The American crisis began unfolding when Richard Nixon disengaged the US dollar from the gold standard
Thomas L. Friedman is a New York Times columnist and three-time Pulitzer Prize winner and is possibly the world’s foremost globalisation evangelist. A kind of Billy Graham of globalisation. His first book The World is Flat came at a time when globalisation was still in its early days and was seen by many as the wave of the future and a panacea to the world’s economic ills. Globalisation is described as the process in which people, ideas and goods spread throughout the world, spurring more interaction and integration between the world’s cultures, governments and economies.
But what it turned out to be in practice is a system where the low-cost producers ended up as providers to America’s gargantuan appetite for manufactured goods. They got paid in US dollars, which they promptly invested in US banks or treasury notes. American banking institutions in turn lent most of it to US consumers and companies who then bought more from us with that money. In 2020, the US posted a trade deficit of $880 billion. But for the Covid-19 pandemic-induced economic contraction this was headed for a trillion dollars. This is the money the rest of the world salivates for. The US dollar is the world’s most trusted and preferred currency. That is directly related to the rest of the world’s confidence in the US system and its credibility. Is it any surprise then that 66 per cent of the world’s reserves are held in US dollars? Even China holds almost $3 trillion in US notes. India has $548 billion. This cycle of production, consumption, conversion, credit and demand is what globalisation has in fact become. Without the annual US deficits, the rest of the world will stagnate.
Every thinking American knows that the good times will not last forever. Former President Barack Obama tried to set it right by promising to narrow America’s trade deficit or possibly ending it in 10 years by seeking to make US businesses competitive. He planned to make the US the centrepiece of a new Indo-Pacific trading bloc (Trans-Pacific Partnership) to blunt China’s export surge and burgeoning trade surpluses. He failed. He left the US with an annual trade deficit of $568 billion in 2016. Then Donald Trump picked up the gauntlet. He threw out the TPP and sought to beat down China’s growing economic power with a sledgehammer as policy. He raised tariffs and banned many companies and their products. It only ended up with US consumers having to pay more and the US having to subsidise its farmers more as China dropped shutters on US farm products. By the time he was through he left the US with a trade deficit of $880 billion in 2020. Now he has gone, and Joseph R. Biden has to pick it up from there.
The problem with the Americans is that they have the problem defined wrong in the first place. The problem is not about the US sliding into oblivion because its education system is faltering, or its R&D is flagging, or because Americans have ceased to be innovative and finally that China and India are beating it at all this. Far from being America’s competitors, China and India are still its under-economies, serving it with cheap labour working on repetitive jobs and repetitive number crunching. The problem with the US is that it lives far beyond its means and its profligacy has left it as debtor unable to pay its bills by endeavour, but by printing new banknotes. The problem with the unlimited printing of banknotes is that the more you print the less they can do.
The American crisis began unfolding when Richard Nixon disengaged the US dollar from the gold standard. Remember how we in the ex-colony of the empire upon which the sun never set used to refer to the UK pound as sterling? That was because every British pound was linked to a gold equivalent in weight. That’s how world currencies were valued then.
That was the basis of exchange rates. In one fell swoop, Richard Nixon, aka Tricky Dicky, unable to finance his twin wars in Vietnam and Cambodia, found a way out. Delink the US dollar from the gold standard and put the printing presses at its five Federal Reserves to full use. This had gone on over 40 long years and the birds have begun to come home to roost. Its two seaboards, the US’ blue wings, keep it soaring. In the east the “masters of the universe” have invented an ideology — globalisation — that makes them the rest of the world’s money managers. That money drives domestic consumption with easy credit. That money also drives the relentless innovation in America’s west that drives global production and consumption. It’s the geographical middle with its wheat, corn and soyabean fields, industrial scale production of poultry, pork, beef and dairy products and with its shuttered factories, that is blaming the rest of the world for its relative penury. They want to make America great again by making, if not all, but most of the world’s manufactured goods. These need the giant steel mills and chemical plants gushing out industrial material to turn into industrial and consumer products. All those have also bolted. There is little President Biden can do to reverse it. The genie has left the American bottle and America’s industries have mostly gone overseas.
The error in Friedman’s analysis is that declining education standards, declining spending on R&D and productivity have led to the American crisis. President Obama never tired of stating this. Assuming the US sets right its high school education and the maths proficiency of its kids are on par with that of Indian or Chinese kids, would that stop US jobs from leaving for Bengaluru or Nanjing? As long as Indian and Chinese workers work for less than one dollar an hour when US workers will not work for less than $15 an hour, jobs will flow across the deep oceans.
Despite what Friedman writes, the US will never cede the innovation crown to either China or India. If not the brilliant young techie entrepreneurs US universities churn out, young Indians and Chinese who flock to Silicon Valley and its clones in droves will see to that. The US will keep innovating. China and India will turn the innovation into goods and services. That is the future, till the house of cards falls down. Keeping it up is Mr Biden’s biggest challenge.