Peter Boyle
We have become accustomed to the International Monetary Fund warning Third World governments about their foreign debt levels. The IMF doing the same to the world's richest and most powerful government, however, is a bit unusual.
On January 7, Charles Collyns, deputy director of the IMF's Western Hemisphere Department, released a paper that warned that the US budget had gone from surplus in 2000 to a forecast US$400 billion deficit this year.
The US could soon have a net foreign debt equal to 40% of its gross domestic product — "an unprecedented level of debt for a large industrialised country". This was a "significant risk" to the global financial system, the paper concluded, in what was the second warning from the IMF in less than six months.
While US Federal Reserve chairperson Alan Greenspan said in Berlin on January 13 that there was "for the moment, little evidence of stress in funding US current account deficits", at least one US Federal Reserve governor, Donald Kohn, has echoed the IMF warning.
I spoke to Marxist historian Humphrey McQueen, author of The Essence of Capitalism and a member of the Socialist Alliance.
What is going on?
This is not a qualitatively new situation, but for the IMF to say it, puts a whole new force in the market that is so much driven by the animal spirits of those who decide where to invest.
The recovery of the US stock markets last year convinced these investors that everything was all right, even though there was the jobless recovery (in fact, people were losing jobs in the US while all this was happening).
But as Paul Krugman and some other commentators have been saying for some time, these twin deficits [fiscal and current-account] can't be managed, even by the world's largest superpower. There's no reason, he said, why the US currency couldn't go the way of Argentina's.
There is a battle going on in the US ruling class between the old eastern seaboard establishment — the old "money power" — and the "wild catters" from Texas and the western seaboard. So this is as much a brawl inside the US establishment as it is external concerns about the US economy. We saw the same divide open up over Iraq and Bush's tax cuts.
The IMF wasn't pointing to something new in the US economy, rather it is the IMF finally coming out to say "We can't trust you to fix this".
It is interesting that in 1967 the Wall Street Journal ran an editorial that said "Let's get out of Vietnam or we are going to ruin our dominance of the world economy". That was coming from a similar line of conflict within the US ruling class.
Isn't there a basis for the "Texas wild-cat faction" to be confident that the rest of the world cannot afford not to keep lending more money to the US, because the global economy now depends on the 4.5% of the world's population that consume nearly half of the world's resources?
Certainly they've been saying that. There was a German economist who recently argued that the Japanese and German capitalists keep throwing their money at them because they had a model that told them that it was in their medium to long-term interests to lose money as the US$ keeps going down. That argument came out in November and it cheered up the Americans that everything will be all right and it won't stop. That might take a bit of a beating.
The division in the US ruling class is not just between east- and west-coast capitalists, as there is a split in the East coast between the manufacturers and the financiers, whose interests are more represented by the IMF.
What are the risks to the global economy from the US twin deficits?
Some are worried that the declining US dollar, partly brought into effect to make the US more competitive, will frighten off the people who are putting their money into the US currency. If you own US$100 at the beginning of the year and it is now worth $66, then you have lost a third and begin to think about getting out of US dollars.
Traditionally, the flight to gold is a sign that things are going bad. But there are also some other intermediate options. You can move into US bonds or into other currencies (and this is why the Australian dollar is going up).
Meanwhile, the appreciating currencies in Australia and Europe are being used to restructure workplaces. Capitalists are beginning to say, "Great now we can push through with the industrial relations reform that the government failed to complete!" because what this means is that unions are going to have to give up their demands for better wages and working conditions.
So, for Australian firms that are cashed up, this situation can be used against their workers as a kind of lock out.
The European Central Bank has been saying that the over-valued euro is not a bad thing because they want to be used to smash through the German social security and wage systems. So they will be trying to help manage an orderly devaluation of the US dollar.
There is a lot of discussion in Australia about tariff but most people don't realise that the exchange rate is now having a far greater impact than any remaining tariffs. The 30% appreciation in the Australian dollar over the last year alone has meant that there are no remaining effective tariffs in place.
[Australian Manufacturing Workers Union national secretary] Doug Cameron doesn't seem to have caught on. The Productivity Commission knows what is happening and they are quite happily encouraging the bosses to offer useless carrots to the unions in the automobile industry by holding out keeping some minimal and ineffective tariffs in return for more labour market reform.
The IMF paper was not arguing against devaluation of the US dollar but warning about the risks of a "disorderly devaluation".
What they are worried about is that sharp growth of the US debt will panic somebody into starting a sell-off of US dollars. Alternatively, this could put more pressure on China to revalue its currency and this will have negative flow-on effects through East Asia, hitting the Japanese and Taiwanese economies, for example.
The trip wire could be anything. You never know these days, when some sort of scandal like Parmalat or some new concealed loss in a big US corporation, is going to emerge and reverberate somewhere else.
It may show up in the stock market first, but it is not really a stock market crisis. High-profile investor Warren Buffet makes the point that the stock market is a voting machine not a weighing machine. Investors vote by taking money out or putting it into stocks. But this is further distorted by tax systems which encourage people to keep their money in even at a risk of it being lost.
The IMF paper expressed alarm at the rapidity with which President George Bush's administration had built up its deficit, urged that projected tax cuts be reconsidered and that social security entitlements be further tightened.
The IMF is saying, "We really don't trust this administration to look after our system properly". There are too many people in there who just think they can take out of the system — by giving tax cuts to their own kind, and so on — and you then get a situation which perpetuates the problem.
For the group of people who put up their money for the Bush election campaign, if they are getting their billions in return, they are not thinking of the whole system. The illogic of market theory is that if you are looking after yourself, you are supposed to be looking after everybody. That is not how it truly works, but they don't see it that way.
So the IMF rescue is saying to the Bush administration, this is a serious problem, you have got to work out a solution to fix it over the next 10 years.
What is to stop the Bush administration saying to the IMF, "This is your problem — not mine — if I go down!"?
This is what the Bush administration is probably going to say. "If the ship's going down, we're going to steal as much jewelry out of the safe, kick the women and children out of the lifeboats and save ourselves".
From Green Left Weekly, January 21, 2004.
Visit the Green Left Weekly home page.