IMF Warns: Rising US Debt Threatens World Economy
By Nat Weinstein
In the December 2003 edition of this magazine we commented on the rising price of gold, the declining value of the dollar and the steadily mounting public and private U.S. debtall being made dangerously manifest by the double-barreled threat of rising trade and budget deficits Now, in less than a month, the price of gold has risen by $20 to a new high of $420 an ounce and rising. And, as of the beginning of the year, the dollar hit a new low after having lost 30 percent of its value against the euro in the last 18 months.
Among other things, we noted last month that the crisis of the dollar was not merely a problem for American capitalism but one that affects the entire world. That is, if the dollar falls sharply in value relative to the worlds major currencies the initial effect would be to increase the relative value of stronger currencies, but in the longer run, it threatens to precipitate a generalized crisis of the global monetary system.
In confirmation of that analysis and conclusion, on January 8 the New York Times featured a report headlined IMF Says Rise in US Debts Is Threat to Worlds Economy. The opening sentence reads, With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy according to a report released [January 7] by the International Monetary Fund.
The team of IMF economists who prepared the report questioned the wisdom of the Bush administrations tax cuts and warned that the growing budget and trade deficits posed significant risks not just for the United States but for the rest of the world. The newspaper further reports that C. Fred Bergsten, director of the Institute for International Economics in Washington said, If those twin deficits continue to grow you are increasing the risk of a day of reckoning when things can get pretty nasty.
But, as might be expected, White House officials dismissed the report as alarmist, saying that President Bush has already vowed to reduce the budget deficit by half over the next five years. Administration officials were also reported to have said that the burgeoning U.S. external debt and the declining value of the dollar does not alarm them.
One of the more significant observations in the IMF report was the warning that the long-term fiscal outlook was far grimmer than it might appear. Based on trends already well underway, IMF economists warned that underfunding for Social Security and Medicare will lead to shortages as high as $47 trillion over the next 70 years or nearly 500 percent of the current gross domestic product in the coming decades. (According to the National Council on Economic Education, gross U.S. domestic product was around $9 trillion in 2001.)
The significance of this estimate is not what will happen 70 years from now, but that it serves as a measure of the startling pace at which the U.S. economy is heading towards bankruptcy.
Other cheerleading economists also reportedly downplayed the seriousness of the U.S. fiscal shortfall by noting that the United States is hardly the only country to run big budget deficits. According to these experts Japans budget deficit is much higher than that of the United States and those of Germany and France are climbing rapidly. There is no doubt that this is indeed the case, but rather than it lessening the global threat rightly worrying the IMF, it underscores the generalized nature of the debt crisis.
The administrations boosters also pointed to the recent stream of optimistic reports alleging that the economy is expanding at a healthy rate, that productivity is on the increase and that profits are rising. But just a few days later, the Bureau of Labor Statistics reported an astonishing collapse of job creation in December. Most observers had expected the creation of around 150,000 new jobs that month, which is what it takes to just keep the rate of unemployment from rising. Instead the U.S. economy generated barely 1,000 new jobs!
To be sure, at the very same time, the Labor Department also reported a decrease in unemployment, from 5.9 to 5.7 percent, followed by the usual explanation that it was because there was a sharp decline in those looking for work. But also reported was a downward revision of job creation figures for previous months; that is, over the past five months just 278,000 jobs have been generated in the U.S.a number normally achieved in a single month of a typically reviving economy.
On balance, all reports belie the optimistic projections of economic revival as the economy continues to hemorrhage jobs, suffers continuing budget and trade deficits and is weighed down by net financial obligations to the rest of the world approaching 40 percent of the U.S. gross domestic product.
Echoing this theme, Robert E. Rubin, the former Secretary of the Treasury, reportedly said that the federal budget was on an unsustainable path and that the scale of the nations projected imbalance is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur.
Furthermore, it is widely recognized that many of the jobs being created are being exported overseas. But that does not mean that employment abroad is on the upswing, rather it reflects the weakening global economy and the general transfer of jobs from wherever wages are higher to wherever they are lower. But most unsettling is the cold fact that jobs are slowly evaporating everywhere.
The rising euro is not good news for Europe
The reaction of the Europeans to the current critical state of the global economy focuses quite logically on the negative consequences of the rising value of the euro and yen, which is the flip side of the weakening dollar. Europe and Japan do not see that as good news. In fact the Europeans see the relation between the euro and the dollar as though from the other side of Alices looking glass. The rising value of their currency relative to the dollar means that many of their exports will be priced out of the world market by American goods.
The Timess influential financial columnist, Floyd Norris, in his July 9 column asks, What happens if the world wont let the dollar fall? A question, he says, may sound odd given the run of headlines about the plunging dollar. But the reality is that the dollar is still strong where it counts, helping explain why most U.S. economic decision-makers remain sanguine in the face of the dollars slide in value. That is, while they know it reflects a weakening economy, they nevertheless are able to use the rising euro to buttress the weakening dollar and ride the cheaper dollar to increased U.S. exportswhich, of course, serves to reduce the U.S. trade deficit.
Americas European and Japanese competitors, seeing their exports decline as the euro and yen rise in value relative to the dollar are forced to buy dollars, or what is the same thing, buy U.S. Treasuries and Wall Street stocks and bonds, which also helps shore up the value of the dollar, reducing somewhat the U.S. balance of payments deficit.
Further illustrating the benefits accruing to the United States from this process, Norris points out that Japan, which ranks No. 2 in the world marketplace with a trade surplus of $68 billion, spent about $200 billion last year trying to prop up the dollar, presumably slowing the yens rise. (The dollar is down, as a result, 19 percent against the yen since the end of 2001.)
The rise of the euro, Norris continues, at first brought some joy to Europeans, who had been embarrassed by their new currencys initial slide. But now there is a growing concern among companies and politicians that the euro will rise far enough to damage the nascent European recovery. Thus, the European central Bank, which had been considering a change in interest rates to be acted on the day after the IMF issued its ominous report, left them unchanged. The Timess business analyst notes, with a tinge of satisfaction, that the chairman of Europes regulatory bank appears more worried about European budget deficits than about the impact of the rising euro on European currencies.
Meanwhile, he notes, China, which has the largest trade surplus, $123 billion in the latest 12 months, and has a policy of fixing the value of the yuan against the dollar, had rejected demands by the United States that it change that policy, allowing its currency to float like other currencies against the dollar, so that the U.S. trade deficit with the latter would likely be reduced.
The reporter concludes his column by wondering: The question now is whether Europe will stand by and watch its own competitiveness erode while hoping that world growth will somehow solve all problems.
In other words, the Europeans, the Japanese, the Americans and all other competing capitalist nations are all in the same boat. They have no way of rationally solving their mutual problem; instead, all nations seek to solve their problems at each others expense. Thats why, even in an age when more than a few of the worlds major powers each have a nuclear arsenal capable of destroying each other many times over, the suicidal threat of another inter-imperialist waras crazy as that might seem to rational peoplecannot be excluded, since, as the often-quoted Prussian General once so famously had pointed out: war is economic competition by other means.
Where it all leads
To be sure, the most thoughtful representatives and defenders of the existing social and economic order are fully aware of the intractable problem they face. The more than half a century of economic expansion without a major crisis of overproduction, they know, was enabled by the separation of the world monetary system from its golden base, which permitted an exponential expansion of credit. But, when a critic of the new economic order noted that it would result in a prolonged expansion of credit that was not sustainable and that the mountain of debt that would accumulate would eventually come crashing down under its own weight, the architect of the new economy, John Maynard Keynes, famously responded by acknowledging the facts of the matter but noting with some satisfaction, by that time well all be dead.
Well, that time appears to have arrived. But even though the powers-that-be know they cannot escape the inexorable consequences of decades of borrowing from Peter to pay Paulwithout paying down the principle. They know from more than 50 years of experience, that it is indeed possible to postpone the inevitable. This is how it has been done and will continue to be done until it cannot be done anymore. And thats a simple matter of fact:
A glance back will show that since shortly after the end of World War II when the bipartisan Congress passed what became known as the Taft-Hartley slave labor lawa new set of rules governing the war between the working and capitalist classes was imposed by the bipartisan U.S. Congress. The new rules of war were actually those that had prevailed in the period before the great labor upsurge of the 1930s and which had become a dead letter when the workers successfully defied them. In order to regain the confidence of the workers in order to maintain some measure of influence over themthe so-called liberal wing of the capitalist class revoked the laws they could no longer enforcebut only until the time came when they believed they might be able to enforce them when the time came.
These rules are in principle identical to the rules American imperialism imposed on Iraq after its victory over the latter in 1991. The new rules imposed a system of inspections, formally under the aegis of the United Nations but strictly controlled by the U.S.-led imperialist nations of the world. The UN was authorized and backed by Anglo-American military power to deny the Iraqi ruling class the right to arm itself beyond what every capitalist state requires to defend itself against its own people. Then from that time on, the system of inspections imposed on Iraq served to strip the Saddam Hussein regime of its so-called weapons of mass destruction, which in reality softened them up for the easy victory and regime change executed last year by the American superpower.
Thats what the bipartisan capitalist government of the United States imposed on its working class adversary in 1947. The new legislation, popularly known in labors ranks at the time as the slave labor law, was designed by capitalist America to strip the working class and its unions of its only means of self-defenseits right to freely organize and mount effective strikesthat is, as free or nearly as free as capitalists are to organize and mount attacks on the living standards of working people.
However, while the right to strike was not formally outlawed, it was made so restrictive that effective strike action was impossible within the framework of the new rules of class war. In fact, the most inhibiting restrictions that lay at the heart of the Taft-Hartley Act were the abolition of the workers fundamental right exercise class solidarity; that is the right to honor the picket lines of striking sister unions. Also severely restricted was the workers Constitutional right to freely exercise freedom of speech and assembly in the course of a strike. That is, the new law, among other things, allowed the courts to place restrictions on picketing to no more than ten or so strikers at each entrance to the workplace.
From that time on, while effective strikes were made increasingly more difficult to mount, it was still possible for unions with a leadership that did its duty by its members to mobilize effective picket linesbut only by violating the bosses rules of war. To be sure, a few unions did so and were able to make it stick because when leaders loyally serve the interest of their members and do whats necessary to bring maximum force to bear against avaricious and merciless corporations, enforcing these restrictive laws is no easy matter in the face of a fighting working class with a leadership to match.
However, as the saying goes, theres more than one way to skin a cat. The ruling class then waited patiently until an opportunity presented itself to deal a crushing blow to a fighting union and prove that they can enforce these unjust laws and thereby set an example of what happens when workers dare to struggle but their strikes are lost.
They got their chance when the airline controllers union, PATCO, went out on strike in 1981. Newly elected President Ronald Reagan declared the strike illegal and ordered them back to work. After strikers failed to immediately return to work, Reagan put his predecessor, President Jimmy Carters strike-breaking plans into operation. AFL-CIO President Lane Kirkland denounced Reagans strikebreaking and pledged support to PATCO promising financial aid. But at the very same time, citing the Taft-Hartley Act, which had been invoked by Reagan, he ordered all affiliated AFL-CIO unions to cross PATCO picket linesstabbing striking airline controllers in the back and virtually guaranteeing a major defeat for the entire labor movement.
That changed the class relation of forces between labor and capital and there were few important strikes with workers living standards gradually declining until 1995 when United Food and Commercial Workers (UFCW) local union P-9a meatpacking local in Austin, Minnesotafaced by a massive demand for wage cuts by Hormel Co. bosseswent on strike.
Hormel Co. with the help of the strikebreaking governor (a noted Democrat and friend of labor) managed to successfully crush their strike.
But the key to American capitalisms success was the treasonous role played by International UFCW leaders who gave token aid to its striking local in Austin, Minnesota, but in the end the UFCW bureaucracy chartered a scab local union, they named, local P-10, composed of so-called replacement workers and strikers who could hold out no longer. While P-9 workers remained on strike and still fighting a losing battle, the UFCW top official signed a sellout contract with the struck company based on the terms originally offered by Hormel almost a year before. The UFCW leaderships betrayal, of course, sealed the fate of the striking union.
Its important to note that Hormel eagerly agreed to a provision in the contract providing for the automatic check-off of union dues as its reward to UFCW bureaucrats for their betrayal. Its also important to point out another innovation that has contributed heavily to the corruption of the AFL-CIO officialdom. Whereas in the days before Taft-Hartley, a defeated strike, more often than not, led to a smashed union, capitalists have found it far more productive not to destroy unions when strikes are defeated. That has served to assure self-serving labor bureaucrats that if the dont put up an effective fight they will be appropriately compensated for their services.
Moreover, a pattern emerged whereby labor bureaucrats are routinely rewarded for abiding by the bosses rules of class war by being allowed to continue collecting dues from the members they betray and to make sure dues are subtracted from workers paychecks for deposit in the union treasury in order that the class collaborators enjoy a lifestyle that befits those that imagine that they are in a partnership with what they like to call managementavoiding terms like bosses and capitalists like the proverbial devil stays clear of holy water.
What is to be done?
From the point of view of the great majority of the union rank and file, it is now becoming increasingly apparent that something must be done. In fact, this realization will become increasingly apparent in the days immediately ahead as capitalist America continues turning the screws ever tighter to extract more surplus value out of every hour worked by every worker in order to compensate for the tendency of the rate of profit to fall. And now that world capitalism faces the worst of all worlds, a monetary and financial crisis together with a classic crisis of overproduction that promises to be wider and deeper than the one following the 1929 stock market crash, the drive to force down the living standards of the American working class will sharply intensify.
In fact, the latest attack on the United Food and Commercial Workers union (UFCW) in Southern California by the three big supermarket chains, if successful will set off a new wave of attacks on all of American labor. But rather than the UFCW and the AFL-CIO top officialdom mobilizing all the forces at their command to defeat this latest assault on the living standards of their dues-paying members, they have by their actions made clear that they have no intention of mounting an effective defense of striking grocery workers. The UFCW top officialdom have gone so far as to call off picketing at the strategically located distribution centers that was effectively hitting the supermarket bosses where it hurts mostin their pocketbooks. (See The Grocery Strike and the Left, by Charles Walker following this article.)
There is only one way forward for the AFL-CIO rank and file if they hope to weather the coming storms. A new leadership must be constructed and the best of the experienced veterans of past labor struggles need to find ways to collaborate in the big struggles that are bound to break out in the immediate period ahead. That is, the blows will begin to rain down on isolated unions in order to pick them off one at a time at an ever-faster pace. The very least that must be done is for devoted trade union activists and others who consider themselves a part of the small vanguard of class struggle fighters to establish a collaborative relationship with others anxious to stop the headlong retreat of the American labor movement and begin to fight to regain lost ground and more.
It has always been up to the class struggle vanguard to serve as the memory, as it were, of the lessons they have learned from the class struggle veterans that came before them as well as from their own experience. Its up to this vanguard to find its way to the rank-and-file class struggle fighters that will be impelled to the fore out of the struggles that will inevitably erupt when the capitalist assaults begin to meet with determined resistance.
In this writers experience, workers engaged in a fight to defend the living standards of their families and friends tend to eagerly welcome any help they can get. When the battle is in full swing any sincere volunteer that wants to help a group of workers locked in struggle will find the door wide open so long as they make clear that all they want to do is help.
Walker and other veterans of the class struggle are already talking about the need for what I prefer to call a class struggle left wing of the American labor movement. One like the Trade Union Educational League that helped lay the foundations for the modern industrial trade union movement that was crystallized as the Congress of Industrial Organizations that eventually re-merged with the American Federation of Labor to become what we now know as the AFL-CIO.
The formation of an alliance of class struggle fighters such as was the TUEL will surely arise in one form or another in the course of the coming labor upsurge. Its up to the existing workers vanguard to find its way to them and help reconstruct a class struggle wing of the American labor movement. Its our duty to help the new generation that will replace us find their way to the recorded history of the world workers movement and its rich lessons which serve to point the way to victory and the ultimate liberation of the working class from wage slavery, and to the emancipation of the human race from capitalist barbarism and self destruction.