(Based in part on a recent article by journalist and author Chris Hedges.)
This week marks the end of the dollar’s reign as the world’s reserve currency. It also, therefore, marks the start of a terrible period of economic and political decline in the United States, and signals the last gasp of the American imperium.
Barack Obama, and the criminal class on Wall Street, aided by a corporate media that continues to peddle fatuous gossip and trash talk as news (while we endure the greatest economic crisis in our history) may have fooled us, but the rest of the world knows we are bankrupt. And these nations are damned if they are going to lay out any more money to continue to prop up an inflated dollar and sustain massive US federal budget deficits, already swollen to over $2 trillion, which fund both our imperial expansion into Eurasia and our system of casino capitalism. They have us by the throat and they are about to tighten their grip.
Crucially important meetings were recently held in Yekaterinburg, Russia, which presaged America’s soon-to-be greatly reduced status. Attending the meetings were Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance, even as a silent observer.
This high level gathering was, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”
Why? Because it was the first formal step by our major trading partners to replace the dollar as the world’s reserve currency. And if they eventually succeed in negotiating such a transition, the dollar will dramatically plummet in value, the cost of our imports, including oil, will skyrocket, interest rates will climb and jobs will hemorrhage at a rate that will make the last few months look like boom times. State and federal services will be reduced or shut down for lack of funds. The United States will begin to resemble the Weimar Republic or Zimbabwe.
Obama, endowed by many with the qualities of a savior, will suddenly look pitiful, inept and weak. And the rage that has kindled a handful of shootings and hate crimes in the past few weeks will engulf vast segments of a disenfranchised and bewildered middle class, who will in all likelihood demand vengeance, radical change, order and moral renewal — which an array of proto-fascists, from the Christian right to the goons who disseminate hate talk on Fox News, will impose.
In his recent Financial Times article called “The Yekaterinburg Turning Point: De-Dollarization and the Ending of America’s Financial-Military Hegemony,” economist Michael Hudson writes, Yekaterinburg, Russia “may become known not only as the death place of the czars but of the American empire as well.”
Perhaps most significantly, China, Russia, India, Pakistan, and Iran are forming a financial and military arrangement that could enable them to force America out of Eurasia.
To understand exactly how all this could be done, first realize that the US balance-of-payments deficit is mainly military in origin — half of America’s discretionary spending is military. And since our deficit spending ends up in the hands of central banks around the world, those countries don’t have many choices other than to recycle the money by buying US government debt (i.e. loaning our government money), thereby supplying our government (primarily the Pentagon) with hundreds of billions of dollars the US would otherwise have to try and collect from American taxpayers, greatly reducing their purchasing power — at least to whatever extent the IRS succeeded in collecting. And so it is with these huge and continuing loans, that the Eurasian countries have been financing their own military encirclement by the US.
Plus, they have been providing us with these billions in loans that have no chance of ever being repaid! — at least not in full, and perhaps nowhere near in full.
Thus, Eurasian countries are literally paying for America’s military encirclement and potential aggression against them! Not surprisingly they want to stop doing this.
China, as Hudson points out, has already struck bilateral trade deals with Brazil and Malaysia to denominate their trade in Chinese currency rather than the dollar, pound or euro. Russia promises to begin trading in the ruble and local currencies. The governor of China’s central bank has openly called for the abandonment of the dollar as reserve currency. What the new system will be remains unclear, but the flight from the dollar has clearly begun. The goal, in the words of the Russian President, is to build a “multipolar world order” which will break the economic (and, by extension, military) domination by the United States. China is frantically spending its dollar reserves to buy factories, minerals and property around the world (including in the US) so it can unload its US currency. This is why Aluminum Corp. of China made so many major concessions in the attempt to salvage its $19.5 billion alliance with the Rio Tinto mining concern in Australia – it desperately needs to shed its dollars. China knows that these American dollars are going to be worthless in the not-very-distant future.
The architects of this new global arrangement realize that if they ‘break’ the dollar they also break America’s worldwide military domination, for our military spending cannot be sustained without this cycle of heavy US borrowing. The official US defense budget for fiscal year 2008 is $623 billion, and this is before one adds on things like nuclear research and the massively wasteful Strategic Defense Initiative (SDI) “star wars” boondoggle.
There are three components of our balance-of-payment deficit: 1) America imports way more than it exports — this is the trade component. 2) Wall Street and American corporations buy up foreign companies and build countless factories in lesser developed countries — this is the capital-investment-in-foreign-countries component. 3) The third and largest balance-of-payment deficit component, over the past 50 years, has been Pentagon-spending-abroad component. In fact, it has been military spending that has been responsible for the lion’s share of America’s balance-of-payments deficit over the last five decades.
So, in the process of funding our permanent war economy and paying for our hyperconsumption consumer pig-out (using mostly money borrowed from abroad), we end up flooding the world with the dollars we use to pay for all this. The foreign business recipients then turn these dollars over to their central banks in exchange for local currency that they can spend locally.
But this presents these central banks with a problem. If they don’t spend their US dollars in the United States (buying up US companies etc.), the exchange rate against the dollar goes up, thus penalizing exporters in places like China, i.e. penalizes them with a tough exchange rate, so that they don’t receive as much money for the stuff they sell us.
Bottom line: America must create new money without restraint — to buy an immense and growing number of imports, and also to pay for foreign investments, e.g. Boeing builds sections of their airplanes in China. (America’s buying huge amounts of foreign exports ensures that nations like China continue to buy our treasury bonds, providing our government with the operating revenue that allows it to spare American taxpayers the responsibility of assuming the full tax burden, thus keeping their spending on imported goods at a maximum.)
However, with the coming replacement of the dollar as the world’s reserve currency, it appears that this cycle will soon come to an end. And once the dollar no longer floods the world’s central banks, and no one buys our Treasury bonds, our empire will collapse.
Our profligate spending on the military (some $1 trillion/year when everything is counted) will be unsustainable. Why? Because then “we will have to finance our own military spending,” Hudson warns, and the only way to do that will be to sharply cut back wage rates, causing the class war to ramp up as never before.
And of course Wall Street and the power elite understand that, which is why they required that Bush and Obama provide them with many trillions of dollars, in the world’s greatest rip-off — so that they, the power elite, can have enough money to get through the coming financial and societal catastrophe in their usual royal comfort.
From the Financial Times, one more indication that a theft of unprecedented proportions may well have taken place and continues as we speak:
“The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight — or at least from the official statistics.
“A closer look at the data … suggests that both the current account deficit and the net debtor position of the US are even worse than officially reported. This can only mean that the need for a substantial depreciation of the dollar and/or a period of sub-par growth is even bigger than generally accepted.”
The size of the theft, as author and economic analyst James Kunstler sees it:
“The current mass delusion that will go down in history as the “green shoots fugue” can’t possibly bring the credit freak show back because the credit — i.e. money borrowed from the American future — was swindled away. Something like $14 trillion worth of nominal dollars is being sucked into a cosmic vortex never to be seen again. It was last seen in the spectral forms of so many collateralized debt obligations, credit default swaps, so-called structured investment vehicles and other now-obvious frauds. That giant sucking sound we hear means the process is still underway, and the “money” disappearing into yawning oblivion will out-pace any effort orchestrated by the Federal Reserve and the US Treasury to replace it with new “money” (or credit). Therefore there is no chance between heaven and hell that the pre-2008 suburban homesteading and shopping fiesta can ever come back. The American polity is simply tapped out, in all sectors, personal, corporate, and public.”
Finally, Chris Hedges predicts the ultimate consequences of all this:
“The cost of daily living, from buying food to getting medical care, will become difficult for all but a few as the dollar plunges. States and cities will see their pension funds drained and finally shut down. State and local governments will be forced to accelerate the selling off of infrastructure, including roads and transport, as ever more of our corporations and factories are put on the block as well. We will be increasingly charged by privatized utilities — think Enron — for what was once regulated and subsidized. (Some financially strapped cities have already sold off their parking meters, leading to a fourfold increase in the cost of parking!) As joblessness grows by leaps and bounds, foreclosures will multiply and real estate will soon be worth less than half its current value. The negative equity that already plagues 25% of American homes will expand to engulf nearly all property owners. It will be difficult to borrow and impossible to sell real estate unless we accept massive losses. There will be block after block of empty stores and boarded-up houses. There will be long lines at soup kitchens and many, many homeless. Our corporate-controlled media, already banal and trivial, will work overtime to anesthetize us with useless gossip, spectacle, sex, gratuitous violence, fear and tawdry junk politics. America will be composed of a large dispossessed underclass and a tiny empowered oligarchy that will run a ruthless and brutal system of neo-feudalism (if not complete fascism) from secure compounds. Those who resist will be silenced, many by force.
“We will pay a terrible price, and we will pay this price soon, for the gross malfeasance of our power elite.”