Now that Bush “the decider” has opted to send thousands more troops to Iraq, what are the possible economic consequences if this “troop surge” is fully implemented? In addition to the prospect of more working-class youth ending up in the Middle East to kill and be killed and the possibly explosive political consequences of a further escalation of Bush’s global “war on terror,” the economic impact could be harsh for working-class families and oppressed communities.
Rising prices can easily wipe out wage gains and even cause real wages to fall. Social services will likely be cut
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The Federal Reserve’s “Open Market Committee” in a statement issued after its Dec. 12, 2006, meeting on monetary policy claimed that inflation expectations are currently “contained.” Recent Consumer Price Index numbers issued by the U.S. Labor Department also suggest that inflation remains subdued. The department’s Bureau of Labor Statistics reported last month that the index for all urban consumers (CPI-U) actually decreased 0.1 percent in November 2006—before seasonal adjustment—and that the November level was only 2 percent higher than in November 2005.
Government understates inflation
Before going into the broader economic implications of an escalation of the U.S. “war on terror,” it should be pointed out that the government’s inflation numbers, along with other economic statistics it issues, are manipulated to make it appear that the U.S. economy is doing better than it actually is and to limit Social Security and other benefits tied to the Consumer Price Index.
The prices of particular goods and services included in the CPI are subject to “hedonic” adjustments based on changes in quality as determined by government bureaucrats. Such adjustments often cause inflation to be understated, inflation-adjusted gross domestic product and other measures of economic output to be overstated, and wages, pensions, and Social Security payments tied to the index to lag behind the actual cost of living.
Mortgage interest and other costs of home ownership are left out of the index completely, on grounds that an owned home is an “investment.” Instead, an “equivalent rent” component is included in the index—making up 30 percent of the core CPI—based on surveys of rental costs in various parts of the country.
This provides an additional way for the capitalist government to understate inflation. In recent years, for example, a real-estate bubble has caused home prices to rise sharply along with a burst of new home construction, putting downward pressure on rents. The result has been to understate the housing cost component of the CPI and the index as a whole.
According to the Shadow Government Stats website, www.shadowstats.com, inflation as measured by the Consumer Price Index, since changes in the index were instituted by the Clinton administration, is understated by roughly seven percent per year, and—based on that—payments to Social Security recipients should be double current levels!
Based on a rent increase for 2007 of 5 percent, a jump in the price of gasoline in my area of 13 percent over the past year, and an increase starting in January for medical coverage of 28 percent for my wife and 32 percent for myself—with no change in our health except for being one year older—this writer can personally testify to the validity of this claim. Meanwhile my income, supposedly pegged to the cost of living, has gone up a whopping 3.3 percent.
These facts underline the importance for the workers’ movement to raise once again the “transitional demand” for unions and consumer groups to determine the actual cost of living rather than the capitalist government.
Precedent of Vietnam War
President Bush will reportedly request in early February another $100 billion or more in a supplemental appropriation for the wars in Iraq and Afghanistan. This is on top of around $500 billion in such funds requested—and routinely approved by overwhelming majorities in Congress—since 2001. These wars are largely funded through such special appropriations, not out of the bloated “defense” budget.
With the federal deficit already deep in the red as a result of past tax cuts for the rich and mounting expenditures for
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Although the circumstances were different in many ways, the Johnson and Nixon administrations faced a similar challenge during the Vietnam War years as expenditures for that war mounted higher and higher.
Owing to the mass opposition to the war, the U.S. government dared not call for the big economic sacrifices that had been imposed on the working class during World War II—forced savings, rationing, no-strike pledge and so forth. As a consequence, the Johnson and then Nixon administrations had to finance the war mainly by, in effect, printing money.
A “gold pool” had been set up in 1961 by seven capitalist powers to stabilize the dollar against gold after initial signs of weakness. Under the “dollar-gold exchange system” in effect at the time—the modified gold standard established at an international conference in Bretton Woods, N.H., in 1944—the dollar was tied to gold at $35 an ounce. A dollar crisis came to a head following the January-March 1968 Tet Offensive, when Vietnamese liberation fighters inflicted heavy casualties on U.S. forces throughout South Vietnam.
By March 1968, the dollar had been severely weakened by unrestrained deficit-spending for the war, by an impending overproduction crisis, and by a growing political crisis in the United States, largely due to mounting casualties and lack of progress for imperialist forces on the war front. The situation was so serious that had the gold pool members continued to defend the fixed dollar-gold parity, they would have run out of gold in several weeks’ time.
The Federal Reserve—the U.S. central bank—and the Johnson administration could have instituted a deflationary policy at this point and saved the dollar from devaluation. But this would have required raising interest rates very sharply and drastically cutting back on war spending. A deflationary overproduction crisis of unknown magnitude—with potentially serious political consequences—would have been the outcome.
Instead, the gold pool member governments allowed the dollar to “float” against gold—temporarily, it was hoped—and the Johnson administration enacted an emergency income tax surcharge and other measures to stabilize the U.S. currency. Johnson also announced that he wouldn’t be running for a second term as president.
Meanwhile, Johnson—and Richard Nixon, who succeeded him—continued to pursue the chimera of “victory” in Vietnam, though with a change of tactics involving increased use of air power, “Vietnamization” of the fighting with decreased use of U.S. ground troops, and diplomatic overtures to the Soviet Union and China to help bring about a “settlement” that would avoid a catastrophic defeat for U.S. imperialism.
‘Stagflation’ makes its appearance
The measures to stabilize the dollar were only temporarily successful. “Stagflation” soon made its appearance. This refers to a period marked by sharply declining currency values against gold, rapidly rising prices in terms of the depreciating currency, and stagnating production and employment such as occurred in the 1970s.
Initially, Richard Nixon imposed emergency wage and price controls—in August 1971—to contain the crisis. Nixon’s controls failed to prevent a further weakening of the dollar, and the gold-dollar exchange standard had to be abandoned.
Nixon’s policies also could not prevent the severe overproduction crisis of 1973-74. In the course of the 1970s, the dollar lost roughly 90 percent of its value in terms of gold (see chart below), the cost of living for working-class families skyrocketed, and real wages for many workers, especially those lacking cost-of-living clauses in union contracts, fell sharply.
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Parallels with Vietnam
Fast-forwarding to 2007, what lessons can be learned from the experience of the Vietnam War years with respect to the dollar, the current world monetary system, and the possibility of new stagflationary crises that can severely impact the livelihoods of working-class families?
One definite parallel is that, like Johnson and Nixon in their illusory pursuit of “victory” in Vietnam, Bush refuses to face the fact that a U.S. military victory is also not possible in Iraq. “Waist deep in the Big Muddy, and the big fool says to push on.” (Line from Pete Seeger song, 1963)
A second parallel is that a section of the U.S. ruling class, the “realists” represented by the bipartisan Baker Commission, has proposed a change of tactics analogous in many ways to the policy shift implemented by Nixon following the initial dollar crisis of 1968—his “secret plan for ending the war.” Besides “Iraqization” of the war effort and gradual “redeployment” of U.S. troops, the Baker Commission calls for diplomatic overtures to Iran and Syria to help bring about a settlement in Iraq acceptable to U.S. imperialism.
However, a grouping in the ruling establishment that represents a more aggressive section of the military-industrial complex is clearly pushing for escalation—Bush’s “troop surge” and stepped-up threats against Syria and Iran. Here, too, there is a parallel with Vietnam. In late February 1968, Joint Chiefs Chairman Gen. Wheeler, at the behest of Gen. William Westmoreland, commander of U.S. forces in Vietnam, asked President Johnson for an additional 206,000 soldiers and mobilization of reserve units in the U.S.
However, that escalation of ground forces was never carried out. A change of tactics was forced on Johnson and then Nixon as a result of the big developments of the late 1960s—the upsurge of mass actions against the war, the rebellions breaking out in the African American communities, the Tet Offensive by the Vietnamese resistance forces and the dollar crisis.
The net result was that the war dragged on for more years and a decade of stagflation ensued. Nixon was forced to resign, replaced by Gerald “the healer” Ford, and the potentially revolutionary mass upsurge of the late 1960s was successfully repressed and defused.
What are the prospects now?
We haven’t yet seen an upsurge of mass actions against the war comparable to the late 1960s, but Bush’s “troop surge” push is already igniting a major expansion of anti-war action.
Last year’s big upsurge of the immigrant rights movement may also portend potentially revolutionary struggles to come. And the resistance in Iraq continues its struggle against the U.S. occupation.
What are the possibilities for another dollar crisis? The world monetary system is now based on the “dollar standard,” sometimes referred to as “dollar hegemony.” This is the unstable system that replaced the Bretton Woods system.
Under this system for settling international transactions, exchange rates between currencies and between currencies and gold are not fixed but fluctuate daily—depending on trade balances, relative interest rates and economic conditions prevailing in the different countries, and central bank manipulation. Most raw materials, most importantly oil, are priced in—and therefore bought and sold for—U.S. dollars. Hence, dollar-denominated U.S. Treasury obligations—bonds, notes and bills—end up as the desired reserve holdings of most countries.
The dollar standard has allowed the United States to run chronic and growing trade and budget deficits for many years. As a result, the United States is now the biggest debtor in the world. But other countries will not keep loaning money to the United States indefinitely, just as they couldn’t continue propping up the dollar in 1968.
Another parallel with the Vietnam era is that mass opposition to the war today, although not yet as strong as the opposition that developed in the late 1960s, is such that the U.S. government dares not impose the economic sacrifices that would enable non-inflationary financing of the Iraq and Afghanistan wars.
If as in 1968 the dollar’s value is seriously threatened by a combination of overproduction, printing of money to meet war expenses, an upsurge of anti-war and other mass struggles, and further military reverses for U.S. forces, the current monetary system could go the way of the Bretton Woods system—that is, collapse.
Should that occur, the dollar would suffer a severe devaluation ushering in a new stagflation crisis with runaway inflation—and possibly even an uncontrollable collapse of the dollar that ushers in hyper-inflation.
In either event, the U.S. empire, depending as it does on continued dollar hegemony for its brutal, blood-sucking and profligate existence, would be placed in extreme jeopardy. Working-class families and oppressed communities could face hardship on an unprecedented scale.
A different political context
The late 1960s mass upsurge took place near the end of a long period of radicalization that was born in the dark days McCarthyite reaction. That radicalization gave way, in turn, to an extended period of political reaction that extended into the 1990s. It is becoming increasingly clear that a new period of radicalization has begun—not only in the United States but also in Latin America and elsewhere—that has the potential to bring major new changes of a progressive and revolutionary character.
These are the economic and political prospects for which revolutionaries and other leaders of the working class and the oppressed need to prepare.
