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Text Part 1
It is impossible to understand the current existential threat the US feels from China without first understanding what happened to Japan 37 years ago.
This is the story of the Plaza Accord 🧵
As Japan emerged shattered from WW2, the US was intent on establishing a forward operating base from which to combat communism in Asia. So in the spring of 1949, under allied occupation, Japan joined a US-led system of monetary management known as the Bretton Woods agreement.
The agreement pegged the currencies of the largest economies to the USD, and the USD to gold, establishing the dollar as the global reserve currency. As a concession, the US allowed Japan to peg the yen to dollar at a favorable rate of 360:1, buoying Japan’s export economy.
While initially tolerable, the rapid post-war growth of Japan’s export industry quickly allowed them to outcompete US manufacturing by producing similar quality goods at 1/3rd the price. This led to significant anti-Japan reaction in the US, particularly amongst auto workers. The Bretton Woods Agreement…
As a result of this growth, experts began predicting in the ’70s that Japan could overtake the US as the world’s largest economy by century’s end. This trend only accelerated when the US was hit by the ’73 oil embargo.
https://www.nytimes.com/1970/12/13/archives/the-emerging-japanese-superstate.html
Meanwhile in the US, the costly Vietnam war, high social spending, and growing negative trade balance were all being financed by money printing. But almost as soon as they were printed, these newly minted dollars left the country via the US’s negative balance of trade. As a result of this monetary inflation, it was becoming increasingly clear the USD was overvalued relative to its fixed gold tether and in 1968, this overvaluation manifested as a collapse of the London gold pool, when growing US debts caused a loss of confidence in the dollar.
In 1971, Nixon intervened to address rising inflation by instituting domestic price controls and a blanket 10% import tariff. He also officially ended the direct convertibility of dollars to gold, untethering the dollar and effectively kicking off the fiat currency era.
With the dollar untethered, it could now drift toward its ‘true’ value. In ’73, the USD was again devalued against its official rate as the price of gold continued to rise. Soon after, Japan and the EEC were forced to let their currencies float, ending the Bretton Woods system.
With the USD now in turmoil, the late 70s saw the worst US inflation in decades. When Reagan took office in ’81, inflation had reached a crisis. To get it under control, the Fed increased interest rates to the highest level ever, with the prime rate peaking in Aug ’81 at 20.5%
While this finally brought inflation under control, it came at the expense of dramatic economic slowdown and mass unemployment. What followed was an era of lower interest rates, slashed social spending, regressive taxation, and massive military spending, aka ‘Reaganomics’. Reagan’s policies of military spending while cutting tax revenues resulted in an exploding deficit. This deficit spending combined with the contraction of US exports needed to be financed somehow. And the solution that was chosen was to sell the debt.
As a result of the high interest rates of the early 80s, combined with a flood of new government debt entering the market, demand for USD soared, and between 1980 - 85 the dollar appreciated against the currencies of the next four largest economies by a whopping 50%.
While good news for the cost of imported goods, this strong dollar was disastrous for US exports, and contributed to the further collapse of domestic manufacturing.
But who was buying all this debt?
Japan.
By 1985, capital inflow attracted by these high interest rates meant that Japan owned more US-treasuries than any other country. But why buy only treasuries?
Because after the collapse of Bretton Woods, the US began stipulating that dollars accrued through trade surplus could not be used to buy major American companies, only allowing them to be recycled back into the American economy to purchase debt securities. With this, the USD had finally landed on a foundation seemingly more stable than gold: dollar recycling. This recycling became the way in which the US has been able to maintain both a budget deficit and a balance-of-payments deficit year-over-year, seemingly without consequence.
And while export countries gain a small but stable return from these US securities, they inadvertently finance the cost of surrounding themselves with 800 American military bases, which are then used to break any country that tries to form alternatives to this dollar system. But this system of maintaining the dollar created a new problem: too much indebtedness to one country would pose a strategic threat. And with Japan now the primary debt holder, the US needed to throw a wrench in the engine driving Japan’s growing leverage.
Enter the Plaza Accord Assembling leaders from the top 5 economies in Sept ’85, the Plaza accord was designed to boost US manufacturing and agricultural exports and lower the value of the US Treasury instruments purchased with the trade surpluses held by other countries. At least on paper. But the true aim of the accord was to cripple Japan’s manufacturing-driven economy.
The plan had 2 parts. The 1st part was to decrease the value of the USD, while the 2nd was to deregulate Japan’s economy, loosen monetary policy / liberalize markets, and cut government spending.
To accomplish the first, Germany agreed to dump a massive portion of its USD foreign reserves, flooding markets with USD and driving the relative value downward. The actual USD surplus that entered the market was less impactful than the implied threat of further intervention.
Almost overnight, the higher relative value of the yen made Japanese exports much less competitive. At the same time, Japanese capital was being incentivized by the US-backed deregulation of the Japanese economy into real estate, the stock market, and even more US treasuries.
The deregulation that followed also led to foreign capital flowing into Japan like a firehose. Tokyo’s stock market index rose 49% in the year after the accords. By 1989, it had risen 300% and Japanese stocks comprised almost half the entire world’s equity market cap. As the newly available cheap credit created by the Bank of Japan congealed within Japan’s real estate sector, a massive asset price bubble began to grow.
In 1987, Washington piled on further to break the back of Japan’s manufacturing base by imposing 100% tariffs on $300 million worth of imports from Japan, effectively blocking them from the US market.
Eventually, Japan’s financialized frenzy had to end. On the eve of 1990, the real-estate and stock market bubbles finally popped, resulting in widespread collapse and sustained stagnation of Japan’s economic growth, beginning a period now known as “the lost decades”.
And while Japanese exports became more expensive overnight, productive capital couldn’t shift as quickly. It took another 5 years after the financial bubble popped before the actual productive output of Japan finally began to sputter.
Where did production shift to? In response to the tariffs, some production, such as Japanese auto manufacturers, relocated to the US, while the rest, particularly electronic goods, moved to China. I
Given that this exact outcome was largely predictable at the outset of the accords, why did Japan agree to so thoroughly subordinate their own economy to US interests?
Because the post-WW2 US occupation of Japan never ended.
(End of part 1. Part 2 won’t fit in this post)
Plaza Accord - Part 2
After much of Japan’s political left was eliminated after WW2 in the US-backed Red Purge, the remaining politicians and party members on the political right coalesced into the Liberal Democratic Party (LDP), with some notable “help” from the CIA.
Since then, Japan has been ruled by this one party for all but 9 yrs. Far from being an odd quirk of Japanese conservatism, this political consistency has been unwaveringly in service of US interests.
And there’s no better recent demonstration of that subservience than Okinawa.
As one of her first acts as Obama’s Secretary of State, Hillary Clinton flew to Japan to sign the “Guam Treaty” in Feb 2009. The treaty obliged Japan to construct and pay for a new US base on Okinawa and to contribute a massive sum towards constructing another on Guam.
Popular resistance to the new US base in Okinawa grew. During Japan’s 2009 elections, the center left candidate Yukio Hatoyama campaigned on eliminating the US base in Okinawa. He rode this wave to win in a landslide victory, ending 54 years of LDP rule.
Hotoyama quickly got to work normalizing relations with South Korea and China, and pulled support for the US war in Afghanistan. He began taking a “partnership of equals” approach to relations with the US, pivoting away from the US and toward building an East Asian economic zone.
But less than a year into his term, Hotoyama inexplicably U-turned on the Okinawa promise, cryptically stating that removing the US base would be “impossible”. Shortly after, his coalition began to falter, and following the threat of a no-confidence vote, he resigned.
After two short stints by PMs from the DPJ, the LDP regained their hold on political power 2 years later when Shinzo Abe was re-elected, ushering in an era of redoubled neoliberalism and tight realignment with US foreign policy goals.
So what really happened? Did the US covertly overthrow the Japanese govt in 2010?
While this may sound far-fetched even to those familiar with US history of meddling in foreign govts, it wouldn’t even have been the only western govt coup’d that year!
Literally overnight, a handful of factional warlords, including US “protected sources,” engineered Prime Minister Kevin Rudd’s ouster, entirely behind the backs of the population.
But even if we approach this from outside the controlled political arena, after decades of stagnant wages and an oppressive work culture, why hasn’t Japanese labor organized to demand better working conditions? They have. But members of labor organizations, particularly those expressing anti-americanism, have been brutally suppressed through an alliance between the CIA, the LDP, and organized crime syndicates like the Yakuza through intimidation, attack, and murder.
And so while Japan’s initial compliance with US demands guaranteed they wouldn’t have to pay WW2 reparations and their ruling class avoided any socialist reform or standing trial at the Hague, their ongoing subservience can be harder to understand. However no arrangement like this would be stable for so long without an exchange of consideration. Which is why, for their continued compliance, Japan has been allowed to play junior partner to US imperialism.
Now, almost four decades after the Plaza accords, a superficially similar scenario is emerging as China economically eclipses the US, with one important difference: the US doesn’t have the direct ability to hamstring China’s economy like it did with Japan.
But not for lack of trying!
The efforts to similarly infiltrate the Chinese political system have been severely hampered in recent years, first by the anti-corruption drive that began under Xi and then by massive purges of CIA spies.
In contrast to Japan’s subservience, the US deems China’s refusal to bend the knee as a major threat. Repeated US tantrums branding China as a “currency manipulator”, expose this frustration.
One of the most basic pillars of sovereignty is being able to adjust one’s own economic and monetary policies to best serve one’s own people. When the US imposed the disastrous Plaza accords on Japan, it demonstrated the degree to which Japan remains an occupied country.
Marx’s foundational theory shows that while capitalism first develops the productive forces, it inevitably becomes a brick wall in the way of further development, holding it back and even destroying those very forces it brought into being.
In this way, a major tension is again building as US global monetary strategy comes to a head, with the US wanting a strong dollar to combat inflation, while simultaneously needing a weak dollar to maintain foreign investment and dollar recycling.
In the past, this tension could be resolved by bringing peer economies to heel, as was done to Japan in the 80s and Russia in the 90s. But now, the newest economic superpower is not only proving impervious to US efforts to subordinate it, it is forging an alternative pathway.
In 1971, John Connally, Richard Nixon’s treasury secretary, famously told a delegation of Europeans worried about exchange rate fluctuations that the American dollar “is our currency, but your problem.”
But now, in 2022, the ‘dollar problem’ is coming home.