The United States has three large economic problems.  The overarching one is that the U.S. dollar’s role as world reserve currency is wearing out from continuous and large trade deficits and from government budget deficits that have to be financed by foreigners because the U.S. savings rate is approximately zero.  Judging by the dollar’s loss of value in relation to gold and to currencies such as the euro, Swiss franc, and Japanese yen, the U.S. dollar is losing its attractiveness as a currency in which to hold assets.

A second problem is the solvency of our financial institutions because of the crisis of subprime-mortgage derivatives and other ill-conceived leveraged derivatives.  The extent of this crisis is not known.  Financial-industry balance sheets and capital structures are impaired.  If the troubled derivatives are in trillions of dollars, as news reports claim, the Federal Reserve bailout of one investment bank, Bear Sterns, is unlikely to have stopped the bleeding.

A third is that the U.S. economy has entered into recession.  Normally, the Federal Reserve responds to recession by expanding credit through the banking system, relying on the growing supply of money to fuel consumer and investment demand.  However, with the banking system impaired and with American consumers overloaded with credit-card and mortgage debt, that course of action alone might not be effective.  Consequently, the Bush administration and Congress are handing out $600 “tax rebate” checks—which will likely be used to pay down existing credit-card debt.

Together, these three create a fourth problem.  With the dollar declining in value against other currencies and with U.S. domestic inflation rising, U.S. government debt at low interest rates is not an attractive investment.  Traditionally, financial panics result in a flight to Treasury bonds and bills, and this traditional response can sustain the Treasury market for a while.  However, sooner or later, investors must realize that a low-interest, dollar-denominated security is not a good investment.

Can these problems be solved?

Perhaps the Federal Reserve can create the liquidity to stabilize the financial system or, in effect, purchase the troubled financial instruments.  However, monetizing debt is inflationary.

Getting the U.S. economy going again might be more difficult; in the 21st century, it has been driven by the expansion of consumer debt, not by growth in real incomes, and most consumers lack the capacity to take on more debt in order to purchase more goods and services.  Credit-card debt is high, and many Americans responded to the housing boom by refinancing their home mortgages and spending the equity that they had in their homes.  This boost to consumer demand is no longer possible.

The dollar problem seems even less correctable.  There appears to be no way that the United States can close her trade deficit.  According to the February 28 issue of Manufacturing & Technology News, our imports exceed our industrial production.  Even if we sold abroad every item manufactured on our soil, we would still have a trade deficit.

Globalism is often touted as the savior of the U.S. economy.  This positive spin ignores the fundamental problems globalism poses.  For example, globalism reduces GDP growth and drives down average wages.

A significant percentage of U.S. imports, especially those from China, is the offshored production that U.S. corporations sell to us at home.  When a corporation closes facilities located here and moves them to China in order to benefit from lower labor costs, our GDP goes down, and China’s goes up.  When the products manufactured offshore are brought back into America, imports rise by that amount.  By offshoring their production for U.S. markets, American corporations have simultaneously increased U.S. imports and reduced U.S. goods available for export.

Offshoring has reduced the availability of good-paying jobs for middle-class Americans.  It is not only manufacturing jobs that are being moved abroad, but software-engineering jobs, IT jobs, and a wide range of other professional occupations.  Consequently, the ladders of upward mobility are being dismantled.  Many of the professional jobs that remain are being filled with foreigners, especially engineers and IT professionals from India, who are brought in on work visas and paid less by U.S. employers, who falsely claim worker shortages.  Many thousands of U.S. employees are discharged after being forced to train their foreign replacements.  The pursuit of lower-cost foreign labor is eroding consumer purchasing power in the United States.

In the 21st century, all net new U.S. jobs have been in non-tradable domestic services, such as waitresses and bartenders, healthcare and social assistance, and wholesale and retail trade.  The U.S. labor force is taking on the characteristics of a Third World economy.  In 2007, we lost 374,000 jobs in goods-producing industries.  Job growth was confined to domestic services.  Waitresses and bartenders accounted for 29 percent of the 1,054,000 net new private-sector jobs in 2007.  Healthcare and social assistance accounted for 45 percent of them.  Wholesale and retail trade, together with transportation and utilities, accounted for 17 percent.

The Bush administration’s estimate of a $410 billion federal-budget deficit for the current fiscal year is based on an assumption of 2.7-percent economic growth; that estimate is unrealistic, however, since the economy has entered into recession.  With consumers pressed and jobs declining, Americans do not have enough discretionary income to afford a tax increase.  And the Republicans are determined to keep their wars going.  Joseph Stiglitz, winner of the Nobel Prize in economics, estimates that the full cost of the wars in Iraq and Afghanistan is now a staggering three trillion dollars.

Foreigners have been financing our trade deficit by using export earnings to purchase existing U.S. assets, acquiring ownership over a larger percentage of U.S. equities, companies, bonds, and real estate.  They have even acquired long-term leases (99 years) on the revenues from several state toll roads.  The Chinese have purchased U.S. iron deposits.  With each passing year, the United States owns less of herself.  By acquiring our assets, foreigners also acquire the income streams generated by them—profits, capital gains, rents, dividends, tolls, and interest.  These diverted income streams, in turn, increase the U.S. current-account deficit.

The idea that the United States is a “superpower,” when she is dependent on China and Japan to finance her wars in Afghanistan and Iraq, is nonsensical.  The United States is too dependent on foreign finance to retain her role as holder of the world’s reserve currency, an important source of U.S. power.

Libertarians and free-market economists mistake offshoring for free trade and, therefore, assume that offshoring is beneficial.  Offshoring is not trade at all; it is international labor arbitrage.  Trade takes place when, for example, U.S. industries compete against Chinese industries in domestic and foreign markets.  Free trade is based on different countries specializing in areas in which they have comparative advantage.  Offshoring is based on the desire for absolute advantage by achieving lowest factor cost.  U.S. corporations move their production to China in order to maximize profits by minimizing labor and compliance costs.

Offshoring was not possible on a significant scale until the collapse of world socialism and the advent of high-speed internet access, which opened large excess supplies of Chinese and Indian labor to First World corporations.  Today, many American brand-name manufactured goods are made abroad in whole or in part for U.S. markets, and a wide range of professional services can be supplied to U.S. offices from foreigners via the internet and H1B, L1, and other work visas.  Young people from Russia, Ukraine, Rumania, Thailand, and elsewhere are brought in on short-term J9 and J4 visas and supplied as contract labor to supermarkets, resort-area cleaning services, and restaurants.  It is becoming increasingly difficult for Americans of all ages to find a job of any kind.

Offshoring, the internet, and work visas have forced American labor into direct competition with foreign labor.  This is different from trade competition in which U.S. labor competes with foreign labor in manufactured product markets.  In foreign trade, U.S. labor, working with better technology and business know-how, was more productive than foreign labor and remained competitive despite higher U.S. wage rates.  Today, offshoring provides Chinese or other foreign labor with the same technology and business acumen.  This gives the advantage to the lower-wage countries and has halted growth in U.S. real wages despite productivity growth.

In pursuit of higher profits, Wall Street pressures corporations to move facilities offshore, and in pursuit of price advantages, large retailers, such as Wal-Mart, pressure their U.S. suppliers to go offshore.  Some economists tout Wal-Mart’s lower prices as the payoff to Americans for their lost jobs.  However, when the lower prices are offset by lower incomes and the dollar’s decline, the overall effect of offshoring is adverse.  Wal-Mart’s “always low prices” can only last so long as China keeps her currency pegged to the U.S. dollar.  Sooner or later, if the dollar continues to decline, China may abandon the currency peg (Beijing has recently adopted a moving peg and is allowing its currency to appreciate gradually against the dollar), and the United States will find herself dependent on expensive foreign-manufactured goods she cannot afford.

John Williams, proprietor of Shadow Government Statistics (www.shadowstats.com), has been following U.S. economic indicators for decades.  He notes that each administration has tinkered with the official statistics in order to make itself look a bit better; the cumulative effect over the decades is that the statistics greatly understate the problems.  Williams finds that the real rates of inflation and unemployment are about twice the reported rates.

Before his resignation in March, David M. Walker, head of the U.S. Government Accountability Office, revealed that the unfunded liabilities of the U.S. government total $53 trillion.  Our declining economy has no possibility of paying such an enormous sum.  Hubris has blinded Washington to the severity of our economic problems.  In truth, it owns the world.