Too big to fail, too weak to lead by Ingo Schmidt, 11/1/2023

Too big to fail, too weak to lead
by Ingo Schmidt
[This article posted on 11/1/2023 is translated from the German on the the Internet,,] {This article can be read on the Internet,]

The country is deeply divided. Its freedom and economic power are threatened by the great power ambitions of Russia and China. These two assertions can be found in almost all reports from the USA, whether it is about the next interest rate decision by the Federal Reserve, budget squabbles in Congress, state visits to the White House or arms deliveries from the Pentagon.

The first assertion is a rather superficial statement. Culture wars and political intrigue in Washington regularly cause uncertainty on Wall Street. Is the US government running out of money or not? Will US Treasury bonds remain a safe investment or not? On one point, however, there is broad agreement between Democrats, Republicans and the vast majority of their supporters: the USA must be No. 1. According to former Secretary of State Albright, it is seen as an “indispensable nation”, but must be restored to its former greatness. Accordingly, Donald Trump entered the 2015 presidential election campaign with the slogan “Make America Great Again”. Ronald Reagan was elected president in 1980 under the same slogan and subsequently became the symbol of the USA’s re-emergence as an undisputed world power and therefore an indispensable nation.

But there is a gap between wanting to and being able to. Even Joe Biden, who promised during the 2020 election campaign to finally achieve Trump’s goal, was unable to close this gap. His campaign slogan was “Build Back Better”. To this end, he offered the Americans, with reference to Franklin D. Roosevelt, a Green New Deal. Although this enabled him to win the elections, he was unable to achieve a social consensus that would have included some of his political opponents.

Even internationally, the USA is not seen as an indispensable leading power. The much-vaunted unity of the West is more fragile than oaths of allegiance from Europe would suggest. The nuclear power Russia and the economic power China are perceived as a threat because they cannot be forced to fully adopt American business conditions – a sign of weakness that is difficult for the USA to bear.

The free market and its state

When US capitalism weakened recently, parts of US society looked to the future with hope. The labor, women’s, civil rights and peace movements were on the rise. However, many of their demands were seen by the bourgeoisie as a threat to their profits and international supremacy.

This role was already threatened enough by the rising export powers Germany and Japan, the policy of d├ętente in Europe and the demands for a new international economic order from the global South. The abandonment of the gold backing of the dollar and the exchange rates linked to it, the OPEC price shock, the withdrawal from Vietnam and the fall of the Shah symbolized the weakness of US capitalism in the 1970s. Inflationary distribution struggles, overcapacity and stagnation were the underlying economic problems. They were solved by a mixture of a strong state and a free market.

Freedom is understood as the ability of American capitalists to invest their money and sell their goods unhindered. Only a strong state could create the freedom to do business. The American state proved to be up to the task.

Drastic interest rate hikes by the Federal Reserve led to recession and mass unemployment worldwide. The bargaining power of the trade unions was broken. Many countries in the South were plunged into debt crises by the interest rate shock, and the USA became a safe haven for international financial investments. Through the World Bank and IMF, they were able to push through privatization and the dismantling of social benefits and trade union rights in the over-indebted countries of the South. They also pursued this policy domestically, while corporations and the upper income brackets were spoiled with tax gifts. There were also massive arms orders. A new round of the arms race with the Soviet Union and support for the Contras in Central America, southern Africa and the Islamist Mujahideen in Afghanistan positioned the USA as the vanguard in the fight against communism and anti-colonialism.

From the Cold War to globalization

Reagan had begun the neoliberal restructuring of US capitalism and strongly promoted the export of neoliberal policies in the wake of the debt crisis in the South. However, the globalization of neoliberalism only came about after the end of the Soviet Union and the reorientation of the Chinese Communist Party.

To a lesser extent, production facilities had already been relocated to countries in the global South, whose cheap labor could produce for the world market thanks to neoliberal structural adjustment. But also to the southern states of the USA, where, in contrast to the industrial centers of the Northeast, trade union rights do not even exist to any extent. In addition, Japanese companies were pressured by the US government to limit the export of finished products from Japan and instead set up production facilities in the USA – union-free, of course, and using the just-in-time and group work methods developed in their home country.

However, it was only as a result of China’s opening up to the global market that large-scale production relocations took place. Research and development, financing and control of international and, above all, transpacific value chains remained in the USA and helped a numerically small but media-rich middle class to find jobs. Manufacturing jobs tended to be created in China and a few other countries in the South. Or they fell victim to automation. Instead, masses of poorly paid service jobs were created.

Despite wage cuts for many, stagnating wages for some and rising incomes for a few, and despite a long-term decline in the accumulation rate (i.e. the share of investment in gross domestic product), the USA became an international economic engine, particularly in the years of globalization. Not least because the principle of balanced budgets did not apply to them. As the dollar was once again the undisputed international reserve currency thanks to petrodollar recycling in the 1970s and the debt crisis in the 1980s, the USA – the state as well as private households and companies – was able to take out almost unlimited loans in other countries and thus also finance current account deficits, which became an economic driver for the surplus countries.

Socialism for capital, austerity for the people

The crux of debt-driven accumulation was that it was not even perceived as such. In the 1990s, rising securities prices were seen as evidence of rising real assets – production facilities, infrastructure, real estate. The debt-financed acquisition of such assets is not a problem as long as these assets generate sufficient income for interest and redemption payments. In fact, the expected profits increasingly exceeded the realized profits. Private households that financed their consumption, including real estate purchases, through debt due to stagnating or falling wages never had a chance to repay their debts. In addition, more and more financial instruments were issued on one and the same real asset portfolio and acquired via loans. The era of derivatives and their financing via fast-ball systems had begun.

The end of speculation in 2001 was a warning shot, and the financial and economic crisis of 2008/2009 made the limits of the US-managed model of debt-driven accumulation clear. Government money to restructure bankrupt banks and central bank money at zero cost contained the crisis, led to a new speculative bubble, but hardly to real accumulation. Instead of the USA, China became the international economic engine. An economic fact that many Americans saw as a disgrace. A mass base of disappointed and insecure people emerged, which Trump was able to mobilize for his aggressive nationalism.

Trump’s rhetoric should not make us forget that Obama had already initiated the turnaround from the war on terror to the containment and repression of China and Russia. The war on terror was based on the idea that the USA, as an indispensable nation, had the task of reshaping the entire world in its image, by force if necessary. Without success. Unloved regimes could be destroyed, but the countries overrun by war could not be integrated into the US-controlled world market as prosperity zones. The regrouping of Russia and China as opponents rather than partners reduces the claim to shaping the world. Even if this is not admitted.

Obama, Trump and Biden are all pursuing the goal of at least holding together the world they consider to be democratic – under US leadership. However, the means used to achieve this, proxy wars and sanctions, undermine the neoliberal globalization that has made the USA the world’s No. 1 from Reagan to Clinton.

Ingo Schmidt is a Marxist economist and lives in Canada and Germany.

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