The #Money Thing
[Welcome to Digby's readers. -- lambert]
Lambert asked me to write on "the money thing" and "straighten it out" for people. Let me turn that around, what we are getting wrong is "the reality thing." The "money thing" is a consequence of getting reality wrong.
So what has happened? What has happened is that the outside world is willing to fund the United States only to do those things that the outside world values. The rest, the US has to pay for itself. The Bush era killed the goose that laid the golden egg for Americans, and that is the thing that needs to be explained, over and over again, in no small part because economists and policy makers are not getting what happened.
Lambert warned me about English majors, but it is the MBAs that I worry about, they write things like "pursuing synergies in multiple horizontally integratable vertical market universes." As an aside, the previous phrase means that they are going to lay people off from merging the two companies because the two companies, while not actually being connected, service the same kinds of people. Just to translate from the Corporatese.
Shock Therapy for Main Street
What has happened is this: for decades the United States Dollar had two functions. One was as the central currency of the domestic economy, the other was as the lingua franca of international commerce. During Bretton Woods the other currencies of the world were pegged to the US Dollar, but even after this time, the United States, as the provider of security to the "Western" market, was the place to store wealth. While this is often termed being the world's "reserve" currency in popular thinking, "reserve currency" is a very specific term of art in finance, and it means something different: specifically the currency that banks do their exchanges in and hold reserves of liquidity for. This is not the same thing as being the currency that everyone uses to store their wealth in - a very large difference. In sociology the term is that the US dollar has "hegemony."
The two parts were connected: the health of the US consumer economy was the measuring stick for the developed world's economy. Over time all of the other developed world economies were gradually "coupled" to the United States. We provided security, they sold us "stuff" and used the money to buy capital goods and resources. After the collapse of Bretton-Woods, the United States was allowed to run a chronic trade deficit, in part because we developed the developing world, and the profits made up for part of the difference, in part because we spent down the credit gained after World War II, and in part because the United States provided military security, and was being allowed to over spend as a means of paying for that security.
Nixon dropped the peg between the dollar and gold. This was not a one to one gold standard, there wasn't one dollar for each unit of gold, but instead a system where the United States promised to buy gold at a certain price. Nixon "closed the gold window" and said that the United States would no longer buy gold at that price. The gold peg was a link between the role of the dollar as the world peg currency, and the ability of Americans to import goods. After the gold peg was ended, there was a period of instability where a new basis had to be found.
That new basis is called in the academic community that studies finance "Bretton Woods II." This is a peg by agreement. The United States acts, other countries react, partially accommodating the US, partially pushing back. The details of this system include the spread of a particular trade and financial order which is under the term "neo-liberalism."
This system imposed a discipline on countries: they had to develop in order to sell things to the outside, they had to sell things to the outside to buy oil and capital goods, and they had to buy these to keep political stability. Countries took in capital, and engaged in some mixture of consumption and investment. Investment to export, consumption to provide an incentive to leave old jobs and old life, and enter the new export driven economy. Countries that failed to walk this fine line had capital flee out, and were forced to go to the IMF for a "bail out" and engage in "shock therapy."
Shock therapy radically increased interest rates in the target country, slashed consumption and government services. The result would be high unemployment. But crucially almost no change in the elites. Several countries have been through more than one cycle of shock therapy, and the two main parties have continued to swap power since then. It also meant the end of domestically protected consumer industries in the target countries.
What the United States is seeing now is a "decoupling" of the role of the dollar as hegemonic currency, from its role as the US domestic currency. That decoupling is resulting in "shock therapy" for Main Street, even as Wall Street receives a massive bail out. The rest of the world is willing to lend to America the hegemony, but not to America the consumer. American consumers, repeatedly, voted for the consumption binge that led to this state of affairs, and voted, again, for neo-liberal shock therapy, so the complaining now is merely whinging. This is the America we wanted, worked for, voted for, and supported. The complaints about bank fraud and so on are merely a way of shifting the blame. Everyone in the US economy was attached to this system. Everyone's income came, directly or indirectly, either from the hegemony of war and finance, or from the consumer boom.
What confuses people is that the people predicting a meltdown of the US currency haven't been right, instead the dollar, while still relatively weak in historical terms, has strengthened. Nominal interest rates from the Fed are still very low, but there is little inflation. However, the trade deficit has plummeted, even though the rest of the world is also in recession. What gives?
The answer lies in the decoupling. There is the hegemony US, and there is the domestic US. Many critics of Iraq predicted that there would be a collapse of the US empire, and that we would go back to being a neo-Jeffersonian subsistence Republic. This view, prevalent on what might be called "the disaffected right," has been exactly wrong. The reason is simple: the rest of the world wants American security and financial hegemony, albeit with greater controls, but it does not care about American consumerism beyond the level needed to keep their own domestic economies supplied with dollars.
One can see this dynamic playing out in the recent G20 summit: where France and Germany wanted financial regulation, but were not interested in stimulating domestic consumption. One can see this in the debt markets: the treasury auctions in the United States have gone off, where as the UK auctions have stuttered. The libertarian illusion was that good old Americans were pulling their weight in the world, and that this imperial scheme was dropped on top of it. The reality was that the imperial scheme is profitable in the eyes of the rest of the world, whereas American suburbia and exurbia are the designated losers of the economic world. They aren't willing to loan us money to buy their goods any more, but they will loan us money to bomb the Taliban, kill pirates, and prop up the global financial order.
So that is what is going on: the bail out, as everyone admits, is socialism for Wall Street. However the other side is that the United States is now on shock therapy, and most of the economy is on the outside looking in. Taking out the defense and financial sectors, and the unemployment rate in the United States isn't the headline 8.5%, but is, in fact, closer to 15% and marching upwards. There is no domestic economy for all practical purposes at this point, other than what is needed to extract every loose dime from the American public to pay off debts. The American Empire is alive and well, as the Roman Empire was alive and well, even as its public was crushed under the weight of debts.
History has repeated itself.