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Offshoring interests and economic
dogmas are destroying the US dollar
Paul Craig Roberts
Online
Journal
Saturday December 15, 2007
On December 8, Chinese and French news services
reported that Iran had stopped billing its oil exports in dollars.
Americans might never hear this news as the independence of the
US media was destroyed in the 1990s when Rupert Murdoch persuaded
the Clinton administration and the quislings in Congress to allow
the US media to be monopolized by a few mega-corporations.
Iran's oil minister, Gholam Hossein Nozari, declared: "The
dollar is an unreliable currency in regards to its devaluation
and the loss oil exporters have endured from this trend."
Iran has proposed to OPEC that the US dollar no longer be used
by any oil exporting countries. As the oil emirates and the Saudis
have already decided to reduce their holdings of US dollars, the
US might actually find itself having to pay for its energy imports
in euros or yen.
Venezuela's Chavez, survivor of a US-led coup against him and
a likely target of a US assassination attempt, might follow the
Iranian lead. Also, Russia's Putin, who is fed up with the US
government's efforts to encircle Russia militarily, will be tempted
to add Russia's oil exports to the symbolic assault on the dollar.
(Article continues below)
The assault is symbolic, because the dollar is not the reserve
currency due to oil exports being billed in dollars. It's the
other way around. Oil exports are billed in dollars, because the
dollar is the reserve currency.
What is important to the dollar's value and its role as reserve
currency is whether foreigners continue to consider dollar-denominated
assets sufficiently attractive to absorb the constant flow of
red ink from US trade and budget deficits. If Iran and other countries
do not want dollars, they can exchange them for other currencies
regardless of the currency in which oil is billed.
Indeed, the evidence is that foreigners are not finding dollar-denominated
assets sufficiently attractive. The dollar has declined dramatically
during the Bush regime regardless of the fact that oil is billed
in dollars. Iran is dropping dollars in response to the dollar's
loss of value. This is a market response to a depreciating currency,
not a punitive action by Iran to sink the dollar.
Oil bills are only a small part of the problem. Oil minister
Nozari's statement about the loss suffered by oil exporters applies
to all exporters of all products.
A quarter century ago, US oil imports accounted for the US trade
deficit. The concerns expressed over the years about "energy
dependence" accustomed Americans to think of trade problems
only in terms of oil. The desire to gain "energy independence"
has led to such foolish policies as subsidies for ethanol, the
main effect of which is to drive up food prices and further ravage
the poor.
Today, oil imports comprise a small part of the US trade deficit.
During the decades when Americans were fixated on "the energy
deficit," the US became three to four times more dependent
on foreign made manufactures. America's trade deficit in manufactured
goods, including advanced technology products, dwarfs the US energy
deficit.
For example, the US trade deficit with China is more than twice
the size of the US trade deficit with OPEC. The US deficit with
Japan is about the size of the US deficit with OPEC. With an overall
US trade deficit of more than $800 billion, the deficit with OPEC
only comprises one-eighth.
If abandonment of the dollar by oil exporters is not the cause
of the dollar's woes, what is?
There are two reasons for the dollar's demise. One is the practice
of American corporations offshoring their production for US consumers.
When US corporations move to foreign countries their production
of goods and services for American consumers, they convert US
Gross Domestic Product (GDP) into imports. US production declines,
US jobs and skill pools are destroyed, and the trade deficit increases.
Foreign GDP, employment, and exports rise.
US corporations that offshore their production for US markets
account for a larger share of the US trade deficit than does the
OPEC energy deficit. Half or more of the US trade deficit with
China consists of the offshored production of US firms. In 2006,
the US trade deficit with China was $233 billion, half of which
is $116.5 billion or $10 billion more than the US deficit with
OPEC.
The other reason for the dollar's demise is the ignorance and
nonchalance of "libertarian free market free trade economists"
about offshoring and the trade deficit.
There is a great deal to be said in behalf of free markets and
free trade. However, for many economists free trade has become
an ideology, and they have ceased to think.
Such economists have become insouciant shills for the offshoring
interests that fund their research and institutes. Their interests
are tied together with those of the offshoring corporations.
Free trade economists have made three massive errors: (1) they
confuse labor arbitrage across international borders with free
trade when nothing in fact is being traded, (2) they have forgot
the two necessary conditions in order for the classic theory of
free trade, which rests on the principle of comparative advantage,
to be valid, and (3) they are ignorant of the latest work in trade
theory, which shows that free trade theory was never correct even
when the conditions on which it is based were prevalent.
When a US firm moves its output abroad, the firm is arbitraging
labor (and taxes, regulation, etc.) across international borders
in pursuit of absolute advantage, not in pursuit of comparative
advantage at home. When the US firm brings its offshored goods
and services to the US to be marketed, those goods and services
count as imports.
David Ricardo based comparative advantage on two necessary conditions:
One is that a country's capital seek comparative advantage at
home and not seek absolute advantage abroad. The other is that
countries have different relative cost ratios of producing tradable
goods. Under the Ricardian conditions, offshoring is prohibited.
Today capital is as internationally mobile as traded goods, and
knowledge-based production functions have the same relative cost
ratios regardless of the country of location. The famous Ricardian
conditions for free trade are not present in today's world.
In the most important development in trade theory in 200 years,
the distinguished mathematician Ralph Gomory and the distinguished
economist and former president of the American Economics Association,
William Baumol, have shown that the case for free trade was invalid
even when the Ricardian conditions were present in the world.
Their book, Global Trade and Conflicting National Interests, first
presented as lectures at the London School of Economics, was published
in 2000 by MIT Press.
While free trade economists hold on to their doctrine-turned-ideology,
the US dollar and the American economy are dying.
One of the great lies of the offshoring interests is that US
manufacturing is in trouble because of poor US education and a
shortage of US scientists and engineers. Pundits such as Thomas
Friedman have helped to spread this ignorance until it has become
a dogma. Recently, General Electric CEO Jeffrey Immelt lent his
weight to this falsehood. (See "The US No Longer Drives Global
Economic Growth," Manufacturing & Technology News, Nov.
30, 2007.)
The fact of the matter is that the offshoring of US engineering
and R&D jobs and the importation of foreign engineers and
scientists on work visas have combined with educational subsidies
to produce a surplus of American scientists and engineers, many
of whom are unable to find jobs when they graduate from university
or become casualties of offshoring and H-1b visas.
Corporate interests continue to lobby Congress for more foreign
workers, claiming a non-existent shortage of trained Americans,
even as the Commission on Professionals in Science and Technology
concludes that real salary growth for American scientists and
engineers has been flat or declining for the past 10 years. The
"long trend of strong US demand for scientific and technical
specialists" has come to an end with no signs of revival.
(See "Job and Income Growth for Scientists and Engineers
Comes to an End," Manufacturing & Technology News, November
30, 2007.)
What economist has ever heard of a labor shortage resulting in
flat or declining pay?
There is no more of a shortage of US scientists and engineers
than there were weapons of mass destruction in Iraq. The US media
has no investigative capability and serves up the lies that serve
short-term corporate and political interests. If it were not for
the Internet that provides Americans with access to foreign news
sources, Americans would live in a world of perfect disinformation.
Offshoring interests and economic dogmas have combined to create
a false picture of America's economic position. While the ladders
of upward mobility are being dismantled, Americans are being told
that they have never had it better.
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INFOWARS:
BECAUSE THERE'S A WAR ON FOR YOUR MIND
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