Nos. 33 & 34, December 2002


Why this Special Issue: India as a Pillar of US Hegemony

From Colony to Semi-Colony

Towards Nationalisation

The Iran-Iraq War: Serving American Interests

The Torment of Iraq

Return of Imperialist Occupation
The Current Strategic Agenda of the United States

Home Front in Shambles

Military Solution to an Economic Crisis
US Declares India a Strategic Pillar

The Pages Ripped out by the US from the Weapons Report

Real Reasons for the US Invasion:
Home Front in Shambles

Even as the US prepares to launch an invasion of Iraq (and perhaps of other countries as well), its economy is trapped in a recession with no clear prospect of recovery. True to their character, the world’s giant media corporations have not seen it fit to explore the causal connection between these two outstanding facts.

No doubt the recession has been extraordinarily mild by historical standards—in fact, going by the narrow official definition and available data, the US economy is now out of the recession, and has begun to grow again. However, this upturn is illusory: all signs point to the US returning to recession soon, if indeed it has not done so already. Moreover, the official definition of ‘recession’ is itself dubious—for instance, there has been no real pick-up in employment during the so-called recovery. The US corporate sector knows the truth: corporate profits and business investment have experienced their steepest decline since the 1930s.

Importantly, the US is not alone in its fate: Japan has been stuck in recession for a decade, and Europe has now joined the club. Whereas, in the recent past, buoyant US demand was the motor pulling the world economy out of recession, today the US itself is in the doldrums and no other economy is taking its place as the demand-motor. Prospects for a global recovery are bleak. Indeed, the giant overhang of debt and excess capacity dictates that the recession must deepen.

Three years ago, economic analysts and the financial press were still celebrating the American economy’s seemingly endless capacity for growth. Alan Greenspan, the head of the US Federal Reserve (the American central bank), was treated as a media star for his genius in fine-tuning interest rates to avoid both inflation and recession. Some advanced the novel theory that new technology, continuous productivity growth, and globalisation had made the American economy recession-proof.

Crisis of overproduction in full bloom
It is in times of economic setback that the press returns to earth. The Chicago Tribune recently published a series of articles on the current crisis, drawing on a wide range of interviews with employers, employees and economic analysts. The first piece in the series is titled: “The Economics of Glut. Bloated industries put the economy in a bind. Glut is making it harder to shake off the recession.” (William Neikirk, 15-18/12/02) The article begins: “The world’s auto industry can now produce 20 million more cars than consumers can buy.” Citing instances also from telecommunications and dot-coms, the Tribune discovers that “economists call the phenomenon overcapacity.... businesses can produce far more than we need. Supply has simply outstripped demand. When that happens, production slows, equipment sits idle, costs go up, workers are laid off and investments are postponed. The capacity glut exists on a scale that this country and many others haven’t seen for decades, and it at least partially explains why it is so difficult for the American economy to shake off a recession that by all measures seemed mild.”

The Tribune sees a swamp of excess capacity in airline, auto, machine tool, steel, textile, and high-tech industries, even commercial space and hotel rooms. According to the Federal Reserve, manufacturers are using only 73.5 per cent of capacity, far below the 80.9 per cent average of 1967-2001, and 3.5 percentage points below the level during the 1990-91 recession. In an effort to attract customers, airlines have slashed their fares to five-year lows; United Airlines, the second largest in the country, has filed for bankruptcy; and Boeing says its deliveries of aeroplanes will be down 28 per cent this year.

The telecommunications industry took on $2.1 trillion in debt between 1996 and 2000 and jacked up investment by 15 per cent per year in real terms (Robert Brenner, “Enron Metastasized: Scandals and the Economy”, Against the Current, Sept.-Oct. 2002). Each firm tried to steal a march on the others, on the basis of projections of a massive growth in demand. By 2000 the telecom industry accounted for a quarter of the increase in the US economy’s equipment spending. Today the world has 39 million miles of fibre-optic lines, and telecom networks are operating at three percent of their capacity.

Despite 45 semiconductor fabricating plants having shut down in the US, the American semiconductor industry is said to suffer from 15 per cent overcapacity. This figure is set to rise: apparently China has just built some of the largest advanced semiconductor plants in the world.

The US automobile industry—still the most important industry in that country—can produce two million more cars than it can sell. The big three manufacturers—General Motors, Ford, and Chrysler—are dealing with the collapse of demand by financing customers at zero per cent interest. Sales are projected to fall from 17.5 million last year to 17 million this year and 16.5 million next year. Ford is planning to slash production by 16 per cent, or 900,000 vehicles, by 2004, shutting five plants and slashing 12,000 jobs.

Under monopoly capital the build-up of overcapacity doesn’t immediately result in a cutback in investment. Indeed, firms are driven to invest on an even grander scale, to outspend their rivals and thereby grab market share away from them—a strategy pursued by all the firms, with predictable results. In 1998 the world automobile industry, the largest manufacturing industry, could make 18 million more cars than it could sell, and Japanese car makers were running at 50 per cent of their capacity (Economist, 10/5/98); that gap has risen to 20 million. Automobile giants have been setting up plants in their rivals’ countries the better to penetrate their markets.

Investment now not responding to stimuli
When the authorities conceded in late 2001 that recession had already set in, they ascribed it partly to the September 11 attacks and exuded confidence that it would be brief. The necessary measures were in fact already in motion: Lower interest rates and tax cuts were meant to induce businesses and consumers to spend more, and so boost demand for firms’ products and services, in turn giving a fillip to investment. However, despite the passage of a 10-year tax reduction package of $1.35 trillion, and the Federal Reserve’s slashing interest rates 12 times over 13 months, the ‘recovery’ is pallid.

“Even more unsettling”, says the Tribune, “is the fact that falling prices—or deflation—have taken hold in the manufacturing sector. Prices of goods have been dropping as a global excess capacity has developed. There are some indications that deflation is beginning to spill over into the services sector, in areas like retail trade, which is indirectly related to manufacturing. The U.S. hasn’t had a generalized deflation since the Great Depression in the 1930s. In a deflationary environment, people postpone purchases in anticipation that prices could be lower in the future. Demand drops. Profits spiral downward. Jobs are lost. Retrenchment sets in.”

Unemployment rose from 3.9 per cent in September 2000 to six per cent in November 2002, and won’t fall for foreseeable future. Three million jobs have been slashed—two million in manufacturing. The vast excess capacity means that even the slight pick-up in growth hasn’t translated into more jobs. A year ago, there were one million people who had been unemployed 26 weeks or longer; now there are 1.7 million. The retrenchments are particularly large in the ‘new economy’ sectors: Brenner points out that “In the very brief period between the end of 2000 and the middle of 2002, as more than sixty companies went bankrupt, the telecommunications industry laid off more than 500,000 workers, which is 50 per cent more than it hired in its spectacular expansion between 1996 and 2000.”

Not to worry, says the Federal Reserve. More interest rate reductions are on the way. “But by now”, says the Economist (28/9/02), “the Fed has shot most of its ammunition: with interest rates and inflation already so low, there is little room for further easing if the economy stumbles. That raises the spectre of falling prices, which would be devastating in an economy so awash with debt”—as the value of assets for which people have borrowed plummet, this sets off a devastating chain of defaults and bankruptcies throughout the economy.

In fact overcapacity in US industry—and indeed the world—isn’t new. It has been a perennial underlying feature of monopoly capital, and so of the American economy. Capacity utilisation in US manufacturing has been on a steady downward trend since the sixties (see Stagnation and the Financial Explosion, Harry Magdoff and Paul Sweezy, 1987, p. 83, Chart 2). It is huge overcapacities in manufacturing worldwide that explain the decade-long recession in Japan—an economy that is at the forefront of manufacturing efficiency.1 It is again giant global overcapacities in industries such as computer chips that underlay the collapse of the southeast Asian economies in 1997-98. The southeast Asian economies were shortly followed by Russia and Brazil, and then Argentina in 2000. Recession in the US and Europe is only the latest act in this as yet unfolding drama.

Endemic to capitalism
How do such overcapacities develop? Capitalists invest in order to earn a profit, and how much they invest, in which industries, using which technologies, and so on are determined by the prospect for profits. In the course of competing with one another to grab market shares and to maximise their profits, capitalists must continuously expand their productive capacity. The purpose of production under capitalism is to accumulate more capital.

However, in this process the growth of productive capacity soon outstrips demand. (Seriously redistributing income throughout society would no doubt increase demand, but it would take away profits from capitalists, going against the very reason for existence of investment under capitalism.) As demand weakens, the profitability of investment declines; capitalists therefore cut back on investment; demand for investment goods suffers, and, as workers get retrenched, demand for consumer goods further weakens. This is how recessions come about.

Capitalist theorists claim that the scrapping of capacity and the depression of wages (due to mass unemployment and the desperation of workers to work at any price) eventually make it profitable for capitalists to invest again. In fact, these factors may work the other way. Workers may be available more cheaply, but with less money in the hands of workers in general, demand would stay depressed, and the capitalist would be reluctant to invest again. In the absence of some counter-acting force outside the forces just described, production and employment would remain at a level far below the productive capacity of the economy. The Great Depression persisted through the thirties despite wages falling dramatically.

Such a crisis is peculiar to capitalism. Under earlier historical social systems, there were no doubt periods when growth—or even production itself—declined. However, the causes were generally natural calamities or war. Unique to capitalism is the strange phenomenon of production falling because of the ability to produce too much. The further growth of production is held back not by physical limits to production (equipment, raw materials, labour power) or by physical limits to consumption (even if needs for a particular commodity were completely satisfied, investment could move to fulfilling other needs). Rather, production is held back by the fact that it is not profitable for the capitalists to produce more.

The only way to resolve this contradiction—establishing the social control of the surplus, so that it is deployed not according to private profit but social need—is by definition impossible under capitalism. Instead, capitalists and their governments employ various methods to deal with the effects of this contradiction. These methods do deal with some effects for some time, without making the contradiction go away—in fact, the use of these methods could even accentuate the contradiction when it finally once again surfaces. It is important to grasp that it is not the policy of one or the other administration or country, but this contradiction itself, a necessary part of capitalism, that propels the entire dynamic.

Why aren’t capitalist economies always in crisis, then? Because they have been able to draw on various counter-acting forces outside the process of capital accumulation described above. In the past century, such forces generating demand came from different sources. It was only once it entered World War II, and the needs of war created full employment of labour and industrial capacity, that the US really emerged from the Great Depression that began in 1929. After the war, there were the needs of post-war re-building, as well as pent-up demand for consumer goods postponed during the War; then demand continued to be boosted by wars in Korea and Vietnam, and the Cold War, requiring massive arms expenditures even in peacetime.

Finally, however, the economy came to rely, for generating demand, more and more on an explosion of debt (consumer, corporate, national), and on a financial-speculative sector whose growth far outstripped the growth of commodity-producing sectors. (Magdoff and Sweezy, p. 35)

The biggest bubble in America’s history
Under capitalism, as we mentioned above, profitability ultimately determines investment, but under monopoly capital the day of reckoning can be put off for some time with the help of state intervention (physical, fiscal and financial). US corporate profitability, it now emerges, turned dramatically downward in 1997 in the face of worldwide overcapacity. Brenner points out that “Between 1997 and 2000, at the very same time as the much-vaunted US economic expansion was reaching its peak, corporate profits in absolute terms and the rate of return on capital stock (plant, equipment, and software) in the non-financial corporate economy were falling sharply—as recently revised figures show, by 15-20 per cent in both cases!”

Despite this share prices soared, fuelled by cheaper and cheaper funds as the Federal Reserve repeatedly loosened interest rates. What took place was the biggest credit boom in US history. The wealthy, finding the prices of their shares soaring, consumed more. Corporations borrowed and bought back their shares, pushing up their share prices further and thus getting access to cheap funds. With these funds they made massive new investments. No doubt, profitability kept plummeting, but unscrupulous auditors were hired to dress the books. Among the 27 major corporations so far found guilty of such practices are such stars as AOL Time Warner, Enron, Worldcom, and Xerox. The two top US banks, Citigroup and J.P. Morgan Chase, as well as Merrill Lynch, and the country’s top auditing firm, Arthur Andersen, are also deeply implicated.

In the words of the Economist (28/9/02),

“This is no normal business cycle, but the bursting of the biggest bubble in America’s history. Never before have shares become so overvalued. Never before have so many people owned shares. And never before has every part of the economy invested (indeed, overinvested) in a new technology with such gusto. All this makes it likely that the hangover from the binge will last longer and be more widespread than is generally expected....

“The most recent bubble was not confined to the stockmarket: instead, the whole economy became distorted. Firms overborrowed and overinvested on unrealistic expectations about future profits and the belief that the business cycle was dead. Consumers ran up huge debts and saved too little, believing that an ever rising stockmarket would boost their wealth. The boom became self-reinforcing as rising profit expectations pushed up share prices, which increased investment and consumer spending. Higher investment and a strong dollar helped to hold down inflation and hence interest rates, fuelling faster growth and higher share prices....”

The outcome has been catastrophic:

“Since March 2000 the S&P 500 index [an index of share prices] has fallen by more than 40 per cent. Some $ seven trillion has been wiped off the value of American shares, equivalent to two-thirds of annual GDP. And yet share prices still look expensive [i.e. they will fall more].....”

Yet to hit bottom
We described earlier the theory of business cycles to which the American establishment, including Alan Greenspan, subscribes. According to this theory, overinvestment and high employment finally result in declining profitability, triggering a recession. Through the recession, the earlier “excesses” are purged: capacity is scrapped, and workers retrenched. Finally comes a point at which forces accumulate to reverse the downward direction, and it is profitable to invest again. However, by this standard theory the recession should be nowhere near its end, since the earlier excesses are not being purged at all. Instead the Federal Reserve’s answer to the downturn is to pump in more debt, as the Economist (the London-based voice of capital) notes with concern:

“A good indication of the size of the adjustment yet to be made is the private sector’s financial balance (or private-sector net saving, equivalent to saving minus investment)... In the United States the private sector balance shifted from a surplus of five per cent of GDP in 1992 to a deficit of five per cent of GDP in 2000 as households and firms went on a borrowing spree, an astonishing change after almost four decades when the private sector never ran a deficit at all....

“Troublingly, consumers have continued to borrow as if little has changed. By slashing interest rates, the Fed has encouraged a house-price boom that has partially offset equity losses and allowed households to take out bigger mortgages to prop up their spending.... Households’ debt-service payments are... close to a record high, even though interest rates are low.

“Households cannot keep borrowing at their current pace. At some stage they will need to start saving more and spending less. If this happens abruptly, it will trigger another, deeper recession.... America’s economy now looks awfully like Japan’s in the early 1990s...”

Even as American households do borrow massively for consumption, the American manufacturing sector has become increasingly unable to compete with imports. For every dollar of goods it exports, the US is now spending $1.43 on imports. It is running a monthly trade deficit of more than $40 billion a month, or nearly $500 billion a year. American commentators worry that the American manufacturing base is being whittled away. Smaller American manufacturers are pressing for a substantial devaluation of the dollar to make American goods cheaper than foreign ones, and thus better able to compete. As we shall see below, this solution is ruled out for the US, since it runs counter to the interests of the US’s global financial hegemony.

The secret to a limitless debt: Dollar Hegemony
Normally, a country whose national debt grows rapidly faces serious problems. Investors worry that it will not be able to service its debts, and they begin withdrawing their investments; bankers refuse to provide it fresh loans; and the country soon suffers a balance of payments crisis. If the debtor is a third world country, it is forced to turn for loans to the International Monetary Fund and the World Bank. These two institutions in turn stipulate a programme of ‘structural adjustment’, which depresses the consumption of the vast majority, depresses the cost of labour power, cheapens the country’s raw materials exports, hawks off public sector assets and natural resources to foreign investors at cut-rate prices, and so on.

However, till now the United States has been able to run up a truly giant national debt for a special reason. Being the world’s leading capitalist economy, and a military superpower, its currency has been used for payments between countries (and therefore for their reserves of foreign exchange as well). When it needs to pay its debts it merely issues a treasury bond (ie borrows from the capital market) to which investors from around the world rush to subscribe. Foreign investors buy not only bonds issued by the government, but also American corporate bonds, shares, and real estate. These inflows, soaking up as they do the world’s savings, ensure that the US is able to import more than it exports, year after year, without suffering the treatment handed out by the IMF and World Bank to countries like Argentina, Brazil, India, and so on.

This endless supply of golden eggs depends on the US remaining the supreme imperialist power and the dollar remaining the currency for international payments. However, that is precisely what is now threatened.

The role of oil in dollar hegemony
During World War II, the Bretton Woods conference worked out post-war international financial arrangements with the aim of ensuring the imperialist powers’ stability, providing for their growth, and avoiding the types of financial crises witnessed in the preceding decades. Among other things, the conference fixed the value of the US dollar in gold—$35 to an ounce. Holders of US dollars could convert them into gold at their option. This posed no problem as long as no one wanted to do so. But, from the mid-sixties, when inflation (brought on by increased spending on the Vietnam war and welfare programmes) reduced the value of the dollar, foreign dollar holders began converting their dollars to gold.

Alarmed at its declining gold supplies, the US first devalued the dollar relative to gold in 1971 and, in 1973, unilaterally declared it would no longer be convertible into gold. If, despite this severe shock, countries continued to accept the dollar as the currency for international payments and investors continued to put their money in dollars, it was because of America’s continuing supremacy worldwide and the absence of a competing international currency. US control over oil producers played a crucial role. Arjun Makhijani notes that

“oil exporters—led by Iran, Venezuela and Saudi Arabia — decided to continue denominating the price of oil in US dollars, ostensibly a sign of confidence in the United States and in its money. But, in fact, these countries had little choice but to continue to use US dollars—there was simply no realistic global alternative at the time.

“With oil linked to the dollar, and a substantial U.S. military presence in the Middle East, the position of the dollar seemed to be strong. At that time, Iran was the closest U.S. ally in the Persian Gulf and welcomed U.S. military presence. Iran was also the most powerful military force and the most populous country in the region, as well as the world’s second largest oil exporter.

“To date, the oil-dollar link has given the United States a huge advantage in international trade. Corporations and countries carry out trade in U.S. dollars, making the U.S. Treasury and the U.S. Federal Reserve Board the ultimate arbiters of global monetary policy. However, the stability of the U.S. dollar, and by extension the global monetary system, partially depends on the financial policies of Persian Gulf countries that control nearly two-thirds of the world’s reserve of `black gold.’ [petroleum]

“That weakness became evident in 1979, when the Shah of Iran was overthrown by Ayatollah Khomeini’s Islamic revolution, and the United States lost its main military ally in the global oil patch. The price of oil shot up to $40 a barrel (about three times today’s level in real terms) and the value of the dollar plummeted relative to other currencies. The price of gold soared to $800 per ounce. The U.S. had to drastically increase interest rates—to 15 to 20 percent, causing the most severe recession since World War II—to encourage foreigners to hold onto their U.S. dollars rather than dump them for other currencies.” (“Saddam’s Last Laugh: The Dollar Could Be Headed for Hard Times If OPEC Switches to the Euro”,, 9/3/01)

It is worth summing up the points made above:

  • The US, and indeed the world economy, is suffering from a crisis of overproduction.

  • In order to stave off recession, the US central bank has been boosting demand by pumping in unprecedented amounts of credit.

  • The US has the funds to do this because foreigners put their savings in US dollar assets.

  • The US’s overall global supremacy and in particular its control over oil have sustained its status as the safest harbour for international capital.

  • However, the US’s ability to soak up the world’s savings is a double-edged sword. If foreigners, who hold half or more of all the US currency, should decide to dump the dollar, its value would plummet, leading to yet more capital flying from the country.

  • In order to prevent that happening, and to get foreign capital to return, the US would have to raise its interest rates steeply.

  • But if that were to be done, given the vast addition to US debt since 1980, this time round a steep US interest rate hike could cause a crash heard round the world. This would happen because debt-laden American corporations and consumers would be unable to service their debts, so their assets would flood the market; asset prices would collapse, and banks—swamped with worthless assets instead of income—would in turn collapse. In short, there is a threat of a new Great Depression.

Implications of the euro
In the 1970s, there was no alternative to the dollar. On January 1, 1999, an alternative arose in the form of the euro, the new currency of the European Union (EU). Of course, investors did not immediately flock to the euro. The euro stuttered at birth, falling 30 per cent against the dollar by the end of 2000. In the last year, however, it has picked up sharply, and in recent months has remained at parity with the dollar (ie about one euro per dollar).

The euro has become attractive for three reasons.

First, since the EU is a large imperialist economy, about the same size as the US, it is an attractive and stable investment for foreign investors.

Secondly, since foreign investors’ holdings are overwhelmingly in dollars, they wish to diversify and thus reduce the risk of losses in case of a dollar decline: they are increasingly nervous at the size of the US debt mountain and the failure of the US government to tackle this problem.

Thirdly, certain countries smarting under American military domination sense that the rule of the dollar is now vulnerable, and see the switch to the euro as a way to hit back.

Thus even in November 2000, when the euro was 30 per cent down against the dollar, Iraq demanded UN approval to be paid in euros in the UN oil-for-food programme. This despite the fact that the currency markets at the time did not see a rebound for the euro and despite the fact that Iraq would make the switch at considerable immediate cost, losing 10 cents a barrel to compensate buyers for their currency conversion costs. Iraq also asked that the $10 billion in its frozen bank account in New York be converted to euros. The UN, a plaything of the US, resisted the change until Iraq threatened to suspend its oil exports. (“Iraq: Baghdad Moves to the Euro”, Radio Free Europe, 1/11/00; “Iraq uses the euro in its trade deals,” Arabic, 7/9/01)

Iran, which the US has now labelled, along with Iraq and North Korea, as part of an “axis of evil”, is also contemplating switching to the euro. The Iran National Oil Company welcomed the launch of the euro in 1998 itself, saying that “This money will free us from the rule of the dollar”, and we “will adopt it”. The national oil company and other major Iranian companies have made it clear to both their European and Latin American oil partners that they would “prefer the euro”. While Iran continued using the dollar thereafter, there are indications it could follow Iraq’s example. The Iranian government budget for the year to March 2002 was tabulated in dollars, but in December 2001 an oil ministry official said that “could change in the future”. Iran News (29/12/01) called for a switch to the euro for both oil and non-oil trade: “The euro could become our currency of choice” if it made gains on the dollar. Since then the euro has climbed 14 per cent against the dollar. (“Iran sees euro as way to ‘free’ itself from the US dollar”, Agence France Presse, 31/12/01)

Some in Saudi Arabia have called for switching to the euro as “a more effective punishment [than an oil embargo] for the United States, Israel’s principal source of financial and political support”. (“Protest by switching oil trade from dollar to euro”, Oil and Gas International, 15/4/02)

At the Russia-European Union summit in May 2001,

“EU leaders... made an audacious bid to lure Russia away from its reliance on the greenback [the dollar], calling on Moscow to start accepting euros instead of dollars for its exports, dangling the attractive carrot of a boom in investment and trade.

“In a report commissioned by Russia’s Central Bank in July 1999, the Russian Academy of Science said: ‘The introduction of the euro directly bears on the strategic interests of Russia and alters the conditions for its integration into the world economy. In the final analysis, the consequences are to the benefit of our country.’ Olga Butorina from the Academy of Science said whereas EU states accounted for 33 percent of trade turnover in 1998 compared with 8 percent for the United States, 80 percent of foreign trade contracts—mainly for oil, gas and other commodities—were concluded in dollars.... ‘[Switching to the euro] would increase dramatically the demand for euros in the world,’ she said. ‘For sure, it would be an important strategic shift and the euro would start to compete with the dollar in international trade markets.’” (Asia Times, 19/5/01)

Another likely candidate for switching to the euro is Venezuela, whose leader Hugo Chavez the US has been attempting to oust over the last year, without success (at the time of going to press). It is not only the oil economies that would make the switch (for example, North Korea too recently said it would convert its foreign exchange reserves to the euro); but the shift of the major oil exporters to accepting payment in euros would indeed have a major, potentially devastating, impact on the dollar.

The more countries that switch to the euro, the more attractive would be the euro.

Dollar slide threatens
As the dollar’s share of trade declines, central banks will want their foreign exchange reserves to be similarly distributed. Asian central banks have accounted for 80 per cent of the growth in global foreign exchange reserves, with current holdings of a gargantuan $1.5 trillion, most of it invested in American bonds. Around 85 per cent of Asian central bank reserves are estimated to be in US dollars. A shift of just 15 per cent would subtract $225 billion from the dollar and add it to the euro.

The revelations that a stellar gallery of American corporations led by Enron and Worldcom have been cooking their books, and that US manufacturing corporations’ profits fell by 65 per cent between their 1997 peak and 2002 (Brenner, op. cit.), would also unnerve foreign investors — who own a reported $1.5 trillion in US corporate equities (“Dollar crisis may be close at hand”, Nick Beams, World Socialist Website, 18/6/02).

Of course, there are certain checks on these trends. For one, the world’s major financial centres are still New York and London, and Britain has still not joined the euro. The euro has as yet no financial centre to rival London and New York. Thus Iran is hesitant to actually make the switch to the euro because London is still the financial centre for Iran overseas business.

Moreover, neither Europe nor the Asian economies want to see the US economy collapse. First, they would not be able to liquidate their holdings in the US before that happened, and therefore would suffer huge losses. Secondly, the collapse of the US market for their goods would deal them a heavy blow. Thirdly, if the dollar lost value American goods would become cheap in terms of other currencies, and displace European and Asian goods in their home markets. So, unlike Iraq, the EU and Asia would want to proceed slowly, protecting the value of their investments as they withdrew them.

However, that is assuming rational collective behaviour on the part of investors, far removed from reality. Once a sudden shift takes place, herd behaviour takes over. As each investor races to pull out his investments, investors collectively drag down the value of all their investments. “We seem to be approaching the cliff edge”, says Avinash Persaud, head of research at State Street, a leading New York-based investment bank. “Even if everyone expects just a modest fall in the dollar they end up getting a violent one, simply because everyone will wait before buying” the dollar. (“Dollar slide could gather dangerous speed”, Christopher Swann, Financial Times, 25/6/02)

US unilateralism
During this period, the US has damaged its chances of cooperative action with Europe and east Asia by going on a rampage of unilateralism. Examples abound.

It has dismissed the binding obligations of the Kyoto Protocol on Climate Change, and thus thrust the burden of preventing global warming on the rest of the world.

It has refused to be bound by the newly-set-up International Criminal Court.

It has refused to sign the treaty banning anti-personnel mines.

It has dumped the process of strengthening the Biological Weapons Convention.

It has rejected the Comprehensive Test Ban Treaty which the previous US administration was trying to force third world countries like India to sign, and is preparing to test a fresh generation of nuclear weapons, which it now calmly says it plans to use against non-nuclear countries as well.

It has unilaterally withdrawn from the Anti Ballistic Missile Treaty, and is racing to set up a space-based ‘shield’ against missiles (the National Missile Defence, which will indeed enable it to strike others with nuclear weapons and not fear reprisal). It thus creates scope to seize control of outer space.

It has openly threatened the UN that it would be rendered irrelevant if it did not follow American dictates.

After extracting an unprecedented declaration from NATO that the September 11 attack on the US would be treated as an attack on all NATO member-states, the US ignored NATO for the Afghanistan invasion, and assigned European forces only such lowly jobs as policing.

In trade, the US has levelled heavy tariffs on European steel imports in order to protect its own industry. It has unilaterally retaliated at what it sees as European restrictions on imports of American beef and bananas, each retaliation accounting for a hundred million dollars or so of annual trade, and has rejected all European efforts to resolve these disputes. Without sanction from any international body, the US levels sanctions against European firms that deal with American enemies such as Cuba and Iran.

More trade clashes loom. The world’s biggest aeroplane makers, the American Boeing and the European Airbus, are fighting a frenzied battle for shrinking orders. In 2003, a dispute is set to explode over agricultural subsidies, genetically modified products, and overall agricultural trade. (“America’s Two-Front Economic Conflict”, C. Fred Bergsten, Foreign Affairs, March-April 2001)

In Asia, the threat to the US could come from the increasing trend towards the setting up of an economic bloc on the lines of the EU. China, Japan, South Korea and the southeast Asian countries are moving slowly toward an East Asian free trade area. South Korea, Indonesia, and Thailand have suffered the humiliation of begging for IMF loans during the 1997-98 crisis. The loans were given on condition that they followed austerity measures that merely suppressed economic activity and made their firms cheap for American corporations to buy up. This experience has spurred the moves to set up cooperative arrangements to prevent currency collapses, and eventually establish an Asian Monetary Fund (AMF) for this purpose. Since these countries have $1.5 trillion of foreign exchange reserves between them, the AMF would rival the US-dominated IMF. These developments may move in the direction of a common currency at some point in the future. (Bergsten, ibid) The US is strenuously attempting to prevent the emergence of such a separate bloc. It sees the growing integration of capitalist China with the southeast Asian economies as an important threat. (“China Races to Replace US as Economic Power in Asia”, Jane Perlez, New York Times, 27/6/02)

As the global recession sets in, with the US, Europe and Japan sinking together, tensions are likely to sharpen between these three blocs. Cooperative effort to boost global demand is less likely than is competition among them to get the biggest share.

1. Japan is also the world’s largest creditor, the world’s largest saver, the possessor of a giant trade surplus and has the world’s largest foreign exchange reserves. (back)


Next: Military Solution to an Economic Crisis


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