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America the next Great Banana Republic

By       Message Richard Backus       (Page 1 of 1 pages)     Permalink

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After 30 years trying to defy economic gravity, the US is well on the way to becoming the world's largest banana republic. If the current level of government mismanagement continues, within 20 years the US economy will be comparable to that of Mexico. With a more modest level of mismanagement, this will occur in less than 10 years but under much better economic circumstances. This article will disclose the uncanny (but to be expected) similarities between the circumstances preceding the downfall of Mexico during its periodic crashes over the last 50 years with similar circumstances prevalent in the US today. The government of the US, unfortunately, does not seem to believe that all countries are subject to the discipline of the marketplace, regardless of their demonstrative wealth and seeming invulnerability. The sad part is that the bigger the country is, the harder it will fall. The US will drag down the entire world with it if it persists in its current flagrant economic profligacy.

   First I will explain how the Mexican people (as well as the people of many other Latin American peoples) ended up in their current poor economic conditions of low income and general poverty. The term "Banana Republic" was used to describe a country with a low level national production whose sole foreign exchange earnings came from only a few products. The resulting lack of export earnings combined with a considerable level of imports inevitably lead to a drain of the assets from the banking system. The imports of essential goods not locally produced from the rest of the world, accompanied by luxury goods of a non-essential character procured by the small percentage of rich, overwhelmed the amount of exports. This results in a current account deficit, which is the amount of money leaving the country consequent to shortfalls in trade, services, and returns on asset purchases/loans incurred during previous current account deficits. If the Mexican government did not want to completely lose control of its money supply, resulting in a devaluation of the peso and drastic fall in the living standard of the working classes, it had to modify its policies.

   There are basically only three ways to remedy a current account deficit. One is to impose trade barriers in order to force a balance between exports and imports. This is what the IMF and US government have discouraged Mexico from doing. The IMF and US government are committed to "free trade" and are advising all countries to do likewise. In many cases this is not in the best interest of these less-developed countries because they will continue to need protection for their infant industries if they are to survive. The second way to remedy a current account deficit is to allow a devaluation of the currency making it more costly for its citizens to buy foreign products and making its exports more competitive overseas. The third way is adopt economic policies designed to create recession, which undermines the public's ability to buy foreign-made goods. Unfortunately, if this is done when a country is already in recession, it simply creates a depression with widespread unemployment instead of simply less purchasing power.

   Whenever a country depreciates its currency the purchasing power of imported goods of its citizens declines. This is usually the final remedy the IMF imposes upon these countries as a condition of granting it those loans needed to avoid a collapse in the value of their currencies. The people are pushed down into ever lower levels of poverty by doing so. The IMF usually insists on continuing "free trade" although this may have been a major cause of the foreign trade imbalance in the first place. The IMF normally begins "reform" by impressing "austerity measures" on the government such as privatization of publicly-held companies and a downsizing of workers on the government payroll. All of these IMF-imposed "corrections" result in a substantial reduction in the standard of living for Mexican workers and the consequent rioting whenever the IMF, or their partners-in-crime, the WTO, meet.

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   One way that most countries(including the US) employ to avoid a current account problem is that of selling off its assets to foreign creditors whenever they experience a trade deficit. Unfortunately, Mexico found itself in such dire economic straits in the first place because of a lack of productive enterprises creating those manufactured goods needed for export. The only assets Mexico had to sell were their natural resources, which were the sole patronage of its people. So, wisely, it typically has refused to sell them(as it should) and their bank deposits immediately have come into jeopardy. To avoid a currency collapse, Mexico was finally forced to comply with the harsh rules set down by the IMF, with a consequent drastic fall in their people's standard of living.

   The US government has been following this same path due to ever-increasing balance of payment problems. It has managed to give away US multinationals or allowed and encouraged them to move their manufacturing facilities from the US mainland to foreign locations. These industries previously provided the backbone of US exports to the world and the reason that the US had become the most prosperous country in the world. These industrial losses have resulted in the almost unbelievable current account deficit seen(much less contemplated) in the history of the world. But, because the US government apparently believes that the economic factors that have ruined Mexico do not apply to it, the government  has done nothing to remedy the situation. Consequently we find ourselves now in the beginning stages of an inevitable substantial devaluation of the dollar and decrease in American standard of living. The recent rapid drop in the value of the dollar with prospective further devaluations are simply an unavoidable consequence of these cavalier government policies.

   The US government can establish protective trade measures or establish a managed trade regime. But it is committed to "free trade" (which is far from free) mainly because the imports which are causing our current account deficit simply are those products which our own multinational corporations are manufacturing overseas(after laying off the US workforce stateside which had previously made them). Ninety percent of the export coming to us from China are made by companies owned or party-owned by foreign-owned companies, twelve percent of which are American, with the rest predominantly shared by the EU, Japan, and Taiwan. The US government has been kind enough to give the earnings from these exports by our multinational(to us) favorable tax treatment to make it even more lucrative to move production from the US to overseas locations.

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   Now for the good part. The US government assumes that it can do something that Mexico couldn't do, that is to completely offset the trade deficit by the sale of US assets to foreign dollar holders. This will take the pressure off of US bank assets and avoid the necessity to devalue the US dollar. They have been doing this for quite some time and can continue for quite some more time, perhaps for as long as 20 more years. But even US assets are ultimately limited. With the current yearly transfer of US assets of more than $2 trillion, these assets(stocks,bonds,real estate, and money market) will eventually become entirely foreign-owned and the US will be the world's largest banana republic. The FED will have lost control of the currency and the dollar will go into free-fall. If this folly continues, the dollar may lose all value caused by a hyperinflation.

   But here is the kicker. If the US government takes no action while these asset transfers are occurring, within 20 years essentially all US assets will be under foreign control or ownership. So I suggest that if the US government is just able to mismanage the economy a little better it will, as Mexico tried to do, preserve US ownership of a major portion of our assets. By preventing substantial capital asset transfers to foreigners, the US government will shorten the time for the draining of bank assets and the eventual massive devaluation of the dollar. Citizens of the US will suffer a drastic drop in their standard of living but will at least not be completely poverty stricken. They will also have avoided the need in the future to pay the substantial interest payments on foreign-owned assets which is causing so much pain for the Mexican public today. The US government will also avoid being in the unenviable position of having to petition or coerce foreign owners to support the US in times of international troubles.

   But wait, why not avoid the major consequences of these unfortunate circumstances? Why not adopt the austerity policies that the US(via the IMF) has so enthusatically imposed upon other countries? If the US still wants "free trade" then it should be willing to adopt those "austerity" measures that the IMF forced upon Mexico. All it has to do is adjust federal expenditures in a way to effectively decrease excess spending on foreign-made goods. The government could accomplish this by imposing the very graduated income taxes which had served us so well in the past. And downsizing the federal government by laying off many in our current bloated bureaucracy whose inflated salaries and pensions have played and will in the future play havoc with federal budgets. While they are at it, why not stop the subsidies to those "special friends" like the big farm groups. And the big government "no bid" contracts to their corporate cronies. And last but not least, stop subsidizing the education and salaries of those "lucky ones" who manage to get into medical schools. These measures would go a long way toward correcting the foreign trade deficits, with an added bonus of rationalizing our budget deficit. But the beneficiaries of this government largess are all well connected politically so there is no hope of that happening. So, hello recession.

 

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Richard Backus is a journalist specializing in economics and politics.He has degrees in physics and engineering, and considerable experience in computer systems development. He is single, a good bridge player, and an enthusiastic tennis player.

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