In my academic career and path to understanding the American financial system and the economy in general there was a question that had always perplexed me. I have gained a better understanding of why this is and in my research for my paper I came across this great article from the radical perspective site called “Financial realities after the dollar” by John Clegg. How is our beloved country considered to be the biggest superpower in the world despite our enormous debt? Or perhaps a better way to phase the question is why is America so comfortable with a debt of $12 trillion and growing. This careless attitude has contributed to the credit dependent lifestyle of everyday Americans as well. Our society is sold on the predominantly reigning belief that debt is “okay”. I mean if my government has a liability of $12 trillion why can’t I buy a house on $30,000 salary, hell its become the American way of life. Plastic money has become so readily available to everyone, and Average Joe is comfortable with making the minimum payment just like his government respectively.
The core of this problem is the overwhelming strength of the American dollar. America rose from the ashes of WWII as the richest country in the world and they didn’t waste any time in establishing a stronghold over the rest of the world.
The US emerged from the second world war as the richest power. Britain was weakened by debt; France was exhausted; the Soviet Union had been bled dry. US dominance was formalised by the Bretton Woods accords, named after the New Hampshire town where the new financial rules were laid down in July 1944. These affirmed the pivotal role of the dollar (in place of sterling) and created the two institutions that became Washington’s wings: the International Bank for Reconstruction and Development (IBRD, subsequently part of the World Bank) and the International Monetary Fund (IMF). The Marshall Plan for Europe was funded in dollars to consolidate the strength of the dollar and guarantee opportunities for US producers.
China is the biggest holder of U.S. government securities followed then by Japan and Russia respectively. The beauty of the dollar is that it has entangled these countries to the point where they can’t be indifferent to the fate of the U.S. China holds over two trillion dollars in their reserves and if the U.S. government were to collapse, China’s wealth would be diminished to worthless pieces of paper. And to be quite honest thats what the dollar really is. It’s just a piece of paper! Back when the gold standard was around, an American Dollar could be converted into gold that was held by the reserve. Therefore cash was an asset backed security. Today the only thing backing the dollar is the good will of the American government. So if tomorrow China came to claim their debt needless to say there would be a shit storm. China has to be careful because the prosperity of the dollar is closely tied to the prosperity of the global economy. This is also the reason that China recently proposed the implementation of a new global currency that would not be enslaved by the ups and downs of the U.S. economy.
The government believes that it can casually handle debt and that is why an unrgulated free market system can work so potentially well here (Notice that i said “can”). So the whole idea of Capitalism is based on excess spending, people making money and pumping it right back into the economy. The more you make the more you spend, and eventually you start spending even more than you make. This is not the case globally however. In the case of a country such as China, the personal savings rate astronomical.
But it takes more than increased purchasing power to drive consumption: some of this increase is squirreled away (China has the highest savings rate in the world) as families put money aside for sickness or retirement. So the government must increase incomes and build the current embryonic system of collective social security into something effective.
However to a certain extent a high savings rate can hurt the domestic growth of an economy. But the point of this comparison is not to suggest that Americans should save 40% of their income, rather my point is that they should save at least a little. The savings rate in this country has lingered around 2 to 3% and in 2005 that rate dipped into the red zone. That’s right; the people of America actually had a negative savings rate. Not only had we maxed out our existing resources we collectively went ahead and spent money we didn’t even have. In essence consumer spending also serves as a hedge to inflation where the interest rate will fluctuate in accordance with the demand of money. Had a weaker economy suggested a budget scale in line with ours their economy would collapse overnight.
In relationshp to my paper, “Credit as a life style” the overwhelming power of the American dollar has contributed to a way of life that revolves around credit and deficit spending both federally and personally.
