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Britain and the US: warring on an overdraft. by Ann Pettifor Director, Jubilee Research @ the New Economics Foundation apettifor.jubilee@neweconomics.org www.jubileeresearch.org www.neweconomics.org Cinnamon House, 6-8 Cole St London SE1 4YH Tel: (44) 207 089 2853 Mob: (44) 7770 886 146 Tuesday, 11 March 2003 The war in Iraq will be prosecuted by two great powers who stride the world stage confidently, buying votes at the UN; bullying and bribing allies; and threatening to act unilaterally. Nothing new here. This, the history books tell us, is how empires have always behaved. All the same there is something decidedly odd and historically unprecedented about these two empires and their allies. Despite the appearance of financial muscle and economic strength, both are quite vulnerable, relying for vital finance on foreigners. Foreigners like the prudent savers of Japan, Taiwan and Singapore, and, wait for it, those of France and Germany. These countries have surpluses, which thanks to the structure of the international financial system, are at the disposal of the US and UK - and used to finance their growing deficits and foreign wars. Time was when such indebtedness and dependence led to imperial decline. Back in 1918, thanks to the heavy costs of war, the UK moved from being one of the world's biggest creditors, to a major debtor. At this point, America used its creditor power to demand that the UK "structurally adjust" its economy, and sacrifice its world position. British living standards were lowered. The UK became dependent on the US and other creditors, and was toppled by its ally from its post as a world power. Today Britain's foreign indebtedness eclipses that of 1918. The latest trade deficit, now $34bn, is the highest since records began in 1697. Similarly, and for some decades now, US imports have massively exceeded exports, as Americans and their government indulged in a gigantic consumer binge. In 2000 the trade deficit hit $400bn; by the end of 2002 it had shot up to $500bn. If, thanks to the heavy costs of war, it continues to rise at this rate, to say, $700bn next year, then we can expect a daily deficit of about $2bn. Add this to $2bn which flows out of the US each day, and America will borrow $4bn from the pool of world savings each day, just to stay afloat. Given this fundamental vulnerability to, and dependence on, the goodwill of foreign creditors, the US's dominant position in the world is a remarkable achievement. It can largely be attributed to her position as issuer of the world's reserve currency. In days gone by, gold acted as the key standard by which the value of currencies was fixed, and central banks held gold reserves. But then came the Vietnam war. As Michael Hudson notes in his insightful book Super Imperialism1, the US ran up massive military debts, and did not have enough gold to pay for these debts. So in a high-handed gesture, Nixon announced that gold would no longer be the key currency standard. The rest of the world meekly agreed. Instead of using the dollars the US spent in their markets to buy American gold, all central banks (including those of the poorest countries) are now obliged to buy American debt, in the form of US Treasury bills - and at very low interest rates too. So thanks to these structural changes the US has transformed weakness into unprecedented global power. This dominance has emboldened Donald Rumsfeld and Dick Cheney to embark on a potentially very costly war, which unlike the Gulf War, will not be financed by US allies. George Bush, well briefed by distinguished conservative economists, appears unfazed. The obliging creditors of Asia and Europe seem happy, for the moment, to sacrifice their own consumption, and appear hesitant to require that these empires structurally adjust their economies, to raise funds for debt repayments. Can Britain and the US finance both the war, and the post-war fall-out, on an overdraft? That depends on whether allies, and former allies, will hand over their savings. The question that should be keeping Bush and Blair awake at night is this: what happens if their friends foreclose? 1 Super Imperialism: the Origin and Fundamentals of Us World Dominance, by Michael Hudson, re-published by Pluto Press, London, 2003.
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