- The deindustrialisation of the US economy.
- The importance of fracking and maintaining high oil prices at all costs.
- The resemblence of the situation in the US to the fall of the British empire and what it means for the Dollar.
As the current global long cycle moves closer to its trough, China appears to be taking over the lead role in the world economy. Meanwhile, the country that has been dominating the global economy for the past 60 years, the United States of America, is patently in economic decline. It is perhaps opportune to look at the nature of, and reasons for, this decline in the US economy, and consider the implications it might have for the rest of the world.
Whereas the US economy was responsible for over half of global GDP at the beginning of the 1960s, it now accounts for about half of this level, or just about a quarter of global GDP (see chart). Most of the ground has been lost to a rapidly growing East Asia, the economies of which now constitute a larger share of world GDP than the United States.
Structural changes in the US economy
The first and most important development of note in the country that once used to be considered the world’s factory is its ongoing deindustrialisation. Whereas the US dominated manufacturing half a century ago, a considerable amount of manufacturing production has since then shifted out of the country, mostly to China (see chart), leaving the US as essentially a service economy.
This decline is manifest in the share of the US in global manufacturing exports, which now stands at only eight per cent, ten percentage points down from where it was 50 years ago (see chart below).
As the chart below shows, the share of services in US GDP has correspondingly risen by six percentage points in the last 20 years. Services are now responsible for 77% of the country’s GDP. The former industrial power has now completely changed its face.
The few US industries of any global significance that remain are arguably dominated by monopolies. Moreover, the only industries that are still producing on a large scale inside the country are those serving the country’s military-industrial complex.
The US economy – and thus millions of jobs – is consequently ever more dependent on not only the sale of arms, but of all kinds of military goods and services, such as surveillance, artificial intelligence and drones. This is reflected in a giant military budget, the true amount of which now exceeds one trillion dollars (much higher than the official numbers admit).
The military budget rises every year, irrespective of the fact that nobody can actually trace how it is spent – except that it surely does not contribute to world peace. Large multinational companies such as Google, Microsoft and Amazon are increasingly dependent on military orders, exemplified by the so-called ‘war cloud’ contract with the Pentagon that Microsoft and Amazon have been battling over.
But not only domestic demand drives the war industry. Military aid to foreign countries is another path through which the government indirectly subsidies its own companies. The US government provides aid to countries so that they can buy arms from US companies, while simultaneously lifting restrictions that allows the export of weapons to be exported to countries with more than questionable human rights records.
The rise of fracking
Apart from arms-related products and services, the other industry keeping the US economy above water is fracking. In August this year, the US emerged as the world’s largest oil and gas producer, even briefly overtaking Saudi Arabia as the largest exporter of these products.
As fuel is replacing manufactured goods in the composition of US exports (see chart), high oil prices are now becoming extremely important for the country’s prosperity. This contrasts with the situation of a couple of decades ago when high prices were deemed to be extremely damaging to the well-being of the US economy.
One consequence of this change appears to be that the US foreign policy is increasingly geared towards undermining many of the countries with large oil reserves that could potentially weaken oil prices if they were allowed to exploit these reserves.
It is perhaps no coincidence that Venezuela, with the largest known oil reserves, stands at the top of the list of countries being destabilized by the US, and Iran, Iraq and Libya stand not too far down that list (see chart and table below). Indeed, as the table below shows, four of the ten countries with the largest oil reserves have been subjected to US military interventions in the last ten years, leading to drastic reductions in their oil production. During the same time, the US’s own oil exports have risen dramatically, as can be seen from the chart below.
This said, the military-industrial complex and fracking alone cannot fend off the economy’s decline. The shift from a manufacturing-based to a services-based economy translates into less competitiveness, which can be seen from a falling US trade balance.
It bears remembering in this context that Great Britain experienced a similar economic decline some 150 years ago, and adopted a similarly hostile international foreign policy posture in response, one aspect of which was a desperate attempt to hold on to its colonies.
Don’t trust the official figures
So, one may ask, if the US is falling inexorably into economic decline, why don’t the numbers show this? The answer is, because officials are trying their best to disguise the true extend of the effects the decline.
For example, Shadow Government Statistics shows that actual unemployment in the US is at 20.9% as of September 2019, some 17.4 percentage points higher than the official figure of 3.5%. The true extent of unemployment is concealed by a clever redefinition of unemployment. Official figures list anyone who has been searching work for more than nine months as unwilling to work and thus not as unemployed.
Moreover, even the shortest duration part-time jobs are counted as full employment, further skewing the statistics. People who do not have a job, but claim that they are not looking for one, are not even counted in the statistics.
Even for those people who are employed, real wages have barely risen in the last 40 years, with income and wealth disparities growing drastically as a consequence. Poverty is high and rising, with 80 per cent of Americans now living from paycheck to paycheck, leading to what the Guardian calls a “good job crisis”. The deteriorating state of the economy is further evidenced by its increasingly creaky infrastructure, that is in some places worse than that of many countries in the Global South.
The role of world money
The US government has been doing everything in its power to delay the decline. One, and perhaps the major, reason it has been able to do so for so long is that it is the issuer of world money. The dollar, as world money, can in principle command any and all goods and services produced by any country in the world.
Naturally, the issuer of word money has the advantage of being able to print it at will in order to artificially sustain the economy, which is what the USA has been doing. The manifestation of this is the rising dollar denominated global and US mountain of debt.
However, the US can only continue to issue world money if this money is backed by real goods and services, which, as the preceding suggests, is increasingly no longer the case. Already the Dollar’s share in the world’s total foreign exchange reserves is falling (by more than ten percentage points in the last 20 years), as the chart below shows.
This means that the trust in the US currency is falling with governments around the world putting increasingly greater faith in other currencies and gold. In fact, it is a real possibility that country after country will stop accepting the dollar as world money, fearing that these dollars will not be redeemed by actual goods and services. When this happens, the dollar’s fate will be sealed.
The US appears to be de-industrialising at a rapid rate, as the long business cycle bottoms. This is causing a shift in the economic centre of gravity away from the US.
The wars and political disturbances in Iraq, Libya, Syria and Venezuela that have driven up or sustained the price of oil (and thus help to keep the revenues of fracking high) are the most obvious manifestations of the government’s increasingly desperate attempt to stem the decline of the economy.
Russia and China are being depicted as constant threats in order to keep weapon sales high. The situation now is similar to that just preceding the second World War, when the US was taking power from the former superpower Great Britain, with nationalism, trade wars and international conflict on the rise wherever one looked.