The Decline of Dollar-Centered World Accumulation: 1973 All Over Again?

Loren Goldner

Posted September 12, 2006

THE WORLD FINANCIAL turmoil that began in early May and continued into June indicates that we are at a turning point. With oil (at this writing in early July) now at $75 per barrel (up from $25 in 2000), the specter of a new period of “stagflation” (inflation with production stagnant or falling) has re-entered mainstream discussion for the first time since the late 1970s.

Because the current account deficit has reached an all-time high and shows no sign of correcting itself, the dollar threatens to plummet leading to a plunge of asset prices.
We must surmise that behind the scenes, negotiations are proceeding at the highest levels to head off a run on the currency and make possible an orderly decline over the controlled management of the decline of the dollar – like the secret negotiations that produced the famous Plaza Accord in 1985, allowing the dollar to fall dramatically against the German mark and the Japanese yen, or the “reverse Plaza Accord” ten years later (organizing the rise of the dollar to new peaks by 2003).

Such seemingly technical monetary matters express deep social and ultimately political realities. They are therefore rarely settled amicably around a negotiating table. As countries from Venezuela to Russia to Iran increasingly voice their intention to downsize their dollar holdings, threatening the dollar’s role as the world’s reserve currency, we can be sure that the period ahead will see the ante upped geopolitically and militarily, and thus that these questions move to center stage for the international working class.

The Crisis As It Appears

Before entering into the class dynamic of the current world economic situation, let us consider the manifestations of crisis on the visible surface, which are real enough.
The world is still in the early phase of an inflationary blowout (similar to that of the late 1970’s, when 15% inflation in the U.S. almost provoked an international flight from the dollar) centered on the indebted “U.S. consumer” as the “locomotive” of the world economy.(1)

Every indicator in the world economy today points to a reflation-driven boom that ultimately can be traced back to credit expansion in the United States, generalized to the world by the unbelievable levels of U.S. balance-of-payments deficits. The U.S. consumer buys more than he/she can afford; the Asian governments keep lending the United States money on the cheap so its citizens can afford to keep buying their countries’ exports; the deficit gets larger; and the cycle continues.

When this worldwide Ponzi scheme unravels, the Asian export giants (Japan, Korea, China) will go into the tank with the United States, as will the Third World raw materials producers (e.g. Latin America) currently enjoying a boom from exports to Asia, above all China.

The parallels with the early 1970s, just prior to the 1973-1979 inflationary surge, are uncanny:

The United States bogged down in a losing, unpopular war (Vietnam then, Iraq now).

  • A scandal-ridden, foundering Republican administration (Nixon then, Bush now).
  • All commodity prices headed skyward, led by gold and oil.
  • A lingering “boom” mentality in the U.S. mainstream, with the Dow Jones Industrial Average finally regaining the peak levels of early 2000, just before the crash (in fact, the U.S. stock market has gone exactly nowhere for six years, and has gone backward when inflation is factored in).
  • An unbelievable runup of consumer (and all kinds of) debt in the United States.
  • A faltering dollar and growing uneasiness of this country’s international creditors, who have made the above runup of debt possible.

Empire Through Bankruptcy

These parallels are not mere empirical coincidence, but point to an “invariant” in world accumulation since the late 1950s when the worldwide “dollar standard” first began to erode. From that time till this, capital has faced ever greater difficulties in expanding with profit.

The United States has had to step in to underpin ever greater processes of debt creation and financial expansion. But while this has not proved incompatible with some increased competitiveness in production, it has led U.S. capital to an increasing orientation to financial services and speculation.

Thus, every U.S. “expansion” since 1958 has brought about a further decline in America’s international position. (This is what Michael Hudson, in his excellent book Super-Imperialism, calls “managing empire through bankruptcy.”)

A brief look at basic economic realities shows this erosion has continued unabated. As of the end of 2005, there was $33 trillion in outstanding debt (Federal, state, local, corporate, personal) in the U.S. economy, three times Gross Domestic Product (GDP).
No one knows how much is tied up in the international hedge funds and derivatives, and the estimated $7-8 trillion in Federal debt does not include trillions more in commitments for Social Security and Medicare.

The state at all levels (including Federal, state and local) consumes 40% of GDP. The net U.S. debt abroad is between $3 and $4 trillion (at least $11 trillion held by foreigners minus $8 trillion in U.S. assets abroad), which means it is comparable (at 30% of GDP) to the situation of crisis-ridden Third World countries.  That amount is growing by $800 billion a year at current rates.

Ominously, in late 2005, foreign income from investment in the United States exceeded U.S. income from overseas investment (the one remaining strong pillar of the U.S. international position) for the first time. Foreigners hold an increasing percent of U.S. government debt; the four major Asian central banks (Japan, China, South Korea, Taiwan) alone hold nearly $2 trillion. It is the Federal government’s debt, and hence these foreign loans, which make possible the reflationary actions of the Federal Reserve Bank. [“Reflation” means essentially pumping money into the economy by means of low interest rates for debt – ed.]

A Financial Casino

Since the early 1980s a kind of “financial arbitrage capitalism” has been put in place, in which investment is increasingly focused on different possible financial instruments instead of production. (“Arbitrage” refers to playing different rates of return against each other. Capitalist investors have always done this, but until the 1970s it took place mainly between different sectors of production; now it increasingly takes place in the financial sphere, in a myriad of new forms of debt that did not exist 20 years ago.)

Thus the old conception of the role of the banking system, and the Fed’s (apparent) ability to expand and contract credit availability through it, is superseded; increasing amounts of “virtual” credit are created by “securitized finance” independent of banks. One must also consider the government-linked entities (Freddie Mac, Fannie Mae) which backed the reflation of mortgages of the past four years, leading to an incredible housing bubble.

This entire edifice has depended on 1) low inflation in the United States, as higher inflation would scare off foreign lenders; 2) the willingness of U.S. “consumers” to go more and more heavily into debt, with debt service now taking 14% of incomes as opposed to 11% a few years ago; 3) the willingness and ability and above all the need of foreigners to go on re-lending U.S. balance-of-payments deficits back to the United States, allowing increasingly indebted U.S. “consumers” to be the “locomotive” of the world economy.

Constantly re-lending to an ever-more indebted borrower to delay the latter’s bankruptcy is the very definition of a “Ponzi (or pyramid) scheme,” and that is what world accumulation has come to. But a new inflationary blowout driven by massive new debt creation, while essential to keep the economy turning over, will sooner or later undermine the value of the huge overhang of financial assets that has been created with the long term rise of debt, threatening a crash.

The Offensive Against Labor

There are of course important discontinuities with the early 1970s. The U.S. strategy of a “global leveraged buyout” – using financial pyramiding to buy out “distressed assets” (cf. below) of previously protected or semi-protected regions (the ex-Soviet bloc, China, India, East Asia, Europe) is much more advanced, bringing more than two billion people into a global work force far less sheltered behind previous national barriers to looting.

This reality is having a major downward pull on wages, as outsourcing accelerates from the United States and Europe to these new zones (China, India, Eastern Europe).

The early 1970s was the final phase of the last worldwide working-class upsurge, against which the entire post-1973 period must be understood as a conscious counter-offensive. It took the worldwide working-class movement nearly three decades to learn how to struggle offensively on the new terrain of neoliberalism.

The new wave of struggles can be dated from the 1997 UPS strike in the U.S. and the Seattle anti-globalization riot of 1999, against which September 11 marked a major turning point in capitalist, above all American counter-strategy.  More recently, this new revival of the working-class movement can be seen in a palpable strike wave in western Europe or, most recently, the May 1 mobilization of the Latino working class in the U.S. over immigrant rights.

It is true that Chinese exports are exerting a deflationary drag globally, which is different from the 1970s. But wages are rapidly rising in Shenzhen and in Guandong province to attract workers, and Bangladesh has now edged out China as the low-wage champion of the Third World. Further, the relentless boom in China is pulling up all commodity prices by its seemingly bottomless demand for raw materials, now spreading the boom to Latin America, and to African oil producers.

Last but not least, one must not forget geopolitical dislocation, led by the brewing Iran or North Korea crises, one of several dimensions that takes the preceding out of purely economic considerations.

What Might Happen?

One plausible counter-scenario to the prospect of an inflationary spiral is that the downward turn of the U.S. housing market, now underway, plunges the United States (and, by a fall-off of U.S. demand, the world) into a deflationary crash faster than otherwise anticipated.

In my opinion, the Federal Reserve Bank will not allow this to happen without first pulling out all stops on reflation with the famous “helicopter money” theorized by its new chairman, Benjamin Bernanke. True, the Fed is hardly omnipotent and there would be a huge run out of the dollar, as well as a crisis in the bond market, forcing a rapid rise in U.S. interest rates, which would in turn further act to kill off the housing bubble.

It is thus conceivable that a slide into recession will cut short the inflationary boom. But the world’s financial authorities will do everything they can to keep the markets rising and the economy turning over via whatever loosening is necessary. For the moment, all the capitalists can do is continue expanding the debt pyramid, and intensify their attacks on the working class.

The Threat to Accumulation

What is “a global leveraged buyout”? To understand what it means and why it’s required, we have to begin with the threat to accumulation: The totality of capitalist paper claims to wealth (profit, interest and ground rent), starting with 11-12 trillion “nomad dollars” held outside the United States, exceed the surplus value available for their valorization (i.e. to turn them into real wealth).

Simply put, the productive economy has been unable to produce sufficient profits to match the paper profits apparently generated by speculation. This excess of fictitious claims is, as sketched above, the result of decades of debt pyramiding aimed at delaying a deflationary crisis, and must be continually countered by relentless efforts to squeeze out new surpluses from every possible source.

The latter can be accomplished only by reducing the global wage, as well as  through “primitive accumulation” (non-reproduction or non-exchange) from incorporating petty producers from Third World agriculture into the global working class, the running down of capital plant and infrastructure, and the looting of nature

This process of creating surplus value essentially by coercive processes of redistribution rather than increased production is quite different from that of earlier, “normal” capitalist expansions in which these paper claims grow alongside the expanded reproduction of society. Today, capitalist paper expands and social reproduction contracts.

Global leveraged buyout has meant, since 1973, opening national or regional zones of assets to the U.S.-centered credit bubble, much in the same way that Germany’s military expansion after 1938 aimed at  propping up the 1933-1938 credit pyramid created by Hjalmar Schacht’s “Mefo bill” (Mefowechsel, issued by the Metallforschungsgesellschaft which financed German rearmament).(2)

In the 1997-98 Asian financial crisis, for example, American capital through the International Monetary Fund (IMF) opened relatively closed Asian economies such as Korea to “vulture capitalist” buyouts of greatly discounted real assets, which were later restructured and resold at a significant profit. (South Korea is currently in an uproar about the American “vulture capitalist” firm Lone Star’s acquisition of the Korean Exchange Bank in the wake of the Asia crisis. Lone Star resold the bank for a $3 billion profit and evaded all Korean taxation by making the sale in Belgium.)

The opening of the ex-Soviet bloc, China and India presents the global leveraged buyout with tremendous possibilities of exploiting highly-educated, cheap labor power and natural resources which might keep this process going for years. Behind these empirical manifestations we see the classic cycle of valorization-devalorization-revalorization described in vol. III of Marx’s Capital.

China: Barrier to U.S. Power

Two major powers, the European Union (EU) and China, represent obstacles to America’s strategy of global leveraged buyout. Both are vulnerable to America’s current dominance of world petroleum resources through its massive Middle Eastern military presence, and are increasingly challenging the United States in the worldwide race for further access to oil, from disagreements over Iran to the competition for new oil sources in Africa.

Europe is far from being able to challenge the United States. Because capital is not merely an economic and social relationship but also a political and military one, history has shown that monetary and economic union without political unification is unviable – and Europe’s political unification is currently dead in the water, as shown by last year’s French and Dutch referenda rejecting the proposed EU constitution, understood by its framers as a step toward political consolidation.

Consider, moreover, the euro’s challenge to the dollar as an international reserve currency. While Europe’s net global position, both in trade and finance, has none of the problems of  the foreign indebtedness of the United States, a worldwide flight from the dollar would strongly revalue the euro and weigh heavily on Europe’s international competitive position. This already alarmed the European capitalists with the post-2002 rise of the euro to .80 to the dollar, a 40% revaluation in 18 months.

But this problem would pale next to a major Mideast crisis that threatened Europe’s access to oil, to say nothing of a military confrontation (of which the Yugoslav wars were an excellent foretaste) that would reveal Europe’s profound disarray in foreign and military policy.

China is in fact the real problem for U.S. world hegemony, as recent CIA reports have frankly stated. Sometimes it seems as if all U.S. foreign policy since at least the late 1970s (e.g. Afghanistan) has been aimed at controlling the periphery of Russia and China, and since the collapse of the Soviet bloc, the encirclement of China.

The emergence of an East Asian capitalist bloc capable of replacing the United States as the world hegemon is the nightmare of American capital. China, in contrast to the European Union, is still too closed for the capitalists’ satisfaction, and “global leveraged buyout” there is still in its early stages. Asian nationalisms (China, Korea, Japan) as well as the lingering Cold War questions (Taiwan, the division of Korea) are still major obstacles to anything resembling an “Asian Union,” but the United States is using every means in its power to stoke these fires and prevent such a union from forming.

Phony “Demographic Crisis”

In the currently accelerating world reflation, Germany and Japan, the two previous “locomotives” of Europe and East Asia respectively, recently eclipsed by the creation of the euro and the rise of China, are showing the highest “capitalist confidence” in 15 years.

But both countries are highly vulnerable to the rising international interest rates necessary to control the return of inflation, as well as to the currency revaluation mentioned previously. In early May the European Central Bank avoided raising interest rates, both to prevent such a revaluation and to avoid choking off signs of recovery, particularly in Germany.

Both countries (particularly Japan) also show signs of the “demographic crisis” touted in the capitalist press around the incipient pension bankruptcy. The recent capitalist hue and cry over this crisis could not be more hypocritical. Within a capitalist framework, this crisis only exists because the restructuring of the past 30 years has narrowed the “active population” (i.e. the population capable of producing surplus value) to people between the ages of 25 and 50.

France, for example, in recent years has seen the gamut of excluded or potentially excluded groups struggle against this downsizing. Public employees went into the streets over pensions (May-June 2003), immigrant youth rioted over their total exclusion and criminalization (November 2005). Most recently students struck for two months (March-April 2006) to prevent the gutting of labor protection for young people.

The retired, the unemployable and the soon-to-be-exploited have all moved, while the surplus-value producing population, the group with the greatest power to resist capital, has remained largely immobile.

The “demographic crisis” exists only because of the demands of capitalist valorization. It expresses the fact that productive forces exist today which could enable a higher form of society both to greatly decrease socially-necessary labor and to transform the remaining necessary labor into the

…development of the rich individuality which is as all-sided in its production as in its consumption, and whose labor also therefore no longer appears as labor, but as the full development of activity itself…” (Marx, Grundisse) (1973 edition, 325)

Further, the “demographic crisis” in Europe and Japan reflects the actual contraction of population (Japan has negative population growth in 2005, Germany has been close to zero growth) because of the greatly increased cost, in capitalist terms, of reproducing the next generation. Having children has simply become too expensive.

Finally, on a world scale, there is no “demographic crisis” whatsoever. It is only a crisis because of the persistence of value production and of the nation-state.

The crisis in the advanced capitalist sector since the early 1970s has produced an aging population-for-capital, and the same crisis in the less-developed world has produced a huge young population (as among poor peasants, where a large family is indispensable for the elderly where no pensions exist). These complementary imbalances are only two signs of the same coin, the crisis of capital’s recomposition for a possible new expansion.

Class War and the Crisis

This brings us to the final dimension of the analysis. Why has capital, since the early 1970s, had to resort to such fictitious development and launch such (at least in the United States) a class war in which only one side was fighting?

The early 1970s crisis erupted, as mentioned, at the end of a period of rising working-class insurgency. Underneath all appearances, this crisis expressed the superannuation of value as a form through which society could reproduce itself.

In the proletarian eruption in Europe and the United States from the mid-1960’s (wildcat movement in the U.S. and the U.K.) to the mid-1970s (Italy, Portugal, Spain) by way of May 1968 in France, the working class (as well as other social strata) were groping toward the “full development of activity itself” made possible and necessary by the previous development of capitalism.

The capitalists, on the other hand, needed to oversee a general devaluing of capital and of labor power such that a new expansion could begin on a profitable basis. In contrast to the first phase of capitalist history (1815-1914) this could not occur through a rapid deflation, depression and recovery.

Global society was too productive for the value form, and hence not merely capitalist paper but actual productive forces, and above all labor power, had to be destroyed and rolled back, as had occurred in the 1914-1945 transition from British-centered to America-centered world accumulation.

The emergence of the “neoliberal” phase of capitalism in the late 1970’s was the attempt to protect the capitalist titles to profit, interest and ground rent from excessive devalorization through the global “Ponzi scheme” described previously, and at the same time to oversee a “slow-motion crash landing” in the grinding down of working-class living standards globally.

As a result, the world today is poised between the U.S. and East Asian centered phases of capitalist expansion. But the latter can only triumph by a far greater, more violent shakeout than has occurred to date. And like the early years of the last shakeout (1917-1921), before the new American dominance was in place, this is creating a new opening for the “old mole” (of revolution – ed.), in which the old slogan “socialism or barbarism” will not be a romantic battle cry, but the most rigorous necessity.


  1. See my 2003 article “First Inflation, Then Deflation” in Wildcat No. 66
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  2. Once again, my 2003 article “Germany 1938, U.S.A. 2003”
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