How the Economy Was Lost: The War of the Worlds (Counterpunch) (10 page)

Chapter 19: The Truth About High Oil Prices

H
ow to explain the oil price? Why is it so high? Are we
running out? Are supplies disrupted, or is the high price a reflection of oil company greed or OPEC greed? Are Hugo Chavez and the Saudis conspiring against us? In my opinion, the two biggest factors in oil’s high price are the weakness in the U.S. dollar’s exchange value and the liquidity that the Federal Reserve is pumping out.

The dollar is weak because of large trade and budget deficits, the closing of which is beyond American political will. As abuse wears out the U.S. dollar’s reserve currency role, sellers demand more dollars as a hedge against its declining exchange value and ultimate loss of reserve currency status.

In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts. Hedge funds and investment banks are restoring their impaired capital structures with profits made by speculating in highly leveraged oil future contracts, just as real estate speculators flipping contracts pushed up home prices. The oil futures bubble, too, will pop, hopefully before new derivatives are created on the basis of high oil prices.

There are other factors affecting the price of oil. The prospect of an Israeli/U.S. attack on Iran has increased current demand in order to build stocks against disruption. No one knows the consequence of such an ill-conceived act of aggression, and the uncertainty pushes up the price of oil as the entire Middle East could be engulfed in conflagration. However, storage facilities are limited, and the impact on price of larger inventories has a limit.

Saudi Oil Minister Ali al-Naimi recently stated, “There is no justification for the current rise in prices.” What the minister means is that there are no shortages or supply disruptions. He means no real reasons as distinct from speculative or psychological reasons.

The run up in oil price coincides with a period of heightened U.S. and Israeli military aggression in the Middle East. However, the biggest jump has been in the last 18 months.

When Bush invaded Iraq in 2003, the average price of oil that year was about $27 per barrel, or about $31 in inflation adjusted 2007 dollars. The price rose another $10 in 2004 to an average annual price of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006, and $4 in 2007 to $65. But in the last few months the price has more than doubled to about $135. It is difficult to explain a $70 jump in price in terms other than speculation.

Oil prices have been high in the past. Until 2008, the record monthly oil price was $104 in December 1979 (measured in December 2007 dollars). As recently as 1998 the real price of oil was lower than in 1946 when the nominal price of oil was $1.63 per barrel. During the Bush regime, the price of oil in 2007 dollars has risen from $27 to approximately $135.

Possibly, the rise in the oil price was held down, prior to the recent jump, by expectations that Democrats would eventually end the conflict and restrain Israel in the interest of Middle East peace and justice for the Palestinians.

Now that Obama has pledged allegiance to AIPAC and adopted Bush’s position toward Iran, the high oil price could be a forecast that U.S./Israeli policy is likely to result in substantial supply disruptions. Still, the recent Israeli statements that an attack on Iran was “inevitable” only jumped the oil price about $8.

Perhaps more difficult to understand than the high price of oil are the low U.S. long-term interest rates. U.S. interest rates are actually below the rate of inflation, to say nothing of the imperiled exchange value of the dollar. Economists who assume rational participants in rational markets cannot explain why lenders would indefinitely accept interest rates below the rate of inflation.

Of course, Americans don’t get real inflation numbers from their government and have not since the Consumer Price Index was rigged during the Clinton administration to hold down Social Security payments by denying retirees their full cost of living adjustments.

Understating inflation makes real GDP growth appear higher. If inflation were properly measured, the U.S. has probably experienced no real GDP growth in the 21st century.

Statistician John Williams reports that for decades political administrations have fiddled with the inflation and employment numbers to make themselves look slightly better. The cumulative effect has been to deprive these measurements of veracity.

By pumping out money in an effort to forestall recession and paper over balance sheet problems, the Federal Reserve is driving up commodity and food prices in general. Yet American real incomes are not growing. Even without jobs offshoring, U.S. economic policy has put the bulk of the population on a path to lower living standards.

The crisis that looms for the U.S. is the loss of world currency role. Once the dollar loses that role, the U.S. government will not be able to finance its operations by borrowing abroad, and foreigners will cease to finance the massive U.S. trade deficit. This crisis will eliminate the U.S. as a world power.

June 11, 2008

Chapter 20 : What Uncle Sam has to Tell His Creditors

A
ccording to all accounts the U.S. faces its worse
economic crisis since the Great Depression with $2 trillion in near-term financing needs for bailouts and economic stimulus. This is an enormous sum for any country, especially for one that is so heavily indebted that it is close to bankruptcy. If the money can’t be borrowed abroad, it will have to be printed—a policy that carries the implication of hyper-inflation.

In normal life a borrower who must appeal to creditors makes every effort to bring order to his financial affairs. But not the Bush regime.

The out-of-pocket costs of Bush’s Iraq war are about $600 billion at the present moment, a figure that increases by millions of dollars every hour.

In addition, there are the much larger future costs that have already been incurred, such as long-term care for the wounded and disabled U.S. soldiers, the replacement costs of the used up equipment, interest payments on the war debt, and the lost economic use of the resources and manpower squandered in war. Experts estimate that the already incurred out-of-pocket and future costs of Bush’s Iraq war to be $3 trillion and rising.

Even these costs might be small if an article by Richard LaMountain in the November 2008
Middle American News
is accurate. According to LaMountain, U.S. refugee programs for Iraqis displaced by the U.S. invasion and occupation could result in a large and growing Muslim U.S. population. These would be people whose lives were adversely impacted by the U.S. invasion of Iraq.

If the U.S. maintains its pro-Israeli stance against Arabs and Muslims generally, the implications of a growing Muslim population and a government obsessed with its “war on terror” are frightening for American civil liberty. In order to contain the potential terror that it will have imported, Washington would impose a total police state.

The war must also end in order that bankrupt Washington can borrow abroad the money it needs to bail out the U.S. economy.

The budget authority for the annual out-of-pocket costs of the war have been rising by $150 billion per year, an addition to the budget deficit that must be financed by borrowing abroad. A sane person might think that a government, such as the U.S., in need of foreign loans to save its economy, would jump at the chance to get its troops out of Iraq, where they are not wanted.

Instead the Bush regime has been struggling all year with the Iraq government in order to secure an agreement that lets the U.S. government continue to hemorrhage hundreds of billions of dollars by keeping American troops in Iraq.

The Korean War ended 55 years ago, and the U.S. still has troops in Korea.

Germany was defeated in 1945, and the U.S. still has troops in Germany.

A country that must go hat in hand to its creditors must first look to where costs can be cut. Annual military spending of $700 billion is certainly a good place to start.

But the U.S. government has far more hubris than intelligence and is on its way to being a failed state that has to print money to pay its bills.

It is not too late for the U.S. to save itself and the dollar standard, but it would require a rapid transition from arrogance to humility. The rest of the world can bring America down by not lending to us, in which case neither the trade nor budget deficits could be financed.

The world does not want to bring us down in this way. Our creditors would like to preserve as much as possible the values of their trillions in U.S. dollar assets. This is easier done if the dollar remains the reserve currency. Therefore, the U.S. government has an opportunity to go to its creditors with a plan.

This is what the plan must be: A declaration that repudiates the neoconservative goal to achieve U.S. hegemony over the world; a budget that reduces annual U.S. borrowing needs by several hundreds of billions by ending the Afghan and Iraq wars, by closing overseas military bases, and by cutting military spending; a new corporate tax system that brings back American jobs, manufacturing capability, and export potential by taxing U.S. corporations’ worldwide profits according to the value-added in the U.S.

Such a plan would demonstrate that the U.S. respects the sovereignty and aspirations of other countries and is willing to cooperate peacefully with others as an occupant of what the Russian president has termed “our common house.” Such a plan would demonstrate that the U.S. government has come to the realization that there is a limit to its borrowing capacity and the loans that it can service and is prepared to put first things first. Such a plan would show that the U.S. can curtail its unsustainable dependency on imports without erecting a wall of tariffs.

If the U.S. had the leadership to approach its creditors with such a plan, a sigh of relief would emit from the rest of the world. Many of the economic hardships that Americans currently face could be avoided, and the prospect of a hyper-inflationary depression would recede.

Such a favorable outcome requires that the government in Washington give up the delusion that Americans are an “indispensable people” who have a monopoly on virtue that gives them claim to hegemony over the world.

November 20, 2008

Chapter 21: America’s Third World Service Economy

T
he February, 2005, payroll jobs figures released last Friday
by the Bureau of Labor Statistics show a continuation of America’s descent into a Third World service economy.

The Bush administration cheered the creation of 229,000 private sector jobs (which still leaves Bush with a net private sector job loss during his reign). However, once we look at the details, the joy vanishes: 174,000 of the jobs, or 76 percent of the total, are in nontradable services.

Administrative and waste services (largely temporary help and employment services) account for 61,000 or 35 percent of the new service jobs. The remainder are accounted for by construction (30,000), retail trade (30,000), healthcare and social assistance (27,000), and waitresses and bar-tenders (27,000).

The U.S. has apparently lost the ability to create high productivity, high value-added jobs in tradable goods and services. The ladders of upward mobility are being dismantled by offshore production for home markets and outsourcing of knowledge jobs.

The BLS reports that the number of employed U.S. technical workers has fallen by 221,000 in six major computer and engineering job classifications during 2000–2004. The largest drops were suffered by computer programmers, followed by electrical and electronics engineers, computer scientists, and systems analysts.

So much for the new economy that economists promised would take the place of the lost manufacturing economy.

America’s remaining job market is domestic nontradable services. While India and China develop First World job markets, the U.S. labor market takes on the characteristics of a Third World work force. Only jobs that cannot be outsourced are growing.

The Bush economy has seen a loss of 2.8 million manufacturing jobs, a rise in the unemployment rate of 1.2 percentage points, and a stagnation in real weekly earnings.

How bad will things have to get before economists realize that outsourced jobs are not being replaced? Indeed, many American companies are ceasing to have any presence in the U.S. except for a sales force.

Cisco’s CEO, John Chambers, declared recently: “What we’re trying to do is outline an entire strategy of becoming a Chinese company.”

Cisco is establishing a new R&D center in Shanghai. The U.S. corporation manufactures $5 billion of products in China where it employs 10,000 people.

That is just one company, and there are many doing the same thing. The result is abandonment of the American work force by American corporations. Little wonder the Bush administration is the first administration in 70 years to have a net loss of private sector jobs.

If one U.S. company or a few move offshore, their profits improve and consumer prices are lower. However, when work in general moves offshore, American lose the incomes associated with the production of the goods they consume. Domestic production is turned into imports, with the result that America draws down its accumulated wealth in order to pay for the imports on which it is dependent.

The dollar’s value and status as reserve currency cannot forever stand the trade and budget deficits that are now part and parcel of America’s economic policy.

Unless there are major changes soon, America’s economic future is a Third World work force with a banana democracy’s worthless currency.

March 10, 2005

Chapter 22: China is not the Problem: Offshoring and Free Market Ideology

A
t a time when even the
Wall Street Journal
has disappeared
into the maw of a huge media conglomerate, the
New York Times
remains an independent newspaper. But it doesn’t show any independence in reporting or in thought.

The
Times
issued a mea culpa for letting its reporter, Judith Miller, misinform readers about Iraq, thus helping the neoconservatives set the stage for their invasion. Now the
Times’
reporting on Iran seems to be repeating the mistake. After the U.S. commits another act of naked aggression by bombing Iran, will the
Times
publish another mea culpa?

The
Times’
editorials also serve as conduits for propaganda. On August 13, a
Times
editorial jumped on China for “irresponsible threats” that threaten free trade. The
Times’
editorialists do not understand that the offshoring of American jobs, which the
Times
mistakenly thinks is free trade, is a far greater threat to America than a reminder from the Chinese, who are tired of U.S. bullying, that China is America’s banker.

Let’s briefly review the “China threat” and then turn to the real problem.

Members of the U.S. government believe, as do many Americans, that the Chinese currency is undervalued relative to the U.S. dollar and that this is the reason for America’s large trade deficit with China. Pressure continues to be applied to China to revalue its currency in order to reduce its trade advantage over goods made in the U.S.

The pressure put on China is misdirected. The exchange rate is not the main cause of the U.S. trade deficit with China. The costs of labor, regulation, and harassment are far lower in China, and U.S. corporations have offshored their production to China in order to benefit from these lower costs. When a company shifts its production from the U.S. to a foreign country, it transforms U.S. Gross Domestic Product (GDP) into imports. Every time a U.S. company offshores goods and services, it adds to the U.S. trade deficit.

Clearly, it is a mistake for the U.S. government and economists to think of the imbalance as if it were produced by Chinese companies underselling goods produced by U.S. companies in America. The imbalance is the result of U.S. companies producing their goods in China and selling them in America. Many believe the solution is to force China to revalue its currency, thereby driving up the prices of 70 percent of the goods on Wal-Mart shelves.

Mysteriously, members of the U.S. government believe that it would help U.S. consumers, who are as dependent on imported manufactured goods as they are on imported energy, to be charged higher prices.

China believes that the exchange rate is not the cause of U.S. offshoring and opposes any rapid change in its currency’s value. In a message issued in order to tell the U.S. to ease off the public bullying, China reminded Washington that the U.S. doesn’t hold all the cards.

The
New York Times
editorial expresses the concern that China’s “threat” will cause protectionist U.S. lawmakers to stick on tariffs and start a trade war. “Free trade, free market” economists rush to tell us how bad this would be for U.S. consumers: A tariff would raise the price of consumer goods.

The free market economists don’t tell us that dollar depreciation would have the same effect. Goods made in China would go up 30 percent in price if a 30 percent tariff was placed on them, and the goods would go up 30 percent in price if the value of the Chinese currency rises 30 percent against the dollar.

So, why all the fuss about tariffs?

The fuss about tariffs makes even less sense once one realizes that the purpose of tariffs is to protect domestically produced goods from cheaper imports. However, U.S. tariffs today would be imposed on the offshored production of U.S. firms. In the era of offshoring, corporations are not a constituency for tariffs.

Tariffs would benefit American labor, something that the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Republican Party would strongly oppose. A wage equalization tariff would wipe out much of the advantage of offshoring. Profits would come down, and with lower profits would come lower CEO compensation and shareholder returns. Obviously, the corporate interests and Wall Street do not want any tariffs.

The
New York Times
and “free trade” economists haven’t caught on, because they mistakenly think that offshoring is trade. In fact, offshoring is labor arbitrage. U.S. labor is simply removed from production functions that produce goods and services for U.S. markets and replaced with foreign labor. No trade is involved. Instead of being produced in America, U.S. brand names sold in America are produced in China.

It is not China’s fault that American corporations have so little regard for their employees and fellow citizens that they destroy their economic opportunities and give them to foreigners instead.

It is paradoxical that everyone is blaming China for the behavior of American firms. What is China supposed to do, close its borders to foreign capital?

When free market economists align, as they have done, with foreigners against American citizens, they destroy their credibility and the future of economic freedom. Recently the Independent Institute, with which I am associated, stressed that free market associations “have defended completely open immigration and free markets in labor,” emphasizing that 500 economists signed the Independent Institute’s “Open Letter” on Immigration in behalf of open immigration.

Such a policy is satisfying to some in its ideological purity. But what it means in practice is that the Americans, who are displaced in their professional and manufacturing jobs by offshoring and work visas for foreigners, also cannot find work in the unskilled and semi-skilled jobs taken over by illegal immigrants. A free market policy that gives the bird to American labor is not going to win acceptance by the population. Such a policy serves only the owners of capital and its senior managers.

Free market economists will dispute this conclusion. They claim that offshoring and unrestricted immigration provide consumers with cheaper prices in the market place. What the free market economists do not say is that offshoring and unrestricted immigration also provide U.S. citizens with lower incomes, fewer job opportunities, and less satisfying jobs. There is no evidence that consumer prices fall by more than incomes so that U.S. citizens can be said to benefit materially. The psychological experience of a citizen losing his career to a foreigner is alienating.

The free market economists ignore the fact that a country that offshores its production also offshores its jobs. It becomes dependent on goods and services made in foreign countries, but lacks sufficient export earnings with which to pay for them. A country whose workforce is being reallocated, under pressure of offshoring, to domestic services has nothing to trade for its imports. That is why the U.S. trade deficit has exploded to over $800 billion annually.

Among all the countries of the world, only the U.S. can get away with exploding trade deficits. The reason is that the U.S. inherited from Great Britain, exhausted by two world wars, the reserve currency role. To be the reserve currency country means that your currency is the accepted means of payment to settle international accounts. Countries pay their oil import bills in dollars and settle the deficits in their trade accounts in dollars.

The enormous and continuing U.S. deficits are wearing out the U.S. dollar as reserve currency. A time will come when the U.S. cannot pay for the imports, on which it has become ever more dependent, by flooding the world with ever more dollars.

Offshoring and free market ideology are turning the U.S. into a Third World country. According to the Bureau of Labor Statistics, one-quarter of all new U.S. jobs created between June 2006 and June 2007 were for waitresses and bartenders. Almost all of the net new U.S. jobs in the 21st century have been in domestic services.

Free market economists simply ignore the facts and proceed with their ideological justifications of open borders, a policy that is rapidly destroying the ladders of upward mobility for the U.S. population.

August 17, 2007