Contributed by Joe Montero
The worrying rumbles threatening a storm within the American economy are getting louder, and we’d better all watch out.
Most major indicators are showing that they have hit their lowest point in more than a decade. Given that the United States is still the world’s biggest economy, with links stretching across the planet, no corner will be left unscathed if tit all goes belly up.
Commentators everywhere are pointing to the trade wars with China and Europe. They are certainly having an impact on the immediate numbers, and if these escalate, they may soon become much worse.
But this does not make the trade wars the original cause. There are underlying and much longer running problems involved.
Partially hiding this is the myth of creating jobs, rising GDP and high share prices under Donald Trump’s watch.
The reality has been a jump in the transfer of full time and permanent jobs into part time and non-permanent work, economic growth figures inflated by financial transactions and asset swaps, and share prices being kept up via speculation, asset raiding and other forms of financial wheeling and dealing.
One change is that the myth is starting to look more transparent. Despite this, the bulk of commentators avoid what is going on in the longer term and stick to the short-term. They miss out on what is really happening.
One of the key indicators is the fall in manufacturing, which has now recorded two consecutive months of contraction, and the level has not been as low since 2009 and the impact of the Global Financial Crisis.
This fall is not something new. American manufacturing has been declining for a long time in real terms. And this is because its biggest owners have shifted their attention towards putting their money in the world of finance. Why. Because it has become more profitable. The reasons why are not part of the scope of this article. Let’s just leave it to underline that this transfer has taken place.
In more recent times, a slarge part of this manufacturing base as been transferred overseas by its owners.
A new emerging factor is that demand for American products around the world is starting to fall. This is revealed in the September quarter figures.
Manufacturing has officially contracted for the second consecutive month and beginning to look like what happened in the fallout form the Global Financial Crisis
On the jobs front even the rise of casualised work slowed down. Casualised work is call by the better sounding title alternative work.
Twenty percent of the workforce is on contracts. Seventeent percent on part time. the gig economy soaks up 57 million workers. According to Gullup, 36 percent of US workers were in alternative work in 2018.
A lower share for labour meant that the bottom lines of the big employers was improved o for a while. But the underlying realities had to resurface. The trade wars are helping to reveal this, because they are aggravating the problems.
To make sense of it all one must realise that, for a long time, the economy of the United States has been dependent on its economic dealings with the rest of the world. This is its primary growth engine, not doing business at home.
Export of what is manufactured to other countries is part of it. But the main game is the export investment capital and returning a surplus from it. If something is going wrong, it is going wrong with this engine.
Because of the extent of dependence on the world of finance, a mounting reliance on borrowing and the rise of the debt driven economy has been locked into place.
The fallout has been an over supply of the American currency, historically low interest rates and a debt crisis. The financial system has been made a lot less stable.
This debt is held by US investors to the tune of $6.89 trillion (32.5 percent), foreigners $6.21 trillion (29.3 percent). the government $5.73 trillion (27 percent) and the Federal Reserve $2.38 (11,2 percent).
The graphic below shows which nations hold US debt.
Aside from the politics, the United States has sought to transfers its burden to other nations, through the establishment of trade in goods, and more importantly, trade in capital regimes that guarantee the advantage to American multinationals. These unequal arrangements have been misleadingly called Free Trade Agreements.
The failure of the Free Trade Agreements to resolve the problems is the principal economic factor behind the trade wars.
Simply put, the United States is seeking to force open new markets to export investment capital, and secondarily, its manufactured goods.
A big problem is that the world does not want to go along with it. There is a greater awareness of what is at stake. Governments are pressured by their populations to draw a line. Rival business interests also want a stop to it. This is where economics meets politics.
Come in Europe. Sanctions have been in force against this continent for a while now. On 2 October Donald Trump announced that $7.5 billion worth of new tariffs on European Union goods will be imposed from 18 October, covering aircraft, food and other goods.
On one level, Washington is trying to force a bridge into Europe for Boeing aircraft, the American competitor to Europe’s Airbus.
On a more fundamental one, the sanctions are an effort to breach the walls for American financial interests to buy into the banks and other companies based in the European Union.
Achieving this would go a significant way towards resolving the problems of the American economy, at least for a while, through gaining a new source of profit and weakening a major rival in the global economy.
Europe does not want this and is resisting the incursion.
Even more important is China. Much greater access to the worlds fastest growing economy would be a windfall.
China is the number one holder of American government bonds and currency. This means a huge debt. The debt must eventually be called in, and this poses a major threat to the American economy.
Debt and the transfer of manufacturing have imposed a certain level of dependency of the United States on China, and although the point of crisis has not been reached, the threat is always there.
Washington is attempting to transfer the burden, by pressuring China to devalue its currency, remove all restriction on American investment it its domestic economy, and flood the country with its own goods.
Achieving these ambitions would provide a counter to the debt problem, by making it more expensive for China to do business with the United States. And it would provide an enormous source of profit from the world’s most dynamic, fastest growing, and most populous economy.
The trouble is that China does not want to go along with it and has the capacity to stand against the pressure.
It is the inability of the United States to expand though the global economy and the failure of the application of trade sanctions to break through this wall, that is the cause of the weakening of its economy over the last two months.
The situation has become more precarious. If the decline gets worse, there will be a point where the prospect of a major American depression will become a reality.
Given that the United States remains the world’s biggest economy and its financial network dominates the global financial system, such a collapse would devastate the global economy.
Those countries most closely integrated with the American economy will be hurt worst of all.