ON the morrow of WW-II, the US enjoyed an absolute supremacy, a monopoly of sorts, in all domains of the world economy. Not so now, although it remains the number one far ahead of the second and the third (Europe and Japan respectively):

  • In 1950 the United States supplied half the world's gross product, against 21 per cent at present. Sixty per cent of the world's manufacturing production in 1950 came from the United States, 25 per cent in 1999. The U.S. share of exports of commercial services, the fastest growing part of the world economy, stood at 24 per cent in 2001, while the European Union (EU) had 23 per cent — 40 per cent if intra-EU exports were counted.

  • Non-US companies dominated major industries in 2002, accounting for nine of the ten largest electronics and electrical equipment manufacturers; eight of the ten largest motor vehicle makers and electric and gas utilities; seven of the ten largest petroleum refiners; six of ten telecommunications companies; five of ten pharmaceutical firms; four of six chemical producers; four of seven airlines. Of the twenty-five largest banks in the world, nineteen were non-U.S. banks, although the two largest were Citigroup and Bank of America.

  • Of the top one hundred corporations in the world in 2000 ranked by foreign-held assets, twenty-three were American. Together, Germany, France, the United Kingdom, and the Netherlands, with a combined gross domestic product (GDP) seven-tenths that of the United States, had forty; Japan had sixteen. During the 1990s, the share of U.S. multinationals in the foreign sales of the world's one hundred largest multinationals decreased from 30 to 25 per cent; the share of EU-based companies increased from 41 to 46 per cent.

  • Twenty-one per cent of the world's stock of direct investment in other countries was American in 2001, compared with 47 per cent in 1960. During 1996-2001, 17 per cent of all new direct investment abroad came from the United States and 16 per cent from Great Britain; together, France and Belgium-Luxembourg supplied 21 per cent.

  • In the 1980s, 60 per cent of cross- border assets of banks were in dollar and 19 per cent in the euro legacy currencies (currencies of those countries which later adopted the euro). In 1999, the respective shares were: 45 per cent for dollar and 32 per cent for euro.

  • Apart from Europe and Japan, Northeast Asia with China at its center has come up as a new challenger. It is the world's most dynamic economic region, accounting for almost 30 per cent of world GDP, far more than the US, and holding about half of global foreign exchange reserve.Figures cited in the bulleted paragraphs are mostly from U.S. Hegemony: Continuing Decline, Enduring Danger (Monthly Review, December 2003)

In this long-term backdrop, let us now assess the current scenario. For all its enormous power, the US economy has in the recent past been suffering from some fundamental weaknesses : unmanageable budget deficits; abnormally low savings rate (1.6 per cent of GDP, less than a third of the average savings rate obtaining in the 1990s); rising unemployment and jobless growthParadoxically, the failure to generate jobs even during periods of economic expansion stems from a big success in raising per capita productivity of labour (which grew from an average of 0. 7% during the 25 years ending 1995 to more than 2% over the last few years, enabling corporations shed labour and save on the wage bill on a grand scale) in an economy where there is hardly any new investment in the productive (goods and services) sectors which create jobs. The chronic problem of demand-crunch worsens and leads to more fierce competition and elimination of weaker firms and further attacks on jobs and wages. The vicious cycle roles on, even as the economy expands. [para] “The focus of his concern is the current-account deficit, the general measure of how much more we spend than we produce. This has been hovering around record levels recently, North of 5% of gross domestic product, or total output. In dollar terms, it’s about half a trillion dollars annually, or about $1,800 for every American. All of that adds up to our cumulative U.S. debt outstanding to the rest of the world. [para]‘That was a problem in the 1980s, but it's worse now because in the ’80s, the U.S. was a net creditor country and now it is a debtor country,' Prof. Mundell told me. ‘The U.S. debt is something like $3 trillion dollars, almost 30% of gross domestic product. So this is a major problem, not immediately, and not this current cycle, but its a problem people will be anticipating over the next few years.’... [para]‘What it means is that as a percentage of GDP, it will be 35% next year, eventually 40% and then at some point it is an accident waiting to happen - a big international crisis.’ (My emphasis added.)”; and potentially most threatening perhaps, a tricky combination of mounting current account deficit (henceforth CAD), falling dollarSince the fall of the dollar is not sudden and very steep, the panic button is yet to be pressed. Rather it is a mixed blessing for US manufacturers who pay more for imported materials and components, but can boost exports to Europe and Japan (not to China which has fixed the Yuan to the dollar). This has led some analysts to suggest that Washington is deliberaely following a weak dollar policy. However, such partial benefits detract but little from the threat perception of a looming financial catastrophe. [para]Like many others, Robert Mundell, the 1999 Nobel prize winner in economics, believes the CAD is a veritable time bomb. Writes Steve Linesman after an interview with Mundell (Wall Street Journal, 18 December); and advent of euro as a real alternative to the dollar.

When in a particular year the sum total of a country’s export earnings and other earnings from abroad (such as dividends) falls below the total expenditures on account of imports and other costs incurred abroad (e.g., for wars and for maintaining military bases), that entails a CAD. When the opposite happens in a particular year, i.e., when total incomes from abroad exceeds total expenditure abroad, that country is said to have a current account surplus. In the year 2000, Japan and France enjoyed surpluses to the tune of 117 billion and 20 billion dollars respectively. In the same year, USA reported a deficit of 445 billion dollars (up from 79 billion in 1990) compared to around 25 billion dollars each for England and Brazil and 18 billion dollars for Mexico. At present the American CAD amounts to more than 4 per cent of its GDP, much higher than the 3 per cent obtaining in the critical years of mid-’80s. Here it may be noted that during its heyday the British empire enjoyed a consistent and comfortable surplus (e.g., 4 per cent of GDP on the eve of World War I) and so did the US until recently.

How does the USA cope with this highly abnormal situation? When an individual expends more than he earns, he has to bridge the gap by borrowing. In the case of a nation too, borrowing covers the current account deficit. In 2002, the United States borrowed $503 billion from abroad, a record 4.8 per cent of GDP. In other words, it manages the CAD with a huge inflow of funds from abroad on capital account: FDI, investments in treasury bills and non-government bonds and securities, petrodollars earned by OPEC countries and deposited in American banks, and so on. The extent of dependence on investment from abroad will be evident from the fact that foreigners now own 42 per cent of US treasury bills.

The massive inflow takes place because of a dollar fetishism caused by (a) the belief, supported by decades of real experience, that investment in dollar is as good as investment in gold, since its value never (well, almost) falls; (b) the position of the US as the safest investment haven with very high, if not the highest, rate of return in the world. And to bolster these economic factors, there are the ultimate imperial weapons of political pressure in various forms (aid-diplomacy, veiled military threat or simply a threat of downgrading economic relations) and even armed intervention (as in the case of Iraq which dared to switch over to the euro as petrocurrency, followed by a decision to convert the country’s $10 billion reserve fund at the UN to euro).

What if the economic factors behind the huge inflow of finance on capital account cease to operate? There will be a decline in the inflow, for the politico-military pressures do not work equally effectively against all states and they cannot be applied against private (including institutional) investors. The decline could be small if there were no other feasible international currency, but big or perhaps even devastating now that such an alternative (the euro) has emerged. In the latter case, the US would lose the unique advantage of carrying on with a persistent and growing CAD. The world’s most-indebted country will face a situation comparable to that experienced not long ago by Mexico, Argentina, and South Korea. There will be a run on US banks, as holders of dollar reserves convert these into other currencies. A stock market crash of unprecedented proportions may be unavoidable.

The gravity of the situation was recognised in the (US) President’s Report 2003:

“... the U.S. current account has typically been in deficit for the past two decades. As a result, the net international investment position in the United States (the value of U .S. investment holdings abroad less that of foreign holdings in the United States) has moved from an accumulated surplus of slightly less than 10 per cent of GDP in the late 1970s to a deficit of almost 20 per cent of GDP in 2001 ... Recent increases in the current account deficit have led to some concerns that continued current account deficits (and the increase in the United States’ international debt that would result) might not be sustainable.”

As expected, the Council of Economic Advisors which prepared this report took pains to play down the threat. But as Guardian reported on 19 September 2003:

“The International Monetary Fund yesterday warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasising that the once mighty dollar could collapse at any moment. ... The IMF’s chief economist Kenneth Rogoff said that it was just a matter of time before the gap closed, tipping the dollar into a potentially steep fall. ‘If we were looking at a poor developing country, the world gives them just enough rope to hang themselves. A country like the United States, they give them enough rope to tie the noose around their neck several times. But it does happen in the end,’ he said.”

As if to lend credence to the IMF prognosis, capital flow data for September released by the US Treasury showed a net $ 4.2 billion of inflows in the month, down from $ 49.9 billion in August — by no means sufficient to cover the current account deficit estimated at about $ 46 billion a month. Certain OPEC countries like Venezuela have switched oil trade from dollar to euro, Russia also is contemplating a similar course and in recent months wealthy Saudi investors have pulled $ 200 billion out of US financial markets. When these trends are considered in conjunction with the growing euro-challenge (e.g., the rise of the euro by around 35 per cent against the dollar over the last three years, including 16 per cent this year and 3 per cent in December alone), it becomes clear why the deadly symbiosis of skyrocketing CAD, falling dollar and rising euro – where each reinforces the other- constitute the proverbial Achilles' heel of the demonic dollar empire.

In Greek mythology, the seemingly insuperable Achilles was eventually hit on his heel and felled. In our era too, conditions are emerging and forces are getting mobilised to launch the final battle against the demon that has none of the great qualities of the Trojan hero but only the myth of being undefeatable.