America's deindustrialisation began many years before China entered the equation

Daily Maverick

20-05-2025

Part 2 in a five-part series. Read Part 1 here.
Even in the late 1950s, stresses were building up in the US' external position. Having run external surpluses after World War 2, between 1958 and 1960 the US averaged annual balance of payments deficits of $3.7-billion, and gold started leaving the US.
The 1960s extended these trends as the age of guns and butter grew out of Lyndon B Johnson's simultaneous pursuit of an expensive Vietnam War and his costly Great Society programme. (The Social Security Act was passed in 1968, the same year that Medicare and Medicaid were introduced.)
By 1965, when US current account deficits were growing and shortfalls were being paid for more with printed US dollars than gold, Valéry Giscard d'Estaing, the French Minister of Finance, protested at the ' exorbitant privilege ' that the dollar's status as the global reserve currency gave the US. (Little could d'Estaing foresee just how exorbitant that privilege would become by 2025!)
In 1973, the Gold Standard was replaced by fiat money
The Bretton Woods system had presupposed that its guarantor, the US, would always run a current account surplus from which it could supply investment capital to the rest of the world. By the early 1970s, this was the dream of yesteryear: bullion was leaving Fort Knox for the likes of the Banque de France at an accelerating pace.
The ensuing 1973 'Nixon Shock' — a complete suspension of the gold standard so delinking gold from the US dollar — was 'a shot that was heard around the monetary world' at a time when the US dollar was unquestionably the centre of the monetary universe.
It quickly became clear that, with the era of the 1944 Bretton Woods Accord over, some hydra-headed construct would have to replace it: thus, the era of US dollar fiat money was born.
By the end of the messy decade that was the 1970s — it saw rampant inflation and sky-high interest rates as well as frequent dislocations in global capital flows that even led Britain to seek International Monetary Fund assistance in 1976 — it was also apparent that the US would, indeed could, no longer be an exporter of capital to the rest of the world on a structural basis. The capital gamekeeper had turned poacher.
Siamese Twins: the US's twin deficits, external trade and internal budget
Because of its rising current account and budget deficits, the US thereafter had to be a net capital importer… or see the US dollar weaken materially, thereby risking compromising the US dollar's reserve currency status. Except briefly in 1991 (when the five-year bounce in US export competitiveness engineered by the 1985 Plaza Accord's controlled devaluation of the dollar was about to wear off), the world's largest and most capitalist economy has since had to rely on what Tennessee Williams called 'the kindness of strangers' — foreign savers — to balance its external account.
As noted above, in 2024, foreigners sent more than $1-trillion of their surplus savings into US capital markets. A deeper dimension of this was that, with a budget deficit/net dissaving of 7.1% of GDP in 2024, notwithstanding the small positive savings of consumers and companies (collectively plus 6%), the US combined was not generating savings: it had a national negative net savings rate of 1%. In 2024 so much so that foreigners were for the first time being called upon to fill this dissaving gap.
Exactly when Congress started to realise that foreign investors could be leant upon to fund a share of the US's ever growing federal deficit is impossible to pinpoint.
Yet, especially since 2000, this dependency has been the underpinning reality of the US's fiscal expansionism. From 2008 to 2024, a mere 16 years, US federal debt grew more than fourfold, from $8-trillion to more than $34-trillion; it is now $37-trillion. This debt grew out of a combination of lower taxes and higher expenditure plus Covid-19 handouts.
Yet for as long as the US dollar remained strong, foreigners underwrote an average of 30% of each recurring annual budget deficit.
From 2000, the US Congress has in effect relied upon the monetisation of the US dollar's store of value function and used the proceeds to help fund its excess domestic budget expenditure. But the ructions in the US bond market since 2020 are hinting that the well of foreign savings that has provided this foreign cover financing may now be showing signs of running dry.
The name's Bond, Treasury Bond
If all those foreign savings did was to flow into US equity markets in the free market spirit of corporate capitalism, then at least this arrangement might seem to be justified. As Walter Wriston, the 1970s Chief Executive of Citicorp, famously observed: 'Capital goes where it is welcome and stays where it is well treated.' And US equity markets had a welcome mat unmatched worldwide.
Yet US bond markets — which treated foreign capital well too — became an even more important destination, a fact that further anchored the US dollar's reserve currency status. For the 50 years that followed the 'Nixon Shock', the preferred destination for the bulk of the world's surplus savings has been not just the United States nor even its equity market, but the US bond market.
Given that these foreign inflows helped tie together the US's Siamese Twin requirements — 'we need your savings to underwrite both our current account and, interrelatedly, our budget deficits' — it is hardly surprising that, in the 1980s, Ronald Reagan and Margaret Thatcher became self-serving champions of free-flowing global capital. To them, exchange controls became anathema to free markets.
Thus, the many-headed financial hydra born in the 1970s has grown up into what it has become today: a bizarre creature where the Anglo-American combine — the US with 4.2% of world population, the UK with 0.8%, a combined 5% — consumes about 75% of globally mobile savings annually: in 2024, the US ran 65% of the world's current account deficits, the UK 10%.
Underneath this external deficit, the combined budget deficits of the US and UK as a share of global budget deficits was close to 50%: 42% for the US, 8% for the UK.
China 'didn't start the fire', even if it subsequently fanned it
Bob Dylan saw the deindustrialisation of the US spreading before the rise of China when, back in 1983, table cloths started arriving from Malaysia and shirts from the Philippines. Job losses in industrial America were becoming commonplace. Elsewhere in Union Sundown, Dylan wrote:
Well, you know lots of people are complaining that there is no work
I say, 'Why you say that for
When nothing you got is US made?'
Rising capital inflows in Dylan's early 1980s helped drive the US dollar's appreciation, further reinforcing the deindustrialisation of the United States. Factories across America, notably in the Midwest (in what is today seen as hardcore Trump country), found they could no longer compete with often much lower priced foreign imports.
By the 1990s, the value of the US dollar — admittedly recovering from its post-Plaza Accord lows — resumed its rise, appreciating 50% on a trade-weighted basis over the decade.
More significantly, over the same period the US dollar was especially strong against Asia's currencies, particularly in the wake of 1997's Asian Financial Crisis: the Thai baht lost 60% of its value; the Korean won 47%; and the Indonesian rupiah 85%.
Meanwhile the Chinese renminbi's value fell from 3.73 to the US dollar in the 1990s to 8.28 in 2000. By the turn of the century, searing heat from Asia was being directed towards the export competitiveness of the US' manufacturing industries.
And that heat was not just on US export competitiveness. Foreign imports made huge inroads into the domestic US market too. Owners of US factories, if only to stay in business, were obliged to shutter them and instead import products from abroad: this only added salt to the wounds of America's now unemployed blue-collar workers.
Retailers in the US, where margins were already tight, had little option but to stop buying 'Made in America ' and buy foreign instead, mostly from Asia. Since then, Walmart has earned the nickname of being 'the Great Mall of China'. Today 70% of Amazon's online offerings are made in China!
After Deng Xiaoping's Southern Tour in 1992, which reinforced his 'reform and opening up' programme, Chinese products started entering the global market, and especially the higher priced US market.
But it was only after 2001, when China joined the World Trade Organization, that the 1990s Chinese trickle turned into a flood. In 2001, like-for-like blue-collar job wages in the US were 33 times those of China. Middle America's workers stood no chance against those of the Middle Kingdom. A 2004 Business Week cover story declared the three scariest words in US industry to be 'The China Price'.
Dylan again:
When it costs too much to build it at home
You just build it cheaper someplace else.
Post-2000, the hydra-headed headed monster grew dramatically
In 2000, the US current account deficit was already a negative $402-billion; by 2006, it had doubled to a negative $816-billion; last year, 2024, it was a negative $1.0-trillion. In parallel, (and the two events were not unrelated, if not tightly correlated) after 9/11 the US budget deficit was again growing considerably. In 2000, the US federal budget showed a small surplus of $240-billion; by 2006, it was a negative $250-billion; in 2024, it was a negative $1.8-trillion.
The current account deficit was an annual total needing to be financed from abroad. But there was a cumulative total of these annual deficits that required matching capital inflows: the Net International Financial Position (NIFP). This is a measure of how much the US owes the world, less how much the world owes the US.
In 1990, the NIFP was broadly balanced. In 2025, the US now owes the rest of the world $26-trillion, of which $9-trillion of that total is US Treasury Bonds alone. Of the Treasuries in issue not owned by the US government — $29-trillion — this means foreigners own 30%.
Global savings glut = American consumption glut
Ben Bernanke, still to become the Federal Reserve Board chairperson in 2006, was acutely aware of significant capital inflows that were needed not just to cover an ever-increasing US current account deficit, but also to help fund the ballooning US budget deficit. He realised that a significant share of global savings flows had to find their way into the US bond market to fund especially the budget deficit.
In 2005, Bernanke famously attributed the US' growing current account deficit to what he dubbed 'the global savings glut'. In his US-centric view, Germany, Japan and Asia at large (led by a fast-rising China) were not spending enough on US exports to bring greater balance to world trade patterns.
If one accepts his analysis, then there is an equal but opposite matching bookend explanation to his imbalance: the US must have likewise been enjoying an 'American consumption glut'.
On the surface, part of this excess consumption manifested itself as a current account deficit, while beneath the surface the required matching capital inflows were partly being fed into funding the growing US budget deficit.
It is a moot point as to whether the growing budget deficit then in turn fed US consumption (often then translated into a greater appetite for foreign imported goods) and so further increased that already rising current account deficit! DM