Dr. Susmit Kumar, Ph.D.
Note: This article is not about any individual. Instead, it is about the fraudulent and bogus “Reaganomics” economic policy, which is being religiously preached by nearly all US economists/MBAs and Wall Street.
When the future of world trade was discussed and the Bretton Woods conference was planned during World War II, many Third World countries were still under colonial rule and had absolutely no say in those discussions. The main deliberations took place between the United States and Britain exclusively, and at Bretton Woods all other countries were invited simply for the formal signing-in ceremony.
During the 1944 Bretton Woods agreement deliberation, there were two competing plans for the future of the global economic order—Britain’s Keynes plan and United States’ Harry Dexter White plan. Keynes favored a world currency, to be called bancor, managed by a global bank and an International Clearing Union. That “neutral” world currency would be exchangeable with national currencies at fixed rates of exchange. Under Keynes’s plan, both debtors and creditors would be required to change their policies. A country with a large trade deficit would pay interest on its account and devalue its currency to prevent the export of capital. On the other hand, a country with a large trade surplus would increase the value of its currency to permit the export of capital. A country with a bancor credit balance more than half the size of its overdraft facility would be required to pay interest on it. Keynes went so far as to propose the severe penalty of confiscation of surplus if at the end of the year the country’s credit balance exceeded the total value of its permitted overdraft.
Under the White plan, the US dollar was to be the global currency and the United States was given veto power in the workings of the IMF and the International Bank for Reconstruction and Development (IBRD, later incorporated into the present World Bank). Because of the two world wars, the European countries were deeply in debt and had transferred huge amounts of gold to the United States. They also needed money from the United States for their postwar reconstruction. Therefore, the United States was able to impose its will and its plan at Bretton Woods and Keynes’ brilliant proposal was not accepted.
Under the Bretton Woods Agreement, signed by 44 countries, the US enticed all other countries by claiming that it would keep its dollar pegged to gold at the rate of $35 for one ounce of gold. The US asked other countries to use the US dollar as reserve currency and also for conducting transactions between countries. As per the agreement, you could have asked the US govt to give you one ounce of gold for $35. The US had trade surplus from the end of World War II till the early 1970s, but since it has had trade deficit year after year (Chart 1 and Chart 2). The reason for it is that Nixon de-linked the dollar from gold in 1971, after which the US has just continued to print dollars to fund its trade and budget deficits. This has been going on since the Reagan administration. Had the dollar not been the global currency, there would not have been “Reaganomics”, the much-revered economic theory of the Republican Party. According to economist Allan H. Meltzer at Carnegie Mellon University,
“We [United States] get cheap goods in exchange for pieces of paper, which we can print at a great rate.” (“U.S. Trade Deficit Hangs In a Delicate Imbalance,” Paul Blustein, Washington Post, November 19, 2005).
The US dollar is a Ponzi scheme and is over-valued (please read my article: The US Dollar – A Ponzi Scheme). The US just print its currency, which happens to be the global currency, to fund its trade (and also budget) deficit for last four decades. In return, exporting countries deposit the same paper, i.e. the US dollar, in the US by investing in US Treasury Bills, US real estate and US share markets.
Here is a recent statement by a current top economic official in India:
“… has rightly pitched for lowering India’s peak Customs duty to 7% from 10%. Restarting the reform, that began in 1991 but got stalled after 2007-08, will enhance the quality of our domestic produce, make our products more competitive in the international market” (India must lower, not raise, tariff walls, The Economic Times, August 11, 2017).
The US has minimal tariffs in the world and as per the economist’s theory, described in the previous paragraph, the US should have the most efficient manufacturing units. But instead the US has lost massive amounts of manufacturing units to other countries, mainly to China, resulting in tens of millions of lost jobs in the Midwest, also called the Rust Belt in the US. When I went to the US for a PhD in late 1980s, 80% to 90% consumer goods sold in the US shops and malls were “Made in US.” But now nearly more than 95% consumer goods, sold in the US, are made by other countries, mainly by China. You can barely find “Made in US” consumer goods in the US now. Reaganomics have created America’s Frankenstein, China, and then sold the US to it, and now India is following the same path, mainly due to the US-based Indian origin economists at the helm of administration.
As per a recent news report (Amid Doklam standoff, Chinese imports to India up by 33% in April-June quarter, Mahua Venkatesh, Hindustan Times, August 14, 2017),
“Chinese imports to India recorded a 33% jump in the April-June quarter [of 2017] over the same period last year. … For some policy experts though it could be India’s leverage. With its economic growth slowing, China would want its foreign markets to widen.”
The question is: The US has had more than $350 billion a year deficit with China for the last several years; does the US has any leverage over China?
The answer is: No. Instead, China has stranglehold over the US economy and over the US dollar (please read my article: China Does Not Care For US Credit Rating Agencies). In the 2009 Pentagon Economic Warfare, the US lost consistently to China in every case and China won without as much as reaching for a gun.
The above tweet by Mr Kaushik Basu reflects a widespread academic misconception. Mr. Basu needs to know that the US is cheating the entire world through the Ponzi scheme called the US dollar. Countries like India have to “earn” the US dollar to pay for its imports whereas the US just needs a printer to print its currency to pay for its $600+ billion trade deficit. The US hoodwinked entire world by getting them to sign the 1944 Bretton Woods Accord as discussed above. Had there been a global currency “Bancor” as per the British proposal discussed above, then all the countries would have kept their FOREX in Bancor instead of dollars and the US would have had to “earn” the Bancor to pay for its imports just like everybody else. The US dollar would have been just like Indian rupee and the US would have had to devalue its currency 15% to 20% every year due to its massive $600 billion trade deficit a year. In fact, in that case Mr. Basu (and I also) would not have even gone to the US for jobs and he would have been a professor somewhere in India.
Till now the US has been surviving due its over-valued dollar. If the US dollar goes down to its Purchasing Power Parity (PPP) value, there will be a complete collapse of the US economy, akin to the Russian economy during 1990s. In Purchasing Power Parity (PPP) terms one dollar is 10 to 11 rupees only, i.e. the US dollar is six times over-valued vis-à-vis the Indian rupee. Right now, even after massive loss of manufacturing jobs, the living standard of even an American hourly wage is very high as compared to the rest of the world. Once China pulls the carpet underneath the US dollar, the US median household income, which is about $56,000 a year in 2016, would go down to less than $10,000 a year in terms of purchasing power. Half of US households would then be homeless and would find it hard to even survive as their entire money would be good only for food with nothing left for housing and health care.
In an op-ed article, published in the New York Times, William Grieder, a bestselling author, wrote (“America's Truth Deficit,” New York Times, July 18, 2005):
“For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public?”
Rather than paying any money towards its principal, which right now stands above $19 trillion, the US has been accumulating additional debt of anywhere from $300 billion to $500 billion each year. While describing the US debt, Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University said, ("In China’s Orbit", Niall Ferguson, December 1, 2010)
“With a debt-to-revenue ratio of 312 percent, Greece is in dire straits till now. However, the debt-to-revenue ratio of the United States is 358 percent, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9 percent of federal tax revenues to 20 percent in 2020, 36 percent in 2030, and 58 percent in 2040. Only America’s “exorbitant privilege” of being able to print the world's premier reserve currency gives it breathing space. But this very privilege is under mounting attack from the Chinese government.
Media and people need to stop listening to those who believe in Reaganomics. They need to confront these economists, in interviews and meetings, so that they would stop preaching the fraudulent and bogus theory called “Reaganomics.” These economists have misled and mismanaged the Indian economy for nearly three decades, i.e. since the 1991 liberalization.
Even before thinking to become a super-power, a country needs to generate trade surplus, which the US did for more than 25-30 years following World War II, China since the early 2000s, and both Japan and Germany in recent decades. The latter two countries are economic super-powers but are too small to be military super-powers. Without having trade surplus and becoming self-sufficient in essential mass consumer items, India has no hope of becoming a super-power.
Chart 1. US Monthly Balance of Trade (1950-75)
Chart 2. US Monthly Balance of Trade (1975-2017)
