Jane D’Arista: Big states will defend dollar, but private capital may move to precious metals and oil
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. In a recent article, economist Jane D’Arista quotes another economist, whose name is Nicholas Kaldor. Here’s what he had to say: “as the products of American industry are increasingly displaced by others, both in American and foreign markets, maintaining prosperity requires ever-rising budgetary and balance of payments deficits, which makes it steadily less attractive as a method of economic management. If continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome.” Now joining us to explain all of this is Jane D’Arista. She’s an economist with the Political Economy Research Institute (PERI), at the University of Massachusetts Amherst, where she’s co-founder of a committee of economists called SAFER, for stable, accountable, fair, and efficient financial reform. Thanks for joining us, Jane.
JANE D’ARISTA, ECONOMISTS FOR FINANCIAL REFORM: Thank you for having me.
JAY: So at the end of the last segment we left off with the question: so who is this good for? If Kaldor in 1971—I don’t think I mentioned that Kaldor’s quote isn’t recent. Kaldor’s quote’s from 1971.
D’ARISTA: No. He wrote that in The London Times in September 1971.
JAY: So it was pretty clear then where this would all lead.
JAY: So they do it anyway. So who are they doing it for?
D’ARISTA: Well, the question there is one that put many progressive economists and others on the side of the National Association of Manufacturers, who complained: you’ve driven up the value of the dollar in the 1980s to a point where we can sell nothing abroad and we can’t sell anything in our own country. And there was no real response. They tried to bring down the value of the dollar toward the middle of the 1980s, but not sufficiently.
JAY: So who’s benefiting from this?
D’ARISTA: Well, so then what happened was the manufacturers of this country said, we can’t lick ’em, we’ll join them, meaning the banks, and went offshore. So they were then manufacturing offshore in a cheap currency with cheap labor and selling back into the home market. So whose benefit? The financial sector.
JAY: So they go—by “cheap currency” meaning a cheap Chinese currency wherever they’re—.
D’ARISTA: Yes, right, wherever they’re manufacturing.
JAY: And they sell back into the market, where there’s a high dollar.
D’ARISTA: Mexico and then China. Yeah. And they make a larger profit doing so.
JAY: But the problem is is the high dollar’s based on what, other than the fact that it’s the world’s reserve currency? Because the more this happens, the less purchasing power people have.
D’ARISTA: That’s exactly right, unless you put them on credit. How do you make—?
JAY: Or you could have done one other thing. You could have let wages come up in the United States. But that was a no-no.
D’ARISTA: You couldn’t, because what were you producing?
JAY: Well, there was still a big manufacturing sector. It wasn’t [inaudible] nothing.
D’ARISTA: It has really shrunk, and over time it really did shrink. And the issue was constantly no, no, you can’t raise wages because (A) we’ll go from England to Virginia, we’ll go from Virginia to Mexico, we’ll go from Mexico—etc. Even the Mexicos began—.
JAY: Which is sort of the point, is there’s deliberate measures taken, including Reagan’s breaking of the Air Traffic Controllers strike.
JAY: And there’s a real effort made to make sure wages didn’t go up, and push people into debt instead.
D’ARISTA: Precisely so. You really did sort of have to push them into debt in order to maintain a middle-class lifestyle, which people were accustomed to—they had houses, they had, you know, children in school, etc. So this is then what happened in that period in the 1980s. We got into a recession in the 1990s, and we came out of it only because Greenspan in March 1994 raised interest rates, so we see this dynamic then. How do you maintain the value of the dollar? You keep the difference between the US interest rate and all imported, foreign interest rates at a level that favors the dollar, so that everybody wants to be in dollars ’cause you earn more money in dollars. That keeps it very strong. And that’s wonderful for Wall Street and the major banks. They have access to the dollar, and they make money on the transactions.
JAY: And I guess the point that needs to be repeated over and over again is that they know they’re creating a bubble, they know the bubble’s going to burst someday, but it doesn’t matter because the guys that are doing all this are cashing out at every step of the way, either through bonuses or other ways. They actually don’t care if the bubble bursts. In fact, once the bubble did burst, they didn’t lose anyway, ’cause the federal government comes in and saves their behinds anyway.
D’ARISTA: Yes, but there is also another mentality in that, which we hear constantly about the financial crisis in this country. People really do think the present will go on forever, and what I’m saying is: not necessarily.
JAY: So explain, go into that, because that’s really the key thing here is that this doesn’t keep going if at some point the dollar really collapses and people completely lose faith in it. And you’re saying we’re getting closer to that than a lot of people think.
D’ARISTA: We’re getting closer to that because we have an economy that has now come to the end of its rope, playing that role that Kaldor described, in the sense that we do not have a household sector that can continue to buy. They’ve lost their jobs; they’ve lost their homes. And so what is—they’ve been replaced by the government sector, in a sense, as the borrower in the global economy. And now we have, with the example of Greece, and with Bernanke himself making these statements, a problem. Governments are going into debt. They have to. Nobody else can spend. And at the same time, the market says, well, we don’t like that.
JAY: But we still see people, every time there’s a crisis, they still run to the dollar. And we understand—if you’re in the business news, at any rate, we’re told that even surreptitiously the Chinese are buying more long-term US bonds and seem to still believe in all of this, I mean, and I guess partly ’cause they have to. So, I mean, to what extent can this be allowed to fall?
D’ARISTA: It is a very difficult situation should it fall, but we’re in a cliff-like situation. Here is the problem. First of all, as far as China is concerned, they are trying to diversify. They are still buying dollars, yes, but at the same time they’re also buying soybean fields in Brazil and oil in Africa, etc. They are buying real economic value, if you will, rather than pieces of paper. That’s what they want to do with their savings, and they’re doing it in terms of what are the needs of their economy. Other countries with high reserves may follow in that path as well. The Chinese, of course, as we know, have over $1 trillion of US assets. If they pull the plug on us, I mean, our interest rates would go 30 percent overnight. That’s not going to happen, ’cause the Chinese are too responsible.
JAY: And, of course, it makes sense for them to let the business press report on how they’re buying some long-term bonds, ’cause they need to stop any sense of panic.
D’ARISTA: That’s right, and they also know that the world has to continue, and they have to moderate their behavior. But at the same time, the private sector is not the Chinese government. The private sector is fickle. I mean, you know, you look at the stock markets, you look at any of it, if US interest rates stay low, if there’s no hope that they will rise, if it looks to them that the US government debt is getting too large and they want more and more interest rates on US government debt, they may then decide to either flee the dollar or push up the interest rate in the US to an extent in which we are in difficulty.
JAY: But flee the dollar to what?
D’ARISTA: Gold. Platinum. Have you noticed platinum prices have gone up? Bet on oil in the markets. I mean, remember, we got to $147 a barrel in 2008. There are opportunities to speculate. The commodities we did back in 2008, there are opportunities out there. There are the things to do. Speculate on land and other parts of the world, etc.
JAY: Although there’s a lot less real things to speculate on, so they’re creating these casino markets, which essentially is like horseracing. We did an interview recently about the speculation on food. They’re creating these, where you don’t have to own and hoard rice anymore; you can just bet on what’s going to happen to rice. And it’s exactly like a horserace.
D’ARISTA: Precisely so. Yeah. And so you’ve got it.
JAY: You don’t have to own the horses; you can just sit there and you can bet on the horses.
D’ARISTA: Right. So, I mean, when they do this, of course, this means that the value of the dollar does go down. In the process, the value of the vast savings of many countries also begins to shrink, and those savings are terribly important to those countries. They back—they are held, as it were, by the central banks, and they back domestic credit. So if we have an implosion of the reserves of most of the countries of the world, especially the emerging-market countries, then we will have a contraction of credit.
JAY: Okay. In the next segment, let’s talk a little bit more about why this might crash. I mean, a lot of this is in the hands of the Chinese and Japanese, I would think, who own most of the US securities. And, I mean, as long as they keep believing, why would it fall? But let’s answer that in the next segment of our interview. Please join us with Jane D’Arista on The Real News Network.