The dollar’s reign is in a downhill slide
U.S. system can’t fill profit gaps much longer
Welcome to another special edition of Contention! Like last week we’re taking a little more space than normal to talk about the big picture that inspires our coverage. You’ll still be able to finish in less than ten minutes.
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Last week we mentioned the “Big 3” forces shaping the trajectory of the world economy today, and analyzed the first of these forces: a shrinking rate of profit rapidly eroding the basis for liberal politics. This process has been underway for decades, so why is it just now getting so bad? Because U.S. decision makers have long been able to offset these shortfalls with profits extracted from the rest of the world.
These offsets, however, are now at risk, thanks to the second force at play right now: a critical upheaval in the world system that made this wealth transfer possible, led by China. We can debate the exact nature of China’s efforts, but all paths lead to heightened crises for rich nation economies in the years to come.
To recap: businesses are always looking to get more output for the same dollar of input. To do this, they invest their profits into better and better technology over time. As competitors either catch up or die, industries get more complex with tighter margins. The U.S. economy has used rapid debt expansion to keep growing despite these tougher profits.
But consumer and business debt is only part of this story. The United States has consistently run a current accounts deficit since the 1970s: U.S. companies, investors, and consumers spend more with other countries than they earn from abroad. And with only a few brief exceptions the federal government has run fiscal deficits every year since the 1950s. Together these shortfalls mean that the U.S. economy lives beyond its means, financing its structural deficits with exploding public debt.
The government isn't just making up this value -- it is real wealth sucked from the rest of the world through the “exorbitant privilege” enjoyed by the U.S. dollar, the world’s primary reserve currency. As far as governments, multinational corporations, and large financial institutions are concerned, the dollar is the definition of money. The United States can run persistent deficits because it can print dollars at will. Meanwhile, reserve holders always have demand for U.S. debt -- Treasury bonds -- to protect their dollar stocks from inflation.
Why is the dollar the world’s reserve currency? Because money exists to circulate commodities, and there are vital goods and services that can only be purchased with U.S. dollars. This includes petroleum, pharmaceuticals, and other advanced technologies made only in the United States or in wealthy U.S.-aligned economies. These firms settle their global transactions in dollars, so every country must have U.S. currency to meet their citizens’ basic needs.
The lynchpin of the system: preventing any countries outside the U.S. sphere from developing their own advanced technologies. Building those industries takes a lot of capital, and so-called developing economies can only access these resources if international financial institutions (IFIs) like the World Bank and IMF give big investors the green light.
These countries, however, can only get IFI support if they swear off capital controls, major government spending, and trade protections -- all historically necessary to foster advanced industries. Without these policies any capital they earn flows right back out before they can build up their capacities. The United States and its allies use this veto over global economic development to maintain a monopoly on advanced technologies. This also keeps incomes low, making these countries price takers, and giving U.S. business a permanent upper hand, padding its bottom lines with artificially cheap commodities and labor.
Enter the People’s Republic of China. Cold War strategy opened the door for several Asian economies -- including China after the Sino-Soviet Split -- to pursue state-led development strategies contrary to normal U.S. policy. China could then attract large-scale foreign investment and protect it with strong state planning under the leadership of its Communist Party. Now its “Made in China 2025” strategy is openly building the very sort of technological independence that could disrupt the entire U.S.-led system.
If the effort works, then the dollar’s days are numbered -- economies that prefer to deal with China could buy from their companies, in whatever currency China wants. This will not be a quick or simple process, but the U.S. veto will be doomed.
The longer it takes China to fully develop its advanced industries, however, the more likely the United States and its allies will disrupt this progress through economic, political, or military intervention. If the Chinese can instead buy key industrial inputs -- like semiconductor lithography technology -- on the open market, they can build out their value chain very quickly, breaking important Western monopolies.
The West is scrambling to stall China’s ascent by "decoupling" supply chains and capital flows into Beijing. But this disruption risks raising prices, further tightening profit margins and undermining the dollar through inflation. As things get worse it will become harder and harder for U.S.-aligned companies to keep refusing to sell to China, especially since “winning” will mean reversing the engine of global economic growth.
In the meantime, China is taking the surplus they’ve generated and investing it internationally, outside the leadership of the U.S.-dominated IFIs. Led by the Belt and Road Initiative and its alternatives to the World Bank and IMF, the question is whether China is copying the current order or creating something new. Even if it is simply competing with the Western system on its own terms and exploiting poor countries, this still diverts crucial profit flows away from rich countries like the United States.
If, on the other hand, China is serious about respecting all development paths from its recipients, with no preconditions restricting the sort of state-led development it has enjoyed, then poor countries will have an opportunity for significant industrial gains. The whole system holding up the dollar’s privilege will be over one way or the other.
So this is the big force at play: either the United States will lose its global technological and financial dominance, or it will gut the world’s most significant source of economic energy. It will either compete away its advantages, lose its most important future markets, or see its system fully dismantled. In any case, we will see big upheavals in the global system that has papered over dwindling profits for years.
The desperate measures the United States is sure to take in response have their own risks and their own substantial long-term costs. The silver lining: the global majority may have an opening to demand something better, and the powers that be may finally have to listen.
Our only investment advice: Listen to more Moor Mother.
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