The relative decline of the US

Image: Adrien Olichon


The American failure in Afghanistan and the pressure on the dollar

The rapid collapse of Afghanistan's puppet government, once US troops withdrew from the war with the Taliban and left the country after 20 years, has been compared to the fall of Saigon, which occurred at the end of the 30-year "American" war against Afghanistan. Vietnamese people. Scenes of Afghans trying to board American planes at Kabul airport in order to escape the new government seem surprisingly familiar to those who remember Saigon's last days.

But isn't that a superficial resemblance? After all, the US occupation of Vietnam was far more costly, either as a share of US national production or in terms of US soldier lives, than the attempted “regime” change in Afghanistan. The Vietnam disaster caused the US government to run fiscal deficits for the first time since World War II. But, what is even more important, it meant a diversion of investment to the arms sectors, instead of allocating it to the productive sectors of civil goods, at a time when the profitability of capital had already begun to fall. As is well known, the Golden Age of investment and profitability peaked in the mid-1960s.

Source: Penn World Tables 10.0, author's calculations

Indeed, by the late 1960s, it was clear that the US could never win the war in Vietnam. However, the ruling elite continued, under Nixon and Kissinger, the warlike conflict for a few more years, spreading it to neighboring countries like Laos and Cambodia. It was also clear, at least a decade ago (if not from the beginning), that they could not win in Afghanistan.

But, at the official end of the Vietnam War, the economic consequences of this 30-year “intervention” pointed to an important turning point: the end of the Pax Americana and the end of the hegemonic position of US imperialism in the world economy. From then on, one can speak of a relative decline (in relation to other imperialist powers) of the US, with the rise of European countries, Japan, East Asia and more recently China. Despite the collapse of the Soviet Union in the late 1980s and early 1990s, the end of the “cold war” did not reverse or even stop this relative decline. The US can no longer rule the world on its own, and even with the help of a “coalition of the wills”, it cannot dictate a “world order”.

From an economic point of view, it all started before the fall of Saigon. As the profitability of US capital began to decline from the mid-1960s onwards, US manufacturing – and even many services – began to lose its competitive edge to rising Franco-German and Japanese capital. Well, then, the world economic order after the 2nd World War, within which the economic hegemony of the United States and its currency, the dollar, took place, began to collapse.

In fact, it's been 50 years since Nixon administration officials secretly met at Camp David to decide the fate of the international monetary system. In the previous 25 years, the value of the US dollar remained fixed at a quantum of gold (35 dollars per ounce) as a result of a post-war international agreement. In principle, any holder of dollars could convert them into a fixed amount of gold, which would then come out of US reserves. But in August 1971, President Nixon went on national television to announce that he had asked Treasury Secretary John Connally to "temporarily suspend the convertibility of the dollar into gold or other reserve assets."

It was the end of the so-called Bretton Woods agreement, so painfully negotiated by the allied powers, namely the USA and the United Kingdom, despite the interests of all other countries in the world. Conceived, jointly with the IMF, the World Bank and the UN, the agreement established a regime of fixed exchange rates; country currencies would be bought and sold for fixed amounts in US dollars. The US, in turn, would maintain the value of the dollar in terms of gold. No country could change its rates without the IMF's agreement.

But with Nixon's announcement, the fixed exchange rate regime was ended; it was the United States that abandoned it, and with it collapsed the entire Keynesian-style international monetary regime that had prevailed in the post-war period. It was no coincidence that the end of the Bretton Woods system coincided with the end of Keynesian macromanagement in the United States, as well as in other economies. This used to rely on the manipulation of government spending and taxes to maintain effective demand and thus growth.

The post-war economic boom, which was based on high profitability, relative full employment and strong productive investment, is over. It now faced a decline in the profitability of capital and investment growth, which culminated in the first post-war international crisis of 1974-75. Alongside this, a relative decline in American industry and exports was observed in comparison with competitors.

The United States failed to export more manufactured goods to Europe, Latin America, or Asia than it imported from them in various internationally traded commodities, such as oil from the Middle East and industrial products from Germany and Japan. In fact, that country saw its balance of trade show continuous deficits. The dollar was therefore seriously overvalued. If US capital, especially industrial capital, wanted to compete internationally, the value of the dollar against gold could no longer be kept fixed; on the contrary, the US needed to let its currency depreciate.

As early as 1959, the Belgian-American economist Robert Triffin predicted that the US could not continue to run trade deficits with other countries, export capital to invest abroad and still maintain a strong dollar: “if the United States continues to run deficits, its liabilities would far outstrip its ability to convert dollars into gold on demand and trigger a “gold and dollar crisis”.

And this is what happened. Under the gold dollar standard, imbalances in trade and capital flows had to be resolved through transfers of bullion. Up until 1953, during post-war reconstruction, the US gained gold to the tune of 12 million ounces, while Europe and Japan lost 35 million ounces (to finance their recovery). deliver gold to Europe and Japan. At the end of 1965, the latter together surpassed the former, for the first time in the post-war period, in terms of volumes of gold held in reserve. As a result, Europe and Japan began to accumulate huge dollar reserves that they could use to buy American assets. The global economy began to evolve against US interests.

Dollar reserves in Europe and Japan were now so large that if these countries bought gold with their dollars under the terms of the gold-dollar standard, they could quickly deplete US gold stocks. Private financial outflows (foreign investment) from the US averaged approximately 1,2% of GDP throughout the 1960s – which consisted, roughly speaking, of long-term investment abroad or, which is the same thing, direct foreign investment (FDI). As well as so-called portfolio outflows.

This served to finance US net exports of investment goods and to run a current account surplus – something that offset the outflow of dollars. In addition, about 0,4% of US GDP in surplus foreign investment was made available every year during the 1960s. This surplus was available to countries with current account deficits – France, Germany, Japan, etc. – who were willing to acquire US gold. They thus replenished their reserves or accumulated financial claims against the US – as shown on the right side of the following figure.

But throughout the 1960s, the US current account surplus gradually declined until, in the early 1970s, the current account started to register a deficit. The US started to export dollars globally not only because of foreign investment, but also because of excessive domestic spending, especially on imports. This occurred as domestic manufacturers lost ground to foreign competitors.

The US became dependent, for the first time since the 1890s, on foreign finance to sustain its domestic and foreign expenditures. Thus, US external accounts were affected less by flows of real goods and services and more by global demand for US financial assets and the liquidity they provided. In the 1980s, the US was accumulating net external liabilities, which reached 70% of GDP in 2020.

If a country's current account is permanently in deficit and increasingly dependent on foreign funds, its currency is vulnerable to high depreciations. This is the experience of almost every country in the world, from Argentina to Turkey, Zambia and even the UK.

However, this is not true for the US because the dollar is still the main international reserve currency – a residue left over from the Bretton Woods regime. Approximately 90% of global foreign exchange transactions require the dollar; approximately 40% of global trade outside the United States is invoiced and settled in dollars; and nearly 60% of US dollar bills circulate internationally as a global store of value and medium of exchange. More than 60% of global foreign exchange reserves held by central banks and foreign monetary authorities remain denominated in dollars. These indices have also not changed in recent years.

Countries with export surpluses relative to the United States, such as the European Union, Japan, China, Russia and oil countries in the Middle East, accumulate surpluses in dollars (mainly) and buy or hold assets abroad in dollars. Now, only the US treasury can “print” these dollars, resulting in a profit that is often called “seignorage”. So, despite the relative economic decline of US imperialism, the dollar remains supreme.

This fact, the dominance of the dollar as an international reserve currency, on the occasion of the end of the Bretton Woods agreement, in 1971, encouraged US Treasury Secretary John Connally to tell European Union finance ministers that “the dollar it's our currency, but it's your problem”. Indeed, this was one of the reasons why the European Union, led by Franco-German capital, decided to establish a currency union in the 1990s; the objective was to try to break the hegemony of the dollar in international trade and finance. This target, however, has had only limited success, as the euro's share of international reserves is around 20%. And this amount is mainly due to transactions within the European Union.

International competitors such as Russia and China often demand a new international financial order and, to that end, work aggressively to break the current dollar hegemony. The addition, in 2016, of the renminbi to the basket of currencies that make up the IMF's special drawing rights represented an important global recognition of the growing international use of the Chinese currency. There is also talk of rival countries launching digital currencies to compete with the dollar. But while the dollar-euro share of reserves has fallen in favor of the yen and the renminbi from 86% in 2014 to 82% now, alternative currencies still have a long way to go to displace the dollar.

That said, it should be noted the relative decline in the production of goods by the US, as well as the loss of competitiveness in the production of services in relation, first, to Europe, and then to Japan and East Asia and now to China, has worn down gradually the strength of the US dollar against other currencies. Moreover, this is reinforced by the fact that the supply of dollars exceeds the international demand. Since Nixon's momentous announcement in 1971, the value of the US dollar has fallen by 20% – this is perhaps a good gauge of the relative decline of the US economy.

The fall of the dollar, as seen in the graph above, was not in a straight line. In global recessions, the dollar always strengthens because the dollar is the safe haven for international capital. This is because the dollar is still the international reserve currency. In a crisis, investors often look to hold cash rather than productively investing it or even speculating in financial assets.

This effect is especially reinforced when US interest rates on dollar investments are high compared to interest rates in other currencies. To break the inflationary spiral of the late 1970s, Paul Volcker, then chairman of the Federal Reserve, deliberately raised interest rates. And that deepened the economic crisis of 1980-2. Faced with the crisis, investors flocked to high-yield dollar investments. Bankers loved it, but not American manufacturers and exporters, as well as countries with large debts in US dollars. The fall proved to be bad, as Volcker's policy began to compromise the world economy.

Finally, in 1985, at a meeting of central bankers and finance ministers from the five major economies at the time, held at the Plaza Hotel in New York, an agreement was reached to sell the dollar and buy other currencies in order to devalue the dollar. . The Plaza agreement was another milestone in the relative decline of US imperialism, as that country could no longer impose its domestic monetary policy on other countries. In any case, it ended up relenting and allowing the dollar to fall.

However, the dollar continues to dominate. Behold, it remains as the currency that does not lose value in economic crises. And this was seen in the dot-com crisis of 2001 and the emerging market commodity crisis, as well as the euro debt crisis of 2011-14.

The dollar's relative decline, however, will continue. The Afghan debacle is not a tipping point – the dollar actually strengthened on news of Kabul's collapse. Lo and behold, investors flocked to the “safe haven” of dollar-denominated assets. But the currency boom and fiscal stimulus now being applied by US authorities to revive the US economy will not solve the problem. After the small surge produced by the “sugar rush” of the “Biden economy”, the profitability of US capital will resume its decline and investment and production will prove weak. And if US inflation doesn't come down as well, the dollar will come under more pressure. Distorting a sentence by Leon Trotsky, it can be said that “the dollar may not be interested in the world economy, but the world is certainly interested in the dollar”.

*michael roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério FS Prado.

Originally published on the website The next recession.


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