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The US economy: For whom the bell tolls

"The might of its industries"

 

Part I

The inevitable decline of the US dollar is the most awaited event of the 21st century. It may not be as cataclysmic as the wars we experienced, but the demise of the currency is the most traumatic for it could make or unmake nations. Some even view the US dollar as the ultimate substitute to war. Instead of violence, the US dollar has turned an entire population to penury and created unimaginable poverty. Poverty deprived men of their instinct to distinguish what is right what is wrong, hereby transforming violence to one of necessity.

Although Karl Marx centered his analysis on mankind’s entanglement with a system called capitalism, he never conceived that currency could dominate as capitalists would do. Today’s economists abandoned production as the basis of capitalism. They ignored that capitalism served as the soul to keep alive the value of currency to shape and determine the destiny to mankind since the signing of the Treaty of Westphalia in 1648.

Side by side with the evolution of the economic system was the rapid centralization of capital. Marx himself never thought that currency would become stateless just as capital was indelibly linked to property ownership. The ancient coins of the Roman Empire ruled the era of the slave economy. With the advent of the second industrialization, using technology and artificial intelligence as basic tools, the world is witnessing the loss of control of the dollar seeing how the once touted universal currency is losing its value.

In creating the World Bank and the IMF in the historic Bretton Woods Agreement in 1944, the bankers already conceived of establishing a world currency dominated by the US dollar. It made the gold the ledger in measuring its value. And because the US is in control of three-fourths of the world’s most precious metal, this technically made the US dollar a universal currency.

But the US could not print more money and have it circulated without tempering the value of gold then pegged at 1/35 per as ounce. Backed by its gold reserves and by the might of its industries as the leading manufacturing of the world, the two assets allowed the dollar to assert itself as the universal currency plus the fact that no country would challenge its position.

The US imposed restrictions on the use of gold or its hoarding. On that basis, the dollar became the substitute for gold. As the world’s economy advances in science and progress, the value of the dollar began to disproportionately increase against the value of gold which once theoretically remained at 1/35 per ounce, thus creating a dual problem of budget and trade deficit not to mention the expenditures caused by its involvement in wars.

Already suffering from massive stagflation, a situation in the economy where there is unemployment and low economic growth, President Nixon in 1970 decoupled the US dollar from the gold standard. That decision pushed the price of gold to 1/38 per ounce then to 1/42 until it went up to $120 per ounce, thus finally ending the long-held Bretton Woods system. Today the price of gold per ounce to the US dollar in the open market is $1,755.00.

The US dollar rode right on the value of the gold with economists entertaining the thought that as the price of gold increases, the value of the US dollar will automatically be lifted. On that premise, the US economy will remain powerful without the thought that the value of its currency is no longer dependent on its gold reserves. They unilaterally increased valued of the US dollar in accordance to its GDP while the value of the gold per ounce increased independently from its market value. This allowed the US to cheat the world just as the world was cheated on the value of the US dollar.

The new monetary policy outlined by President Nixon was wholly designed to make the dollar dominant and controlling. The new formula allowed it to soar against other currencies when the US economy still controlled 70 percent of the world’s total manufacturing output and created more than 50 percent of the world’s exports.

Since the ascent of the dollar as universal currency, the US has devised many ways to keep it afloat. This ranged from the most subtle practice of currency manipulation though banks arbitrarily make rules tantamount to usury, cheating and swindling. The US “monetarists” did not only have the power to compel sovereign states to devalue their currency but also to adjust interest rate to ease the flow of credit through quantitative easing or the printing of money.

First, lending countries led by the US insist on devaluing the currency of debtor-countries to increase their exports that often end up with them mired deeper in debt. This was the heyday when international financial institutions like the World Bank, the IMF, and the ADB became the debt trap of underdeveloped countries.

Second, the US then insisted in devaluing debtor-countries’ currency to “increase” their exports of raw materials. Underneath the US imposed quota to assure buyers of steady supply. This caused local farmers to reduce their productivity because of low price to their harvest.

Third, in 1978 Deng Xiao Ping opened up China’s economy. Americans as usual were the first to grab the opportunity of letting others do the work for them. It was tempting to every Chinese to take the opportunity where they receive an average daily wage of barely 1/10 the take home pay the average American worker would receive for his day’s work. This marked the beginning of outsourcing production to China.

On second thought, Americans claimed that China owes it its economic miracle. Instead of exporting human beings as what they did to ship Africans to the Americas to work as slaves, they were civilized enough to export their capital that made China today a towering threat to their own economy.

Fourth, as poverty continues to stalk underdeveloped economies, the US introduced the concept of import substitution to produce substandard but affordable products while it embarked on the production and manufacture of capital-intensive industries requiring technology and heavy equipment.

The US military industrial complex then began to sell to its client states military equipment. Before that, these weapons were sold exclusively to allies with proven loyalty. The US entered into arms sales with the Philippines deceptively dubbed as military assistance agreement. Many were outdated weapons done by “forced” sale. These weapons remain astronomically costly that they often derail developmental projects.

Fifth, after the US realized that industrialized allies, mostly those it defeated in the Second World War, were experiencing tremendous trade surplus, it demanded the revaluation of their currency to make US arms export competitive.

The revaluation of the yen pushed to unreasonable level the price of Japanese exports thus forcing them to outsource production to China. Japanese companies, however, exported everything that can be manufactured overseas including those which Americans treat as covered by trade secrets.

To escape the trade deficit caused by the steep revaluation of the yen, Japan has to provide credit to the US. It was a dual approach of outsourcing production to China while lending its surplus capital to the US. The Japanese started buying US treasury bonds which means that the US would from then on borrow directly from Japan. To give Japanese corporations guaranty, they were allowed to purchase prime real estate properties, and big and reputable US corporations. The bursting of the bubble in real estate property resulted in Japan’s long drawn recession while the US kept silent.

To avoid being sucked to an empty cone like the US economy, China allowed its enormous surplus capital take a win-win approach of allowing trade between the two countries to move on. Today China stands as the single biggest lender to the US, surpassing Japan in addition to the accumulating huge trade deficit with that country.

Sixth, to soften the transition from the gold standard to one of freefall currency, the IMF at the instigation of the US, created the Special Drawing Right or SDR as an international reserve asset to supplement the official reserves of member countries as freely usable currencies. SDR allocations means the exclusive club can provide liquidity and supplement among themselves reserves in times of global financial crisis.

The SDR value in terms of US dollar is determined daily on the spot exchange rates, London time. For a currency to be determined “freely usable” by the IMF, it has to be used to make payments for international transactions and widely traded in the principal exchange markets.

On October 1, 2016 the Chinese RMB joined the US dollar, euro, Japanese yen, and British pound sterling in the SDR basket of currency. They constituted the five members of the exclusive club. During the 2015 review, the Board also approved a new formula of assigning equal shares to the currency issuer’s exports and a composite financial indicator to determine the weights of currencies in the SDR basket. The weight and value per unit of the currency was measured as follows:

Currency weight / 2015 Number of units/Oct 2016

U.S. Dollar 41.73 0.58252

Euro 30.93 0.38671

Chinese Yuan 10.92 1.0174

Japanese Yen 8.33 11.900

Pound Sterling 8.09 0.085946

Since 1970 the ratio of world reserves had fallen by half. The SDR allocation to member countries was made in proportion to their quotas. Countries in need of foreign currency may obtain them from other central banks in exchange for SDRs.

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Topics: Rod Kapunan , US economy , US dollar , Karl Marx
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