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In a struggle between oligarchy and democracy, something must give
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To hear the candidates debate, you would think that their fight was over who could best beat Trump. But when Trump’s billionaire twin Mike Bloomberg throws a quarter-billion dollars into an ad campaign to bypass the candidates actually running for votes in Iowa, New Hampshire and Nevada, it’s obvious that what really is at issue is the future of the Democrat Party. Bloomberg is banking on a brokered convention held by the Democratic National Committee (DNC) in which money votes. (If “corporations are people,” so is money in today’s political world.)

Until Nevada, all the presidential candidates except for Bernie Sanders were playing for a brokered convention. The party’s candidates seemed likely to be chosen by the Donor Class, the One Percent and its proxies, not the voting class (the 99 Percent). If, as Mayor Bloomberg has assumed, the DNC will sell the presidency to the highest bidder, this poses the great question: Can the myth that the Democrats represent the working/middle class survive? Or, will the Donor Class trump the voting class?

This could be thought of as “election interference” – not from Russia but from the DNC on behalf of its Donor Class. That scenario would make the Democrats’ slogan for 2020 “No Hope or Change.” That is, no change from today’s economic trends that are sweeping wealth up to the One Percent.

All this sounds like Rome at the end of the Republic in the 1st century BC. The way Rome’s constitution was set up, candidates for the position of consul had to pay their way through a series of offices. The process started by going deeply into debt to get elected to the position of aedile, in charge of staging public games and entertainments. Rome’s neoliberal fiscal policy did not tax or spend, and there was little public administrative bureaucracy, so all such spending had to be made out of the pockets of the oligarchy. That was a way of keeping decisions about how to spend out of the hands of democratic politics. Julius Caesar and others borrowed from the richest Bloomberg of their day, Crassus, to pay for staging games that would demonstrate their public spirit to voters (and also demonstrate their financial liability to their backers among Rome’s One Percent). Keeping election financing private enabled the leading oligarchs to select who would be able to run as viable candidates. That was Rome’s version of Citizens United.

But in the wake of Sanders’ landslide victory in Nevada, a brokered convention would mean the end of the Democrat Party pretense to represent the 99 Percent. The American voting system would be seen to be as oligarchic as that of Rome on the eve of the infighting that ended with Augustus becoming Emperor in 27 BC.

Today’s pro-One Percent media – CNN, MSNBC and The New York Times have been busy spreading their venom against Sanders. On Sunday, February 23, CNN ran a slot, “Bloomberg needs to take down Sanders, immediately.” Given Sanders’ heavy national lead, CNN warned, the race suddenly is almost beyond the vote-fixers’ ability to fiddle with the election returns. That means that challengers to Sanders should focus their attack on him; they will have a chance to deal with Bloomberg later (by which CNN means, when it is too late to stop him).

The party’s Clinton-Obama recipients of Donor Class largesse pretend to believe that Sanders is not electable against Donald Trump. This tactic seeks to attack him at his strongest point. Recent polls show that he is the only candidate who actually would defeat Trump – as they showed that he would have done in 2016.

The DNC knew that, but preferred to lose to Trump than to win with Bernie. Will history repeat itself? Or to put it another way, will this year’s July convention become a replay of Chicago in 1968?

A quandary, not a problem

Last year I was asked to write a scenario for what might happen with a renewed DNC theft of the election’s nomination process. To be technical, I realize, it’s not called theft when it’s legal. In the aftermath of suits over the 2016 power grab, the courts ruled that the Democrat Party is indeed controlled by the DNC members, not by the voters. When it comes to party machinations and decision-making, voters are subsidiary to the superdelegates in their proverbial smoke-filled room (now replaced by dollar-filled foundation contracts).

I could not come up with a solution that does not involve dismantling and restructuring the existing party system. We have passed beyond the point of having a solvable “problem” with the Democratic National Committee (DNC). That is what a quandary is. A problem has a solution – by definition. A quandary does not have a solution. There is no way out. The conflict of interest between the Donor Class and the Voting Class has become too large to contain within a single party. It must split.

A second-ballot super-delegate scenario would mean that we are once again in for a second Trump term. That option was supported by five of the six presidential contenders on stage in Nevada on Wednesday, February 20. When Chuck Todd asked whether Michael Bloomberg, Elizabeth Warren, Joe Biden, Pete Buttigieg and Amy Klobuchar would support the candidate who received the most votes in the primaries (now obviously Bernie Sanders), or throw the nomination to the super-delegates held over from the Obama-Clinton neoliberals (75 of whom already are said to have pledged their support to Bloomberg), each advocated “letting the process play out.” That was a euphemism for leaving the choice to the Tony-Blair style leadership that have made the Democrats the servants’ entrance to the Republican Party. Like the British Labour Party behind Blair and Gordon Brown, its role is to block any left-wing alternative to the Republican program on behalf of the One Percent.

This problem would not exist if the United States had a European-style parliamentary system that would enable a third party to obtain space on the ballots in all 50 states. If this were Europe, the new party of Bernie Sanders, AOC et al. would exceed 50 percent of the votes, leaving the Wall Street democrats with about the same 8 percent share that similar neoliberal democratic parties have in Europe (e.g., Germany’s hapless neoliberalized Social Democrats), that is, Klobocop territory as voters moved to the left. The “voting Democrats,” the 99 Percent, would win a majority leaving the Old Neoliberal Democrats in the dust.

The DNC’s role is to prevent any such challenge. The United States has an effective political duopoly, as both parties have created such burdensome third-party access to the ballot box in state after state that Bernie Sanders decided long ago that he had little alternative but to run as a Democrat.

The problem is that the Democrat Party does not seem to be reformable. That means that voters still may simply abandon it – but that will simply re-elect the Democrats’ de facto 2020 candidate, Donald Trump. The only hope would be to shrink the party into a shell, enabling the old guard to go away so that the party could be rebuilt from the ground up.

But the two parties have created a legal duopoly reinforced with so many technical barriers that a repeat of Ross Perot’s third party (not to mention the old Socialist Party, or the Whigs in 1854) would take more than one election cycle to put in place. For the time being, we may expect another few months of dirty political tricks to rival those of 2016 as Obama appointee Tom Perez is simply the most recent version of Florida fixer Debbie Schultz-Wasserman (who gave a new meaning to the Wasserman Test).

So we are in for another four years of Donald Trump. But by 2024, how tightly will the U.S. economy find itself tied in knots?

The Democrats’ Vocabulary of Deception: How I would explain Bernie’s Program

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Rees Jeannotte [00:00:05] Hello and welcome. I’m Rees Jeannotte, and you are watching Know Your Stuff. Joining me today is economist and anthropologist Michael Hudson. He is a professor of economics at the University of Missouri, Kansas City, and an author of many books, including Killing the Host, J for Junk Economics, and his most recent “…and forgive Them their Debts”. Today, we’ll be talking with him about his latest book …and forgive them their debts, the eurozone crisis and the problem of ever-increasing rental and home ownership costs around the world. Professor Michael Hudson, thank you for joining us.

Michael Hudson [00:00:41] It’s good to be here.

Rees Jeannotte [00:00:43] How did you come to be both an economist and an anthropologist and in fact, combine the two the culmination of which is in large part at least is your latest book “…and forgive them their debts”?

Michael Hudson [00:00:55] I began as an economist on Wall Street dealing with third world debt for the Chase Manhattan Bank in the 1960s, and then by the 1970s for the United Nations Institute of Training and Research (UNITAR) writing about how the Third World was unable to pay its foreign debts to the United States and other creditors. That is, unable to pay without submitting to the IMF austerity programs, without having to sell off its raw materials and its industry and impose a permanent debt crisis on itself.

At Mexico City at a UNITAR meeting in 1979/78, I gave a speech to point out that the Third World could not pay its debts. This was four years before Mexico’s debt default. There was a riot, and I realized that the issue of debt cancelation – and the basic idea that debts chronically could not be paid – led me to want to write a history of debt cancellations and how society had handled the problem of debts growing beyond the ability to be paid. The problem is that compound interest rises steadily, compounding the debt much faster than an economy can grow.

It took about a year to write about Greece, Rome and the biblical lands. But then, while I was studying Israel, I realized that there were hints of an earlier tradition of debt cancelation in Babylonia and Sumer in Bronze Age Mesopotamia. So I began to read the literature on Sumer and Babylonia. The word “debt” almost never appeared in the index. I had to read through the whole book in order to find out about debt and its context.

I soon realized that most histories of antiquity were based on assumptions about what would happen if a modern economist – especially a Thatcherite kindred right-wing economist – would get into a time machine and go back to 3000 BC. How would they have created an economy? Of course, it would have been an economy just like Argentina or Greece. It would have gone bankrupt in a hurry and soon been conquered by the surrounding lands. Civilization wouldn’t have been able to take off from such an economy.

So I got very interested, and wrote a draft of a history of debt cancelation in Sumer and Babylonia by about 1984. A friend of mine at Harvard introduced me to the head of the anthropology department there, Carl Lamberg-Karlovsky. Anthropology included the archaeology department, and I became a research fellow in Babylonian archaeology. By the 1990s we decided that because most Assyriologists had never talked specifically about debt, we would begin to have some conferences on it. How did property and land ownership begin? How did economic rent begin? How did the economics of enterprise, interest-bearing debt and credit contracts began in Mesopotamia?

We decided on a series of three volumes, to culminate in the third volume, which to review debt cancelations in Mesopotamia. Well, I submitted the first draft to a university press and they sent it out to readers, as academic presses do. The readers replied that a debt cancellation was inconceivable, that this was a crazy book. Three decades ago it seemed inconceivable that any country, any society could have canceled the debts – because then the creditors wouldn’t lend any more money. Just about everybody believed that in the 1980s and early ‘90s.

What they did not understand was, number one, that most debts were owed to the palace. The palace had a choice when crops failed or debts mounted up: It could insist on all debts being paid. That would have reduced much of the population to bondage, in which case the palace doesn’t get any taxes or rent or labor services. The creditors would get all the crop surplus and an oligarchy would take form. In that case the local city was likely to be defeated by invaders. Or, the palace could cancel debts so as to restore economic order.

We decided to invite archaeologists and Assyriologists, and ask them to provide everything they knew from their particular period of Babylonia, Sumer, the Neo-Babylonian period and Israel. They explained how enterprise and economic techniques and profit seeking contracts began in the palatial sector of the economy. Money did not begin as barter as the free-enterprise boys say. Money was created as a means of paying taxes and fees to the palace. Basically, you had enterprise and private property beginning in the palatial sector, often with a symbiotic connection to private entrepreneurs.

Rees Jeannotte [00:06:19] The key here is that barter wasn’t the key to money or credit. That is, barter didn’t happen in the way that most people would imagine.

Michael Hudson [00:06:25] Right. The German firm Springer just published a Handbook of Money and Credit, in which I wrote the lead article on the origins of money, showing that the barter theory was made up by right-wing Austrian economists who hated governments acting in the public interest. Almost all the mainstream monetary theories are by right-wing anti-socialists claiming that government can play no positive role at all. Their conclusion is that money is best without government, and should be left to the private banks. The idea is that they would plan society better. So basically the libertarians, the free-enterprise boys, advocate a highly centralized economy – much more centralized than Soviet Russia, much more centralized than China. They want everything centralized in Wall Street or the City of London, that is, in the banks. They want the banks to be in charge of everything. They say that all this is all for the best.

So we find in antiquity, through Sumer, Babylonia, Greece and Rome, that whenever a financial oligarchy has taken power, it has created a depression – a disaster and an economic collapse. Almost all ancient historians have found this. This is what Livy and Dionysius wrote about in their histories of Rome. And Plutarch. That’s why the free-enterprise boys today in the United States have stopped teaching economic history in the economic curriculum. If you go to get an economics degree in the United States, you no longer study history. It’s out of the curriculum. You don’t even study the history of economic thought. It’s as if economics began in 1980 with Margaret Thatcher, Milton Friedman and other right wingers.

The result is a censorship about how civilization has been evolving for the last few thousand years, and how it has dealt with debt issues. I edited five big colloquia volumes for Harvard on the origins of money, privatization and land ownership, labor and economic accounting. After finishing five colloquia, I decided to write the popular summary of it all. That’s my book “… and forgive us our debts.”

• Category: Economics • Tags: Debt, Debt Jubilee, EU, Germany 
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Introduction: After posting Michael Hudson’s article “America Escalates its “Democratic” Oil War in the Near East” on the blog, I decided to ask Michael to reply to a few follow-up questions. Michael very kindly agreed. Please see our exchange below.

The Saker: Trump has been accused of not thinking forward, of not having a long-term strategy regarding the consequences of assassinating General Soleimani. Does the United States in fact have a strategy in the Near East, or is it only ad hoc?

Michael Hudson: Of course American strategists will deny that the recent actions do not reflect a deliberate strategy, because their long-term strategy is so aggressive and exploitative that it would even strike the American public as being immoral and offensive if they came right out and said it.

President Trump is just the taxicab driver, taking the passengers he has accepted – Pompeo, Bolton and the Iran-derangement syndrome neocons – wherever they tell him they want to be driven. They want to pull a heist, and he’s being used as the getaway driver (fully accepting his role). Their plan is to hold onto the main source of their international revenue: Saudi Arabia and the surrounding Near Eastern oil-export surpluses and money. They see the US losing its ability to exploit Russia and China, and look to keep Europe under its control by monopolizing key sectors so that it has the power to use sanctions to squeeze countries that resist turning over control of their economies and natural rentier monopolies to US buyers. In short, US strategists would like to do to Europe and the Near East just what they did to Russia under Yeltsin: turn over public infrastructure, natural resources and the banking system to U.S. owners, relying on US dollar credit to fund their domestic government spending and private investment.

This is basically a resource grab. Soleimani was in the same position as Chile’s Allende, Libya’s Qaddafi, Iraq’s Saddam. The motto is that of Stalin: “No person, no problem.”

The Saker: Your answer raises a question about Israel: In your recent article you only mention Israel twice, and these are only passing comments. Furthermore, you also clearly say the US Oil lobby as much more crucial than the Israel Lobby, so here is my follow-up question to you: On what basis have you come to this conclusion and how powerful do you believe the Israel Lobby to be compared to, say, the Oil lobby or the US Military-Industrial Complex? To what degree do their interests coincide and to what degree to they differ?

Michael Hudson: I wrote my article to explain the most basic concerns of U.S. international diplomacy: the balance of payments (dollarizing the global economy, basing foreign central bank savings on loans to the U.S. Treasury to finance the military spending mainly responsible for the international and domestic budget deficit), oil (and the enormous revenue produced by the international oil trade), and recruitment of foreign fighters (given the impossibility of drafting domestic U.S. soldiers in sufficient numbers). From the time these concerns became critical to today, Israel was viewed as a U.S. military base and supporter, but the U.S. policy was formulated independently of Israel.

I remember one day in 1973 or ’74 I was traveling with my Hudson Institute colleague Uzi Arad (later a head of Mossad and advisor to Netanyahu) to Asia, stopping off in San Francisco. At a quasi-party, a U.S. general came up to Uzi and clapped him on the shoulder and said, “You’re our landed aircraft carrier in the Near East,” and expressed his friendship.

Uzi was rather embarrassed. But that’s how the U.S. military thought of Israel back then. By that time the three planks of U.S. foreign policy strategy that I outlined were already firmly in place.

Of course Netanyahu has applauded U.S. moves to break up Syria, and Trump’s assassination choice. But the move is a U.S. move, and it’s the U.S. that is acting on behalf of the dollar standard, oil power and mobilizing Saudi Arabia’s Wahabi army.

Israel fits into the U.S.-structured global diplomacy much like Turkey does. They and other countries act opportunistically within the context set by U.S. diplomacy to pursue their own policies. Obviously Israel wants to secure the Golan Heights; hence its opposition to Syria, and also its fight with Lebanon; hence, its opposition to Iran as the backer of Assad and Hezbollah. This dovetails with US policy.

But when it comes to the global and U.S. domestic response, it’s the United States that is the determining active force. And its concern rests above all with protecting its cash cow of Saudi Arabia, as well as working with the Saudi jihadis to destabilize governments whose foreign policy is independent of U.S. direction – from Syria to Russia (Wahabis in Chechnya) to China (Wahabis in the western Uighur region). The Saudis provide the underpinning for U.S. dollarization (by recycling their oil revenues into U.S. financial investments and arms purchases), and also by providing and organizing the ISIS terrorists and coordinating their destruction with U.S. objectives. Both the Oil lobby and the Military-Industrial Complex obtain huge economic benefits from the Saudis.

Therefore, to focus one-sidedly on Israel is a distraction away from what the US-centered international order really is all about.

The Saker: In your recent article you wrote: “The assassination was intended to escalate America’s presence in Iraq to keep control the region’s oil reserves.” Others believe that the goal was precisely the opposite, to get a pretext to remove the US forces from both Iraq and Syria. What are your grounds to believe that your hypothesis is the most likely one?

Michael Hudson: Why would killing Soleimani help remove the U.S. presence? He was the leader of the fight against ISIS, especially in Syria. US policy was to continue using ISIS to permanently destabilize Syria and Iraq so as to prevent a Shi’ite crescent reaching from Iran to Lebanon – which incidentally would serve as part of China’s Belt and Road initiative. So it killed Soleimani to prevent the peace negotiation. He was killed because he had been invited by Iraq’s government to help mediate a rapprochement between Iran and Saudi Arabia. That was what the United States feared most of all, because it effectively would prevent its control of the region and Trump’s drive to seize Iraqi and Syrian oil.

So using the usual Orwellian doublethink, Soleimani was accused of being a terrorist, and assassinated under the U.S. 2002 military Authorization Bill giving the President to move without Congressional approval against Al Qaeda. Trump used it to protect Al Qaeda’s terrorist ISIS offshoots.

Given my three planks of U.S. diplomacy described above, the United States must remain in the Near East to hold onto Saudi Arabia and try to make Iraq and Syria client states equally subservient to U.S. balance-of-payments and oil policy.

Certainly the Saudis must realize that as the buttress of U.S. aggression and terrorism in the Near East, their country (and oil reserves) are the most obvious target to speed the parting guest. I suspect that this is why they are seeking a rapprochement with Iran. And I think it is destined to come about, at least to provide breathing room and remove the threat. The Iranian missiles to Iraq were a demonstration of how easy it would be to aim them at Saudi oil fields. What then would be Aramco’s stock market valuation?

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The mainstream media are carefully sidestepping the method behind America’s seeming madness in assassinating Islamic Revolutionary Guard general Qassim Suleimani to start the New Year. The logic behind the assassination this was a long-standing application of U.S. global policy, not just a personality quirk of Donald Trump’s impulsive action. His assassination of Iranian military leader Suleimani was indeed a unilateral act of war in violation of international law, but it was a logical step in a long-standing U.S. strategy. It was explicitly authorized by the Senate in the funding bill for the Pentagon that it passed last year.

The assassination was intended to escalate America’s presence in Iraq to keep control the region’s oil reserves, and to back Saudi Arabia’s Wahabi troops (Isis, Al Quaeda in Iraq, Al Nusra and other divisions of what are actually America’s foreign legion) to support U.S. control o Near Eastern oil as a buttress o the U.S. dollar. That remains the key to understanding this policy, and why it is in the process of escalating, not dying down.

I sat in on discussions of this policy as it was formulated nearly fifty years ago when I worked at the Hudson Institute and attended meetings at the White House, met with generals at various armed forces think tanks and with diplomats at the United Nations. My role was as a balance-of-payments economist having specialized for a decade at Chase Manhattan, Arthur Andersen and oil companies in the oil industry and military spending. These were two of the three main dynamic of American foreign policy and diplomacy. (The third concern was how to wage war in a democracy where voters rejected the draft in the wake of the Vietnam War.)

The media and public discussion have diverted attention from this strategy by floundering speculation that President Trump did it, except to counter the (non-)threat of impeachment with a wag-the-dog attack, or to back Israeli lebensraum drives, or simply to surrender the White House to neocon hate-Iran syndrome. The actual context for the neocon’s action was the balance of payments, and the role of oil and energy as a long-term lever of American diplomacy.

The balance of payments dimension

The major deficit in the U.S. balance of payments has long been military spending abroad. The entire payments deficit, beginning with the Korean War in 1950-51 and extending through the Vietnam War of the 1960s, was responsible for forcing the dollar off gold in 1971. The problem facing America’s military strategists was how to continue supporting the 800 U.S. military bases around the world and allied troop support without losing America’s financial leverage.

The solution turned out to be to replace gold with U.S. Treasury securities (IOUs) as the basis of foreign central bank reserves. After 1971, foreign central banks had little option for what to do with their continuing dollar inflows except to recycle them to the U.S. economy by buying U.S. Treasury securities. The effect of U.S. foreign military spending thus did not undercut the dollar’s exchange rate, and did not even force the Treasury and Federal Reserve to raise interest rates to attract foreign exchange to offset the dollar outflows on military account. In fact, U.S. foreign military spending helped finance the domestic U.S. federal budget deficit.

Saudi Arabia and other Near Eastern OPEC countries quickly became a buttress of the dollar. After these countries quadrupled the price of oil (in retaliation for the United States quadrupling the price of its grain exports, a mainstay of the U.S. trade balance), U.S. banks were swamped with an inflow of much foreign deposits – which were lent out to Third World countries in an explosion of bad loans that blew up in 1972 with Mexico’s insolvency, and destroyed Third World government credit for a decade, forcing it into dependence on the United States via the IMF and World Bank).

To top matters, of course, what Saudi Arabia does not save in dollarized assets with its oil-export earnings is spent on buying hundreds of billion of dollars of U.S. arms exports. This locks them into dependence on U.S. supply o replacement parts and repairs, and enables the United States to turn off Saudi military hardware at any point of time, in the event that the Saudis may try to act independently of U.S. foreign policy.

So maintaining the dollar as the world’s reserve currency became a mainstay of U.S. military spending. Foreign countries to not have to pay the Pentagon directly for this spending. They simply finance the U.S. Treasury and U.S. banking system.

Fear of this development was a major reason why the United States moved against Libya, whose foreign reserves were held in gold, not dollars, an which was urging other African countries to follow suit in order to free themselves from “Dollar Diplomacy.” Hillary and Obama invaded, grabbed their gold supplies (we still have no idea who ended up with these billions of dollars worth of gold) and destroyed Libya’s government, its public education system, its public infrastructure and other non-neoliberal policies.

The great threat to this is dedollarization as China, Russia and other countries seek to avoid recycling dollars. Without the dollar’s function as the vehicle for world saving – in effect, without the Pentagon’s role in creating the Treasury debt that is the vehicle for world central bank reserves – the U.S. would find itself constrained militarily and hence diplomatically constrained, as it was under the gold exchange standard.

That is the same strategy that the U.S. has followed in Syria and Iraq. Iran was threatening this dollarization strategy and its buttress in U.S. oil diplomacy.

The oil industry as buttress of the U.S. balance of payments and foreign diplomacy

The trade balance is buttressed by oil and farm surpluses. Oil is the key, because it is imported by U.S. companies at almost no balance-of-payments cost (the payments end up in the oil industry’s head offices here as profits and payments to management), while profits on U.S. oil company sales to other countries are remitted to the United States (via offshore tax-avoidance centers, mainly Liberia and Panama for many years). And as noted above, OPEC countries have been told to keep their official reserves in the form of U.S. securities (stocks and bonds as well as Treasury IOUs, but not direct purchase of U.S. companies being deemed economically important). Financially, OPEC countries are client slates of the Dollar Area.

America’s attempt to maintain this buttress explains U.S. opposition to any foreign government steps to reverse global warming and the extreme weather caused by the world’s U.S.-sponsored dependence on oil. Any such moves by Europe and other countries would reduce dependence on U.S. oil sales, and hence on U.S. ability to control the global oil spigot as a means of control and coercion, are viewed as hostile acts.

Oil also explains U.S. opposition to Russian oil exports via Nordstream. U.S. strategists want to treat energy as a U.S. national monopoly. Other countries can benefit in the way that Saudi Arabia has done – by sending their surpluses to the U.S. economy – but not to support their own economic growth and diplomacy. Control of oil thus implies support for continued global warming as an inherent part of U.S. strategy.

How a “democratic” nation can wage international war and terrorism

The Vietnam War showed that modern democracies cannot field armies for any major military conflict, because this would require a draft of its citizens. That would lead any government attempting such a draft to be voted out of power. And without troops, it is not possible to invade a country to take it over.

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IMMR CoffeeHouse Discussion Forum # 8

Full Transcript (EDITED VERSION)

Thurs. Dec. 19, 2019

Michael Hudson on how debt money has pushed the US and European economies to their financial limit. Followed by an open discussion forum.

INVITATION: I’m sure you have many discussions of bank money causing problems. My focus is on how banks create DEBT, and why it’s necessary to annul the “savings” – electronic credit behind this debt – as well as cancelling debt. My focus is on how debt money has pushed the US and European economies to their financial limit, beyond which they can’t grow any further.

About the speaker: Michael Hudson is an economist and economic historian with a PhD from New York University. Dr. Hudson teaches at the University of Missouri–Kansas City and is associated with the Levy Economics Institute at Bard College. Dr. Hudson’s main research focus is on debt, in all its variations and throughout history going as far back as Bronze Age Mesopotamia. Leading questions are how debt comes into being, when and how it creates economic and societal problems, and what measures have been adopted, or can be adopted, in order to deal with debt-generated economic problems. His insight on the connection between debt and economic crises gave him the tools to foresee the 2007-8 Global Financial Crisis. He currently directs the Institute for the Study of Long-Term Economic Trends (ISLET), which also publishes his recent books like Killing The Host: How Financial Parasites And Debt Bondage Destroy The Global Economy (2015) and J Is For Junk Economics: A Guide To Reality In An Age Of Deception (2017).


[Intro by Mark Young of “Alliance for Just Money,” USA]

{At 1:48 on the recording}

My basic orientation may be different from the usual discussions of Positive Money. I focus on how most money created by banks takes the form of debt, and how its character differs from public banking and money creation. The difference goes beyond the character of money itself. At issue is the purpose for which credit is created. Commercial bank lending tens to push up asset-prices for real estate and financial securities, not to expand the “real” economy. The latter is what public credit and money creation should be for.

This issue became apparent when in 2008, Citibank [in the USA] essentially went broke. Sheila Bair of the Federal Deposit Insurance Corporation (FDIC) pressed for the government to take it over. But before President Obama came into office, he submitted his projected cabinet list to Citibank for approval. Its management team (Robert Rubin et al.) got to nominate Obama’s cabinet and say who could be on it, and who other officials would be. Obama turned out to act basically as a lobbyist for his sponsors and donors rounded up by Citibank. He turned policy making over to the bag man Tim Geithner, who refused to let Sheila Bair take over Citibank and she wrote in her autobiography that she learned it was all about the bondholders.

Imagine how different it would have been if the government would have taken over Citibank and run it for public purposes, in contrast to the bondholders and the existing management team who ran it. In her autobiography describing the 2008 crash, Bair wrote that Citibank was run not only by incompetents but by managers who made fraudulent mortgage loans and reckless loans or made financial gambles on derivatives and corporate take-overs. Almost all of their loans were for what classical economists call “unproductive purposes.” They were not made to create new factories, not to spend into the economy, and not to employ labour, but simply to either finance the transfer of existing property already in place – namely in the form of mortgages (both junk and otherwise) – or for corporate take-over loans, for stocks and bonds, for speculation, derivatives financing and other kinds of loans that basically were so bad that they wiped out the bank’s capital base.

Public banks would have created credit for different purposes. Number one: They would have financed states, localities, the federal government, with government ownership. The government would have got whatever interest was charged. Under government control, Citibank would not have made predatory loans, corporate take-over loans or junk mortgages.

So you can compare what’s happening in China today with what happened to the American economy after 2008. Henry Liu and others have written about why China cannot really go broke as a result of its debt. The reason is that if a corporation in China is unable to repay its debt to the government-owned bank, then the government-owned bank has a choice: It can either write down the debt and leave the corporation functioning, working with its employees and being productive. Or, it can do what a US bank would do: foreclose on the loan, drive the company under, and have it sold at the distressed price to a corporate raider or vulture fund. China doesn’t throw the companies over to the corporate raiders or vulture funds.

[At 6:05 on the recording}

Since we have a number of Canadians here, I’ll talk about my experience in Canada in 1977-78. The argument I made that was one of the very first (as far as I know) for Modern Monetary Theory (MMT). Back in 1977 and ’78 when I was the advisor to the Institute for Research on Public Policy (IRPP in Toronto), Canada was urged by the banks – Scotiabank and a number of other big banks – to let them make commissions by helping the government save on its interest rates by borrowing in Swiss Francs and German Deutsche Marks. They said that provincial governments could save a few percentage points in interest charges by doing this. It could borrow it at only 2% or so in Swiss Francs or [German] Deutsche Marks.

I urged against this, and the banks brought in a lot of lobbyists against me. They naturally won because I’m not a Canadian and they were, and I don’t contribute to political campaigns in Canada and they do. Basically, they explained to me: “Look Dr. Hudson: Canada is run by the banks. If you don’t understand that, you don’t understand Canadian politics.”

Here’s what happened. The local provinces (Alberta, a number of others) did indeed borrow Swiss Francs at a lower interest rate than borrowing Canadian dollars would have involve. What happened technically is that the Swiss Francs were turned over to the Bank of Canada. The Bank of Canada then kept these Swiss Francs in its foreign reserves, and issued domestic Canadian dollars against them, because the provinces who took on this debt spent their money in Canadian dollars. The labour they hired was Canadian labour, paid in Canadian dollars, and the goods and services they bought were also mainly in Canadian dollars.

I asked why they needed Swiss creditors and the German bondholders. If the Bank of Canada is going to create the Canadian dollars anyway, why was there any need to involve debt denominated in a foreign currency? The IRPP published my report, Canada in the New Monetary Order: Borrow? Devalue? Restructure! (Toronto, Butterworth 1978). I think it should be on my website, michael-hudson.com.

• Category: Economics • Tags: Banking System, Debt, MMT, Wall Street 
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Introduction: I recently spoke to a relative of mine who, due to her constant and voluntary exposure to the legacy AngloZionist media, sincerely believed that the three Baltic states and Poland had undergone some kind of wonderful and quasi-miraculous economic and cultural renaissance thanks to their resolute break with the putatively horrible Soviet past and their total submission to the Empire since. Listening to her, I figured that this kind of delusion was probably common amongst those who still pay attention and even believe the official propaganda. So I asked Michael Hudson, whom I consider to be the best US economists and who studied the Baltics in great detail, to reply to a few very basic questions, which he very kindly did in spite of being very pressed on time. Once again, I want to sincerely thank him for his kind time, support and expertise.

* * *

The Saker: The US propaganda often claims that the three Baltic states are a true success, just like Poland is also supposed to be. Does this notion have a factual basis? Initially it did appear that these states were experiencing growth, but was that not mostly/entirely due to EU/IMF/US subsidies? Looking specifically at the three Baltic states, and especially Latvia, these were the “showcase” Soviet republics, with a high standard of living (at least compared to the other Soviet republics) and a lot of high-tech industries (including defense contracts). Could you please outline for us what truly happened to these economies following independence? How did they “reform” their economies going from an ex-Soviet one to the modern “liberal” one?

Michael Hudson: This is a trick question, because it all depends on what you mean by “success.”

The post-Soviet neoliberalism has been a great success for kleptocrats at the top. They gave themselves the public domain, from key industries to prime real estate. But the Balts largely let their Soviet industries collapse, making no effort to salvage or reorganize them.

Much of the problem, of course, was that all the linkages to Soviet-era industry were torn apart as the Soviet Union was disbanded. With their supplier and final markets closed down from Russia to Central Asia, the Baltic economies had to start afresh – with a very right-wing tax policy and no government help whatsoever, as the government itself had become privatized in the hands of former officials and grabitizers.

Lithuania was marginally better in having some industrial policy. EU and NATO accession in 2004, along with easy credit, kicked off property bubbles in the Baltics, largely inflated by Swedish banks that made a bonanza off these countries that lacked their own banks or public credit creation. The resulting 2008 crashes were the largest in the world as a percent of GDP, with Latvia suffering the world’s biggest contraction.

The neoliberal western advisors who took control of these economies – as if this was the only alternative to Soviet bureaucracy – imposed crushing austerity programs to restore macroeconomic “stability” meaning security of their land and infrastructure grabs. This was applauded by Europe’s bankers, who thought the Balts had discovered a workable recipe allowing austerity governments to retain power in a seeming democracy. These policies would have collapsed governments anywhere else, but the ability to emigrate, plus ethnic divisions against Russian speakers, allowed these governments to survive.

It’s a historically specific situation, but Europe’s bankers promote it as a generalized model. George Soros’s INET and his associated front institutions have been leaders in subsidizing this financialization-cum-grabitization. The result has been a massive exodus of prime working age people from Lithuania and Latvia. (Estonians simply commute to Finland.) Meanwhile, their economies are buoyed by foreign bank lending, which sends profits back to home countries and can be reversed at any time.

Politically, the neoliberal revolution also has been a success for U.S. Cold Warriors, who sent over native Balts from Georgetown and other universities to impose “free market” doctrine – that is, a market “free” of domestic regulation against theft of the public domain, against monopolies, against land taxes and other income taxes. The Baltic states, like most of the rest of the former Soviet Union, became the Wild East.

What was left to the Baltic countries was land and real estate. Their forests are being cut down to sell wood abroad. I describe all this in my book Killing the Host.

The Saker: After independence, the Baltic states had tried to cut as many ties with Russia as possible. This included building (rather silly looking) fences, to forcing the Russians to develop their ports on the Baltic, to shutting down large (or selling to foreign interests which then shut them down) and profitable factories (including a large nuclear plant I believe), etc. What has been the impact of this policy of “economic de-Sovietization” on the local economies?

Michael Hudson: Dissolution of the Soviet Union meant that Baltic countries lost their traditional markets, and had to shift their focus to Western Europe and, to some extent, Asia.

Latvia and Estonia had been assigned computer and information technology, and they have found this to be much in demand. When I was in Japan, for instance, CEOs told me that they were looking to Latvia above all to outsource computer work.

Banking also was a surviving sector. Gregory Lautchansky, former vice-rector at the University of Riga had been a major player already in the 1980s for moving out Russian oil and KGB money. (His company, Nordex, was sold to Mark Rich.) Many banks continued to shepherd Russian flight capital via offshore banking centers into the United States, Britain and other countries. Cyprus of course was another big player in this.

The Saker: Russians are still considered “non-citizens” in the Baltic republics; what has been the economic impact of this policy, if any, of anti-Russian discrimination in the Baltic states?

Michael Hudson: Russian-speakers, who do not acquire citizenship (which requires passing local language and history tests), are blocked from political office and administrative work. While most Russian speakers below retirement age have now acquired that citizenship, the means by which citizenship must be acquired has caused divisions.

Early on in independence, many Russians were blocked from government, and they went into business, which was avoided by many native Balts during the Soviet era because it was not as remunerative as going into government and profiting from corruption. For instance, real estate was a burden to administer. Russian-speakers, especially Jewish ones, have wisely focused on real estate.

The largest political party is Harmony Center, whose members and leadership are mainly Russian-speaking. But the various neoliberal and nationalist parties have jointed to block its ability to influence law in Parliament.

Since Russian speakers are only able to “vote with their feet,” many have joined in the vast outflow of emigration, either back to Russia or to other EU countries. Moreover, the poor quality of social benefits has led to few children being born.

The Saker: I often hear that a huge number of locals (including non-Russians) have emigrated from the Baltic states. What has caused this and what has been the impact of this emigration for the Baltic states?

A Total-Returns Profile of Economic Polarization in America
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Based on work with Dirk Bezemer, with charts by Howard Reed

Polarization in America, 23 September 2019

“More than half of all Americans feel pressure and strain, according to the April 2019 Global Emotions Report published by Gallup. Most (55%) Americans recall feeling stressed much of the day in 2018. That’s more than in all but three countries globally. Nearly half of Americans felt worried (45%) and more than a fifth (22%) felt angry. ‘Even as their economy roared, more Americas were stressed, angry and worried last year than they have been at many points during the last decade,’ Julie Ray, a Gallup editor, wrote in the summary report.”
USA Today, April 26, 2019

“For me the relevant issue isn’t what I report on the bottom line, it’s what I get to keep. … I love depreciation.”
Donald Trump, The Art of the Deal

1. Introduction and overview: A debt-strapped era of downward mobility

Those who praise the post-2008 economy as a successful recovery point to the fact that the stock market has soared to all-time highs, while the unemployment rate has fallen to a decade-low. But is the stock market a good proxy for how the overall economy is doing? The low reported unemployment rate sidesteps the predominance of minimum-wage jobs, part-time “gig” work, and the fact that the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2018 reports that 39% of Americans do not have $400 cash available for a medical or other emergency, and that a quarter of adults skipped medical care in 2018 because they could not afford it. The latest estimates by the U.S. Government Accountability Office (GAO) report that nearly half (48 percent) of households headed by someone 55 and older lack any retirement savings or pension benefits. Even in what the press calls an economic boom, most Americans feel stressed and many are chronically angry and worried. According to a 2015 survey by the American Psychological Association, financial worry is the “number one cause of stress in America today.”

The Fed describes them as suffering from “financial fragility.” What is fragile is their economic status and self-worth, teetering on the brink of downward mobility. Living in today’s financialized economy creates stresses that seem more damaging emotionally than living in a poor country. America certainly is not a poor country, but it has become so debt-ridden, and its wealth and income growth so highly concentrated, that much of its population is emotionally worse off than that of almost any other country in the world.

The U.S. economy’s soaring wealth and income finds its counterpart on the liabilities side of the balance sheet. Rising stock prices have been fueled by corporate stock buyback programs and debt leveraging, not earnings from new tangible investment and employment. And rising real estate prices reflect the decline in interest rates, enabling a given rental flow to be capitalized into higher bank loans and market prices. Additionally, the wave of foreclosures on junk mortgages and debt-strapped new home buyers has reduced home ownership rates, forcing more of the population into a rental market, whose rising charges for housing have supported general real estate prices. Thus, these capital gains do not reflect a thriving economy, but a higher-cost one that is polarizing between creditors and debtors, property owners and renters, and the financial sector vis-à-vis the rest of the economy.

The main culprit for the economy’s falling growth rate and the general middle-class economic squeeze is debt – or more specifically, the burden of having to pay it back, with penalties, fees and lower credit ratings. The mainstream press depicts the rising market price of homes as a benefit to homeowners, a capital gain as if they almost were real estate speculators or capitalists in miniature, not wage-earners running up debt. GDP statisticians include the rise in valuation of owner-occupied real estate and the rising rents it saves homeowners from having to pay as adding to GDP. But homeowners do not receive a corresponding income for living in their homes, even if rents rise in their neighborhood. And debt-financed home-price inflation has become a major factor squeezing family budgets in today’s world.

When they fall behind in their payments and are subject to late fees and higher interest rates, these payments are treated as an addition to GDP (“financial services”), as if the economy is getting richer. So when the specific components of what seems to be empirical statistical evidence of affluence are analyzed, they consist not of real product and prosperity but transfer payments from the economy at large to the Finance, Insurance and Real Estate (FIRE) sector.

Payments on the economy’s rising debt should rightly be viewed as a subtrahend from national income. But the GDP accounting format treats this rising debt as a necessary cost of production. In this line of theorizing, creditors provide a productive service whose value is reflected in the rate of interest and the magnitude of fees and penalties. Ultra-low interest rates, resulting from financial lobbying pressures, have held down the cost of carrying this debt, but these low official rates mask the reality that many debtors fall behind and have to pay penalty fees and high penalty interest rates.

These payments are added to today’s GDP measure, even as they leave less family income available to be spent on products. The result is a statistical confusion concerning how much GDP growth is actual income and product growth, and how much is rent extracted from disposable personal and corporate income. That is the basic conceptual issue addressed in this paper.

The key to understanding the U.S. economy is not so much GDP as capital (asset-price) gains and the offsetting debt burden financing these gains. This financialized overhead is not real growth. It does not make the economy richer. This paper explains why, and provides a statistical format to measure the magnitude of rent extraction or the FIRE sector on the “product” side of the economy, deflating disposable personal income available to spend on goods and services, and capital gains on the “total returns” side, so as to show how most wealth is achieved not by actual production but by increasingly debt-financed asset-price inflation.

Read the full paper.

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Thursday’s debate on Walt Disney’s ABC channel is shaping up as yet another shameless charade. The pretense is that we are to select who the Democratic presidential candidate will be. But most Americans, as the Irish say, vote with their backsides, belonging to the informal but dominant party of non-voters who choose not to be sucked into legitimizing the bad choices put before them.

The debate is being presented as a reality entertainment show. The audience is invited to rate the candidates who seem most likely to implement the policy they want – but not including the economy. Most Americans are now living from paycheck to paycheck and cannot come up with even $400 in an emergency. They are afraid to go on strike or even to complain about their job, because they are afraid of getting fired – and of losing their corporate health care, knowing that getting sick may wipe them out. These problems will not appear on Walt Disney.

Voters basically want what Bernie Sanders is promising: a basic right to Single Payer health care and a retirement income. That means protection against the Republican-Democratic threats to cut back Social Security to balance the budget in the face of tax cuts for the richest One Percent and rising Cold War military spending. This means a government strong enough to take on the vested financial and corporate interests and prosecute Wall Street’s financial crime and corporate monopoly power. When neoliberals shout, “But that’s socialism,” Americans finally are beginning to say, “Then give us socialism.” It beats being ground down into debt peonage.

But here’s the trick that the TV debates sweep under the rug: It is not the voters who are empowered to choose the Democratic Party’s candidate. That privilege belongs legally to the Democratic National Committee (DNC). Since stacking the political deck in 2016 to serve up Hillary Clinton as nominee, it has put in place rules that will enable its Donor Class members, superdelegates and other lobbyists for the One Percent to repeat the trickery once again in 2020.

I hope that the candidate who is clearly the voters’ choice, Bernie Sanders, may end up as the party’s nominee. If he is, I’m sure he’ll beat Donald Trump handily, as he would have done four years ago. But I fear that the DNC’s Donor Class will push Joe Biden, Kamala Harris or even Pete Buttigieg down the throats of voters. Just as when they backed Hillary the last time around, they hope that their anointed neoliberal will be viewed as the lesser evil for a program little different from that of the Republicans.

So Thursday’s reality TV run-off is about “who’s the least evil?” An honest reality show’s questions would focus on “What are you against?” That would attract a real audience, because people are much clearer about what they’re against: the vested interests, Wall Street, the drug companies and other monopolies, the banks, landlords, corporate raiders and private-equity asset strippers. But none of this is to be permitted on the magic island of authorized candidates (not including Tulsi Gabbard, who was purged from further debates for having dared to mention the unmentionable).

Donald Trump as the DNC’s nominee

The problem facing the Democratic National Committee today remains the same as in 2016: How to block even a moderately left-wing social democrat by picking a candidate guaranteed to lose to Trump, so as to continue the policies that serve banks, the financial markets and military spending for Cold War 2.0.

DNC donors favor Joe Biden, long-time senator from the credit-card and corporate-shell state of Delaware, and opportunistic California prosecutor Kamala Harris, with a hopey-changey grab bag alternative in smooth-talking small-town Rorschach blot candidate Pete Buttigieg. These easy victims are presented as “electable” in full knowledge that they will fail against Trump.

Trump meanwhile has done most everything the Democratic Donor Class wants: He has cut taxes on the wealthy, cut social spending for the population at large, backed Quantitative Easing to inflate the stock and bond markets, and pursued Cold War 2.0. Best of all, his abrasive style has enabled Democrats to blame the Republicans for the giveaway to the rich, as if they would have followed a different policy.

The Democratic Party’s role is to protect Republicans from attack from the left, steadily following the Republican march rightward. Claiming that this is at least in the direction of being “centrist,” the Democrats present themselves as the lesser evil (which is still evil, of course), simply as pragmatic in not letting hopes for “the perfect” (meaning moderate social democracy) block the spirit of compromise with what is attainable, “getting things done” by cooperating across the aisle and winning Republican support. That is what Joe Biden promises.

The effect has been to make America into a one-party state. Republicans act as the most blatant lobbyists for the Donor Class. But people can vote for a representative of the One Percent and the military-industrial complex in either the Republican or Democratic column. That is why most Americans owe allegiance to no party.

The Democratic National Committee worries that voters may disturb this alliance by nominating a left-wing reform candidate. The DNC easily solved this problem in 2016: When Bernie Sanders intruded into its space, it the threw the election. It scheduled the party’s early defining primaries in Republican states whose voters leaned right, and packed the nominating convention with Donor Class super-delegates.

After the dust settled, having given many party members political asthma, the DNC pretended that it was all an unfortunate political error. But of course it was not a mistake at all. The DNC preferred to lose with Hillary than win with Bernie, whom springtime polls showed would be the easy winner over Trump. Potential voters who didn’t buy into the program either stayed home or voted green.

Starve out the DNC

Now is the time to start thinking about what to do if and when the DNC presents voters with neoliberal Hillary 2.0, preferring to lose with Biden or his clones than to win with Bernie.

I think the only effective response will be to boycott the Democratic Party – not only its presidential candidates, but its Blue Dog candidates and incumbents.

The legal kerfuffle raised by Sanders supporters in the aftermath made the switcheroo official. The courts affirmed that the Democratic Party’s candidate for president is legally chosen by the DNC alone, and may or may not be the candidate elected by voters in the primaries. To cap matters, the superdelegates serve as a safety valve against any candidate unwilling to go whole-hog neoliberal. A legal tangle of state and national U.S. election laws effectively blocks third parties from meaningful representation in Congress. Registered Independents such as Sanders are constrained to caucus with and serve on committees of one of the two parties.

That makes it difficult for any third party to play more than the role of a spoiler in elections. When the Democratic Party runs its right-wing Blue Dog candidates, a third-party protest will throw the Senate or Congressional election to the Republican – until the DNC finally just walks away.

It would not help much to take over the Democratic Party as long as its rules cede control to Wall Street donors. For the party to be reconstituted, the coterie that has imposed Rubinomics, Hillary’s neocon military empire, and is threatening to balance the budget by cutting Social Security needs to be isolated.

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Control of oil has long been a key aim of U.S. foreign policy. The Paris climate agreements and any other Green programs to reduce the pace of global warming are viewed as threatening the aim of dominating world energy markets by keeping economies dependent on oil under U.S. control. Also blocking U.S. willingness to help stem global warming is the oil industry’s economic and hence political power. Its product is not only energy but also global warming, along with plastic pollution.

This fatal combination of the national security state’s mentality and oil industry lobbying threatens to destroy the planet’s climate. The prospect of raising temperatures and sea levels along the coasts while inland regions suffer drought is viewed simply as collateral damage to the geopolitics of oil. The State Department is reported to have driven out individuals warning about global warming’s negative impact.[1]

The only attempts to restrict oil imports are the new Cold War trade sanctions to isolate Russia, Iran and Venezuela. The aim is to increase foreign dependence on U.S., British and French oil, giving American strategists the power to make other countries “freeze in the dark” if they follow a path diverging from U.S. diplomatic aims.

It was the drive to control the world’s oil trade – and to keep it dollarized – that led the United States to overthrow the Iranian government in 1953, George W. Bush and Dick Cheney to invade Iraq in 2013, and most recently for Donald Trump to isolate Iran while backing Saudi Arabia and its Wahabi foreign legion in Syria, Iraq and Yemen. Sixty years earlier, in 1953, the CIA and Britain joined to overthrow Iran’s elected President Mohammad Mosaddegh to prevent him from nationalizing the Anglo-Iranian Oil Company. A similar strategy explains U.S. attempts at regime change in Venezuela and Russia.

While seeking to make other countries dependent on U.S.-controlled oil, America itself has long aimed at energy self-sufficiency for itself. In the 1970s the Energy Research and Development Administration (ERDA) developed the environmentally disastrous plan to promote North American energy independence by tapping Canada’s Athabasca tar sands. About ten gallons of water are needed to make each gallon of synthetic crude oil. This water is treated as a free good, not factored into the cost of extracting syncrude. (I was the lead Hudson Institute economist evaluating ERDA’s plans, and was removed from the study when I protested that this might cause downstream water problems.) A byproduct of American energy self-sufficiency may be to make water scarcer and more expensive, especially as fracking pollutes local water resources while diverting an immense flow of fresh water as part of the extraction-and-pollution symbiosis.

The short-sightedness of America’s aggressive oil diplomacy is causing opposition in Europe as it buckles under unprecedented summer heat waves, just as U.S. cities are being devastated by drought, forest fires, floods and other extreme weather. Yet this has not dented the basic thrust of U.S. foreign policy to control oil.

Oil in the U.S. balance of payments

Control of oil has long been a major contributor to the U.S. trade and payments, and hence of the dollar’s ability to sustain the huge outflow of overseas military spending. In 1965 I conducted a study for the Chase Manhattan Bank and found that in balance-of-payments terms, every dollar of oil industry investment outflow is recovered in just 18 months. That is because hardly any of the reported import value of oil was paid to foreigners.

To the extent that the United States must import foreign oil, such trade has been limited to U.S. oil majors (on “national security” grounds), mainly from their own foreign branches. Only a small proportion of the price was paid in foreign currency. U.S. companies bought crude oil from their foreign branches at very low prices, and allocated all the price markup to their shipping affiliates in Panama or Liberia, along with shipping and freight costs, dividends and interest, managerial charges and charges for capital investment, depreciation and depletion. Most of what is counted as U.S. foreign investment in oil takes the form of machinery exports, U.S. materials and management, and so did not actually represent a dollar inflow. The effect has been to obtain oil imports at minimal balance-of-payments cost.

Since 1974, Saudi Arabia and neighboring Arab countries have been told that they can charge as high a price as they want for their oil. After all, the higher the price they charge, the higher the profits will be for domestic U.S. oil producers. The “conditionality” is that they must recycle their export earnings into the U.S. financial market. They have to keep their foreign reserves and most personal financial wealth in U.S. Treasury securities, stocks and bonds. A global move away from oil would impair this circular flow of oil-production gains into U.S. financial markets supporting domestic stock prices.

Solar energy technology and other alternatives to oil will not contribute nearly as much to the balance of payments as oil. Not only will environmentally friendly alternatives be outside the ability of U.S. diplomats to control or cut off energy supplies to other countries, but China is taking a leadership position in solar energy technology.

A major factor bolstering the oil industry’s economic power has been its tax-avoiding “flags of convenience” located in offshore banking centers. U.S. oil companies have long registered taken their profits from production, refining and distributing in Panama and Liberia. Over fifty years ago the treasurer of Standard Oil of New Jersey walked me through how the oil industry pretended to make all its profits in the tax havens that had no income tax – paying a low price to oil-producing countries, and charging a high price to downstream refiners and marketers.

One implication of this is that there is little political chance of any cleanup of tax avoidance via offshore banking centers, by Western investors and indeed the world’s criminal class and corrupt politicians, given the fact that oil and mining are the major beneficiaries. Weakening the lobbying power to prevent closing the tax loopholes that permit the fictitious cost-accounting of tax-avoidance centers would weakening the oil industry’s economic power.

U.S. foreign policy is based on making other countries dependent on U.S. oil

U.S. diplomatic strategy is to make other countries dependent on vital materials that U.S. diplomats can use as an economic lever. An early example were the food sanctions imposed in the 1950s to spur resistance to Mao’s revolution in China. Canada broke the grain embargo.

If other countries produce their energy by solar power, wind power or nuclear power, they will be independent of U.S. oil diplomacy and its threats to cut off their energy supplies, grinding their economies to a halt if they don’t endorse U.S. neoliberal economic policies. This explains why the Trump Administration withdrew from the Paris climate agreement to slow global warming.

U.S. Cold War 2.0 policy is aimed at isolating Russia

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Today’s world is at war on many fronts. The rules of international law and order put in place toward the end of World War II are being broken by U.S. foreign policy escalating its confrontation with countries that refrain from giving its companies control of their economic surpluses. Countries that do not give the United States control of their oil and financial sectors or privatize their key sectors are being isolated by the United States imposing trade sanctions and unilateral tariffs giving special advantages to U.S. producers in violation of free trade agreements with European, Asian and other countries.

This global fracture has an increasingly military cast. U.S. officials justify tariffs and import quotas illegal under WTO rules on “national security” grounds, claiming that the United States can do whatever it wants as the world’s “exceptional” nation. U.S. officials explain that this means that their nation is not obliged to adhere to international agreements or even to its own treaties and promises. This allegedly sovereign right to ignore on its international agreements was made explicit after Bill Clinton and his Secretary of State Madeline Albright broke the promise by President George Bush and Secretary of State James Baker that NATO would not expand eastward after 1991. (“You didn’t get it in writing,” was the U.S. response to the verbal agreements that were made.)

Likewise, the Trump administration repudiated the multilateral Iranian nuclear agreement signed by the Obama administration, and is escalating warfare with its proxy armies in the Near East. U.S. politicians are waging a New Cold War against Russia, China, Iran, and oil-exporting countries that the United States is seeking to isolate if cannot control their governments, central bank and foreign diplomacy.

The international framework that originally seemed equitable was pro-U.S. from the outset. In 1945 this was seen as a natural result of the fact that the U.S. economy was the least war-damaged and held by far most of the world’s monetary gold. Still, the postwar trade and financial framework was ostensibly set up on fair and equitable international principles. Other countries were expected to recover and grow, creating diplomatic, financial and trade parity with each other.

But the past decade has seen U.S. diplomacy become one-sided in turning the International Monetary Fund (IMF), World Bank, SWIFT bank-clearing system and world trade into an asymmetrically exploitative system. This unilateral U.S.-centered array of institutions is coming to be widely seen not only as unfair, but as blocking the progress of other countries whose growth and prosperity is seen by U.S. foreign policy as a threat to unilateral U.S. hegemony. What began as an ostensibly international order to promote peaceful prosperity has turned increasingly into an extension of U.S. nationalism, predatory rent-extraction and a more dangerous military confrontation.

Deterioration of international diplomacy into a more nakedly explicit pro-U.S. financial, trade and military aggression was implicit in the way in which economic diplomacy was shaped when the United Nations, IMF and World Bank were shaped mainly by U.S. economic strategists. Their economic belligerence is driving countries to withdraw from the global financial and trade order that has been turned into a New Cold War vehicle to impose unilateral U.S. hegemony. Nationalistic reactions are consolidating into new economic and political alliances from Europe to Asia.

We are still mired in the Oil War that escalated in 2003 with the invasion of Iraq, which quickly spread to Libya and Syria. American foreign policy has long been based largely on control of oil. This has led the United States to oppose the Paris accords to stem global warming. Its aim is to give U.S. officials the power to impose energy sanctions forcing other countries to “freeze in the dark” if they do not follow U.S. leadership.

To expand its oil monopoly, America is pressuring Europe to oppose the Nordstream II gas pipeline from Russia, claiming that this would make Germany and other countries dependent on Russia instead of on U.S. liquified natural gas (LNG). Likewise, American oil diplomacy has imposed unilateral sanctions against Iranian oil exports, until such time as a regime change opens up that country’s oil reserves to U.S., French, British and other allied oil majors.

U.S. control of dollarized money and credit is critical to this hegemony. As Congressman Brad Sherman of Los Angeles told a House Financial Services Committee hearing on May 9, 2019: “An awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions. Clearing through the New York Fed is critical for major oil and other transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant.”[1]

The U.S. aim is to keep the dollar as the transactions currency for world trade, savings, central bank reserves and international lending. This monopoly status enables the U.S. Treasury and State Department to disrupt the financial payments system and trade for countries with which the United States is at economic or outright military war.

Russian President Vladimir Putin quickly responded by describing how “the degeneration of the universalist globalization model [is] turning into a parody, a caricature of itself, where common international rules are replaced with the laws… of one country.”[2] That is the trajectory on which this deterioration of formerly open international trade and finance is now moving. It has been building up for a decade. On June 5, 2009, then-Russian President Dmitry Medvedev cited this same disruptive U.S. dynamic at work in the wake of the U.S. junk mortgage and bank fraud crisis.

Those whose job it was to forecast events … were not ready for the depth of the crisis and turned out to be too rigid, unwieldy and slow in their response. The international financial organisations – and I think we need to state this up front and not try to hide it – were not up to their responsibilities, as has been said quite unambiguously at a number of major international events such as the two recent G20 summits of the world’s largest economies.

Furthermore, we have had confirmation that our pre-crisis analysis of global economic trends and the global economic system were correct. The artificially maintained uni-polar system and preservation of monopolies in key global economic sectors are root causes of the crisis. One big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks – these are all factors that led to an overall drop in the quality of regulation and the economic justification of assessments made, including assessments of macroeconomic policy. As a result, there was no avoiding a global crisis.[3]

That crisis is what is now causing today’s break in global trade and payments.

Warfare on many fronts, with Dollarization being the main arena

Dissolution of the Soviet Union 1991 did not bring the disarmament that was widely expected. U.S. leadership celebrated the Soviet demise as signaling the end of foreign opposition to U.S.-sponsored neoliberalism and even as the End of History. NATO expanded to encircle Russia and sponsored “color revolutions” from Georgia to Ukraine, while carving up former Yugoslavia into small statelets. American diplomacy created a foreign legion of Wahabi fundamentalists from Afghanistan to Iran, Iraq, Syria and Libya in support of Saudi Arabian extremism and Israeli expansionism.

Michael Hudson
About Michael Hudson

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of The Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East.

Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.