Posts
1. The US: a boatload of goods for a book entry in dollars
The US may be concerned about the challenge
of China as a major power in the world, but a closer look at the economic
relationships between the two countries shows who is really in charge. At first
sight, the huge trade surplus that China has with the US might seem to put
China on top: it reached $295bn in 2011, or 40% of the total US deficit.
However, when US importers buy Chinese commodities, they pay for these goods in
US dollars, not in renminbi, because most international trade is priced in
dollars. The Chinese exporters receiving dollars then exchange these for
renminbi at China’s central bank, given China’s exchange controls. Then the
central bank uses these dollars to pay for imports, and, until recent years,
any surplus of dollars was added to China’s foreign exchange reserve holdings.[2]
Hence the US deficit with China found its expression in a rising level of US
indebtedness, though the debt is denominated in dollars - the currency over
which the US has control.[3]
The dollar-based pricing regime, based on US economic power, is complemented by
a dollar financial regime, another consequence of this power. This enables the
US to import trillions of dollars worth of goods in exchange for low
yielding financial securities!
The US balance of payments is characterised
by deficits in traded goods and (usually) a net outflow of funds on the foreign
direct investment account. These potentially negative flows for the US dollar
are offset by a surplus on services trade and investment income, and by a large
volume of foreign purchases of US securities. In 2011, for example, the goods
deficit was nearly $740bn, but the services surplus was nearly $180bn and the
investment income surplus was another $235bn. The latter item has grown
dramatically in recent years as the collapse of US interest rates reduced its
payments to foreign creditors. The remaining gap in US payments was largely
filled by around $250bn of net foreign purchases of US securities and
short-term money flows.
The US current account deficit has now
shrunk to some 3% of GDP, down from 6% in 2006, helped by stagnant growth in US
demand and a decline of the US dollar. Alongside the reduction of the deficit,
there has also been a reduction of the funding that came from central bank
purchases of dollars for their foreign exchange reserves. This volume of dollar
securities buying fell from $488bn in 2006 to ‘only’ $212bn in 2011. While the
volume of US foreign debt continues to climb, the US government has benefited
immensely from the near-zero level of yields. It is now paying less in total
interest to foreign creditors than it did six years ago, when the volume of
debt was much lower.
Such data reveal the huge financial power
that the US exerts in the world economy, a power reflected in its privilege of
being able to draw on global resources cheaply, essentially by selling
securities that it issues on its own terms in exchange for goods and services
produced by other countries. This happens on a persistent basis, and is not a
function of the past few years. If anything, US economic power has increased in
the more recent years of crisis as US banks have easier access to the dollar
funding that is critical for international trade.[4]
2 The UK: broker and rentier
There are some similarities between the US
and UK balance of payments. Each country has a large trading deficit and
regular outflows of foreign direct investment that are funded by other inflows.
The UK also has a surplus in services trade and investment income despite
being, like the US, a large net debtor country. However, whereas the US has
benefited from the role of the US dollar in the global monetary system and
funding from central bank dollar purchases, the UK has a different means of
using the financial system to gain economic advantage. As explained in detail
elsewhere,[5]
the UK has specialised in financial services. This enables it to take a cut of
global financial deals, based on its role as home to the world’s biggest
international money market.
In 2011, while the UK visible trade deficit
was £100.3bn (6.6% of GDP), the services surplus amounted to £76.4bn, which
helped lower the current account deficit to 1.9% of GDP. By far the largest
component of the services figure was a £38.7bn surplus due to financial
services. These items, together with a surplus on investment income – a net
£17.3bn in 2011, which was more than accounted for by the £48.9bn net earnings
on foreign direct investment – are stable elements of the UK balance of
payments that fund the other deficits. Other items, such as portfolio
investment and banking flows tend to be more erratic, but there are many and
varied sources through which the UK can obtain the funds to finance its
persistent trade deficit and regular purchases of foreign companies without
bringing about the collapse of the sterling exchange rate.
3. Germany: Vorsprung durch Technik?
Germany’s balance of payments show a
country with a more ‘productivist’ bias, compared to the financial inflows that
loom large in the Anglo-American data. Germany usually registers a large
visible trade surplus (€158bn in 2011), with a small deficit on services trade.
With the country’s large net foreign asset position, there is a sizeable net inflow
of investment income (€47bn in 2011) and these figures finance the steady
outflow of funds for direct investment and bank lending. Thus Germany’s
international financial strength is based much more on its productive
capabilities than is the case for the US and the UK.[6]
The crisis has brought some acute problems
for German imperialism, however. It is widely known that Germany has been the
main paymaster for the European Union and later for the euro currency area,
contributing by far the most to ‘structural funds’ and the like. These
arrangements have been to its advantage, creating for it a profitable trading
and economic zone. But in the recent years of crisis the bills to ‘save the
euro’ have grown immensely. Apart from Germany’s large commitments to fund
various rescue packages, there is also a far less widely recognised huge
effective loan to the euro banking system. In 2006 the figure was minimal, but
by the end of 2011 the Bundesbank reported that its outstanding claims on the
European Central Bank’s TARGET2 payments system had risen to an astonishing
€463bn.[7]
By mid-2012, this figure had grown to more than €700bn!
This rise in claims is a function of the
way the euro payments system works, reflecting net monetary flows between
member countries that occur as a result of transactions in goods, services and
financial assets. It comes about automatically, rather than being a deliberate
loan from Germany’s central bank, and with the collapse of private interbank
payments in Europe, central banks have become much more prominent. Effectively
what is happening now is that the central banks in euro countries crushed by
debt are the only supports for their national banking systems. They can just
about provide credits to local banks (and then on to companies and individuals)
because they are part of the euro payments system that operates with the ECB as
the go-between. These countries still have big trading deficits, but the
national central banks are continuing to finance these deficits by running up
official debts with the ECB. The ECB’s accounts then record huge assets owed to
it by the debtor countries - and most of its liabilities are with the
Bundesbank on the other side of the balance.
Another way of expressing this point is
that Germany has seen its current account surplus with many other euro
countries paid for by credits at the ECB in the TARGET2 payments system. Well,
it looks like something is not quite right with the populist view that Germany
is to blame for having exported the goods to the debtor countries, especially
when there is little sign that the country is even getting paid!
Regarding the debts now owed to Germany by
other euro countries, one report has suggested that these ‘may be the largest
threat keeping Germany within the Eurozone and prompting it to accept generous
rescue operations such as those agreed on in October 2011’.[8]
This is because Germany would bear more than 25% of the costs of a default
impacting the ECB, based on its share of the ECB’s equity, quite apart from the
broader economic damage that would be done to Germany’s economy and finances.
Germany, in the opposite mode to the US and
the UK, has lent to export rather than borrowed to import. Its creditor
position gives the country important influence and power, but it is having
difficulty in deciding how to use that power because the scale of the economic
trouble in Europe (and elsewhere) is so big. Yet all the indications are that
Germany will come down on the side of sustaining the euro system. This is not
simply because it is a political and economic project on which Germany’s (and
France’s) long-term strategy of building a counter-weight to the US has been
based.[9]
It is also because now the more immediate financial costs of any attempt to get
out have risen so dramatically.
Tony Norfield, 12 September 2012
[1] See, for example, ‘London’s Dirty Laundry’, a Special Report in Private
Eye, 10-23 August 2012. The Tax Justice Network and other groups have also
done some useful work on this question with their coverage of tax havens and
the links these have to major countries.
[2] China’s trade surplus has shrunk in recent years, and so has its
accumulation of FX reserves, which nevertheless amount to some $3 trillion
(around 60% of which is believed to be held in terms of US dollars). Surplus
dollars not used for reserves include hundreds of billions to buy other
currencies instead, to recapitalise Chinese banks, to finance the purchase of
foreign assets and to provide finance for overseas projects. These latter items
boost China’s influence and are the main factors worrying the US government.
[3] The Chinese authorities accumulated holdings of dollar-denominated
assets (principally government securities) as a means of preventing, or
limiting, the appreciation of their currency. To this extent China’s build up
of US dollar holdings was its own policy decision, not one forced on it by the
US. However, it was a policy enacted in the wake of the 1997-98 Asian financial
crisis that led countries to accumulate FX reserves rather risk being subjected
(again) to the dictates of the IMF and imperialist capital.
[4] See for example: ‘Citigroup sails into European bank waters’, Financial
Times, 5 September 2012.
[5] See ‘The Economics of British Imperialism’ on this blog, 22 May
2011.
[6] I don’t want to go too far here! As Guglielmo Carchedi points out
in his book, For Another Europe: A Class Analysis of European Economic
Integration (London 2001, especially Chapter 4 on Economic and Monetary
Union), Germany has used the EU and EMU to secure the position of its
monopolistic companies.
[7] Deutsche Bundesbank, Monthly Report, ‘Germany’s balance of
payments in 2011’, March 2012, p33.
[8] H-W Sinn and T Wollmershaeuser, ‘Target Loans, Current Account
Balances and Capital Flows: The ECB’s Rescue Facility’, NBER Working Paper No.
17626, November 2011, p6. On page 25 of this valuable report, the authors note
that in the three years from 2008 to 2010, 91% of Greece’s current account deficit
and 94% of Portugal’s was financed with credits from the TARGET system.
[9] See ‘Cameron, Merkozy and Europe’ on this blog 12 December 2011,for
a fuller discussion of this issue.
