."
Part II
The US economy was then backed by its enormous industrial-productive output. It stood as the dynamo, producing and manufacturing as many goods as China is today. The US holds nearly more than 70 percent of the world’s production and invariably stands as the world’s greatest importer of raw materials.
That goaded the US dollar the appetite to embark on unilateral monetary policies, unmindful it could backfire to promote instead de-industrialization and deglobalization. Of course, that policy was premised on the thinking that the US could control and dominate the world economy. Nonetheless, the symptom of bad things to come came earlier than anticipated. The symptoms that now beleaguer the US economy today are apparent:
First, the belief that allowing the dollar to revalue, the US could import as much goods at cheaper prices. The decoupling of the US dollar from the gold standard in effect abrogated altogether the 1946 Bretton-Woods Agreement. Its financial advisers have every reason to rely on the strength of its industrial output, it being the only industrial power untouched by the ravage of WWII.
Second, no sooner after the implementation of the Marshall Plan, the US dollar could already feel the tremors to its economy. In Europe, Germany and Italy stiffly competed with its allies like the UK and France. In Asia, Japan was leading the pack among the so-called economic tigers. The threat to its economy and financial position became apparent when it sought a counterbalance to maintain its existential dominance.
Third, no sooner after the US left the gold standard in 1971, the currencies of the world suffered a tailspin. The Philippines, which just experienced an economic shock in 1961 after Macapagal devalued the peso by calling it “floating rate”, had to scrap its anti-usury law to keep the remaining value of the peso viable in the currency market.
Fourth, the decoupling of the US dollar increased our exports which many could hardly understand. The system released the value of the dollar from $35 per ounce only to soar based on the US GDP forcing countries to devalue their currencies. In the meantime, local exporters welcomed the devaluation so much that it “increased” their exports in volume, but not in value.
Gradually, this resulted in a huge trade deficit as countries imported raw materials in exchange for their sparse manufacturing industry. It was this system of currency valuation that allowed the US to assert its short-lived dominance.
China, on the other hand, perfected the policy of import substitution to initially allow it to manufacture goods at cheaper price. It was during this period when Chinese products branded as “copycats” flooded the market. But soon after China improved the quality of its products and perfected their production and manufacturing technology, slowly they raised their price just enough to allow foreign investors to continue the practice of outsourcing. This explains why the US grudgingly allowed China to join the World Trade Organization and consequently allowed it to obtain an annual growth rate of 8 percent of their GDP.
Fifth, the decision to abandon the gold standard forced the Philippines to scrap its anti-usury law just to hold on to the remaining value of its currency. The policy resulted in the removal of the restriction, viz interest rate on loan. The policy was initially welcomed by exporters unmindful that the mechanism of floating rate would result in the bloating of the country’s trade deficit. The country suffered perennial trade imbalance such that development projects lagged behind schedule. It was during this period when the country was truly mired in debt.
Most devastatingly, the devaluation of the peso compelled the country to increase the minimum wage because the depreciating value of the peso affected the country’s cost of living and the prices of basic commodities. Thus, from P2 : 1 USD, it jumped to P6 : 1 USD until it settled at P8 : 1 USD.
Sixth, lending countries equally tightened their grip on debtor states due to lack of foreign exchange to settle their loan obligation. Many had to seek moratorium or enact laws to allow foreign ownership and/or partnership to erstwhile nationalized corporations.
Seventh, the decoupling of the US dollar from gold made it the de facto reserve currency of the world. This led financial institutions to demand from borrowing countries to agree on a system of currency exchange rate adjustment (CERA) to pay the loan based on the current value of the dollar. This is on top of the interest rate embedded in the flexible exchange rate system.
Consequently, many debtor countries defaulted in their payment. The effect was catastrophic to their economies for while they were fighting to stave off high interest rate, they were equally fighting to prevent the erosion in the value of their currency.
Eighth, many countries were forced to consign their production abroad to secure lower production costs. The US was entrapped into this anomaly of exaggerating the value of its own currency in a bid to maintain its status as the world’s number one economy. The system of consigning production to China for a short period proved to be lucrative and profitable. It resulted in the artificial surplus as exporting countries were competing to reduce their own cost of production to maintain their concession.
Despite the windfall, the US dollar continued to suffer from inflation. The price of goods and services continue to increase often against the cost of production. Inflation and trade deficit continue to hobble the US economy. The monetarists could not explain why despite the withering in production, the cost of wage and services continue to press the US economy. The monetarists suggested the printing of more dollars called “quantitative easing” to control interest rate.
In fact, the US has not experienced any increase in real wage since 1971. The effect was far devastating for the fact that prices kept on increasing while the economy was not experiencing any increase in production. Others call this “stagflation”, or one characterized by stagnation and inflation. Many could not understand because while profit and sale increased, production remained stagnant.
Ninth, outsourcing became the shortest route to de-industrialization because next to unemployment, industries and factories were dismantled only to be erected in countries that offer lower production cost. Eventually, towns were reduced to depressed areas populated by homeless, addicts and violent people who could not afford to pay for their rent and depend solely on welfare.
To keep the US economy moving, the monetarist suggested the idea of pumping in more money into the market. It was a prosaic economy the US created. The supposedly richest country of the world became a consumerist society importing almost anything it needs. It was destined to become poor because it abandoned the immutable Marxist economic formula that it is in production that wealth is produced.
An unprecedented number of homeless people mushroomed in America’s urban centers, its medical care system became the most expensive in the world, an educational system obtained only through usurious student loans, a standing army serving as palliative employer only to graduate as ruffians and gun-toting criminals in their own society, and most worrisome, a decaying infrastructure that reminds the people of their past military adventurism.