Where Did the Story of the U.S. Financial Crisis begin?

To understand the history of the U.S. financial crisis, we need to go back to the time of World War II. The economy of Europe — the world’s driving engine and the main center of wealth generation — collapsed and was destroyed during the war. Meanwhile, the United States turned into the undisputed power of the world economy. By the end of that war about half of the entire world’s wealth had already started to generate in the U.S. Not only was the U.S. economy not damaged, but it actually boomed and flourished unprecedentedly during the war. The boom also eliminated all the effects of the Great Depression of 1929-1933. Following WWII, United States imperialism spread throughout the world and the U.S. dollar changed into the world’s most credible currency. It also succeeded in dominating the whole world economy without rival. Here we can classify the important factors in turning the dollar into a universal currency:

1. The unprecedented growth of the U.S. global economy during and after World War II.

2. The economies of Europe and Asia — mainly Japan — as the world’s engine had almost collapsed, while the U.S. economy was not hurt at all.

3. United States imperialism, along with the U.S. dollar, spread universally from the Korean Peninsula and Japan in the Pacific Ocean and across the Atlantic to Western Europe.

The Cold War with Russia was also a very effective bonus in empowering the United States. Hence, the 1960s turned to be the most golden decade in the U.S. economy. This golden decade continued to flourish until the Vietnam War, when all the U.S.’ problems started. The U.S. spent a significant amount of money in this war and lost 58,000 American soldiers. Since then the U.S. crisis has grown even more. The price of oil went up due to the Arab-Israeli conflict, when Israel attacked and occupied the West Bank of the Jordan River in June 1967.

Meanwhile, the Ba’ath party took power in Iraq in 1968; the government of Iran felt the danger and began to develop its own military plans. In fact, an arms race took place throughout the Middle East. Consequently, oil prices went sky high.

By the end of the 1960s, the signs of high inflationary rates began to surface in the U.S. economy. As in the late ‘60s and the early ‘70s, the U.S. was faced with a double-digit inflation rate. Adding to problems was the Watergate scandal; all this led to the gradual degradation of the U.S. economy and its world power.

In 1971 Richard Nixon cut the link between the dollar and the gold. The rate of the dollar in relation to gold and other foreign currencies began to float. As a result, dollar bills were not to be paid in gold anymore; all of a sudden, the U.S. Federal Reserve was no longer obliged to its past commitments in tying the dollar to gold, all based on Nixon’s unilateral decision. Since then the U.S. dollar started to drop in value against the other currencies. About 50 years ago the value of gold was around $38 per ounce, but in the world today it has reached an all-time high record of $1,640 per ounce — and still rising.

In recent years the U.S. — using, and at times misusing, its currency — began to inject a huge amount of liquidity into its financial markets to solve the chronic budget deficit.

The U.S. government has run on a huge federal budget deficit for these many years, except for the last three to four years of Clinton’s presidency. The 2011 federal budget deficit is 9-10 percent of GDP, which means a deficit of about $1.5 trillion. The current budget deficit results in the U.S. printing more dollars and injecting them into the monetary liquidity. More than half of this liquidity gets outside of the United States. And as a matter of fact, the U.S. has imprisoned many countries, including China and Russia, by its dollar. This approach would be considered as a type of pecuniary banditry in the world. As an example, China has turned about $2 trillion of its foreign reserves into U.S. dollars, as did Japan. Many in the Arab world’s foreign currency, especially the oil-rich Gulf countries such as Saudi Arabia and Kuwait, are in U.S. dollars too. Therefore, as the U.S. dollar loses its credibility against other currencies or the world’s primary products, especially gold, the U.S. government will compensate its budget deficit to the detriment of these other countries.

The major cause of this financial crisis is that the U.S. contribution to the global wealth generation is declining daily. The contribution the U.S. made after World War II was 50 percent, which has dropped down to only 20-22 percent in the last 65 years. This indicates that the economy of other countries is growing faster than the U.S. hegemony, and it reduces the power of the U.S. financial and monetary influence in the world. The main concern of the U.S. today is not the budget deficit, but the loss of its position as the world leading power. So the argument over the federal budget deficit and the printing of more dollars has turned to a very critical issue, since the U.S. is no longer the world’s exclusive economic power.

However, the recent congressional decision to compromise with the president is an indication of the U.S. political system’s efficiency. This means that although the White House is in the hands of the Democratic Party and the Republicans hold the majority of the congress, they were able to come to a resolution where the nation came out the winner, not the White House or either of the opposite parties.

The compromise made by the Americans showed that the most prudent and sensible approach to run a government is through democracy, in spite of its slowness. In other words, despite the competition between the Democrats and the Republicans, they did make a compromise which would not hurt the country; this will lead to the best and most stable economic growth rate.

The Alternate Countries Vying for the U.S. Economic Power

At its introduction, the euro became the global economy’s hope. In its first 10 years, the euro was in a very good state and became a universal currency, though not as strong as the dollar. Yet, it attracted a significant portion of international credibility to such a point wherein today, Iran’s foreign currency reserve appears to be the euro.

However, in the last couple of years, some serious problems have appeared in the field of the euro due to some economic dispersion inside Europe. For example, Greece has made such huge undisciplined financial decisions that it would have destroyed the euro if the other countries hadn’t helped her through her crisis.

Besides the euro, the Chinese yuan is moving forward very successfully; through China’s particular economic approach, they have been able to impose the yuan as a universal currency to at least some countries like Iran. India has also been exerting pressure to turn its rupee into a universal currency; accordingly, they have offered Iran to accept payments in the rupee for selling oil.

Some currencies from the Arab countries are also considered credible in the world, though a huge gap still remains to the major powers. The Emirates’ dirham is regarded as one of the credible currencies in many parts of Asia and the Middle East. Saudi Arabia and Kuwait’s currencies are the same; however, the scale of their economies compared to those of the U.S., China, Japan, Europe and India is extremely small; whereas the other currencies are not universal, since their economies do not make major contributions to global wealth generation.

The U.S. Strategy to Return to the Golden Period

The U.S. political leadership with its hegemony is still powerful in the world and plays a more important role than its economic leadership. Nevertheless, the U.S. economy is still the most credible and biggest economy; more than 60 percent of the world’s business interactions are done through the U.S. dollar. The Americans are still well capable of running their country and managing the crisis.

The important fact here is that the U.S. cannot keep making the same undisciplined financial decisions as in the Bush administration. They must set about making better economic policy, just like the approach they took during the Clinton administration. The U.S. has the economic-political structure that would allow them to set down rather sound and proper fiscal discipline.

It is believed that today’s U.S. conflicts will lead to a new period of financial discipline and economic boom.

According to the compromise between the congress and the president, the government, like most of the European countries, is required to control its expenses; it can run a budget deficit only if it injects a boom into the economy, which could result in a rise in the U.S. federal government taxing. Finally, the budget deficit would turn into a budget surplus, just like what happened in the years 1997-2000. Due to an economic growth of 3-4 percent, the U.S. government had a budget surplus during these three years, succeeded in earning more than its expenses and was able to pay down its debts.

Yet, take into account that the scale of the U.S. government debt is only 100 percent of the country’s GDP, as compared to Britain’s debt, which is 500 percent of its GDP. Therefore, they should not exaggerate in the picturing of a very critical situation for the United States.