Louisville, Cincinnati, Havana

Maggie Trowe, at podium, Socialist Workers Party candidate for mayor of Louisville, Kentucky, and Anthony Dutrow, right, member of the SWP National Committee, talk about political opportunities ahead as SWP members move to Cincinnati, at Oct. 2 Militant Labor Forum.
(Photo & caption source: Amy Husk/Militant)

The October 25th issue of The Militant (published by the Socialist Workers Party--SWP) brings us tidings from Louisville, Kentucky. But not for long--because the whole branch is moving a hundred miles up the road to Cincinnati.

The announcement was made in the weirdest possible way. Maggie Trowe is running for mayor of Louisville, and has actually gotten a bit of media attention, including a nice write-up in the Courier-Journal. (See also here and here.) But it seems to no avail, for apparently the campaign is too hot for her, so she and her comrades are hightailing it to Cincinnati.

Eighteen people attended the forum "including four workers from two Walmart stores where members of the SWP had worked. A young woman, who met party members earlier that day at an action to defend a woman’s right to choose an abortion, brought a friend."

Leave it to the Party's mayoral candidate to invite special guests and possible new recruits only to announce that she's decided to cut and run. This rises to Macklerian levels of unseriousness.

The reason for the move is the usual grass is greener elsewhere boilerplate.

“We think in Cincinnati we’ll have greater opportunities to join in union battles and at the same time build a branch of the SWP in a city with a long tradition of class struggle, an industrial center in the Midwest,” Dutrow said. “And where there have been important struggles against racist oppression and police brutality, like those we’ve been part of in Louisville.”

Though timing and manner of the announcement notwithstanding, the move does make sense. The population of metro Cincinnati (2,256,884 from 2020 census), is the 30th largest city in the country, and the largest in Ohio. It's almost double the population of metro Louisville (1,285,439), the 45th biggest city in the nation. So Ohio's Queen City is a bigger sandbox.

I've been to both cities, but know Cincinnati better. My first visit there must have been in the late 80s, when I was living in Buffalo, NY. I went to visit a friend of mine from grad school, by then engaged at the Univ. of Cincinnati. He was a foreign student from Taiwan named Mr. Wong. I've sadly lost touch with him--and it's impossible to locate a Chinese guy named Wong, when a) he's almost certainly moved back to Taiwan, and b) the English spelling does not specify which Chinese character he uses for his name.

Anyway, my friend from Taiwan gave me the grand tour of Cincinnati. The first thing I did was learn how to spell the place. Then we had to eat some chili--I liked it. He drove me to Kentucky just so I could say I'd been there. Of course we spent time at his lab at the University, and then we walked around town. He knew nothing about baseball, but he did point out the P&G buildings downtown.

I wish Ms. Trowe luck in her campaign for mayor of Cincinnati--assuming she stays there long enough to make it happen.

Moving on to Havana: The Militant scored an interview with a foreign dignitary. The conversation is described in an article entitled ‘Cuban Revolution: a challenge to US imperialism’, by Martín Koppel, Mary-Alice Waters and Róger Calero. The lede paragraph:

Carlos Fernández de Cossío, head of the Cuban foreign ministry’s department for U.S. affairs, was in New York at the end of September for the opening session of the United Nations General Assembly. As part of his busy schedule, he made time to sit down and talk with the Militant. He spoke about the intensified assault the world’s strongest imperialist power is today mounting against the men and women who made and continue to defend Cuba’s socialist revolution.

(Source: Cuba Escena reprinted in The Militant)

The best way to parse this is by looking at the pictures included in the article, such as the one above. The Militant's caption reads

Artists bring theater and music to El Salvador, a rural town in Cuba’s Guantánamo province Jan. 28, 2019. Socialist revolution expanded access to culture and education to millions in countryside and city.

This reminds me of rural Uganda when I lived there in the 1990s: no electricity, no telephones, no internet, no television, mostly illiterate, and only limited radio. The performers have no stage, no microphones, no props, no makeup, and no lighting. Apparently that's also how rural Cubans still live--a world of deep and desperate poverty. 

Compare with the average American, who, when they tire of the 50 channels on TV, can stream almost any content they wish from anywhere. My wife and I have been watching a Chinese soap opera called Chef Hua on YouTube. Even poorer countries are better off than Cubans--rural Filipinos at least have access to the Internet and telephones.

The "socialist revolution," far from expanding "access to culture and education," has instead vastly reduced and impoverished said culture. It's very sad.

Or consider this image

(Source: GRANMA/MIGUEL FEBLES HERNÁNDEZ, reprinted in The Militant)

The Militant's caption reads

Havana, February 2021. Medical students go door to door, making sure anyone with COVID symptoms gets needed care. For more than 60 years black Cubans have been a leading force in the socialist revolution, fighting to consolidate social and political gains of working people of all skin colors while uprooting legacy of discrimination against Cubans who are black. 

These are very strange medical students--they carry no supplies, no thermometer or stethoscopes, or any other tools. All they've got are white shirts and clipboards. Perhaps they're not medical students (or not just medical students), but rather agents from the Committees for the Defense of the Revolution--the Stasi-like secret police that hires neighbors to snitch on neighbors. The lady at the door doesn't look too happy to see them--can't say I blame her.

In the past the SWP extended "critical support" to the Castro regime, offering an occasional criticism. For example, they once dinged the Cuban government for their homophobia. But there is nothing even remotely critical in The Militant's account of Fernández de Cossío's interview. Indeed, a more credulous audience our visiting diplomat has likely never had. Surely no audience in Cuba would grant him such authority.

Here's the deal: all government officials lie. Trump lied. Biden lies. Boris Johnson lies, etc. Mr. Fernández de Cossío represents the Cuban government, and there is no way he is telling the truth. Surely any journalist with half a brain will treat his comments with some skepticism.

But not Martín Koppel, Mary-Alice Waters and Róger Calero. Their obsequiousness is embarrassing, and it discredits The Militant as a serious newspaper.

Further Reading:

• Wittenberg, 2021
• Cuba Needs More Communism!
• Down the Cuba Rabbit-Hole with Mary-Alice Waters

The China Beat

This post is in response to three recent articles from the Trotskyist press--one by Jeff Mackler, another by Michael Roberts, and a short piece by Roy Landersen.

Mr. Mackler's piece is entitled The Myth of a New “Cold War” Between the U.S. and China/Russia. He's addicted to the word imperialism--the word fragment imperial- shows up 28 times in the article. This despite the fact that he has no clue what the word means. He's not alone--nobody else knows what it means either.

What I think he thinks it means is something like unequal exchange. That is, on the one hand US capitalists will exploit Chinese workers who manufacture cheap products for American consumers by paying them "near slave wages." On the other hand, the US will export expensive, overpriced products back to China. Thus the capitalist realizes excess profits on both legs of the round trip. The problem is it doesn't work that way. Why would China volunteer their citizens for slavery? And why would they agree to buy overpriced products when the same can be had for cheaper from other countries?

Mr. Mackler actually admits that the imperialism model doesn't fit. He writes,

In the 20 years since China was admitted to the WTO, China went from operating as one of the world’s lowest technology nations to today, when Chinese technology rivals or exceeds almost all other nations on earth. In the past 20-plus years China was transformed from providing “internal migrant” teenage girls from the countryside, producing garments in prison-like foreign-owned dormitory factories at six cents per hour and seven days a week, to a nation with some of the most modern Chinese-owned factories in the world, producing world-class industrial tools and machinery and state-of-the-art 5G (fifth generation) electronics and telecommunication products.

So--in a mere 20 years those migrant slave girls went from being ruthlessly exploited to becoming middle class citizens of an increasingly wealthy country. There is still a lot of poverty in China, but the collaboration between Walmart, on the one hand, and Chinese entrepreneurs on the other has lifted 400,000,000 people into the global middle class--an achievement unprecedented in human history. Mr. Mackler needs to explain how "imperialism" wrought such a change, and if so, then why is "imperialism" such a bad thing?

It's not like American consumers suffered. Walmart reduced prices across the board, sharply lowering the cost of living, especially in rural areas. More, Walmart kept its operating margins at 3%, thereby passing nearly all the benefits of the China trade on to American consumers. Sam Walton only got a small slice.

The problem with Mr. Mackler's version of Marxism is that he sees trade as being a zero-sum game. He thinks anybody who trades with the USA is getting ripped off. Other people postulate the reverse: the US is getting ripped off by foreigners selling cheap products to Americans (I put Barry Sheppard into this category here). Though Mr. Mackler is inconsistent: he also believes Cuba's suffering is due to the US trade embargo, i.e., Cuba can't trade with the US.

There are social and geopolitical reasons why the US needs to curtail its trade with China--but we will pay an economic price by doing so.

Michael Roberts' article, entitled China at a turning point?, is much better--not least because the word imperialism isn't mentioned even once. More, Mr. Roberts actually knows something and is careful about terminology--nothing he says can be dismissed out of hand.

The article is inspired by the collapse of the giant real estate developer, Evergrande. I think Mr. Roberts' analysis of the near-term consequences is accurate. It is not a financial collapse on the order of Lehman Brothers, nor will it bankrupt the entire Chinese economy. But it will lower the standard of living by a misallocation of resources. Mr. Roberts suggests that China is creating "zombie companies" such as exist in many capitalist countries. He writes,

The real problem is that in the last ten years (and even before) the Chinese leaders have allowed a massive expansion of unproductive and speculative investment by the capitalist sector of the economy.  In the drive to build enough houses and infrastructure for the sharply rising urban population, the central and local governments left the job to private developers.  Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale.  Evergrande-like development in China wasn’t just capitalism doing its thing. It was capitalism facilitated by government officials for their own purposes. Beijing wanted houses and local officials wanted revenue. The housing projects helped deliver both. The result was a huge rise in house prices in the major cities and a massive expansion of debt.  Indeed, the real estate sector has now reached over 20% of China’s GDP. 

I think this diagnosis is largely correct, except I wouldn't blame the free market, but instead government intervention in the market. "Beijing wanted houses and local officials wanted revenue" has nothing to do with free market capitalism.

The Chinese problem is in a sense the opposite of that of the USA. In our country we subsidize housing demand: Section 8 vouchers, eviction moratoria, generous tax benefits, subsidized mortgages, concerted government efforts to extend home sales to poor people, etc. At the same time, housing supply is sharply limited, mostly by local zoning and environmental regulations. Many Greenies want to ban single family housing altogether. The result, of course, is sharply higher housing costs as subsidized demand outstrips constrained supply.

In China it's the other way round. Both the local and national governments want more houses--and boy, have they built houses! Whole ghost cities full of them. Supply is hugely subsidized, leading to falling prices. But the government can't have falling prices since that would destroy middle class savings. The result is a bankrupt Evergrande that is building houses that nobody really wants to pay for anymore.

My take on this is government regulation--on either the demand side or the supply side--screws things up. It's not capitalism anymore, but rather government cronyism, which eventually morphs into fascism/socialism.

Mr. Roberts' solution is to prohibit consumers from buying what they want. In the US consumers by a large majority want to live in single family homes in the suburbs. Chinese consumers want to own their own apartment and drive a car. But Mr. Roberts and his fellow socialists are against that--they think they know what the people want more than the people themselves. His penultimate paragraph makes precisely that point.

What is needed is not a further expansion of consumer sectors by opening them up to ‘free markets’, but instead state-led investment into technology to boost productivity growth.  And that state sector investment can be directed towards environmental goals and away from uncontrolled expansion in carbon-emitting fossil fuel industries.  As Richard Smith has put it: “The Chinese don’t need a higher standard of living based on endless consumerism. They need a better mode of life: clean unpolluted air, water and soil, safe and nutritious food, comprehensive public health care, safe, quality housing, a public transportation system centred on urban bicycles and public transit instead of cars and ring roads.” Rising personal consumption and wage growth will follow such investment, as it always does.

Somehow I doubt Chinese consumers prefer to ride around on bicycles instead of owning a car.

Mr. Landersen, writing for The Militant, pens a piece entitled Embracing Mao, Chinese rulers continue assault on working people. The premise is much the same as Mr. Mackler's--Chinese workers were exploited and oppressed by their Stalinist masters (which makes me wonder why The Militant offered the Maoists critical support for all those years). That oppression continues near unabated to this very day--the dramatic rise in China's material well-being is barely mentioned.

China's travails are contrasted with Cuba's virtues:

This is the opposite of the working-class trajectory of the Marxist leadership of Cuba’s socialist revolution. Under Fidel Castro and the July 26 Movement, workers and farmers were led to take political power into their own hands and to take on ever-greater control over all aspects of economic and social life, transforming themselves in the process. Working people became conscious actors in history, extending their hand to anti-imperialist struggles around the world.

Yet China has manifestly been more successful than Cuba! Cities like Shanghai and Beijing look a lot more like New York than Havana. There are good restaurants, excellent public transportation, and nice stores. As mentioned China has a sizeable middle class.

None of that exists in Cuba. Smart and ambitious Cubans have all been exiled. Those still living in Cuba are hungry, live in housing so dilapidated that they're functionally homeless, and survive without electricity for much of the day.

China has a lot of problems--but there is no way that Cuba compares favorably with China.

Further Reading:

• Book Review: Capitalism Alone
• Comrade Keith L. Writes About China
• Book Review: Walmart

The Eurodollar

The Eurodollar is the world's reserve currency.

Most people think the US dollar serves that role, and that's not entirely wrong. But it is misleading.

So just what is a Eurodollar?  A Eurodollar is created when a US dollar is deposited in a foreign bank account, e.g., in Switzerland. Many foreign banks will let you open up dollar accounts where you can deposit dollars and keep them as dollars without having to convert them to the local currency. Historically those dollar accounts were typically in Europe--Switzerland, London, Frankfurt, etc.--hence the misleading prefix Euro-. Today dollar accounts exist in banks around the world: Toronto, Tokyo, Bermuda, Hong Kong, etc. These are collectively known as off-shore banks, and Eurodollars can be found in nearly every country on earth--not just Europe.

The advantage of a Eurodollar account is that foreign banks are not regulated by the US Federal Reserve Bank (Fed). For example, there is no reserve requirement. Domestic banks need to place reserve money at the Fed to protect citizen depositors from a bank run--the amount is equal to 10% of total deposits. Off-shore banks don't need to do that.

In addition domestic banks can borrow or lend money to the Fed, which gives the Fed power to determine short-term interest rates (and indirectly long-term interest rates). Off-shore banks are under no such constraints, and in fact interest on Eurodollar accounts is typically higher than at domestic banks. Further, off-shore banks pay no taxes to the US government. And finally, off-shore banks are exempt from all the myriad rules and regulations (such as the very complex Dodd-Frank rules) that constrain domestic banks.

The Eurodollar system evolved by accident--it wasn't designed by anybody. Likewise, it exists more or less independently of any central authority. Accordingly, it's difficult to determine how many Eurodollars are in circulation, though a 2016 estimate cites nearly $14 trillion. It is precisely this unregulated free market that has pushed the Eurodollar to the fore as the exchange medium for foreign trade.

The Bretton Woods agreement, signed in 1944, envisioned a structure where most currencies would be pegged to the US dollar, and the dollar would in turn be pegged to gold at $35/oz. In 1960 Robert Triffin realized that this was impossible--gold production was not sufficient to maintain the price at $35/oz, and soon the US Treasury's gold reserves would be completely drained. A variety of kludges were invented to keep the system operational, by which the dollar was effectively pegged to fictional gold. It is out of this confusion that the Eurodollar evolved--the term was first used in the early 60s. In 1971 President Nixon called it quits on the gold standard and formally ended the Bretton Woods system.

Eurodollars, while exempt from US regulations, are governed by the rules where the off-shore bank is located. So, for example, a Eurodollar in a Shanghai bank is governed by Chinese rules, and is in some sense is "owned" by China. Thus, even though a Eurodollar is a US dollar, the national sovereignty of China is preserved. This is what makes Eurodollars so valuable to foreigners compared to US dollars in a US bank.

So how are Eurodollars created? A small number arise from retired Americans living abroad, e.g., in Costa Rica. They deposit their social security checks in a dollar account at a Costa Rican bank--and pronto, Eurodollars are born. They remain Eurodollars until they're repatriated back into the US banking system.

The much more important source of Eurodollars is the US trade deficit. The US exports some products to foreign countries, and imports other products from foreigners. When the dollar value of imports exceeds that of exports, then a trade deficit occurs and net dollars are being paid to foreign countries. Those dollars get deposited in foreign banks, thereby becoming Eurodollars.

The US has run a trade deficit every year since 1974 (pdf). That's all money deposited in foreign banks, growing the total stock of Eurodollars. Indeed, the sum of all those annual deficits since 1974 results in about $13 trillion, comparable to the estimate above. In short, the overwhelming bulk of Eurodollars in circulation comes from the US trade deficit.

So now the bottom line: what makes Eurodollars so useful? They are the currency of foreign trade. Suppose a company in Thailand wants to buy goods made in Uganda. Ugandans have no great need for Thai Baht, nor do the Thais have excess reserves of Ugandan Shillings. So without a common and trusted currency by which to finance the trade, it wouldn't happen.

In the old days such trade might have been mediated using gold or silver. That doesn't work very well today--the transaction costs are too high. So instead Eurodollars are used. Because Thailand has a trade surplus with the US, it has a supply of Eurodollars which it can use to buy Ugandan products. Uganda, meanwhile, may not have a positive trade balance with the US, but instead sells products to other countries, e.g., Thailand, and acquires Eurodollars that way.

In order to engage in foreign trade, every country on Earth needs Eurodollars. Otherwise they're essentially reduced to barter with a few of the nearest neighbors. They have no globally accepted money.

Peter Zeihan suggests that the US trade deficits were purposeful, with the intent of buying allies against the Soviet Union. By allowing any country to sell into the US market, America financed the postwar trade boom, massively increasing globalization and raising living standards around the world, most notably in China. For much of the postwar era the Eurodollar system benefited the United States, but of course it had some costs. Today the costs begin to outweigh the benefits.

An obvious cost is the hit American workers have taken as manufacturing has moved off-shore. We imported cars first from Europe, then Japan, and now Korea. We can't run a trade deficit if we don't import manufactured products, and as a result the wages of US factory workers are depressed. Donald Trump won the election in 2016 in part because of this problem. He initiated tariffs on China and Europe--which persist to this day.

Then, in relative terms, the US economy has shrunk compared to the global economy. In 1960 we made up 40% of global GDP. Today we're merely 22%. It's important to emphasize the word relative. In absolute terms the US economy is much richer today than in 1960, but the rest of the world has grown even faster. Given our smaller relative size, it becomes increasingly expensive for us to finance global trade. Hence there are recurring Eurodollar shortages.

Ludwig von Mises (The Theory of Money and Credit) distinguishes between two types of money (among other distinctions): fiat and commodity money. Commodity money begins with the direct exchange of a monetary commodity, e.g., gold coins of known weight and fineness. This evolves into paper certificates that can be exchanged for the equivalent amount of gold, and in the meantime used as money. Often there isn't enough gold to redeem all the certificates (as happened with the dollar under Bretton Woods) in which case the commodity fix is partly imaginary.

The opposite of commodity money is fiat money, or reliance on currency printed up by the government, no longer redeemable for gold even in theory. The US transitioned to a pure fiat regime in 1971 when President Nixon finally dropped the gold peg. The problem with fiat money is the government's continuing temptation to print ever more paper dollars and thereby devalue the currency through inflation.

While the US dollar is pure fiat money, the Eurodollar is not. The Fed can print as many US dollars as it wants, but the Fed cannot print Eurodollars. Eurodollars are created only when American consumers buy products from other countries. The limitation on the creation of Eurodollars depends on the ability and willingness of American consumers to pay for imports, not on how many US dollars the Fed prints.

Indeed, the Eurodollar is much closer to being commodity money than fiat money. It doesn't depend on gold or silver, but instead on the economic wherewithal of the American consumer. This is a real economic datum--a hard number if you will--and not just an imaginary notation in the Fed's accounts. For the reasons described above--protectionism to benefit American workers and the smaller relative size of the US economy--the ability of American consumers to buy from foreigners is marginally smaller than it has been historically. Accordingly, since 2008 (and I don't know why specifically that year), there have been recurring Eurodollar shortages.

Jeffrey Snider, in a long series of videos, has documented this effect. He records four or five Eurodollar shortages since 2008. The first one began in 2008, with the great recession. Subsequent shortages began in 2012, 2014 and 2018. The fifth, possibly now underway, perhaps began in November, 2020. During these shortages the number of Eurodollars in global circulation stopped growing and/or shrank. Data presented in the slide deck here illustrate the point, though note there is no direct measure of Eurodollars in circulation.

So how can there be a Eurodollar shortage? Two ways: supply and/or demand. The supply of Eurodollars depends on the whims of American consumers, and clearly during recessions they tend to hold back. The demand for Eurodollars depends on the volume of global foreign trade (not just with the US). If that grows faster than the US trade deficit, then a Eurodollar shortage will ensue. Today, for example, China needs to buy oil from the Persian Gulf, and because of bad weather they currently need to import food. Both of these purchases require Eurodollars, and given the Covid recession in the US, those may not be readily available. Hence the current shortage (if that's what it turns out to be).

For Americans a Eurodollar shortage is deflationary. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Deflation is the opposite: if the quantity of money is shrinking, then prices have to go down. Since Eurodollars constitute the money supply for global trade, a Eurodollar shortage makes imports into the US cheaper.

Mr. Snider seems to think (I'm not sure) that the Eurodollar is effectively the "real money" that drives the US economy, and therefore US domestic inflation is determined not so much by US dollars, but instead by Eurodollars. I'm not sure I accept that, for according to the World Bank, the "United States exports of goods and services as percentage of GDP is 11.73% and imports of goods and services as percentage of GDP is 14.58%." Wikipedia has a list of countries by trade-to-gdp ratio which shows that the US depends less on foreign trade (as percent of GDP) than almost any country in the world. Further, we're the only country in the world that doesn't need Eurodollars--we can import products using our very own US dollars (which then become Eurodollars).

Nevertheless, Mr. Snider does show that since 2008 there is a close relationship between US recessions and Eurodollar shortages. But correlation is not causation, and what the cause-effect interaction is is anybody's guess.

One last point: Some countries, notably Germany, Japan, South Korea and until recently China, have run large trade surpluses with the United States, hence collecting a large horde of Eurodollars. There is no point in letting all this money sit idly in their domestic banks, so instead they use them to buy US Treasury bills and bonds, and sometimes US equities. The dollars thus flow back into the US banking system, but the foreigners hold a claim on US debt. Since Treasurys are very liquid, they can easily sell the Treasurys and reclaim the dollars as Eurodollars. So effectively US debt held by foreigners is part of the world's Eurodollar supply.

Foreigners will tend to cash in their Treasurys--and/or not buy more of them--when there is a Eurodollar shortage. As that may be happening now, it may be the cause of the very recent rise in interest rates.

Further Reading:

• Peak Bitcoin?
• Trickle-Up Economics
• The Declining Rate of Profit