Harsh realities

Until October 16, the whole world (especially China and Japan – America’s biggest creditors) feared a likely default by the US on its debt repayment commitments. The last-minute deal between Congressional Republicans and Democrats that raises the limit on public borrowing until February 17, 2014 didn’t repair the damage done to the image of the US and its currency.

What no US president (except Eisenhower and Kennedy) understood as clearly as they should have done, was the fact that after the US dollar became the global reserve currency (courtesy America’s becoming the ‘winner’ of WW-II), it was obliged to focus on economic supremacy to ensure that its dollar remained the sole alternative to gold as the reserve backing currencies.

What the US nurtured instead were dreams of becoming the sole imperial power, but after its recent capitulation from Syria, it is no longer even the global policeman – a role that was suicidal, as proved by the fact that foreign invasions finally brought the US close to bankruptcy that has been avoided only temporarily; by February 17, 2014 nothing can be done to avoid a default.

On the part of successive US administrations, it was odd that although the monthly US trade deficit began oscillating in the $45bn-$70bn range they didn’t check this trend, which mandated ever-higher borrowing. But concern over this expanding gap didn’t find a reflection in measures to revive the domestic industry for effective import-substitution.

Now the US economy is virtually frozen – hardly the setting wherein tax revenue can rise, either via higher GDP or via increasing tax rates. Competitiveness of US industry doesn’t promise a rise in exports to increase its productivity, nor can it withstand a rise in tax rates. The only option that may help cut public expenditure is diluting America’s reckless imperial ambitions.

After the government-opposition agreement to lift the ceiling on public debt until February 17, Democratic Senator Harry Reid said, “I’m tired. Concluding this crisis is historic, but let us be honest: this was a pain inflicted on the nation for no good reason… We cannot make the same mistakes again.” Which mistakes he was referring to is unclear.

What brought the US close to defaulting on repaying its debt now was ‘expedient’ Republican opposition to healthcare reforms that most Western nations are guaranteed – reforms earlier passed by the US parliament. The fact is that the gradual build-up of a bankruptcy scenario owes itself to US invasions beginning 1952, that the erstwhile Congressmen and Senators didn’t oppose.

In his last Presidential address, Eisenhower had warned America about a ‘military-industrial complex’ – a union of defence contractors and the armed forces – becoming a threat to America’s future because an arms race with the USSR could deprive social sectors of crucially needed resources. Over time, adventures of this ‘complex’ made the US the world’s most indebted nation.

Tragically however, the US lawmakers never opposed America’s illegal invasion of foreign countries – the last being on Iraq on the charge of non-existent Weapons of Mass Destruction. And yet, the US insists on its style of democracy being copied everywhere. What it conveniently overlooks are events beginning with the My Lia massacre, to the Guantanamo Bay affair.

In his book “The conspiracy to destroy a destiny”, Matthew Smith recalls that in the early days of US involvement in Vietnam, the big issue was how to deal with President Ngo Dinh Diem. JFK ruled out murder. Yet, Diem was ruthlessly overthrown and killed. CIA’s “Executive Action” unit also launched the covert anti-Castro “Project Mongoose” without JFK’s permission.

Having rid the CIA of its top brass following disclosures about a CIA-Mafia alliance, JFK intended to dismantle the CIA. In a private conversation he had said that he planned to “tear the CIA into a thousand pieces and scatter it into the wind”. More recently, Republican presidential candidate in the 2012 elections Ron Paul too faulted the roles of CIA, FBI and other intelligence agencies.

He wanted these agencies to tamper their role to credibly dispel the negative propaganda about them in the global media, and stop indulging in acts contravening the parameters laid down by the constitution and the guidelines thereon provided by George Washington. But the tragedy is that no US president seems to have much clout over US intelligence agencies.

This isn’t the setting wherein America would care for countries that have adopted the US Dollar as their reserve currency. This is reflected by the fact that while being interviewed on CNN on October 17, the CEO of America’s Securities Industry & Financial Markets Association was far more concerned about the fallout of a US default on the domestic economy, far less about its global impact.

The continuing prospect of a US default has made policymakers in China and Japan – second and third largest global economies with investment of $1.28 trillion and $1.14 trillion respectively in US Treasury securities as of July 2013 – realise how vulnerable their own economic revival plans are to a US default; it could flatten the value of their investments in US Treasury securities.

All countries continuing to invest their exchange reserves in US Treasury securities must blame themselves for what they face. But given its foresight and its rapid rise as an economic power, China is pushing for internationalising the Renmimbi. After signing currency swap agreements with several Asian and Middle Eastern states, it has signed similar agreements with Britain and the ECB.

While that may secure its future, China’s investment in US securities remains vulnerable. Analysts predict that investors would now try to sell dollars for yuan, forcing a rapid rise in the yuan’s value, which would hurt China’s exports. Besides, China’s central bank may have to buy dollars when the US is unlikely to meet its obligations, which will hit China from another angle.

According to reports, China’s leadership will hold a key policy meeting in November, which may push for implementing a strategy for global acceptance of its currency as an alternative to the US dollar in international trade (and thus as a reserve currency). For achieving that end, China will also soften its regulations on inflow and outflow of foreign funds. Doesn’t that sound like the preface to a fresh Breton Woods arrangement?

For the US leadership the only option is to promote adoption of austerity for making its industry competitive again to secure its future. Had the Americans elected Ron Paul as their president, things could be different because he wanted America to become an economic (not military) power. Americans must also thank Russia for preventing a disastrous conflict in Syria that the US was heading for.