[OPE-L:1256] Re: Re: monetary inflows versus capital accumulation

From: Rakesh Bhandari (bhandari@phoenix.Princeton.EDU)
Date: Thu Sep 16 1999 - 20:29:00 EDT

Jerry noted:

>Devaluation of the dollar has also, going back to the 1980's, been a
>strategy and/or bargaining chip.

Of course. Volcker considered Baker's veiled threats of further dollar
devaluations in 1986 as an aggressive means of forcing Germany and Japan to
take more aggressive expansionary action (quoted in Robt Solomon Money on
the Move, p. 25). Summers may today be refusing to stem the dollar's
decline in order to force Japan into further expansionary policy (or
perhaps into further trade and financial liberalisation).

>The principal bargaining power in recent years that the US has with Japan
>has been economic -- the knowledge that the Japanese economy depended far
>more on exports to the US market than the US economy depended on exports
>to Japan. This meant that the threat of tariffs or other protectionist
>devices could, on balance once retaliation was taken into consideration,
>hurt the Japanese economy more than the US economy.

I myself implied this source of political economic power, so I do not agree
that the provision of regional security was the only political economic
factor I mentioned.

>As for non-economic power, how exactly can US military power be translated
>into a strategic advantage of the US vis-a-vis Japan? Surely, you are not
>suggesting that the US plans on invading Japan.

Jerry, this needlessy trivializes an important point, taken more seriously
(if not as common sense) by political scientists in the field of
international political economy.

Consider these two examples (the latter is about Japan-US relations) from
poli scientist Susan Strange in her last book *mad money*:

"In Feb 1965 de Gaulle attacked the 'extraordinary priviliges' of the
dollar in the international gold exchange standard, set up under the
Bretton Woods Agreement back in the 1940s. He compared this system
unfavourably with one traditionally based on gold. But his fond dream of a
united European front agains the US and the almighty dollar soon faded away
when the Germans failed to stand by the French in the debates on intl
monetary reform. Germany owed its security fromt eh Red Army to the US
nuclear umbrella; the price, as the US repeatedly made clear, of the
implicit bargain was German membership and support for NATO and compliance
with US interests in the management of money and finance. Gewrman leaders
all understood this, so that, later, before Nixon unilaterlly devalued the
dollar in 1971, Germany was the first western ally after Canada to agree
not to embarrass Washington by asking for gold in return for the dollars it
held in its growing monetary reserves." p. 64-5


"The implicit bargain--that the United States provided security and Japan
paid for it--became more evident in the 1992 Gulf War. In the end, Japan
paid some $13 billion of the costs of Desert Storm. Some calculations even
suggested that the US showed a net profit out of the Gulf War. Every year,
moreover, Japan was paying almost 3/4 of the onon salary costs of US bases
in Japan, most of them in Okinawa, so that it was cheaper for the US
Defense Department to keep soldiers in Japan than form them to stay at
home. That the the Japanese govt raised no objection, even when the
Okinawans did, could be explained by their continued reliance on the US
forces, especially the US Navy, to act as a police force in the Pacific.

"Six years after the Cold War ended, there was rising tension between
Taiwan and mainland China. In February 1996, the Japanese were
understandably reassured by an American show of intermediating force in the
shape of the aircraft carrier Nimitz steaming through the Taiwan staits.
North Korea was another source of insecurity. Would its weak but repressive
govt, facing a collapsing economy, be tempted to use nuclear weapons
against the South? There were also unresolved conflicts between Japan and
Russia over the Kurile Islands, and with China over the Spratlys." p. 45-6

At the same time Strange recognizes the power Japan holds over the US,
viz., heightened vulnerability of the US balance of payments on capital
account from Japanese institutions' preference for shorter term US Treasury
bills instead of long term securities.

> Yet, it seems to me that the US
>for its own reasons irregardless of what the Japanese government wants or
>does not want, uses its military for its own perceived benefit. Thus, a
>demand that the Japanese government pay for the US military lacks muscle
>(this is even more the case today since Japan has little reason to believe
>that China or Russia is a threat to them militarily).

Japan must put up with US unilateralism because it is in no position to
provide its own regional security (including in Indonesia upon which it is
heavily dependent).

>As a general criticism of the economics profession, I think this is valid.
>However, I'm not sure if it has validity in this case since you have yet
>to specify how exactly the US can effectively use non-economic coercion
>against the Japanese government.

I hope some indication is given above. It also seems obvious to me that the
US state has greater room for continued sustainable money creation, despite
a large account deficit, than, say, Thailand, on account of the dollar's
role as reserve currency, the pricing of crucial commodities in dollars,
and US technological monopolies over the most advanced aspects of the arms
industry on the one hand and microprocessors, biotech and aerospace on the
other hand.

Yours, Rakesh

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