Double Trouble for America

(originally published mid-2006, revised January 15, 2007)

(originally published mid-2006, revised January 15, 2007)

During the past few years, a perception has been growing that the United States of America is becoming vulnerable to increasing pressure from other nations, particularly including those which have shown open hostility to America’s interests. This perceived vulnerability comes in two distinct areas; the world of imported petroleum supplies and the desperate need for foreign investments to support the U.S. greenback.

Present day observers might find it incredible to learn that America was self-sufficient in petroleum for most of its history. Until the early 1970’s, importation of petroleum was a matter of convenience in order to preserve American reserves. After the 1970’s, however, importation became an absolute necessity.

During the past four decades America’s demands for all manner of petroleum-based products has been rising relentlessly while their domestic production peaked in 1970 and has been declining slowly but steadily ever since. As a result, importation of petroleum has risen relentlessly, growing to over eleven million barrels per day at present.

Those imports are now absolutely necessary for the continuing functioning of America’s industrial, manufacturing, distributional and agricultural enterprises as well as the maintenance of social order. Without the continued importation of petroleum at ever-higher levels, the USA could face panic and chaos - and therein lies their unique vulnerability - because a significant portion of their petroleum imports come from nations such as Iraq, Iran, Venezuela and Nigeria where revolution or radical socialism prevails or where reaction to American foreign policies could lead to hostilities and embargos.

Of equal or greater importance is America’s financial vulnerability in the form of danger to the greenback’s status as the reserve currency of the world and the lynchpin of international finance.

Forty years ago, “Made in America’ was the normal tag accompanying most of their commerce. Their manufacture of a multitude of products became international standards and monies poured into America from around the world. The USA became the largest creditor nation on earth and the expression “sound as a dollar” reflected the greenback’s dominant position.

How things have changed.

First, America went off the gold standard internationally as well as domestically. The US Dollar was no longer “as good as gold.”

Next, America began to see gradual diminishment of their manufacturing empires. On an increasing basis, a host of foreign-made products for retail and industrial distribution began to flood into America. In the case of entertainment units and communication devices, the USA has been frozen out of manufacturing almost entirely. Auto imports have grown remorselessly and Toyota - not GM - is the leading auto manufacturer on earth. And now, in the past few years, Chinese manufacturing capacity has expanded to the point where a veritable tidal-wave of low-priced goods from that nation now inundates American retail shelf space. As a result of these developments plus the ever-growing importation of petroleum noted earlier, the American Balance of Trade deficit has zoomed skyward.

As of early 2007, that deficit roared past the seven hundred billion dollar per year mark and those dollars are piling up in foreign private holdings and foreign central banks.

But the Balance of Trade deficit is not the only problem for the greenback. The USA is also running a budgetary deficit of close to three hundred billion dollars per year with no end in sight, a deficit requiring the USA to market huge volumes of debt paper to raise sufficient funds to keep their financial system on track. Much of that debt is also piling up in foreign hands.

To date, a significant portion of those foreign-held dollars have been re-invested in American government debt paper and in American commerce and real estate. As long as those dollars are returned through the international currency markets to America, a semblance of currency stability remains. But the great speculation is what will occur if foreigners decide that the risks of continuing to hold America’s dollars outweigh any rewards.

Should that happen, markets would likely begin to wonder whether the dollar could fall sharply and whether foreigners might even begin to unload their heavy holdings of American securities - or whether OPEC and other petroleum exporting nations would continue to accept unbacked greenbacks for their petroleum.

Another concern is whether a falling dollar combined with other uncertainties could lead to a re-ignition of rampant inflation.

Historically, precious metals prices - particularly the price of gold - have risen during periods of inflation scares, falling dollars, falling securities markets or a rising level of fear and panic. The speculation then is whether American can continue to control its economic and social destiny or not. It is that important.

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