Page 1 of 4 CHINA'S DOLLAR MILLSTONE, Part 1 Breaking free from dollar hegemony
By Henry C K Liu
The vast expansion of US-led globalized trade since the Cold War ended in 1991
had been fueled by unsustainable serial debt bubbles built on dollar hegemony,
which came into existence on a global scale with the emergence of deregulated
global financial markets that made cross-border flow of funds routine since the
1990s.
Dollar hegemony is a geopolitically constructed peculiarity through which
critical commodities, the most notable being oil, are denominated in fiat
dollars, not backed by gold or other species since then president Richard Nixon
took the US dollar off gold in 1971. The recycling of petro-dollars into other
dollar assets is the price the US has extracted from oil-producing countries
for US tolerance of the oil-exporting cartel since 1973. After that, everyone
accepts dollars because dollars can buy oil, and every
economy needs oil. Dollar hegemony separates the trade value of every currency
from direct connection to the productivity of the issuing economy to link it
directly to the size of dollar reserves held by the issuing central bank.
Dollar hegemony enables the US to own indirectly but essentially the entire
global economy by requiring its wealth to be denominated in fiat dollars that
the US can print at will with little in the way of monetary penalties.
World trade is now a game in which the US produces fiat dollars of uncertain
exchange value and zero intrinsic value, and the rest of the world produces
goods and services that fiat dollars can buy at "market prices" quoted in
dollars. Such market prices are no longer based on mark-ups over production
costs set by socio-economic conditions in the producing countries. They are
kept artificially low to compensate for the effect of overcapacity in the
global economy created by a combination of overinvestment and weak demand due
to low wages in every economy.
Such low market prices in turn push further down already low wages to further
cut cost in an unending race to the bottom. The higher the production volume
above market demand, the lower the unit market price of a product must go in
order to increase sales volume to keep revenue from falling. Lower market
prices require lower production costs which in turn push wages lower. Lower
wages in turn further reduce demand.
To prevent loss of revenue from falling prices, producers must produce at still
higher volume, thus further lowering market prices and wages in a downward
spiral. Export economies are forced to compete for market share in the global
market by lowering both domestic wages and the exchange rate of their
currencies. Lower exchange rates push up the market price of commodities which
must be compensated for by even lower wages. The adverse effects of dollar
hegemony on wages apply not only to the emerging export economies but also to
the importing US economy. Workers all over the world are oppressed victims of
dollar hegemony, which turns the labor theory of value up-side-down.
In a global market operating under dollar hegemony, the world's interlinked
economies no longer trade to capture Ricardian comparative advantage. The
theory of comparative advantage as espoused by British economist David Ricardo
(1772-1823) asserts that trade can benefit all participating nations, even
those that command no absolute advantage, because such nations can still
benefit from specializing in producing products with the lowest opportunity
cost, which is measured by how much production of another good needs to be
reduced to increase production by one additional unit of that good.
This theory reflected British national opinion at the 19th century when free
trade benefited Britain more than its trade partners. However, in today's
globalized trade when factors of production such as capital, credit,
technology, management, information, branding, distribution and sales are
mobile across national borders and can generate profit much greater than
manufacturing, the theory of comparative advantage has a hard time holding up
against measurable data.
Under dollar hegemony, exporting nations compete in the global market to
capture needed dollars to service dollar-denominated foreign capital and debt,
to pay for imported energy, raw material and capital goods, to pay intellectual
property fees and information technology fees. Moreover, their central banks
must accumulate dollar reserves to ward off speculative attacks on the value of
their currencies in world currency markets. The higher the market pressure to
devalue a particular currency, the more dollar reserves its central bank must
hold. Only the Federal Reserve, the US central bank, is exempt from this
pressure to accumulate dollars because it can issue theoretically unlimited
additional dollars at will with monetary immunity. The dollar is merely a
Federal Reserve note, no more, no less.
Dollar hegemony has created a built-in support for a strong dollar that in turn
forces the world's other central banks to acquire and hold more dollar
reserves, making the dollar stronger, fueling a massive global debt bubble
denominated in dollars as the US becomes the world's largest debtor nation. Yet
a strong dollar, while viewed by US authorities as in the US national interest,
in reality drives the defacement of all fiat currencies that operate as
derivative currencies of the dollar, in turn driving the current commodity-led
inflation. When the dollar falls against the euro, it does not mean the euro is
rising in purchasing power. It only means the dollar is losing purchasing power
faster than the euro. A strong dollar does not always mean high dollar exchange
rates. It means only that the dollars will stay firmly anchored as the prime
reserve currency for international trade even as it falls in exchange value
against other trading currencies.
In recent decades, central banks of all governments, led by the US Federal
Reserve during Alan Greenspan's watch, had bought economic growth with loose
money to feed debt bubbles and to contain inflation with "structural
unemployment", which has been defined as up to 6% of the workforce, to keep the
labor market from being inflationary. Central banking has mutated from being an
institution to safeguard the value of money so as to ensure wages from full
employment do not lose purchasing power into one with a perverted mandate to
promote and preserve dollar hegemony by releasing debt bubbles denominated in
fiat dollars. (See
Critique of Central Banking, Asia Times Online, November 6, 2002.)
Despite all the talk about globalization as an irresistible trend of progress,
the priority for the United States in the final analysis has been to advance
its superpower economic objectives, not its obligations as the center of the
global monetary system. This superpower economic objective includes the global
expansion of US economic dominance through dollar hegemony, reducing all
domestic economies, including that of the US, to be merely local units of a
global empire. Thus when the US asserts that a healthy and strong economy in
Europe, Japan and even Russia and China, all former enemies, is part of the Pax
Americana, it is essentially declaring a neocolonial claim on these economies.
The concept of "stakeholder" in the global geopolitical-economic order advanced
by Robert B Zoellick, former US deputy secretary of state and now president of
the World Bank, is a solicitation from the US to emerging economic powerhouses
to support this Pax Americana. The device for accomplishing this
neo-imperialism is a coordinated monetary policy managed by a global system of
central banking, first adopted in the US in 1913 to allow a financial elite to
gain monetary control of the US national economy, and after the Cold War, to
allow the US as the sole remaining superpower controlled by a financial
oligarchy to gain monetary control of the entire global economy.
With the help of supranational institutions such as the International Monetary
Fund and the Bank of International Settlements, the US aims to negate national
economic sovereignty with globalization of unregulated trade conducted under
dollar hegemony. Unregulated trade globalization in the 21st century aims to
neutralize national economic sovereignty to preempt national development
financed by sovereign credit. Trade through export has become the sole
operative path for national economic growth in a political world order of
sovereign nation states that has existed since the Treaty of Westphalia of
1648. No national domestic economy can henceforth prosper without first adding
to the prosperity of US-controlled global economy denominated in dollars.
Holy Dollar Empire
Echoing the Holy Roman Empire, the global economy has been operating as a
global Holy Dollar Empire with the Federal Reserve as the Holy Dollar Emperor.
Similar to the Holy Roman Empire, which disintegrated from the rise of Lutheran
nationalism, this Holy Dollar Empire will eventually disintegrate from
progressive centrifugal forces of a new populist economic nationalism. This new
nationalism is not to be confused with regressive trade protectionism. The
formation of the new Group of Five (G5 - China, Brazil, India, Mexico and South
Africa) in the 2008 Group of Eight Summit in Tokyo (G8 - the US, UK, Germany,
France, Italy, Japan, Russia and the European Union) is a sign of this new
trend of progressive economic nationalism. The 2008 US presidential election
may herald in a new populism in US history to reform the structure of US debt
capitalism.
In his speech to the G5 leaders, China's President Hu Jintao said: "It is
necessary to take into full account the issue of food security in tackling the
challenges in energy, climate change and other fields." Apart from calling for
the setting up of an UN-led international co-operation mechanism and a global
food-security safeguard system, Hu said all countries should strengthen
cooperation in grain reserves, a process of proven success in China but not
recommended by the UN Food and Agriculture Organization, which views such
scheme as a distortion of trade.
Liberation from this Holy Dollar Empire of dollar hegemony can only come from
sovereign nations withdrawing from the global central banking regime to return
to a national banking regime within a world order of sovereign nation states to
put monetary policy back in its proper role of supporting national development
goals, rather than sacrificing national development to support global dollar
hegemony through wage-suppressing export-led growth.
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