4th June 2023
The US – counting on the dollar to stay supreme
In a week in which the world’s biggest economy almost tanked it is telling that the British media was more concerned with the transgressions of TV presenter, Phillip Schofield. Both print and TV media in Britain have given more airtime and print space to the Schofield saga than the fact that the world economy almost came to collapse and that the prospect of such a calamity may only have been delayed, rather than averted entirely.
The issue has centred around the US economy sailing very close to its debt ceiling, the amount Congress has authorised America’s government to borrow in order to meet its basic obligations. This includes a range of commitments, from providing medical insurance to paying military salaries. The current ceiling for gross debt is $31.4trn (117% of gdp).
The US House of Representatives did eventually vote to agree a deal reached by President Joe Biden and Speaker Kevin McCarthy to raise the amount America can borrow. Failure would have meant the country would have defaulted on debt payment obligations for the first time in its history. The alternative would have seen interest rates soaring, stock and bond markets crashing and the global financial system being plunged into turmoil.
Given the trillions of dollars Congress has authorised the US government to spend over the last decade United States debt has nearly tripled since 2009. The US has been running a deficit, meaning it spends that much more money than it receives in taxes and other revenue, of over £1 trillion every year since 2001, resulting in additional borrowing to finance payments Congress has authorised.
The debate in US political circles has focussed upon President Biden and senior Republicans in the House of Representatives negotiating an increase in the debt ceiling in exchange for reductions in federal spending. Republican proposals centred upon imposing work requirements for some recipients of federal benefits, putting lasting caps on federal spending, and loosening rules for fossil fuel energy projects.
Economists Goldman Sachs estimated that a breach of the US debt ceiling would cause a reduction in about 10% of US economic activity. Centre left US think tank, Third Way, calculate that a default could lead to the loss of 3 million jobs, push up interest rates, thus increasing mortgage payments, with higher interest rates also diverting future spend away from much-needed investments in such areas as infrastructure, education, and health care.
US Treasury Secretary, Janet Yellen, summed up the situation succinctly stating,
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability.”
The US dollar is the most commonly held reserve currency, making up more than 60 percent of global foreign exchange reserves, and the most widely used currency for international trade and other transactions around the world. Given the status of the US dollar as the world’s reserve currency, many countries hold their foreign currency reserves in dollars, meaning any reduction in the value of the dollar has an international impact, making debt repayments more expensive. Heavily indebted low income countries would struggle to repay their debts and therefore tip into default and political crisis.
As a consequence of US financial hegemony this is potentially disastrous. The recent move of the BRICS (Brazil, Russia, India, China, South Africa) nations, towards a process of de-dollarisation, by creating an investment bank less dependent on the dollar, is a move in the right direction and could potentially loosen the stranglehold of the US over international finance systems.
That the world’s most powerful nation and strongest economy can be in such a mess is, in any event, a cause for concern. The mantra of low taxation, free market economics and the small state, beloved of right wing neo-liberal economists is taken to its limits in the United States. Any effort to expand the role of the state in supporting healthcare, the environment or those on welfare are pushed back by Republicans in particular but not resisted with vigour by leading Democrats.
It is unlikely to be coincidence that the downward pressure on public spending is accompanied by a recent decision of the US Supreme Court to effectively outlaw strike action. The 8-1 vote, in the right-wing-dominated US Supreme Court, has curbed the right of the nation’s workers to strike by allowing companies to sue unions in state courts whenever they wish for alleged “damage” strikers cause. Full details can be found here https://peoplesworld.org/article/in-historic-step-backward-the-supreme-court-limits-the-right-to-strike/?eType=EmailBlastContent&eId=46dc7349-f34f-4076-aa74-c1cec7e0d5e2
In addition, any productive investment by the state is inevitably drained by the massive spend on weapons of mass destruction, to maintain the US military budget at the highest level in the world and sustain its role as the self styled ‘global policeman’.
The predominance of the dollar in international trade also means that it can be weaponised by the US in the form of sanctions. Almost all trade done in US dollars, even trade among other countries, can be subject to US sanctions, because they are handled by so-called correspondent banks with accounts at the US Federal Reserve.
By cutting off the ability to transact in dollars, the United States can make it difficult for those it discriminates against to do business. In 2015, the French bank BNP Paribas was given a record penalty of nearly $9 billion for violating US sanctions by processing dollar payments from Cuba, Iran, and Sudan.
For Cuba in particular, suffering under a US economic blockade which has lasted for over 60 years, this is a particular issue, as circuitous routes to make payments and trade internationally have to be constantly devised and end up being more costly for the Cuban economy.
The mantra that when the US sneezes the world catches a cold is a direct result of the economic stranglehold the US continues to exert across the globe. The current US fear of China’s economic growth, manifest in US sabre rattling over the future of Taiwan, is that the US may lose its prime economic position and thereby find its political influence diluted.
Resorting to threats, bullying and military intervention are the direct consequences of US fears. Any alternative to the US capitalist model, as presented by China or Cuba, is inevitably demonised and any achievements put down to fluke or good fortune, rather than the alternatives offered by a socialist orientated system. Demonstrating that there is an alternative to capitalism is not what the British media is paid to promote or explain. Far safer to keep everyone worried about the private life of Phillip Schofield.
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