United States Deficits 101

Financial games concept.

By Richard Westra

Beginning in the 1980s the United States transitioned from its position as predominant national economy and workshop of the post-war world to a global economy, dependent on the world for the consumer goods demanded by its populace as tantamount to their “freedom” and for financing of it quadruple deficits, while remaining in the global driver seat due its currency being world money. There are no business-as-usual policy ways out of this morass.


In the aftermath of World War II (WWII) the United States (US) salvaged the international capitalist order by rebuilding it around three poles of prosperity. Erstwhile belligerents Germany and Japan were reconstructed through US beneficence as showcase economies for their regions while the US shaped development in the Americas. Yet, by the 1970s, as Germany and Japan surpassed US industrial prowess, their own multinational corporations (MNCs) now prowling world markets, the US economy became a victim of the very success of the international system it helped create.¹

The first casualty was the international monetary system “contracted” among major economies at Bretton Woods. Two key features of this system had potential conflict of interest written all over them. First, the possibility of maintaining exchange rate stability hinged on the exchange rate of all currencies in the post WWII international system being fixed in terms of the US dollar. The dollar exchange rate was then fixed in terms of gold. Only if dollars were accumulated in excess by this or that country would gold ever be brought into the equation and dollars be redeemed for it. Second, the currency of every country, including the US, was issued as “fiat money”. Fiat money, quite simply, is money issued as legal tender by the state or “created” through credit issuance by commercial banks, based not on anything of real value such as gold. Rather it is based on “high powered” money or government debt IOUs held by the central bank. Only on the basis of fiat money could major economies maintain welfare states and regimes of macroeconomic policymaking.

The US economy became a victim of the very success of the international system it helped create.

Much to its chagrin, as US competitiveness waned, international demands increased to exchange accumulating dollar surpluses for gold. In 1971, the US responded by closing the gold window to unilaterally exit Bretton Woods. But US difficulties did not end there. US waning global competitiveness had domestic origins in declining MNC profits and slowed investment that its casting of blame upon allies disguised. Responding to these travails, the US turned to the fiat money pump. This spurred domestic inflation as it weakened the dollar. According to accepted economic norms, declining international competitiveness is reflected in currency devaluation. In the post WWII order, the International Monetary Fund (IMF) was tasked with smoothing balance of payments deficits of the sort that the US economy began to experience from the early 1970s for the first time since 1891! Yet the US was not just another economy here. With the dollar as world money, combating its domestic recession while simultaneously expanding military adventurism abroad exported US inflation across the globe.²

Chimera of Globalization

As global grumblings about replacing the dollar as hub currency reached a crescendo, October 1979 saw US Fed chair Paul Volcker launch his “coup” raising interest rates astronomically.³ For the US, Volcker’s coup changed everything. First, the interest rate hike halted the inflationary spiral. Second, it dramatically appreciated the dollar in world markets. Third, it restored global confidence in the dollar as hub currency. Lastly, as US interest rates spiked, global money flooded into US dollar savings instruments and dollar denominated assets.

However, for the world economy as a whole and working people everywhere the story turns dark. With MNC profitability and global growth in the doldrums a perverse situation arose where interest rates outstripped rates of profit and global growth, impelling global money not only into US dollar denominated instruments but short term speculative opportunities being engineered on Wall Street and its international satellites. Further, not only in the US but globally, because borrowing turned on the US dollar as hub currency, every class of borrower from individuals to businesses, cities and countries found themselves beholden to creditors like never before. In the US, exploding budget deficits from the late 1970s and early 80s destroyed the social consensus over the welfare state and almost brought the US banking system to its knees.4

For the US, Volcker’s coup changed everything.

Hardest hit were the mass of third world states which had sought to build their own manufacturing infrastructure by taking advantage of the low real interest environment US dollar inflation engendered across the 1970s. Plunged into inescapable debt crises, former “miracle” economies like Mexico and Venezuela along with other borrowers around the world found themselves at the mercy of IMF “structural adjustment” programs enforcing neoliberal norms upon them, purging all of whatever pretensions leaders might have harboured to build national industrial economies. Instead, all manner of development institutions and public investment was exorcized while third world countries were compelled to promote “export led growth” that in practice meant allowing foreign MNCs to reorient economies toward mostly mineral and agricultural export for sale to the wealthy world.

Rapid appreciation of the US dollar against other major currencies worked in the US to price its goods out of global markets. If US MNCs had commenced outsourcing in the 1970s accompanied by a measure of attrition against unionized workers, during the 1980s organised labour was zapped as MNCs disintegrated their production systems disarticulating them across the globe. US MNCs by the 1990s reconfigured themselves as “brands” that didn’t actually make anything. Yet the information and technology (ICT) revolution empowered MNC brands to control global value chains (GVCs) through which goods produced in low wage, weak regulatory third world regimes, tenderized by structural adjustment programs, flowed.

From 1986, Japan eclipsed the US as the number one creditor economy in the world, with its foreign asset acquisitions and net creditor position vis-à-vis the global economy expanding into the 21st century.

With the US writhing in the throes of outsourcing convulsions, Japan in the late 1970s and early 1980s restructured its integrated industrial economy around ICT and “lean” production techniques. Japan’s MNCs also transformed their low value added supply systems by fostering a network of small and medium size subcontracting firms across the East and Southeast Asian region. Where Japan’s MNCs did make major foreign direct capital investments was in the US particularly in automobile production and parts supply. China enters the GVC equation at this juncture as its leaders became increasingly enamoured by the dynamic potential of special economic zones (SPZs) which had been operating with success producing for export to global markets from places such as Taiwan and Malaysia. By the mid 1990s Japan’s technology exports to affiliates in Asia, particularly China proliferated. Japan opened a large trade surplus during the 1980s which rose in tandem with a widening US trade deficit. Still believing during the 1980s that it could resurrect its industrial might, the US hit Japan with Plaza Accords that forced a gigantic appreciation of the Japanese yen. However, this did nothing to impact the US trade deficit that continued its meteoric growth. And, from 1986, Japan eclipsed the US as the number one creditor economy in the world, with its foreign asset acquisitions and net creditor position vis-à-vis the global economy expanding into the 21st century.5

Taking the world as a whole, when one looked statistically at what was going on evidence showed a huge increase in manufacturing taking place in East and Southeast Asia, particularly of ICT products. But this phenomenon has little to do with the previous capitalist drives toward fully integrated industrial economies as occurred in 1970s South Korea, for example. Rather, it was characterised by intraregional movements of “intermediate goods” or sub-products. This peculiar trade flow fed high and medium value added parts and components to China which emerged as the assembly hub and final exporter to the US and world at large. Economies in the region including South Korea witnessed significant jumps in their export dependency ratios. The result of this seismic shift in global manufacturing GVCs was the perverse international “imbalance” where the US represented over half of total global current account deficits with China accounting for almost a quarter of total global current account surpluses along with a third of the US trade deficit by 2007, while the share of the US deficit held by Japan and other Asian exporters ultimately fell.6


United States Transition to a Global Economy  

At the time of the Volcker coup, US policymakers and their ruling class masters certainly had no grand scheme in mind beyond quashing inflation and maintaining global status of the dollar. However, over the course of the 1980s, and certainly by the 1990s, US policymakers came to understand that even if the US abdicated its manufacturing economy, power of the US dollar as world money, anchored in nothing more than government IOUs would serve ruling class interests with a vengeance. The key question was then how such an excrescence might be brought about?

Processes euphemised as globalization where global production is broken down into GVCs which run through Asia, with China as the final assembly hub, was the initial play. Of course, there had to be something in this for advanced economy MNCs. This was concentrating on their “core competencies” such as design, intellectual property, finance, R&D and marketing. Remember, only a few percent of total value of an iPhone, for example, accrues to manufacturing in China. And, to add icing to the cake, MNCs showed spectacular profitability rises with financial gamesmanship buying and selling their own stock. Beaten down third world countries picked up the agricultural and minerals supply slack to advanced economies, much of this processed and marketed by major global MNC brands.7

But for the US, with a bloating trade deficit, swelling government budget deficits due to “supply-side” tax cuts for businesses and the wealthy plus unending US military escapades, this coupled with plummeting national savings due to the fact that working people were forced into debt just to make ends meet, the money had to come from somewhere!

In short, globalization in many ways is really just a sexed up term for the US becoming a global economy dependent upon a world economy it has spent decades remaking.

Step one, for the US, was to use the carrot of its stratospheric interest rates following the Volcker coup and stick of its power in the global economy to compel advanced economy allies to deregulate and liberalize their financial sectors. By 1986 that was largely completed. Wall Street thus became the vortex through which global finance ebbed and flowed. De facto deregulation and liberalization had already been forced upon the third world as a condition of debt relief and access to global credit. Given the predominant position of Wall Street and its international satellites, the short term, speculative casino orientation of Wall Street acted as a surreptitious industrial policy for the world ensuring that MNCs managing GVCs and countries hosting them no longer strived to resurrect integrated industrial economies without suffering the costs of delinking from the global economy shaped by US dollar power.

Step two for the US was to ensure that its dollar and dollar denominated assets never ever fall out of favor. Part of the answer here entails global “dollarisation”. With the dollar as world money states must either sell more than they buy to accumulate dollar surpluses. Or they have to borrow dollars to buy. Another part stems from volatility a global monetary of liberalised financial systems, unanchored currencies and financial activity oriented toward speculation, manifests. Countries are forced to hold US dollars as a significant component of their national reserves to battle back speculative attacks on their currencies. It is this latter point that drew China into the game outpacing even Japan in the purchase of US Treasury IOUs and holding of US dollar reserves. In fact, using the net international investment position (NIIP) which calculates a ratio of global external assets vs. liabilities as a metric to assess what is going on here, by the mid 1990s Japan’s positive balance was a near mirror image of the US negative balance. At the end of the first decade of the 21st century, the mirror image to US negative NIIP was furnished by a combination of Japan’s and China’s positive NIIP.8

The upshot of this is that the US is able to hold the world’s largest gross national debt. And notwithstanding its trade deficit, current account deficit, capital account deficit and savings rate deficit, with the dollar as world money remain as firmly in the global driver seat as it was after WWII when it was workshop of the world. With the dollar as world money the US gains an automatic borrowing mechanism giving it the global policy autonomy. Due to the US current account deficit being essentially financed by savings of the world US government spending on global military domination and other priorities can expand without “crowding out” private sector borrowing. Though the US savings rate has veered to naught borrowing in the US exercises little pressure on interest rates which easily been manipulated to zero. In the end, the US spends well in excess of its domestic savings plus government tax revenues without engendering price inflation.

In short, globalization in many ways is really just a sexed up term for the US becoming a global economy dependent upon a world economy it has spent decades remaking. There is no simple policy exit from this for the US or those countries whose ruling classes bought into it.

Featured Image: Financial games concept by Amankris

About the Author

Richard Westra is Designated Professor in the Graduate School of Law, Nagoya University Japan. His recent books include Socialism in the 21st CenturyUnleashing Usury, and Exit from Globalization.



  1. A. Saad-Filho, “Monetary Policy in the Neo-liberal Transition: A Political Economy Critique of Keynesianism, Monetarism and Inflation Targeting” in R. Albritton, B. Jessop and R. Westra (eds.) Political Economy and Global Capitalism: The 21st Century, Present and Future (London: Anthem, 2007) p 93.
  2. E. Altvater and K. Hubner, “The End of the U.S. American Empire?” in W. Vath (ed.) Political Regulation in the Great Crisis (Berlin: Sigma, 1989)
  3. G. Dumenil and D. Levy, Capital Resurgent: The Roots of the Neoliberal Revolution (Cambridge, Mass: Harvard University Press, 2004) p. 69.
  4. Altvater and Hubner, “The End of the U.S. American Empire?”
  5. Richard Westra, The Evil Axis of Finance: The US-Japan-China Stranglehold on the Global Future (Atlanta: Clarity, 2012).
  6. M. Hart-Landsberg, Capitalist Globalization: Consequences, Resistance, and Alternatives (New York: Monthly Review Press, 2013) pp. 31-9.
  7. W. Milberg and D. Winkler, Outsourcing Economics: Global Value Chains in Capitalist Development (Cambridge: Cambridge University Press, 2013).
  8. Westra, The Evil Axis of Finance, p. 166.
The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.