Thursday, October 26, 2006

How Sound is the Dollar?

Truthout has published an excerpt from German author Gabor Steingart's book "World War for Wealth: The Global Grab for Power and Prosperity." The excerpt is entitled "America and the Dollar Illusion." Here's a quote:

US economic growth -- an impressive figure on paper -- is an important benchmark. When it is high, investors feel reassured in their faith in the power of the US domestic economy to perform well. True, the trade balance deficit has skyrocketed since it first appeared in the mid-1970s. But the economy is growing steadily anyway, as the dreamers note with growing self-confidence. It may not be growing as rapidly as the Chinese economy, but it is growing twice as fast as the European economy.

And yet this benchmark is not as reliable as it seems. The faith investors have in the figure has actually helped create it. After all, the purchasing price of a government bond feeds almost directly into state consumption, just as the purchasing price of a share makes companies more inclined to consume. It also extends the credit basis of millions of private households -- which in turn boosts consumption. In this way, the expectations of investors - including the expectation that the United States will continue to grow -- transform into certainties almost all by themselves.

In other words, the capital of trust creates the very growth rates it needs in order to justify itself. US economic growth, in fact, is fueled by ever-increasing consumer spending -- puzzling given that American wages are dropping as is industrial output. Still, everyone knows the answer to this riddle. The rise in consumption isn't based on an expansion of production, a rise in wages or even an increase in exports. To a large extent, it's based on the growing debt. But why do banks keep issuing credit? Because they accept the ever-increasing prices of stocks and real estate as a kind of collateral. A closed circuit of miraculous money minting has been created.

Self-Delusion

The extent of this self-delusion can be read in the balance sheets of the banks: Almost no one is saving money in the United States today. The US foreign debt grows by about $1.5 billion every weekday and has now reached about $3 trillion. Private household debt, both at home and abroad, has reached $9 trillion -- and 40 percent of these debts has been incurred since 2001. The Americans are enjoying the present at the cost of selling off ever larger chunks of their future. Arguably, the imminent economic crisis is the most thoroughly predicted one in recent history. Rather than refuting the crisis, the current US economic boom merely heralds it.

Biologists have observed similar phenomena in plants contaminated by toxins. Before they wither, they produce one last batch of healthy shoots -- to the point that they can hardly be distinguished from healthy plants. Some speak of a panic bloom.

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