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Back to Basics The Financial Crisis
Isn’t Just One Of Accounting Standards As Some Would By Perry Hicks and Keith Burton- Special to GulfCoastNews.com Filed 9/27/08 Almost exactly one year ago, GCN had wrapped up a four part series warning readers of multiple dangers looming just over America’s event horizon; dangers that would likely face the next president and dramatically change our way of life. Well, the earth has turned and these storm clouds are now overhead, giving us the opportunity for us to see how each presidential candidate would react in a crisis. And let there be no mistake, this is a true crisis. Peer Steinbrück, the German finance minister, has already stated that the United States will emerge from this crisis no longer a financial super power. As reported by the Financial Times, while Steinbrück also doubted that the U.S. dollar would altogether lose its status as a reserve currency, he projected that the world would never be the same again. Indeed, he predicted that the world would be dominated by the better capitalized centers in Asia and Europe: The very centers utterly destroyed following the end of World War II; and in regard to China, further kept prostrated by Communism up until the end of the Cultural Revolution in 1976. What would be the key element, if any, held in common particularly between China’s rise to an economic superpower and America’s fall? Industry. For exactly as these foreign financial power centers rose in strength, America fell and the common denominator was the transfer of manufacturing capacity from the United States to Asia; and the failure of the U.S. to sustain its own domestic petroleum reserves. To state the core fundamental problem succinctly: A nation cannot “service” its way to prosperity. Wealth must be created and that means making something new that did not exist before. Industry is crucial to the creation and maintenance of prosperity. Economists that exuberantly espoused notions of a clean “post industrial” service economy were in fact talking economic psycho-babble. Servicing for the most part is just exchanging. These talking heads deluded Americans into a false sense of security. Bretton Woods Permitted Deficit Spending While the present crisis has taken 64 years to come about since the Bretton Woods Conference devised a monetary system by which the U.S. dollar would be the world’s reserve currency, trouble was inevitable due to a fundamental flaw in the system. With the last vestiges of the British Empire in collapse at the end of World War II, the previous reserve currency, the British Pound, was no longer able to foster world trade. Hence, a new reserve currency was needed. The United States, having the only industrial base untouched by war, the only merchant marine able to sail under the protection of the only navy able to project power anywhere in the world, the only air force able to drop the atom bomb, and the only nation with 80% of the world’s known oil reserves, the United States was the obvious choice. Thus, it was decided by the allies in 1944 that the dollar would flood the world to be the currency by which most trade would take place. And because the United States had most of the manufactured goods for sale, in the beginning, the U.S. greatly benefited from this arrangement. Through the Marshall Plan, numerous other global economy rebuilding grants, long term Cold War military deployments, and the Korean War, the United States experienced growing and massive balance of trade deficits. Indeed, these deficits were needed to keep the Bretton Woods System working. However, by the 1960s when the previously destroyed economies had returned to recovery, the U.S. began to suffer from the effects of cheap imports. At the same time, the Bretton Woods advantage that made possible high deficit spending without triggering massive inflation also started to fade, yet congress kept spending and the national debt kept climbing. The economist, Robert Triffin, discovered in 1960 the
paradox that existed between maintaining the system in a balance of
payments deficit, which would eventually erode confidence in the dollar,
and a balance of payment surplus, that would maintain confidence in the
dollar but at the same time prevent the system from working. The Bretton Woods System began to be unsustainable when the price of gold, the underlying anchor for paper money, could not be kept within a narrow range near $35 per ounce. Of course, there wasn’t enough gold in the world to sustain the economic growth the world was seeing, so price increases were inevitable. Incidentally, the Soviet Union actually had most of the world’s reserves in gold, but was not part of the Bretton Woods System. Where immediately after World War II the value of the dollar had been better than gold, being pegged to gold but also drawing interest, by the 1960s the World’s confidence in the soundness of the dollar was slipping. Further erosion occurred when President Johnson initiated his War on Poverty while at the same time waging war in Vietnam, and continuing the NASA lunar mission program; all without sufficient revenue to pay for them. Foreigner holders, notably France, began to convert dollars to gold drawing down U.S. reserves from 55% to 22% by the time President Nixon took the Unites States off the gold standard. This sudden departure from the gold standard is called the Nixon Shock and it initiated the stagflation of the 1970s. It wasn’t until Federal Reserve Chairman Paul Volker tightened the money supply in the late 1970s to ratchet down inflation and raise governmental bond rates that the speculative gold market was broken, thus freeing up capital and so releasing the power of the stock market. U.S. Continued to Flood World with Dollars Americans have all but forgotten the dark days of the late 1970s when, under the administration of President Jimmy Carter, the U.S. was perceived as a “paper tiger” by its enemies. The Iranians had held hostages from the U.S. Embassy 444 days before they were released. Outside of the oil business, capital was difficult to acquire, and even then, was expensive. Unemployment was so high that fears were whispered that the U.S. might slip into another Great Depression. Yet, the U.S. Government continued to flood the world with dollars. Owing to the regulatory pressures put on manufacturing by environmentalists and labor unions, the costs of American goods continued to go up making them all but unsalable on world markets. Factories closed or were shipped overseas. The Chinese Cultural Revolution transformed that nation from a communist to fascist one increasingly turning to a limited or controlled “free” market economy. Chinese made goods flooded into America often at a tenth of the cost of American made goods. Steel came to be largely unprofitable to make in America. Shoes, hats, clothes, plates, forks, knives, pianos, televisions, and radios all came to be made overseas and to buy them, dollars were flown to China, Japan, other points east, and Europe by the planeload. All of this was done under the guise of “free trade.” But as any casual observer could see, there was precious little actual “trading.” Ships arrived full of goods but sailed away largely empty. Dollars were amassed in foreign financial centers with nothing much better to do with them but loan them back to the U.S. Government, or use to directly purchase chunks of America itself.
Unbelievably, Congress continues to act as if America was still living in 1945 and the rest of the world is dependent on our largesse. This separation from reality prevents our national leaders from even admitting there is a problem, much less being able to identify the root cause and therefore develop a plan of corrective action. The U.S. Government, having assumed massive debt, with a further crushing obligation looming in the near future as the Baby Boom generation retires, continues to pander to voters promising new costly programs that will require yet still more public debt. With the means to actually create wealth being dismantled, and the value of the national currency being eroded down to intolerable levels, the entire economic-financial system is teetering on collapse. Decisive pro-American action must be taken now and taken soon. Otherwise, the U.S. may find itself living the old adage: He Who Has The Gold Makes The Rules. Imagine an America where nearly all the corporations are foreign owned. Imagine an America where more and more top executives come from China, Korea, the Middle East, Singapore, India, Japan, Europe, and even Russia.
Imagine a call for a constitutional convention to eliminate the troublesome first and second amendments that guarantee your rights to free speech and to bear arms. Imagine an America where the founding fathers are completely written out of the history books; history itself is rewritten to show that America ultimately did not win World War II. Imagine an America with a new flag and the Stars & Stripes branded a symbol of hate speech. Corrective Action Needed Now In order to insure the Unites States will continue as an independent sovereign power, it is imperative that Congress and the White House begin work immediately on a package of legislation with the following goals:
Americans need to realize that the rest of the world is on the march. Having the capital to explore new ventures, it is in places like Beijing and Dubai where we see fantastic new architecture going up; places like Russia where new roads are being built, and where there is a shortage of heavy trucks to roll over them. (To the latter, repossessed trucks find their way to massive sales lots in Atlanta, Georgia where Russian buyers, aided by the depressed dollar, gobble bargains up for shipment back home.) Where immigrants once came to America for the promise of work, increasingly they come for the promise of welfare benefits. However, it is not too late to turn the tide and return America back to a state of sustainable prosperity, where wealth is created, not borrowed from others who made it on our backs. Congress needs to stop party politics and begin putting their country first. Finally, Americans need to relearn a lesson our forefathers had learned: True wealth comes with Liberty, and Liberty is something too valuable to ever be sold at any price. Related: Financial Crisis and Presidential Politics - GCN Analysis About the Authors.....
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Perry Hicks