Paul Craig Roberts: Impending Destruction Of US Economy


Richard Moore

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Impending Destruction
Of The US Economy
By Paul Craig Roberts
29 November, 2007

Hubris and arrogance are too ensconced in Washington for policymakers to be 
aware of the economic policy trap in which they have placed the US economy. If 
the subprime mortgage meltdown is half as bad as predicted, low US interest 
rates will be required in order to contain the crisis. But if the dollar¹s 
plight is half as bad as predicted, high US interest rates will be required if 
foreigners are to continue to hold dollars and to finance US budget and trade 

Which will Washington sacrifice, the domestic financial system and over-extended
homeowners or its ability to finance deficits?

The answer seems obvious. Everything will be sacrificed in order to protect 
Washington¹s ability to borrow abroad. Without the ability to borrow abroad, 
Washington cannot conduct its wars of aggression, and Americans cannot continue 
to consume $800 billion dollars more each year than the economy produces.

A few years ago the euro was worth 85 cents. Today it is worth $1.48. This is an
enormous decline in the exchange value of the US dollar. Foreigners who finance 
the US budget and trade deficits have experienced a huge drop in the value of 
their dollar holdings. The interest rate on US Treasury bonds does not come 
close to compensating foreigners for the decline in the value of the dollar 
against other traded currencies. Investment returns from real estate and 
equities do not offset the losses from the decline in the dollar¹s value.

China holds over one trillion dollars, and Japan almost one trillion, in 
dollar-denominated assets. Other countries have lesser but still substantial 
amounts. As the US dollar is the reserve currency, the entire world¹s investment
portfolio is over-weighted in dollars.

No country wants to hold a depreciating asset, and no country wants to acquire 
more depreciating assets. In order to reassure itself, Wall Street claims that 
foreign countries are locked into accumulating dollars in order to protect the 
value of their existing dollar holdings. But this is utter nonsense. The US 
dollar has lost 60% of its value during the current administration. Obviously, 
countries are not locked into accumulating dollars.

The reason the dollar has not completely collapsed is that there is no clear 
alternative as reserve currency. The euro is a currency without a country. It is
the monetary unit of the European Union, but the countries of Europe have not 
surrendered their sovereignty to the EU. Moreover, the UK, a member of the EU, 
retains the British pound. The fact that a currency as politically exposed as 
the euro can rise in value so rapidly against the US dollar is powerful evidence
of the weakness of the US dollar.

Japan and China have willingly accumulated dollars as the counterpart of their 
penetration and capture of US domestic markets. Japan and China have viewed the 
productive capacity and wealth created in their domestic economies by the 
success of their exports as compensation for the decline in the value of their 
dollar holdings. However, both countries have seen the writing on the wall, 
ignored by Washington and American economists: By offshoring production for US 
markets, the US has no prospect of closing its trade deficit. The offshored 
production of US firms counts as imports when it returns to the US to be 
marketed. The more US production moves abroad, the less there is to export and 
the higher imports rise.

Japan and China, indeed, the entire world, realize that they cannot continue 
forever to give Americans real goods and services in exchange for depreciating 
paper dollars. China is endeavoring to turn its development inward and to rely 
on its potentially huge domestic market. Japan is pinning hopes on participating
in Asia¹s economic development.

The dollar¹s decline has resulted from foreigners accumulating new dollars at a 
lower rate. They still accumulate dollars, but fewer. As new dollars are still 
being produced at high rates, their value has dropped.

If foreigners were to stop accumulating new dollars, the dollar¹s value would 
plummet. If foreigners were to reduce their existing holdings of dollars, 
superpower America would instantly disappear.

Foreigners have continued to accumulate dollars in the expectation that sooner 
or later Washington would address its trade and budget deficits. However, now 
these deficits seem to have passed the point of no return.

The sharp decline in the dollar has not closed the trade deficit by increasing 
exports and decreasing imports. Offshoring prevents the possibility of exports 
reducing the trade deficit, and Americans are now dependent on imports 
(including offshored production) for which there are no longer any domestically 
produced alternatives. The US trade deficit will close when foreigners cease to 
finance it.

The budget deficit cannot be closed by taxation without driving up unemployment 
and poverty. American median family incomes have experienced no real increase 
during the 21st century. Moreover, if the huge bonuses paid to CEOs for 
offshoring their corporations¹ production and to Wall Street for marketing 
subprime derivatives are removed from the income figures, Americans have 
experienced a decline in real income. Some studies, such as the Economic 
Mobility Project, find long-term declines in the real median incomes of some US 
population groups and a decline in upward mobility.

The situation may be even more dire. Recent work by Susan Houseman concludes 
that US statistical data systems, which were set in place prior to the 
development of offshoring, are counting some foreign production as part of US 
productivity and GDP growth, thus overstating the actual performance of the US 

The falling dollar has pushed oil to $100 a barrel, which in turn will drive up 
other prices. The falling dollar means that the imports and offshored production
on which Americans are dependent will rise in price. This is not a formula to 
produce a rise in US real incomes.

In the 21st century, the US economy has been driven by consumers going deeper in
debt. Consumption fueled by increases in indebtedness received its greatest 
boost from Fed chairman Alan Greenspan¹s low interest rate policy. Greenspan 
covered up the adverse effects of offshoring on the US economy by engineering a 
housing boom. The boom created employment in construction and financial firms 
and pushed up home prices, thus creating equity for consumers to spend to keep 
consumer demand growing.

This source of US economic growth is exhausted and imploding. The full 
consequences of the housing bust remain to be realized. American consumers lack 
discretionary income and can pay higher taxes only by reducing their 
consumption. The service industries, which have provided the only source of new 
jobs in the 21st century, are already experiencing falling demand. A tax 
increase would cause widespread distress.

As John Maynard Keynes and his followers made clear, a tax increase on a 
recessionary economy is a recipe for falling tax revenues as well as economic 

Superpower America is a ship of fools in denial of their plight. While 
offshoring kills American economic prospects, ³free market economists² sing its 
praises. While war imposes enormous costs on a bankrupt country, 
neoconservatives call for more war, and Republicans and Democrats appropriate 
war funds which can only be obtained by borrowing abroad.

By focusing America on war in the Middle East, the purpose of which is to 
guarantee Israel¹s territorial expansion, the executive and legislative 
branches, along with the media, have let slip the last opportunities the US had 
to put its financial house in order. We have arrived at the point where it is no
longer bold to say that nothing now can be done. Unless the rest of the world 
decides to underwrite our economic rescue, the chips will fall where they may.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan 
Administration. He is the author of Supply-Side Revolution : An Insider's 
Account of Policymaking in Washington; Alienation and the Soviet Economy and 
Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. 
Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are
Trampling the Constitution in the Name of Justice.

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