While Donald Trump told Americans they were right to feel angry about their economic woes, the Democrats told them they were wrong to feel that way. The election result shows which message voters appreciated most.
A road trip across the United States reveals how much of its heartland is now desolate. Once-proud towns struggle to keep their post offices, and shopping malls open amid rising homelessness and an epidemic of deaths of despair. Trailer parks, Amazon warehouses and the odd giant prison occupy vast tracts of once-happier vistas. Meanwhile, prosperous city dwellers fly over these wastelands as they commute from one ultra-rich, usually coastal, city to another. How did America get into this sorry state?
It’s a far cry from the Golden Age of American capitalism. In the two decades after the Second World War, the United States was a surplus country. As Europe and Japan lay in ruins, US authorities not only fixed exchange rates between the dollar and the currencies of its allies, but also sent huge quantities of dollars to them (both as aid and loans) so that friendly foreigners could afford to buy American goods. With these two bold moves, America dollarised Europe and Japan.
The Bretton Woods system worked because the US surplus meant that, with every Cadillac, every Westinghouse fridge, every Boeing jet that European and Japanese customers imported from America, the dollars sent to Europe and to Japan were being repatriated. It was a mutually advantageous global recycling process.
But then, at the height of the Vietnam War, two developments changed everything. Firstly, the productivity of American factories fell behind those of Germany and Japan, causing the US trade balance to slip into the red. America was now importing more than it was exporting. Secondly, a large amount of the dollars the Pentagon was spending on the Vietnam war ended up in European and Japanese banks. A constant flood of dollars was therefore leaving America’s shores to form dollar lakes in Europe and Japan.
This money ended up in foreign central banks. For a while, America’s trading partners took advantage of the fixed exchange rate of their currency to swap their dollars for their own currency or to buy gold at a fixed exchange rate. But, in August 1971, President Nixon blew this system up.
The Deutschmark and the yen, along with many foreign currencies, skyrocketed. Foreign central banks did not know what to do with the dollars in their vaults. If, for example, the Bundesbank were to use these dollars to buy Deutschmark, the demand for the German currency would increase, damaging Germany’s exports. So, foreign central banks decided to use their dollars to buy US government debt.
Thus it began. The US trade deficit financed, indirectly, the US government, while providing foreign capitalists with the demand they needed for net exports to America. In turn, the Germans, Japanese, Saudis and the like took their dollars to the US to buy government debt, real estate in New York, California and Miami, as well as shares in the very few companies that Washington allowed them to purchase.
And this is why, a decade later, Ronald Reagan’s unfunded tax cuts did not cause inflation or a dollar crisis. The increase in the US government deficit boosted world demand and oiled the wheels of financialisation. Foreign capitalists bought more debt and more real estate. Asset prices rose across America. While Reagan basked in the glory, America was becoming an expensive place to do business in.
Around the time of American financialisation, Deng Xiaoping was opening up China, a move Washington welcomed. As China entered this strange global dollar-recycling mechanism — one driven by US trade and government deficits — Chinese development both benefitted from and turbocharged it. But that’s when US conglomerates had an epiphany: with America becoming an expensive place for business, why not send their production lines to China in search of much cheaper land and labour? Even the dollars that Chinese business collected eventually returned to America, bolstering the US government budget, the Wall Street banks, and the realtors on America’s East and West Coasts.
A Chinese official once, unofficially, described all this to me as a lucrative Dark Deal between US rentiers, US conglomerates, the US government and Chinese capitalists. And the losers? Mainly, the American working and middle classes. Not to mention global stability. For as the tsunami of debt-dollars swamped Wall Street, its bankers discovered fiendishly complicated ways to bet on asset prices and, catastrophically, on each other’s bets. These debt-fuelled bets eventually caved, yielding the Great Financial Crisis in 2008.
Barack Obama became president by promising voters to come to the aid of the many victims of the crisis while punishing the few who had caused it. Tragically, he did the exact opposite. In the swiftest political betrayal in American history, Obama appointed to the Treasury the very men (Tim Geithner and Larry Summers) who had allowed Wall Street to go berserk. Their remit was to bail out the criminal bankers and impose austerity on most Americans. In this light, Mr Trump owes his political career to Mr Obama.
Taking a longer view from the Seventies to today, who lost the most from the aforementioned Dark Deal? The answer is: the majority of Americans, 60% of whom live paycheck-to-paycheck and can barely afford a house or even the bare necessities.
So Trump is not wrong to decry the way America’s ruling class trapped the American people into the indignity of being fundamentally poor in a ridiculously rich country. He is also not wrong in his hunch that America’s wars are a distraction from what kept America powerful after it lost its surplus in the late Sixties: the control of the global dollar-debt recycling system.
But he is spectacularly wrong if he thinks that he can stop Middle America’s “carnage” by means of sky-high tariffs for Chinese and European exports into the US, all while keeping in rude health his beloved real estate sector and the stock exchange. If tariffs undermine the Dark Deal which returns to the US debt-dollars funding foreign capitalists’ net exports to America, the dizzying wealth of America’s rentiers and financiers will evaporate instantly. To help the majority whose vote he just secured, Trump will have to turn on his own class of rentiers and financiers.
In conclusion, Trump can choose one of two options. He can shatter the Dark Deal so as to be true to the majority and risk the wrath of the real estate and the financial markets he so reveres. Or he can maintain the US financial and real estate markets in rude health, thus betraying the majority who returned him to the White House. He can never achieve both. No prizes, dear reader, for guessing which of the two he will choose.
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Source: UnHerd Read the original article here: https://unherd.com/