Published on 3 Aug 2019
Published on 3 Aug 2019
What if tomorrow nobody but the United States would use the US-dollar? Every country, or society would use their own currency for internal and international trade, their own economy-based, non-fiat currency. It could be traditional currencies or new government controlled crypto-currencies, but a country’s own sovereign money. No longer the US-dollar. No longer the dollar’s foster child, the Euro.
No longer international monetary transactions controlled by US banks and – by the US-dollar controlled international transfer system, SWIFT, the system that allows and facilitates US financial and economic sanctions of all kinds – confiscation of foreign funds, stopping trades between countries, blackmailing ‘unwilling’ nations into submission. What would happen? – Well, the short answer is that we would certainly be a step close to world peace, away from US (financial) hegemony, towards nation states’ sovereignty, towards a world geopolitical structure of more equality.
We are not there yet. But graffiti are all over the walls signaling that we are moving quite rapidly in that direction. And Trump knows it and his handlers know it – which is why the onslaught of financial crime – sanctions – trade wars – foreign assets and reserves confiscations, or outright theft – all in the name of “Make America Great Again”, is accelerating exponentially and with impunity. What is surprising is that the Anglo-Saxon hegemons do not seem to understand that all the threats, sanctions, trade barriers, are provoking the contrary to what should contribute to American Greatness. Economic sanctions, in whatever form, are effective only as long as the world uses the US dollar for trading and as a reserve currency.
Once the world gets sick and tired of the grotesque dictate of Washington and the sanction schemes for those who do no longer want to go along with the oppressive rules of the US, they will be eager to jump on another boat, or boats – abandoning the dollar and valuing their own currencies. Meaning trading with each other in their own currencies – and that outside of the US banking system which so far even controls trading in local currencies, as long as funds have to be transferred from one nation to another via SWIFT.
Many countries have also realized that the dollar is increasingly serving to manipulate the value of their economy. The US-dollar, a fiat currency, by its sheer money mass, may bend national economies up or down, depending on which direction the country is favored by the hegemon. Let’s put the absurdity of this phenomenon in perspective.
Today, the dollar is based not even on hot air and is worth less than the paper it is printed on. The US GDP is US$ 21.1 trillion in 2019 (World Bank estimate), with current debt of 22.0 trillion, or about 105% of GDP. The world GDP is projected for 2019 at US$ 88.1 trillion (World Bank). According to Forbes, about US$ 210 trillion are “unfunded liabilities” (net present value of future projected but unfunded obligations (75 years), mainly social security, Medicaid and accumulated interest on debt), a figure about 10 times the US GDP, or two and a half times the world’s economic output.
This figure keeps growing, as interest on debt is compounded, forming part of what would be called in business terms ‘debt service’ (interest and debt amortization), but is never ‘paid back’. In addition, there are about one to two quadrillion dollars (nobody knows the exact amount) of so-called derivatives floating around the globe. A derivative is a financial instrument which creates its value from the speculative difference of underlying assets, most commonly derived from such inter-banking and stock exchange oddities, like ‘futures’, ‘options’, ‘forwards’ and ‘swaps’.
This monstrous debt is partly owned in the form of treasury bonds as foreign exchange reserves by countries around the world. The bulk of it is owed by the US to itself – with no plans to ever “pay it back” – but rather create more money, more debt, with which to pay for the non-stop wars, weapon manufacturing and lie-propaganda to keep the populace quiet and in lockstep.
This amounts to a humongous worldwide dollar-based pyramid system. Imagine, this debt comes crashing down, for example, because one or several big (Wall Street) banks are on the brink of bankruptcy, so, they claim their outstanding derivatives, paper gold (another banking absurdity) and other debt from smaller banks. It would generate a chain reaction that might bring down the whole dollar-dependent world economy. It would create an exponential “Lehman Brothers 2008” on global scale.
The world is increasingly aware of this real threat, an economy built on a house of cards – and countries want to get out of the trap, out of the fangs of the US-dollar. It’s not easy with all the dollar-denominated reserves and assets invested abroad, all over the globe. A solution may be gradually divesting them (US-dollar liquidity and investments) and moving into non-dollar dependent currencies, like the Chinese Yuan and the Russian Ruble, or a basket of eastern currencies that are delinked from the dollar and its international payment scheme, the SWIFT system. Beware of the Euro, it’s the foster child of the US-dollar!
There are increasingly blockchain technology alternatives available. China, Russia, Iran and Venezuela are already experimenting with government-controlled cryptocurrencies to build new payment and transfer systems outside the US-dollar domain to circumvent sanctions. India may or may not join this club – whenever the Modi Government decides which way to bend – east or west. The logic would suggest that India orients herself to the east, as India is a significant part of the huge Eurasian economic market and landmass.
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India is already an active member of the Shanghai Cooperation Organization (SCO) – an association of countries that are developing peaceful strategies for trade, monetary security and defense, comprising China, Russia, India, Pakistan, most Central Asian countries and with Iran waiting in the wings to become a full-fledged member. As such, SCO accounts for about half of the world population and a third of the world’s economic output. The east has no need for the west to survive. No wonder that western media hardly mention the SCO which means that the western average public at large has no clue what the SCO stands for, and who are its members.
Government-controlled and regulated blockchain technology may become key to counter US coercive financial power and to resist sanctions. Any country is welcome to join this new alliance of countries and new but fast-growing approach to alternative trading – and to finding back to national political and financial sovereignty.
In the same vein of dedollarization are Indian “barter banks”. They are, for example, trading Indian tea for Iranian oil. Such arrangements for goods to be exchanged against Iranian petrol are carried out through Indian “barter banks”, where currencies, i.e. Iranian rials and Indian rupees, are handled by the same bank. Exchange of goods is based on a list of highest monetary volume Indian trade items, against Iranian hydrocarbon products, for example, Iran’s large import of Indian tea. No monetary transaction takes place outside of India, therefore, US sanctions may be circumvented, since no US bank or US Treasury interference can stop the bilateral trade activities.
At this point, it might be appropriate to mention Facebook’s attempt to introduce a globe-spanning cryptocurrency, the Lira. Little is known on how exactly it will (or may) function, except that it would cater to billions of facebook members around the world. According to Facebook, there are 2.38 billion active members. Imagine, if only two thirds – about 1.6 billion – opened a Libra account with Facebook, the floodgate of libras around the world would be open. Libra is or would be a privately-owned cryptocurrency – and – coming from Facebook – could be destined to replace the dollar by the same people who are now abusing the world with the US-dollar. It may be projected as the antidote to government-controlled cryptocurrencies, thus, circumventing the impact of dedollarization. Beware of the Libra!
Despite US and EU sanctions, German investments in Russia are breaking a 10-year record in 2019, by German business pouring more than €1.7 billion into the Russian economy in the first three months of 2019. According to the Russian-German Chamber of Commerce, the volume of German companies’ investments in Russia is up by 33% – by € 400 million – since last year, when total investments reached € 3.2 billion, the largest since 2008. Despite sanctions which amounted to about € 1 billion combined for 140 German companies surveyed and registered with the Chamber of Commerce, and despite western anti-Russia pressure, Russia-German trade has increased by 8.4 percent and reached nearly € 62 billion in 2018.
In addition, notwithstanding US protests and threats with sanctions, Moscow and Berlin continue their Nord Stream 2 natural gas pipeline project which is expected to be finished before the end of 2019. Not only is the proximity of Russian gas a natural and logical supply source for Germany and Europe, it will also bring Europe independence form the bullying sales methods of the United States. And payments will not be made in US dollars. In the long-run, the benefits of German-Russian business and economic relations will far outweigh the illegal US sanctions. Once this awareness has sunk in, there is nothing to stop Russian-German business associations to flourish, and to attract other EU-Russian business relations – all outside of the dollar-dominated banking and transfer system.
President Trump’s trade war with China will eventually also have a dedollarization effect, as China will seek – and already has acquired – other trading partners, mostly Asian, Asian-Pacific and European – with whom China will deal in other than dollar-denominated contracts and outside the SWIFT transfer system, for example using the Chinese International Payment System (CIPS) which, by the way, is open for international trade by any country across the globe.
This will not only circumvent punishing tariffs on China’s exports (and make US customers of Chinese goods furious, as their Chinese merchandise is no longer available at affordable prices, or no longer available at all), but this strategy will also enhance the Chinese Yuan on international markets and boost the Yuan even further as a reliable reserve currency – ever outranking the US-dollar. In fact, in the last 20 years, dollar-denominated assets in international reserve coffers have declined from more than 90% to below 60% and will rapidly decline further as Washington’s coercive financial policies prevail. Dollar reserves are rapidly replaced by reserves in Yuan and gold, and that even in such staunch supporters of the west as is Australia.
Washington also has launched a counter-productive financial war against Turkey, because Turkey is associating and creating friendly relations with Russia, Iran and China – and, foremost, because Turkey, a NATO stronghold, is purchasing the Russian S-400 cutting-edge air defense system – a new military alliance which the US cannot accept. As a result, the US is sabotaging the Turkish currency, the Lira which has lost 40% since January 2018.
Turkey will certainly do whatever it can to get out from under the boot of the US-dollar stranglehold and currency sanctions – and further ally itself with the East. This amounts to a double loss for the US. Turkey will most likely abandon all trading in US dollars and align her currency with, for example, the Chinese Yuan and the Russian ruble, and, to the detriment of the Atlantic alliance, Turkey may very likely exit NATO. Abandoning NATO will be a major disaster for the US, as Turkey is both strategically, as well as in terms of NATO military power one of the strongest – if not the strongest – nation of the 29 NATO members, outside of the US.
If Turkey exits NATO, the entire European NATO alliance will be shaken and questioned. Other countries, long wary of NATO and of storing NATO’s nuclear weapons on their soils, especially Italy and Germany, may also consider exiting NATO. In both Germany and Italy, a majority of the people is against NATO and especially against the Pentagon waging wars form their NATO bases in their territories in Germany in Italy.
To stem against this trend, the former German Defense Minister, Ursula von der Leyen, from the conservative German CDU party, is being groomed to become Jean-Claude Juncker’s successor as President of the European Commission. Mr. Juncker served since 2014. Ms. Von der Leyen was voted in tonight, 17 July, with a narrow margin of 9 votes. She is a staunch supporter of NATO. Her role is to keep NATO as an integral part of the EU. In fact, as it stands today, NATO is running the EU. This may change, once people stand up against NATO, against the US vassal, the EU Administration in Brussels, and claim their democratic rights as citizens of their nation states.
Europeans sense that these Pentagon initiated and ongoing wars and conflicts, supported by Washington’s European puppet allies, may escalate into a nuclear war, their countries’ NATO bases will be the first ones to be targeted, sinking Europe for the 3rdtime in a 100 year world war. However, this one may be all-destructive nuclear – and nobody knows or is able to predict the damage and destruction of such a catastrophe, nor the time of recovery of Mother Earth from an atomic calamity.
So, let’s hope Turkey exits NATO. It would be giant step towards peace and a healthy answer to Washington’s blackmail and sabotage against Turkey’s currency. The US currency sanctions are, in the long run, a blessing. It gives Turkey a good argument to abandon the US dollar and gradually shift towards association with eastern moneys, mainly the Chinese Yuan, thereby putting another nail in the US-dollar’s coffin.
However, the hardest blow for Washington will be when Turkey exits NATO. Such a move will come sooner or later, notwithstanding Ms. Von der Leyen’s battle cries for NATO. The breaking up of NATO will annihilate the western power structure in Europe and throughout the world, where the US still maintains more than 800 military bases. On the other hand, the disbanding of NATO will increase the world’s security, especially in Europe – for all the consequences such an exit will bear. Exiting NATO and economically exiting the US-dollar orbit is a further step towards dedollarization, and a blow to US financial and military hegemony.
Finally, investments of the Chinese Belt and Road Initiative (BRI), also called the New Silk Road, will be mostly made in Yuan and local currencies of the countries involved and incorporated in one or more of the several BRI land and maritime routes that eventually will span the globe. Some US-dollar investments may serve the People’s Bank of China, China’s Central Bank, as a dollar-divesting tool of China’s huge dollar reserves which currently stands at close to two trillion dollars.
The BRI promises to become the next economic revolution, a non-dollar economic development scheme, over the coming decades, maybe century, connecting peoples and countries – cultures, research and teaching without, however, forcing uniformity, but promoting cultural diversity and human equality – and all of it outside the dollar dynasty, breaking the nefarious dollar hegemony.
Peter Koenig is an economist and geopolitical analyst. He is also a water resources and environmental specialist. He worked for over 30 years with the World Bank and the World Health Organization around the world in the fields of environment and water. He lectures at universities in the US, Europe and South America. He writes regularly for Global Research; ICH; RT; Sputnik; PressTV; The 21st Century; TeleSUR; The Saker Blog, the New Eastern Outlook (NEO); and other internet sites. He is the author of Implosion – An Economic Thriller about War, Environmental Destruction and Corporate Greed – fiction based on facts and on 30 years of World Bank experience around the globe. He is also a co-author of The World Order and Revolution! – Essays from the Resistance. He is a Research Associate of the Centre for Research on Globalization. Copyright © Peter Koenig, Global Research, 2019 This article was originally published on New Eastern Outlook.
JULY 29, 2019
Debts that can’t be paid, won’t be. That point inevitably arrives on the liabilities side of the economy’s balance sheet.
But what of the asset side? One person’s debt is a creditor’s claim for payment. This is defined as “savings,” even though banks simply create credit endogenously on their own computers without needing any prior savings. When debts can’t be paid and debtors default, what happens to these creditors?
As President Obama showed, banks and bondholders can be bailed out by new Federal Reserve money creation. That is what the $4.6 trillion in Quantitative Easing since 2008 was all about. The Fed has spent the last few years supporting stock market prices (and holding down gold prices) by manipulating the forward option markets.
But this artificial life support to keep the debt overhead afloat is nearing the reality of the debt wall. The European Central Bank has almost run out of available euro-bonds to buy. The new fallback position to keep the increasingly zombified U.S. and Eurozone financial markets afloat is to experiment with negative interest rates.
Writing down savings by a few percentage points helps bring the glut of creditor claims marginally back towards balancing bank deposits with the ability of debtors to pay. But such marginal moves are rarely sufficient. A quantum leap is needed.
Governments have long followed a basic guideline when faced with a need to devalue their currencies (for instance, as the dollar was devalued against gold in 1933). Nothing is worse for a politician or central banker than to be overly shy when it comes to devaluation. The motto is, “Always depreciate to access.” That means at lest 25 percent, often a third when a basic structural adjustment is needed.
The recent experiment in negative interest rates writing down savings as a necessary compliment to the inevitable debt writedowns means that financial policy makes are beginning to fact the hitherto unthinkable fact that many zombie companies and debtors have no foreseeable means of paying the amounts that they owe on paper.
The tendency of debts to grow exponentially at rates in excess of the economy’s ability to create an economic surplus to pay creditors has been known for nearly 5,000 years. My book “… and forgive them their debts” describes how ancient Near Eastern rulers recognized the inherent tendency of financial dynamics to cause instability, leading to debt bondage and forfeiture of land to creditors.
To prevent this rising indebtedness from tearing their realms apart, rulers started their first full year on the throne by clearing away the overhang of arrears that had been accruing on personal and agrarian debts. The aim was to restore an idealized “mother condition” in which bondservants were liberated, able to start with a Clean Slate with their self-support land returned to them, in balance with regard to their income and outgo.
An analogy would be the idyllic condition that the U.S. economy would achieve if we could restore the financial situation that existed in 1945. The end of World War II left an economy in which most families were almost debt-free. Families and businesses and were rife with cash, as there had not been much opportunity to spend during the wartime years, and the Great Depression had wiped out substantial debts. Returning soldiers were able to start families and buy homes by committing to pay only 25 percent of their income for 30 years. This era was as close as the United States came to a Clean Slate. Today it seems an unrecoverable golden age – as the ancient Near East seemed to be to debt-wracked imperial Rome.
Germany’s Economic Miracle consisted of its Allied Monetary Reform of 1948 – a Clean Slate erasing most personal and business. That debt cancellation was fairly easy because most debts were owed to Nazis, and the Allies were glad to see their savings claims for payment wiped out.
Fast forward to today: Indebted students graduate with an obligation to pay so much education debt that they cannot qualify for mortgages to buy homes of their own. Marriage rates are down, U.S. homeownership is plunging, and rents are rising. Automobile debt also has soared, leading to rising default rates second only to student debt defaults. The overhang of junk-mortgage debts that crashed the economy in 2008 remains on the books of families who managed to survive the ten million foreclosures under the Obama bailout of Wall Street. (His constituency turned out to be his Donor Class, not the junk-mortgage victims among his voters. He characterized them as “the mob with pitchforks” to the banksters he invited to the White House to celebrate his bailout.)
By driving down interest rates, the Fed’s policy of Quantitative Easing has subsidized an enormous debt buildup without increasing the interest burden proportionally. This has enabled corporations to carry much higher debt and even indulge in leveraged buyouts and stock buyback programs.
This QE policy has made financial engineering much more enriching than industrial engineering. But it has painted the U.S. and European economies into a corner. At some points, interest rates will inevitably begin to rise back up. Some countries will have to increase rates in order to borrow to stabilize their exchange rates when their balance of trade and payments falls into deficit. Other countries will simply see that the game is over and will give up the pretense that the personal, corporate and public-sector debt overhead can be paid.
It is to prepare for this inevitable eventuality that Europe is experimenting with its trial run of negative interest rates. Once the technique is established, it will prepare the way for the inevitable step of writing down national savings in line with the economy’s ability to pay.
That ability is shrinking much more than at any time since the 1920’s, which gave way to the Great Depression despite the many debt writedowns of 1931-32. The exponential mathematics of compound interest have created more and more claims on personal income and corporate cash flow, leaving less and less to be spent on goods and services.
Until a debt write-down occurs, storefronts will continue to close, arrears will mount, students will continue to postpone marriage and family formation, high-risk bonds will begin to give way and default.
That should be what economic theory is all about. But for the past generation, economic models have pretended that banks and creditors act responsibly enough not to make bad loans. Pension fund managers pretend that they can provide for future retirement by corporate or public employees by earning 8 percent annually ad infinitum, doubling every 7 years, as if this is really possible in an economy not really growing outside of the Finance, Insurance and Real Estate (FIRE) sector (and even so, growing at only 1 or 2 percent). How then can the economy pay its debts without imposing financial austerity much like Third World countries subjected to IMF austerity programs?
Today’s economic orthodoxy denies that this debt problem can exist. Debt dynamics and the exponential growth curve of compound interest does not exist in the parallel academic universe that somehow has been situated in the social science department instead of the literature department as science fiction.
Perhaps someday a revamped economics curriculum will include the study of history to see how earlier societies have coped with the inherent tendency of debts to increase faster than the ability to be paid. It is a long history with many examples. Western civilization has failed to solve the financial problem that Near Eastern societies were able to cope with by intervening from “outside” the economy.
But these formative debt experiences are as repressed today as sexual drives repressed academically before the work of Freud. Academic economists are financial prudes. Debt cancellation is historically the solution. Quantitative Easing and bailouts of the One Percent can only be a temporary substitute. We should think of them as “abstinence” from recognizing the need to write down bad loans (“savings”) along with the bad debts.
False hope breeds crippling apathy – This is what I have to think to myself when I see the news media fervor over the second arrest of billionaire Jefferey Epstein, or similar events which in most cases end up fading into the background and forgotten. The public’s favorite distraction has always been to watch high profile people kicked out of their castles in the clouds, but I would point out that even when the globalists sacrifice one of their own in the public eye it is usually only to satiate the masses and their hunger for justice for a very short time. The system is not designed to root out evil; it is designed to obscure and perpetuate evil.
Epstein is a perfect example of this. He was already prosecuted on pedophilia charges over 12 years ago and received a “sweetheart” plea deal which allowed him to serve a mere 13 month sentence. How many child rapists get that kind of treatment in our court system? And what about the vast array of people (including political leaders) that were close friends and associates with Epstein during his “Lolita Express” days? Are we really to believe they knew nothing about what was going on? That they visited his island and never saw any wrongdoing?
Why didn’t they come forward immediately? Why did they wait until Epstein was already being prosecuted before they publicly admonished him? Is it because they were involved in the same activities? And if so, why have they not been prosecuted as well?
My point is, people should lower their expectations that justice will be served or that the “dominoes will fall” in the Epstein case. Also, keep in mind that James Comey’s daughter, Maureen Comey, will be on the prosecution team in the case, AND , Donald Trump’s Labor Secretary, Alexander Acosta, is the same man who brokered Epstein’s immunity deal. Like strands of malignant cancer, these people are wrapped around every facet of government.
But this is not just about Epstein, and as much as I would also like to see the guy hang for his crimes, I have to admit that this latest event is probably nothing more than another piece of theater meant to give the public false hope that the system is changing and that elitist criminals will be treated the same as any other criminal. How often does this ever happen?
How about the Bernie Madoff scandal? Madoff runs a Ponzi scheme that devoured $65 billion in client funds and he is sentenced to 150 years in prison, but JP Morgan, the bank that HELPED Madoff move his stolen money, got nothing more than a fine.
In the wake of the 2008 credit crash and the exposure of the fraudulent derivatives market, many people thought banker heads were going to roll, yet in the US only one banker, a little known executive at Credit Suisse named Kareem Sarageldin, actually served jail time. After admitting to fraud and inflating bond prices associated with mortgage backed securities, Sarageldin was sentenced to 30 months in prison.
The Financial Times went on to publish an article in 2018 on this matter, claiming they would “dispel the myth that no one was held accountable for the derivatives crash”. They came up with a list of 47 names. The article went on to admit that the vast majority of bankers arrested were in Iceland (where the prisons are like country clubs). The rest came primarily from low level banks or were mid-level employees. The number of CEO’s on the list is decidedly slim, and banks like JP Morgan and Goldman Sachs, the biggest perpetrators of derivatives fraud, are decidedly absent.
The base argument for these types of articles is in itself a kind of fraud. I don’t think that most people assume that “no one” was prosecuted over the fraud that helped create the crash of 2008, a crash the economy is still suffering from. I think that most people assume none of the elites at the top of the pyramid were prosecuted, and perhaps with the exception of former IMF managing director Rodrigo Rato in Spain who was only charged with credit card fraud, this assumption is a correct one.
The most egregious criminals are rarely ever touched by scandal or jail time because they stand in key positions within our system. You will never see central bankers in the Federal Reserve suffer punishment for consistently and deliberately fueling economic bubbles through artificially low interest rates and stimulus measures. You will never see them prosecuted for deliberately imploding these bubbles with perfectly timed liquidity tightening and interest rate hikes into economic weakness.
In fact, just this week Fed Chairman Jerome Powell told the Financial Services Committee that if Trump tried to fire him, he would simply ignore him and remain in his position for the full term. It is rather odd to me that almost no one in the alternative media covered his statement, perhaps because it runs contrary to the latest narrative that Powell is “afraid of Trump” and that Trump now has control of the Fed. This is nonsense. Even Trump’s own acting Chief of Staff noted that Trump “knows he does not have the authority to fire Powell”.
People who think the President chooses the Fed Chairman do not understand how the system actually works. The Fed board controls who the Chair is, and can simply vote to put whoever they wish in the position regardless of what the President does, according to Bill English, a former FOMC secretary and advisor to the Board. This means that Trump’s “choice” of Fed Chair is merely ceremonial. Trump has no power whatsoever over the central bank.
So why does this delusion persist? Again, because people become addicted to false hope. The banking elites will never be punished by the system they control. They would have to be punished by other means.
You will never see IMF heads punished for loan sharking nations into oblivion. Hell, the Bank for International Settlements laundered money for the Nazis and yet they were never punished and still exist to this day! The president of the BIS at the time, Thomas McKittrick, never faced prosecution after the war, went on to work for Chase Manhattan bank, and received a pleasant eulogy from The New York Times after his death in 1970, even though the New York Times also reported on admissions from the BIS that they had helped the Nazis.
Some might argue that this trend of one law for the people and no law for the money elite will finally change under Donald Trump’s presidency, but I find that sentiment to be highly naive. First and foremost, Trump is far too close the money elite to punish them, even if he wanted to. His extensive associations with Rothschild banking agent Wilber Ross, the man who bailed Trump out of his considerable debts in his Atlantic City casino project in the 1990s and who is now Commerce Secretary in Trump’s cabinet, sets a tone for Trump’s presidency that is NOT anti-banker or anti-globalist.
It should be clear to most people now that there will be no “draining of the swamp”, not even from the White House. Trump’s promises to seek prosecution of the Clintons for their criminal activities, which include mishandling of classified data, fraud, and a host of other repulsive behaviors, have fallen flat. Trump’s campaign position to hold the Federal Reserve accountable for the historic bubble they have inflated in stock markets through low interest rates and stimulus is gone. Now Trump takes credit for the bubble as if it is a good thing, and is demanding even more stimulus from the Fed.
And yet, there are still people out there that imagine this is all part of some elaborate ruse on Trump’s part; that he is playing a game of “4D Chess” with the globalists. I believe this insane delusion stems from a singular psychological malfunction that is suffered by many people – the idea that the system, no matter how corrupt, can be fixed from the inside.
Leftists believe this. Many conservatives believe this. Despite all evidence to the contrary, people WANT to imagine a world in which evil can be defeated if only the right people are put in place within the system. If they vote the right way, if they support the right party, if they rally around the right investigation, if they protest peacefully on the steps of Congress or on Wall Street, then the system will be forced to expel the evil and serve the populace once again.
I usually equate our current governmental framework to the “One Ring” from Lord Of The Rings, and I still think there is no better analogy. The core problem is that the system is not only run by corrupt people, it has also been built by them. The system as it stands today is a corruption machine that manufactures evil. Adding good people to an evil machine is not going to stop it. And, as with the One Ring, the people who think they can use an evil machine for good purposes often end up corrupted themselves. You cannot change it, you cannot exploit it for good, you can only destroy it.
In other words, conservatives in the liberty movement in particular need to throw out their illusions that the globalists will be defeated using the very systems the globalists created to serve their interests. And if you cannot change a corrupt system from the inside, then it must be dismantled from the outside and rebuilt from scratch. A constitutional framework and the Bill Of Rights can help in this effort, but these are laws on paper that cannot defend themselves. Without fierce vigilance on the part of the citizenry, laws and rights can be erased.
You will not hear the mainstream media or even much of the alternative media talk about the real solutions to elitist criminality or government corruption. You won’t hear about these solutions because they are hard; they require struggle and sacrifice. Voting is easy, which is why it does not work. Legislation is easy, which is why it does not work. And, protesting with signs on a street corner is easy, and it might spread the word on an issue, but ultimately it does not work. The corruption remains.
There are two options left; first, walk away peacefully from the system and build one that works on your own or with others of like-mind. If you are successful, then expect the corrupt system and the elites behind it to try and stop you. Second, when this happens, the only option left is to fight back and remove the threat. This is where we are inevitably headed, not because we want it, but because they will force the issue.
We can no longer deceive ourselves with notions of absorbing Washington D.C. or Wall Street and making them work for us. The hope that this is possible is poison, and the elites use that poison to weaken public resolve. While we sit around waiting for the system to police itself the Earth turns and they become more powerful. Without a dramatic change in our own strategy, without direct action on our part instead of action through political middlemen, I predict our situation will only become worse.
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July 13, 2019
Economist Michael Hudson continues his discussion of Super Imperialism: The Economic Strategy of American Empire with a focus on US monetary imperialism; President Trump’s demand for lower interest rates undercuts America’s requirement for foreign investment to fund its domestic and balance of payments deficit, increases the carry trade and turns IMF and World Bank policies on the US; analysis of US economic domination of the world from its position as the world’s largest creditor post-WWI; analysis of US economic domination of the world from its position as the world’s largest debtor after the 1971 close of America’s gold window; emergence of the dollar-debt standard; how war has bankrupted the US; the difference between imperialism and super imperialism; US bribes foreign governments; China’s banking system; China and Russia stockpile gold as the world breaks out of dollar domination.
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I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: De-Dollarizing the American Financial Empire. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street Financial Analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His most recent books include, And Forgive Them Their Debts … Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year; Killing the Host: How Financial Parasites and Debt Destroy the Global Economy; and J Is for Junk Economics: A Guide to Reality in an Age of Deception. We return again today to a discussion of Dr. Hudson’s seminal 1972 book, Super Imperialism: The Economic Strategy of American Empire, a critique of how the United States exploited foreign economies through the IMF and World Bank. We discuss how the United States has dominated the world economically both as the world’s largest creditor, and then later as the world’s largest debtor, and take a look at the coming demise of dollar domination.
Bonnie Faulkner: Michael Hudson, welcome back.
Michael Hudson: It’s good to be back, Bonnie.
Bonnie Faulkner: Why is President Trump insisting that the Federal Reserve lower interest rates? I thought they were already extremely low. And if they did go lower, what effect would this have?
Michael Hudson: Interest rates are historically low, and they have been kept low in order to try to keep providing cheap money for speculators to buy stocks and bonds to make arbitrage gains. Speculators can borrow at a low rate of interest to buy a stock yielding dividends (and also making capital gains) at a higher rate of return, or by buying a bond such as corporate junk bonds that pay higher interest rates, and keep the difference. In short, low interest rates are a form of financial engineering.
Trump wants interest rates to be low in order to inflate the housing market and the stock market even more, as if that is an index of the real economy, not just the financial sector that is wrapped around the economy of production and consumption. Beyond this domestic concern, Trump imagines that if you keep interest rates lower than those of Europe, the dollar’s exchange rate will decline. He thinks that this will make U.S. exports more competitive with foreign products.
Trump is criticizing the Federal Reserve for not keeping interest rates even lower than those of Europe. He he thinks that if interest rates are low, there will be an outflow of capital from this country to buy foreign stocks and bonds that pay a higher interest rate. This financial outflow will lower the dollar’s exchange rate. He believes that this will increase the chance of rebuilding America’s manufacturing exports.
This is the great neoliberal miscalculation. It also is the basis for IMF models.
Trump’s guiding idea is that lowering the dollar’s value will lower the cost of labor to employers. That’s what happens when a currency is devalued. Depreciation doesn’t lower costs that have a common worldwide price. There’s a common price for oil in the world, a common price of raw materials, and pretty much a common price for capital and credit. So the main thing that’s devalued when you push a currency down is the price of labor and its working conditions.
Workers are squeezed when a currency’s exchange rate falls, because they have to pay more for goods they import. If the dollar goes down against the Chinese yen or European currency, Chinese imports are going to cost more in dollars. So will European imports. That is the logic behind “beggar my neighbor” devaluations.
How much more foreign imports will cost depends on how far the dollar goes down. But even if it plunges by 50 percent, even if the dollar were to become a junk currency like the Argentinian or other Latin American currencies, that cannot really increase American manufacturing exports, because not much American labor works in factories anymore. Workers drive cabs and work in the service industry or for medical insurance companies. Even if you give American workers in manufacturing companies all their clothing and food for nothing, they still can’t compete with foreign countries, because their housing costs are so high, their medical insurance is so high and their taxes are so high that they’re priced out of world markets. So it won’t help much if the dollar goes down by 1 percent, 10 percent or even 20 percent. If you don’t have factories going and if you don’t have a transportation system, a power supply, and if our public utilities and infrastructure are being run down, there’s nothing that currency manipulation can do to enable America to quickly rebuild its manufacturing export industries.
American parent companies have already moved their factories abroad. They have given up on America. As long as Trump or his successors refrain from changing that system – as long as he gives tax advantages for companies to move abroad – there’s nothing he can do that will restore industry here. But he’s picked up International Monetary Fund’s junk economics, the neoliberal patter talk that it’s given to Latin America pretending that if a country just lowers its exchange rate more, it will be able to lower its wages and living standards, paying labor less in hard-currency terms until at some point, when its poverty and austerity get deep enough, it will become more competitive.
That hasn’t worked for fifty years in Latin America. It hasn’t worked for other countries either, and it never worked in the United States. The 19th-century American School of Political Economy developed the Economy of High Wages doctrine. (I review this in my book on America’s Protectionist Takeoff: 1815-1914.) They recognized that if you pay labor more, it’s more productive, it can afford a better education and it works better. That’s why high-wage labor can undersell low-wage “pauper” labor. Trump is therefore a century behind the times in picking up the IMF austerity idea that you can just devalue the currency and reduce labor’s wages and living standards in international terms to make the economy more profitable and somehow “work your way out of debt.”
What currency depreciation does do when the dollar is devalued is to enable Wall Street firms to borrow 1% and to buy European currencies and bonds yielding 3 percent or 4 percent or 5 percent, or stocks yielding even more. The guiding idea is to do what Japan did in 1990: have very low interest rates to increase what’s called the carry trade. The carry trade is borrowing at a low interest rate and buying bonds yielding a higher rate, making an arbitrage gain on the interest-rate differential. So Trump is creating an arbitrage opportunity for Wall Street investors. He pretends that this is pro-labor and can rebuild manufacturing. But it only helps hollow out the U.S. economy, sending money to other countries to build themup instead of investing in ourselves. So the effect of what Trump’s doing is the opposite of what he says he’s doing.
Bonnie Faulkner: Exactly. What is the point of driving investment into foreign countries, away from the United States?
Michael Hudson: If you’re an investor, you can make more money by dismantling the U.S. economy. You can borrow at 1 percent and buy a bond or a stock that yields 3 or 4 percent. That’s called arbitrage. It’s a financial free lunch. The effect of this free lunch, as you say, is to build up foreign economies or at least their financial markets while undercutting your own. Finance is cosmopolitan, not patriotic. It doesn’t really care where it makes money. Finance goes wherever the rate of return is highest. That’s the dynamic that has been de-industrializing the United States over the past forty years.
Bonnie Faulkner: From what you’re saying, it sounds like Donald Trump’s policies are leading to doing to the United States what the IMF and World Bank have traditionally done to foreign economies.
Michael Hudson: That’s what happens when you devalue. The financial sector will see that interest rates are going down, so the dollar’s exchange rate also will decline. Investors will move their money (or will borrow) into euros, gold or Japanese yen or Swiss francs whose exchange rate is expected to rise. So you’re offering a financial arbitrage and capital gain for investors who speculate in foreign currencies. You’re also hollowing out the economy here, and squeezing real wage levels and living standards.
Bonnie Faulkner: Do you think that Donald Trump understands what he’s doing?
Michael Hudson: I don’t think he understands. I think he has an oversimplified view of how the world works. He thinks that if we devalue the dollar, we can undersell China and Europe. But you can only undersell them if you have car-making factories available. If you don’t have a factory, you’re not going to be able to undersell foreign carmakers no matter how low the dollar goes. And if you don’t have a set of computer manufacturing factories and local suppliers already in the United States, you’re not going to have production capacity able to undersell China. Most of all, you need public infrastructure and affordable housing, education and health care. So Trump’s view is a fantasy. It’s like saying, “If we had some ham, we could have some ham and eggs, if we had some eggs.” It leaves the causes of America’s de-industrialization out of account.
If we had unemployed car makers, computer makers and other manufacturers here – factories that were idle in an economy that was pretty competitive – then devaluation might make some sense. But Americans are not just a bit uncompetitive. The housing costs in America are so high, the medical and health-insurance costs, the taxes and wage withholding on labor and prices for basic infrastructure that there’s no way that we can compete with foreign countries simply by currency manipulation.
Since 1980 the U.S. economy has been made very high-cost. Yet there also has been a huge squeeze on labor, by raising the prices it has to pay for basic needs. Even if wages go up, people can’t afford to live as well as they did thirty years ago. A radical restructuring is needed in order to restore a full-employment industrial economy. You need de-privatization, you have to break up monopolies, you need the kind of economy and economic reform that America had under Franklin Roosevelt in the 1930s. I don’t see that happening.
Bonnie Faulkner: Do you think that Donald Trump was installed as U.S. president to oversee the bankruptcy of the United States and dismantling the U.S. Empire?
Michael Hudson: Nobody installed him; he installed himself. I don’t think most people expected him to win. If you look at the odds that professional bookies and oddsmakers gave from the time he announced his candidacy, most people thought that sleepy Jeb Bush would get the nomination, and that Bush then would lose to Hillary. So there were indeed attempts an attempt to install Hillary or Bush. But nobody tried to install Trump. He made an end run around them, by straight talk, humor and celebrityhood.
He didn’t have advisors that he would listen to, because he’s always been a one-man show. And he doesn’t really know what he’s doing economically. He knows how to cheat people, victimize suppliers, and how to make money in real estate simply by not paying suppliers, and by borrowing from banks and not paying them. But he has no idea that you can’t run an economy this way. Being a real estate mafioso isn’t the same thing as running a whole economy. Trump has no idea and I don’t think anyone knows how to control him, except maybe Fox News.
Bonnie Faulkner: What is going on with the ruling class in the United States? Does anybody in its ranks know how to run an economy?
Michael Hudson: The problem is that running an economy to help the people and raise living standards, and even to lower the cost of living and doing business, means not running it to help Wall Street. If someone knows how to run an economy, the financial sector wants to keep them out of any public office. High finance is short-term, not long-term. It plays the hit-and-run game, not the much harder task of creating a framework for tangible economic growth.
You can do one of two things: You can help labor or you can help Wall Street. If running the economy means helping labor and improving living standards by giving better medical care, this is going to be at the expense of the financial sector and short-term corporate profits. So the last thing you want to do is have somebody run the economy for its own prosperity instead of for Wall Street’s purpose.
At issue is who’s going to do the planning. Will it be elected public officials in the government, or Wall Street? Wall Street’s public relations office is the University of Chicago. It claims that a free market is one where rich Wall Street investors and the financial class run an economy. But if you let people vote and democratically elect governments to regulate, that’s called “interference” in a free market. This is the fight that Trump has against China. He wants to tell it to let the banks run China and have a free market. He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise. In effect, he wants Chinese to be as threatened and insecure as American workers. They should get rid of their public transportation. They should get rid of their subsidies. They should let a lot of their companies go bankrupt so that Americans can buy them. They should have the same kind of free market that has wrecked the US economy.
China doesn’t want that kind of a free market, of course. It does have a market economy. It is actually much like the United States was in its 19th-century industrial takeoff, with strong government subsidy.
Bonnie Faulkner: In your seminal work from 1972, Super Imperialism: The Economic Strategy of American Empire, you write: “Whereas US domination of the world economy stemmed from 1920 through 1960 from its creditor position, its control since the 1960s has stemmed from is debtor position. Not only have the tables been turned, but US diplomats have found that their leverage as the world’s major debtor economy is fully as strong as that which formerly had reflected its net creditor position.” This sounds counter-intuitive. Could you break it down? Let’s start with 1920 through 1960. How was the United States able to dominate the world economy from its creditor position?
Michael Hudson: The U.S. creditor position really began after World War I, based on the money it lent to the Allies before it joined the war. When the war ended, U.S. diplomats told England and France to pay us for the arms they had bought early on. But in the past, for centuries, the victors usually forgave all the debts among each other once a war was over. For the first time, America insisted that the Allies pay for the military support it had sold them before joining them.
The European Allies were pretty devastated by the war, and they turned to Germany and insisted on reparations that quickly bankrupted Germany. German bankrupted its economy trying to pay England and France, which simply sent it on to pay the United States. Their balance of payments was in deficit, and their currencies were going down. American investors saw an opportunity to buy up their industry. Gold was the measure of power, the backing for domestic money and credit and hence capital investment.
America was much more productive, not having suffered war damage here. Between the end of World War II and 1950 when the Korean War broke out, America accumulated over 75 percent of the world’s monetary gold. The United States had heavy agricultural exports, growing industrial exports, and enough money to buy up the leading industries of Europe and Latin America and other countries.
But beginning in 1950 with the Korean War, the U.S. balance of payments moved into deficit for the first time. It got even worse when President Eisenhower decided that America had to support French colonialism in Southeast Asia, in French Indochina – Vietnam and Laos. By the time the Vietnam War escalated in the 1960s, the dollar was running large balance-of-payments deficits. Every week on Wall Street we would watch the gold supply go down, losing gold to countries that weren’t at war, like France and Germany. They were cashing in the excess dollars that were being spent by the U.S. military. By the 1960s it became clear that America was on a trajectory to run out of gold within a decade because of this overseas war spending.
It finally did, by August 1971when President Nixon stopped selling bold on the London exchange and the price was allowed to soar far above $35 an ounce. The U.S. balance-of-payments was still running a deep deficit because of the fighting in Southeast Asia and elsewhere, creating a permanent balance-of-payments deficit. The private sector was just in balance during the 1950s and 1960s. The entire deficit was military.
When America went off gold, people began to wonder what was going to happen. Many predicted an economic doomsday. It was losing its ability to rule the world through gold. But what I realized (and was the first to publish) was that if countries no longer could buy and hold gold in their international reserves, what were they going to hold? There was only one asset that they could hold: U.S. Government securities, that is, Treasury bonds.
A Treasury bond is a loan to the US Treasury. When a foreign central bank buys a bond, it finances the domestic U.S. budget deficit. So the balance of payments deficit ends up financing the domestic budget deficit.
The result is a circular flow of military spending recycled by foreign central banks. After 1971 the United States continued to spend abroad militarily, and in 1974 the OPEC countries quadrupled the price of oil. At that time the United States told Saudi Arabia that it could charge whatever it wanted for its oil, but it had to recycle all its net dollar earnings. The Saudis were not to buy gold. The Saudis were told that it would be an act of war if they didn’t recycle into the American economy the dollars they received for their oil exports. They were encouraged to buy U.S. Treasury bonds but, could also buy other U.S. bonds and stocks to help push up the stock and bond markets here while supporting the dollar.
The United States kept its own gold stock, while wanting the rest of the world to hold its savings in the form of loans to the United States. So the dollar didn’t go down. Other countries that were receiving dollars simply recycled them to buy U.S. financial securities.
What would have happened if they wouldn’t have done this? Let’s say you’re Germany, France or Japan. If you don’t recycle your dollar receipts back to the U.S. economy, your currency is going to go up. Dollar inflows from export sales are being converted into your currency, increasing its exchange rate. But by buying U.S. bonds or stocks, bid the price of dollars back up against your own currency.
So, when the United States runs a balance-of-payments deficit under conditions where other countries keep their foreign reserves in dollars, the effect is for other countries to keep their currencies’ exchange rates stable – mainly by lending to the U.S. government. That gives the United States a free ride. It can encircle the world with military bases, and the dollars that this costs are returned to the United States.
Imagine writing IOUs when you go out to spend at a store or restaurant – but your IOUs are never going to be collected! The store might say, “We have an IOU from Bonnie Faulkner. Let’s keep it as our savings. Instead of putting it in the bank or asking for payment in real money, we’re just going to keep collecting these IOUs from Bonnie Faulkner.” Corporations call such IOUs and trade credit “receivables.” Now, suppose you went on a spending spree and gave the store a billion dollars’ worth of your IOUs. There’s no way that you could pay off this billion dollars. In that case the stores receiving these IOUs would say, “Well, we really don’t want to foreclose on Bonnie, because we know that she can’t pay. We’d lose the value of receivables on the asset side of our balance sheet – all these IOUs that we’ve been collecting.
That’s essentially what foreign countries are saying about their buildup of dollars. The U.S. position is, in effect, that we are not going to repay any foreign country the dollar debt we owe them. As Treasury Secretary John Connolly said, “It’s our dollars, but your problem.” Other countries have to pay us or else we’ll bomb them. The military dimension to this arrangement is the U.S. position that it would be an act of war if other countries don’t keep spending their export earnings on loans or U.S. stocks and bonds.
That’s what makes the United States the “exceptional country.” The value of our currency is based on other countries’ savings. The money they save has to be held in the form of dollars or securities that we’re never going to repay, even if we could.
This is a huge free ride. You’d think that Donald Trump would want to keep it going. But he claims that China is manipulating its currency by recycling its dollars into loans to the U.S. Treasury. What does he mean by that? China is earning a lot of dollars by exports its goods to the United States. What does it do with these dollars? It tried to do what America did with Europe and South America: It tried to buy American companies. But the United States blocked it from doing this, on specious national security grounds. The government claims that our national security would be threatened if China would buy a chain of filling stations, as it wanted to do in California. The United States thus has a double standard, claiming that it is threatened if China buys any company, but insisting on its right to buy out the commanding heights of foreign economies with its electronic dollar credit.
That leaves China with only one option: It can buy U.S. Treasury bonds, lending its export earnings to the U.S. Treasury.
China now realizes that the U.S. Treasury isn’t going to repay. Even if it wanted to recycle its export earnings into Treasury bonds or U.S. stocks and bonds or real estate, Donald Trump now is saying that he doesn’t want China to support the dollar’s exchange rate (and keep its own exchange rate down) by buying U.S. assets. We’re telling China not to do what we’ve told other countries to do for the past forty years: to buy U.S. securities. Trump accuses countries of artificial currency manipulation if they keep their foreign reserves in dollars. So he’s telling them, and specifically China, to get rid of their dollar holdings, not to buy dollars with their export earnings anymore.
So China is buying gold. Russia also is buying gold and much of the world is now in the process of reverting to the gold-exchange standard (meaning that gold is used to settle international payments imbalances, but is not connected to domestic money creation). Countries realize that there’s a great advantage of the gold-exchange standard: There’s only a limited amount of gold in the world’s central banks. This means that any country that wages war is going to run such a large balance-of-payments deficit that it’s going to lose its gold reserves. So reviving the role of gold may prevent any country, including the United States, from going to war and suffering a military deficit.
The irony is that Trump is breaking up America’s financial free ride – its policy of monetary imperialism – by telling counties to stop recycling their dollar inflows. They’ve got to de-dollarize their economies.
The effect is to make these economies independent of the United States. Trump already has announced that we won’t hire Chinese in our IT sectors or let Chinese study subjects at university that might enable them to rival us. So our economies are going to separate.
In effect, Trump has said that if we can’t win in a trade deal, if we can’t make other countries lose and become more dependent on U.S. suppliers and monopoly pricing, then we’re not going to sign an agreement. This stance is driving not only China but Russia and even Europe and other countries all out of the U.S. orbit. The end result is going to be that the United States is going to be isolated, without being able to manufacture like it used to do. It’s dismantled its manufacturing. So how willit get by?
Some population figures were released a week ago showing the middle of America is emptying out. The population is moving from the Midwestern and mountain states to the East and the West coasts and the Gulf Coast. So Trump’s policies are accelerating the de-industrialization of the United States without doing anything to put new productive powers in place, and not even wanting other countries to invest here. The German car companies see Trump putting tariffs on the imported steel they need to build cars in the United States. It built them here to get around America’s tariff barriers against German and other automobiles. But now Trump is not even letting them import the parts that they need to assemble these cars in the non-unionized plants they’ve built in the South.
What can they do? Perhaps they’ll propose a trade with General Motors and Chrysler. The Europeans will get the factories that American companies own in Europe, and give them their American factories in exchange.
This kind of split is occurring without any attempt to make American labor more competitive by lowering its cost of housing, or the price of its health insurance and medical care, or its transportation costs or the infrastructure costs. So America is being left high and dry as a high-priced economy in a nationalistic world, while running a huge balance-of-payments deficit to support its military spending all over the globe.
Bonnie Faulkner: So it sounds like when the United States went off the gold standard, the dollar basically replaced gold as the main asset in which foreign governments could hold their assets. Now you’re saying that when there was no more gold standard, if foreign economies didn’t buy U.S. Treasuries, the price of their currency would rise and make them uncompetitive.
Michael Hudson: Yes. Imagine if Americans would have to pay more and more dollars to buy German cars. There’s going to be a larger demand for German currency, the euro, whose exchange rate would rise. That was happening throughout the 1960s and 1970s, before the euro. The only way that Germany could keep down the value of its mark was to buy something that cost dollars. It didn’t buy American exports, because America already was making and exporting less and less, except for food – and Germany can only eat so much wheat and soybeans. So the only thing that Germany could buy that was priced in dollars were U.S. Treasury bonds. That kept the German mark from rising even more rapidly, and kept the balance of payments in balance.
Japan had a similar problem. The Japanese tried to buy U.S. real estate, but they didn’t have any idea of what made real estate valuable here. They lost a reported billion dollars on buying Rockefeller Center, not realizing that the building was separate from the land value, and the land was owned by Columbia University. The building itself was running at a deficit. Most of the rental value paid was to the owner of the land’s groundrent. The Japanese had no idea of how American real estate worked.
Some Americans worried that the euro might become a rival to the dollar. After all, Europe is not de-industrializing. It is moving forward and producing better cars, airplanes and other exports. So the United States persuaded foreign politicians to cripple the euro by making it an austerity currency, creating so few government bonds that there’s no euro vehicle large enough for foreign countries to keep their foreign reserves in. The United States can create more and more dollar debt by running a budget deficit. We can follow Keynesian policies by running a deficit to employ more labor. But the eurozone refuses to let countries run a budget deficit of more than 3 percent of its GDP. Now running more than 3 percent of their GDP. That level is very marginal compared to the United States. And if you’re trying not to run any deficit at all – and even if you keep it less than 3% – then you’re imposing austerity on your country, keeping your employment down. You’re stifling your internal market, cutting your throat by being unable to create a real rival to the dollar. That’s why Donald Rumsfeld called Europe a dead zone, and why the only alternatives for a rival currency are the Chinese yuan. They’re moving into a gold-based currency area along with Russia, Iran and other members of the Shanghai Cooperation Organization.
Bonnie Faulkner: The European Union not allowing European countries within the eurozone to not run deficits more than 3 percent was basically cutting their own throat. Why would they do such a thing?
Michael Hudson: Because the heads of the Central Bank are fighting a class war. They look at themselves as financial generals in the economic fight against labor, to hurt the working class, lower wages and help their political constituency, the wealthy investing class. Europe always has had a more vicious class war than the United States does. It’s never really emerged from its aristocratic post-feudal system. Its central bankers and universities follow the University of Chicago free-market school, saying that the way to get rich is to make your labor poorer, and to create a government where labor doesn’t have a voice. That’s Europe’s economic philosophy, and it’s why Europe has not matched the growth that China and other countries are experiencing.
Bonnie Faulkner: So it sounds like then the United States has been able to dominate the world economy since 1971 from a debtor position.
Michael Hudson: When it was losing gold, from 1950 to 1971, that wasn’t dominating; that was losing America’s gold supply to France, Germany, Japan and other countries. Only when it stopped the gold-exchange standard and left countries with no alternative for their international savings but to buy U.S. Treasury bonds or other securities was it able to pay for its military spending without losing its power.
Since 1971, world diplomacy has essentially been backed by American military power. It’s not a free market. Military power keeps countries in a financial strait jacket in which the United States can run into debt without having to repay it. Other countries that run payments deficits are not allowed to expand their economies, either to rival the United States or even to improve living standards for their labor force. Only countries outside the U.S. orbit – China, and in principle Russia and some other countries in Asia – are able to increase their living standards and capital investment and technology by being free of this globalized financial class war.
Bonnie Faulkner: In Super Imperialism you write that, “Pressures to create a New International Economic Order collapsed by the end of the 1970s.” Are you saying that other countries simply gave up and acquiesced to American monetary imperialism? What happened?
Michael Hudson: I’m told that there was wholesale bribery. Officials in the Reagan administration told me that they just paid off foreign officials to support the U.S. position, not a New International Economic Order. U.S. agencies maneuvered within the party politics of European and Near Eastern countries to promote pro-American officials and sideline those who did not agree to act as U.S. satellites. A lot of money was involved in this meddling.
So the United States has corrupted democratic politics throughout Europe and the Near East, and much of Asia. That has succeeded in sterilizing foreign independence in the United States. Meanwhile, Thatcher’s and Reagan’s neoliberal ideas were promoted instead of the kind of mixed economy that Roosevelt and social democracy had been pressing for fifty years.
Bonnie Faulkner: If there were pressures to create a New International Economic Order in the 1970s, what was this new order looking to achieve?
Michael Hudson: Other countries wanted to do for their economies what the United States has long done for its own economy: to use their governments’ deficit spending to build up their infrastructure, raise living standards, create housing and promote progressive taxation that would prevent a rentier class, a landlord and financial class from taking over economic management. In the financial field, they wanted governments to create their own money, to promote their own development, just like the United States does. The role of neoliberalism was the opposite: it was to promote the financial and real estate sector and monopolies to take economic management away from government.
So the real question from the 1980s on was about who would be the basic planning center of society. Would it be the financial sector – the banks and bondholders, whose interest is really the One Percent that own most of the banks’ bonds and stocks? Or, is it going to be governments trying to subsidize the economy to help the 99 Percent grow and prosper? That was the social democratic view opposed by Thatcherism and Reaganism.
Bonnie Faulkner: Was this pressure that blocked a New International Economic Order brought on by the United States going off the gold-exchange standard?
Michael Hudson: No. It was a reaction against the U.S. policy of siphoning off the commanding heights of foreign economies. The United States wants to control their raw-materials exports, especially their oil and gas. It wants to control their financial system, so that all of their economic gains will go to foreign investors, mainly U.S. investors. It wants to turn other economies into service economies to the United States, and to make them into a kind of super-NATO military alliance that will oppose any country that does not want to be part of the U.S.-centered unilateral global order.
Bonnie Faulkner: How does today’s monetary imperialism – super imperialism – differ from the imperialism of the past?
Michael Hudson: It’s a higher stage of imperialism. The old imperialism was colonialism. You would come in and use military power to install a client ruling class. But each country would have its own currency. What has made imperialism “super” is that America doesn’t have to colonize another country. It doesn’t have to invade a country or actually go to war with it. All it needs is to have the country invest its savings, its export earnings in loans to the United States Government. This enables the United States to keep its interest rates low and enable American investors to borrow from American banks at a low rate to buy up foreign industry and agriculture that’s yielding 10 percent, 15 percent or more. So American investors realize that despite the balance-of-payments deficit, they can borrow back these dollars at such a low rate from foreign countries – paying only 1 percent to 3 percent on the Treasury bonds they hold – while pumping dollars into foreign economies by buying up their industry and agriculture and infrastructure and public utilities, making large capital gains. The hope is that and soon, we’ll earn our way out of debt by this free ride arrangement.
Imperialism is getting something for nothing. It is a strategy to obtain other countries’ surplus without playing a productive role, but by creating an extractive rentier system. An imperialist power obliges other countries to pay tribute. Of course, America doesn’t come right out and tell other countries, “You have to pay us tribute,” like Roman emperors told the provinces they governed. U.S. diplomats simply insist that other countries invest their balance-of-payments inflows and official central-bank savings in US dollars, especially U.S. Treasury IOUs. This Treasury-bill standard turns the global monetary and financial system into a tributary system.
That is what pays the costs of U.S. military spending, including its 800 military bases throughout the world, and its foreign legion of Isis, Al Qaeda fighters and “color revolutions” to destabilize countries that don’t adhere to the dollar-centered global economic system.
Bonnie Faulkner: You write: “Today it would be necessary for Europe and Asia to design an artificial, politically created alternative to the dollar as an international store of value. This promises to become the crux of international political tensions for the next generation.” How does the world break out of this double-standard dollar domination?
Michael Hudson: It’s already coming about. And Trump is a great catalyst speeding departing guests. China and Russia are reducing their dollar holdings. They don’t want to hold American Treasury bonds, because if America goes to war with them, it will do to them what it did to Iran. It will just keep all the money, not pay back the investment China has kept in U.S. banks and the Treasury. So they’re getting rid of the dollars that they hold. They’re buying gold, and are moving as quickly as they can to be independent of any reliance on U.S. exports. They are building up their military, so that if the United States tries to threaten them, they can defend themselves. The world is fracturing.
Bonnie Faulkner: What are foreign countries like China and Russia using to buy gold? Are they buying it with dollars?
Michael Hudson: Yes. They earn dollars or euros from what they’re exporting. This money goes into the central bank of China, because Chinese exporters want domestic yuan to pay their own workers and suppliers. So they go to the Bank of China and they exchange their dollars for yuan. The Bank of China, the central bank, then decides what to do with this foreign currency. They may go into the open market and buy gold. Or, they may spend it in foreign countries, on the Belt and Road Initiative to build a railway and steamship infrastructure and port development to help China’s exporters integrate their economy with others and ultimately with Europe, replacing the United States as customer and supplier. They see the United States as a dying economy.
Bonnie Faulkner: Can the Chinese build up their Belt and Road infrastructure projects with dollars?
Michael Hudson: No, they are getting rid of dollars. They already are receiving such a large surplus each year that they only use the dollars to buy gold or some goods, such as Boeing airplanes, but mostly food and raw materials. When China buys iron from Australia, for instance, they sell dollars from their foreign-exchange reserves and buy Australian currency to pay Australians for the iron ore that they import. They use dollars to pay other countries that are still part of the dollar area and still willing to keep adding these dollars to their official monetary reserves instead of holding gold.
Bonnie Faulkner: Well, it is kind of surprising, Michael, that countries haven’t started doing this a lot sooner.
Michael Hudson: There has been political pressure not to withdraw from the dollar-debt system. If countries act independently, they risk being overthrown. It takes a strong government to resist American interference and dirty tricks to put its own country first instead of following the U.S. advisors and agents who pay them to serve the U.S. economy rather than their own, or to resist brainwashing by University of Chicago’s junk economics.
Bonnie Faulkner: How far along is the dollar’s demise as the world’s reserve currency?
Michael Hudson: It’s already slowing. Trump is doing everything he can to accelerate it, by threatening that if foreign countries continue to recycle their export earnings into dollars (raising the dollar’s exchange rate), we’ll accuse them of manipulating their currency. So he would like to end it all by the end of his second term in 2024.
Bonnie Faulkner: What would the United States look like if the dollar is no longer the world’s reserve currency?
Michael Hudson: If it continues to let Wall Street do the economic planning, the economy will look like that of Argentina.
Bonnie Faulkner: And what does Argentina look like?
Michael Hudson: A narrow oligarchy at the top, keeping labor at the bottom, taking away labor’s rights to unionize – an economy whose financial and military sectors have won the class war.
Bonnie Faulkner: China, with its Belt and Road infrastructure project, is now buying gold on the open market, as are a number of other countries. Has the Western banking system penetrated China? And if so, how would you characterize China’s banking system?
Michael Hudson: There’s an attempt by the United States to penetrate China. In the recent trade agreements China did permit U.S. banks to create their own credit. I’m not sure that this is going to really take off, now that Trump is accelerating the trade war. But basically, in America you have private banks extending credit to corporations. In China you have the government banks extending the loans. That saves China from having a financial crisis in the way that the United States does.
About 12 percent of American companies are said to be zombie companies. They’re already insolvent, not able to make a profit after paying their heavy debt service. But banks are still giving them enough credit to stay in business, so they won’t have to go bankrupt and create a crisis. China doesn’t have that problem, because when Chinese industry and factories are not able to pay, the public Bank of China can simply forgive the debt. Its choice is clear: Either it can let companies go bankrupt and be sold at a low price to some buyer, mainly an American; or, it can wipe the bad debts off the books.
If China had been crazy enough to have student loans and leave its graduates impoverished instead of providing free universities, China’s central bank could simply write off the student loans. No investors would lose, because the banks are owned by the government. Its position is, “If you’re a factory, we don’t want you to have to close down and unemploy your labor. We’ll just write down the debt. And if your employees are having a really hard time, we’ll just write down their debts, so that they can spend their money on goods and services to help expand our internal market.”
America’s banks are owned by the stockholders and bondholders, who would never let Chase Manhattan or Citibank or Wells Fargo just forgive their various categories of loans. That’s why public banking is so much more efficient from an economy-wide level than private banks. It’s why banking should be a public utility, not privatized.
Bonnie Faulkner: Can you explain further how writing down debts is good for the economy?
Michael Hudson: Well, think of the alternative to writing down debts. If you don’t write down America’s student debts, the graduates are going to have to pay so much of the student debt service (now to the government) that they’re not going to have enough money to be able to buy a house, they won’t have enough money to get married, they won’t have enough money to buy goods and services. It means that most people who can buy houses are graduates with trust funds – students whose parents are rich enough that they didn’t have to take out a student loan to pay for their children’s education. These hereditary families are rich enough to buy them their own apartment.
That’s why the American economy is polarizing between people who inherit enough money to be able to have their own housing and budgets free of student loans and other debts, compared to families that are debt strapped and running deeper into debt and without much savings. This financial bifurcation is making us poorer. Yet neoliberal economic theory sees this as a competitive advantage. For them, and for employers, poverty is not a problem to be solved; it is the solution to their own aim of profitability.
Bonnie Faulkner: So is this whole privatization scheme, particularly the privatization of the banking system and privatizing a lot of infrastructure what’s bankrupting the United States?
Michael Hudson: Yes, just as it’s bankrupted England and other countries that followed Thatcherism or the neo-liberal philosophy since about 1980.
Bonnie Faulkner: Michael Hudson, thank you again.
Michael Hudson: It’s always a pleasure to have these discussions.
Bonnie Faulkner: I’ve been speaking with Dr. Michael Hudson. Today’s show has been: De-Dollarizing the American Financial Empire. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street Financial Analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super Imperialism: The Economic Strategy of American Empire, the subject of today’s broadcast, is posted in PDF format on his website at michael-hudson.com. He is also author of Trade, Development and Foreign Debt, which is the academic sister volume to Super Imperialism. Dr. Hudson acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com.
These days, every time I go to the market or want to buy something it seems that the prices are up. Or, the product is “debased” (smaller item for the same price). The knee-jerk reaction, for me anyway, is to somewhat become miffed and blast the government inwardly, as if governments can really make things better economically. This line of reasoning brought me to this excellent video. Who knew that economists can actually make sense sometimes?
He called US currency an anachronism of the modern world economy, accusing Washington of using sanctions as a political tool.
Talking at an international meeting of security representatives in the Russian city of Ufa, the head of Russian intelligence said: “It seems bewildering that the US continues to be the holder of the main reserve currency while behaving so aggressively and unpredictably.”
Naryshkin added: “The monopoly position of the dollar in international economic relations has become anachronistic. Gradually, the dollar is becoming toxic.”
Countries across the globe, including Russia, China, India, and others, have been working to diversify their foreign reserves away from the greenback.
Russia has taken concrete steps towards de-dollarizing the economy. So far, Moscow has managed to partially phase out the dollar from its exports, signing currency-swap agreements with a number of countries, including China, India, and Iran. Russia has recently proposed using the euro instead of the US dollar in trade with the European Union.