Offshoring interests and economic dogmas are destroying the US dollar
By Paul Craig Roberts
Online Journal Guest Writer
Dec 14, 2007, 00:14
December 8, Chinese and French news services reported that Iran had stopped
billing its oil exports in dollars.
never hear this news as the independence of the US media was destroyed in the
1990s when Rupert Murdoch persuaded the Clinton administration and the
quislings in Congress to allow the US media to be monopolized by a few
Iran's oil minister,
Gholam Hossein Nozari, declared: "The dollar is an unreliable currency in
regards to its devaluation and the loss oil exporters have endured from this
trend." Iran has proposed to OPEC that the US dollar no longer be used by
any oil exporting countries. As the oil emirates and the Saudis have already
decided to reduce their holdings of US dollars, the US might actually find
itself having to pay for its energy imports in euros or yen.
survivor of a US-led coup against him and a likely target of a US assassination
attempt, might follow the Iranian lead. Also, Russia's Putin, who is fed up
with the US government's efforts to encircle Russia militarily, will be tempted
to add Russia's oil exports to the symbolic assault on the dollar.
The assault is
symbolic, because the dollar is not the reserve currency due to oil exports
being billed in dollars. It's the other way around. Oil exports are billed in
dollars, because the dollar is the reserve currency.
What is important to
the dollar's value and its role as reserve currency is whether foreigners
continue to consider dollar-denominated assets sufficiently attractive to
absorb the constant flow of red ink from US trade and budget deficits. If Iran
and other countries do not want dollars, they can exchange them for other
currencies regardless of the currency in which oil is billed.
Indeed, the evidence
is that foreigners are not finding dollar-denominated assets sufficiently
attractive. The dollar has declined dramatically during the Bush regime
regardless of the fact that oil is billed in dollars. Iran is dropping dollars
in response to the dollar's loss of value. This is a market response to a
depreciating currency, not a punitive action by Iran to sink the dollar.
Oil bills are only a
small part of the problem. Oil minister Nozari's statement about the loss
suffered by oil exporters applies to all exporters of all products.
A quarter century
ago, US oil imports accounted for the US trade deficit. The concerns expressed
over the years about "energy dependence" accustomed Americans to
think of trade problems only in terms of oil. The desire to gain "energy
independence" has led to such foolish policies as subsidies for ethanol,
the main effect of which is to drive up food prices and further ravage the
Today, oil imports
comprise a small part of the US trade deficit. During the decades when
Americans were fixated on "the energy deficit," the US became three
to four times more dependent on foreign made manufactures. America's trade
deficit in manufactured goods, including advanced technology products, dwarfs
the US energy deficit.
For example, the US
trade deficit with China is more than twice the size of the US trade deficit
with OPEC. The US deficit with Japan is about the size of the US deficit with
OPEC. With an overall US trade deficit of more than $800 billion, the deficit
with OPEC only comprises one-eighth.
If abandonment of
the dollar by oil exporters is not the cause of the dollar's woes, what is?
There are two reasons
for the dollar's demise. One is the practice of American corporations
offshoring their production for US consumers. When US corporations move to
foreign countries their production of goods and services for American
consumers, they convert US Gross Domestic Product (GDP) into imports. US
production declines, US jobs and skill pools are destroyed, and the trade
deficit increases. Foreign GDP, employment, and exports rise.
US corporations that
offshore their production for US markets account for a larger share of the US
trade deficit than does the OPEC energy deficit. Half or more of the US trade
deficit with China consists of the offshored production of US firms. In 2006,
the US trade deficit with China was $233 billion, half of which is $116.5
billion or $10 billion more than the US deficit with OPEC.
The other reason for
the dollar's demise is the ignorance and nonchalance of "libertarian free
market free trade economists" about offshoring and the trade deficit.
There is a great
deal to be said in behalf of free markets and free trade. However, for many
economists free trade has become an ideology, and they have ceased to think.
Such economists have
become insouciant shills for the offshoring interests that fund their research
and institutes. Their interests are tied together with those of the offshoring
economists have made three massive errors: (1) they confuse labor arbitrage
across international borders with free trade when nothing in fact is being
traded, (2) they have forgot the two necessary conditions in order for the
classic theory of free trade, which rests on the principle of comparative
advantage, to be valid, and (3) they are ignorant of the latest work in trade
theory, which shows that free trade theory was never correct even when the
conditions on which it is based were prevalent.
When a US firm moves
its output abroad, the firm is arbitraging labor (and taxes, regulation, etc.)
across international borders in pursuit of absolute advantage, not in pursuit
of comparative advantage at home. When the US firm brings its offshored goods
and services to the US to be marketed, those goods and services count as
David Ricardo based
comparative advantage on two necessary conditions: One is that a country's
capital seek comparative advantage at home and not seek absolute advantage
abroad. The other is that countries have different relative cost ratios of
producing tradable goods. Under the Ricardian conditions, offshoring is
Today capital is as
internationally mobile as traded goods, and knowledge-based production
functions have the same relative cost ratios regardless of the country of
location. The famous Ricardian conditions for free trade are not present in
In the most
important development in trade theory in 200 years, the distinguished
mathematician Ralph Gomory and the distinguished economist and former president
of the American Economics Association, William Baumol, have shown that the case
for free trade was invalid even when the Ricardian conditions were present in
the world. Their book, Global Trade and Conflicting National Interests, first presented as lectures at the
London School of Economics, was published in 2000 by MIT Press.
While free trade
economists hold on to their doctrine-turned-ideology, the US dollar and the
American economy are dying.
One of the great
lies of the offshoring interests is that US manufacturing is in trouble because
of poor US education and a shortage of US scientists and engineers. Pundits
such as Thomas Friedman have helped to spread this ignorance until it has
become a dogma. Recently, General Electric CEO Jeffrey Immelt lent his weight
to this falsehood. (See "The US No Longer Drives Global Economic
Growth," Manufacturing & Technology News, Nov. 30, 2007.)
The fact of the
matter is that the offshoring of US engineering and R&D jobs and the
importation of foreign engineers and scientists on work visas have combined
with educational subsidies to produce a surplus of American scientists and
engineers, many of whom are unable to find jobs when they graduate from
university or become casualties of offshoring and H-1b visas.
continue to lobby Congress for more foreign workers, claiming a non-existent
shortage of trained Americans, even as the Commission on Professionals in
Science and Technology concludes that real salary growth for American
scientists and engineers has been flat or declining for the past 10 years. The
"long trend of strong US demand for scientific and technical specialists"
has come to an end with no signs of revival. (See "Job and Income Growth
for Scientists and Engineers Comes to an End," Manufacturing &
Technology News, November 30,
What economist has
ever heard of a labor shortage resulting in flat or declining pay?
There is no more of
a shortage of US scientists and engineers than there were weapons of mass
destruction in Iraq. The US media has no investigative capability and serves up
the lies that serve short-term corporate and political interests. If it were
not for the Internet that provides Americans with access to foreign news
sources, Americans would live in a world of perfect disinformation.
and economic dogmas have combined to create a false picture of America's
economic position. While the ladders of upward mobility are being dismantled,
Americans are being told that they have never had it better.
Craig Roberts [email him] was Assistant Secretary of the Treasury in the Reagan
Administration. He is the author of Supply-Side
Revolution : An Insider's Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the
co-author with Lawrence M. Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for Peter
Brimelow�s Forbes Magazine interview with Roberts about the recent epidemic of
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