Deficits, Free Trade and Privatization - How to Finance Empire

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Economy

The aggressive designs for global control of the current US government are supported through a hidden financial supply line from economic players the world over, through their respective countries' Central Banks, right into the US Treasury. This is, in essence, what Michael Hudson, Distinguished Professor of Economics at the University of Missouri and author of Super Imperialism: The Origin and Fundamentals of U.S. World Dominance - explains in a highly interesting interview with Standard Shaefer. The interview was first published in counterpunch.

US deficits are financed by foreign countries who use the US dollar, and by extension, US Treasury Bonds, as their reserve currency.

Privatization may well be the ultimate act of economic piracy, designed to transfer the assets and natural resources of nations around the globe to a financial elite which thrives on debt induced "interest" transfers into its overflowing coffers.

Free Trade is a policy designed to make this transfer of resources a practical, legally enforcible reality. Free Trade was introduced as a tool to promote economic wellbeing. It is one of those "everybody knows" type good ideas - we all know that free trade is supposed to be a good thing. But recently, the policy - or rather the one-sided application of it with rich countries subsidizing their agriculture while demanding "free trade" access to the poorer countries' markets - has come under fire from the developing nations.

Financing the War, Financing the World

By STANDARD SHAEFER

(Interview with Michael Hudson, author of Super Imperialism, Pluto Press, 2003)

Now that even the LA Times has begun to show a modicum of willingness to discuss US foreign policy in terms of a potential imperialism, it has become clear that those on the right have avoided this debate so far only by sticking to the strictest, most out-dated notion of empire. The left, however, for too long has been satisfied with talking about cultural imperialism and corporate exploitation, both of which are serious problems. Recently, however, the left has often clumsily explained the economic motives for the war in terms of big oil, sheer greed and more ephemerally as a desire to weaken the euro. This is all likely, but it also reveals the degree to which the left's understanding of finance is outdated. This is not their fault, however. Not only do university economics departments remain dominated by the ersatz laissez faire notions of the Chicago School, but so are US Government, the World Bank, the IMF, the WTO and the European central banks. The result has been the
censorship of those few economists willing to point out that the US is very much the center of imperialism, unwilling to engage in the "free trade" or laissez faire that it promotes abroad.

Only recently, when World Bank head and Nobel Prize winner Joseph Stiglitz resigned in order to speak out against the sister institution of the IMF did this get serious attention. But Stiglitz remains defensive of the World Bank itself and continues to believe its goals despite no evidence that anything good has come from it, overlooking its complicity in promoting structural adjustments that have proved ecologically destructive and entirely in the American financial interests. The real expose was published over thirty years earlier despite an active campaign to keep the story out of the press, out of the university and out of the government.

Shortly after the US was forced off the gold standard, a young economist by the name of Michael Hudson received a grant to study the effect of the demonetarization of gold. His report was made not only to the US government, but also to Wall Street firms such as his former employers, the Chase Manhattan Bank and Arthur Andersen. The problem was that despite his phrasing the situation in the most critical terms, his report revealed that the US was on inadvertently on the verge of the greatest boondoggle of all times.

Hudson himself describes resistance to his message in a new preface to the recently reprinted ground-breaking book Super Imperialism: The Origin and Fundamentals of US World Dominance. Hudson's is an infuriating story, only partially available in this volume, involving at least two incidents where university board members and economic professors threatened to resign if his books on trade policy were published. The US Treasury Department even went so far as to alter the way it reports statistic on the balance of payments impact of the u.s. government to prevent further study into how the US government actually made money on its "aid" programs. More important, prof. Hudson explains how the US managed to use its debtor status to exploit the world.

By going off the gold standard at precise moment that it did, the United States obliged the world's central banks to finance the U.S. balance-of-payments deficit by using their surplus dollars to buy U.S. Treasury bonds, whose volume quickly exceeded America's ability or intention to pay. All the dollars that end up in European, Asian, and Eastern central banks as result of American's excessive import-imbalance, have no place to go but the U.S. Treasury. Because of the restrictions placed on the central banks - there is no place else for this money to go - these countries were forced to buy US treasuries or else accept the worthlessness of the dollars received through trade.

Like most people, I understood economic imperialism as an open game. Any corporation could invest in another country and extract profits, but apparently this is only one level. 'Super' imperialism occurs and can only occur between the U. S. government and the foreign central banks. To understand this further, I decided to speak to Michael Hudson directly.

Standard Schaefer: How aware was the Nixon administration of the balance of payments issue? Did they realize that it would actually increase US economic dominance?

Michael Hudson: The Nixon people didn't realize. I got an $80,000 grant from the Hudson Institute to explain it to them. The Nixon people said, "Oh gee. That's great". Then they turned my analysis of imperialism into a "How To" book. I had written it as a "How Not To" book, but the nation doing the exploitation was more interested in learning how the system worked than were the countries being exploited. I started to consult for Canada, Mexico and other countries. Canada had been accommodating toward the World Bank and IMF, but when they realized the extent to which these organizations were rigged to further the balance of payments problem, they felt exploited.

SS: Do you believe the neo-conservatives advising Bush at the moment are more aware of "benefits" of this balance of payments issue, what you call the US treasury standard?

MH: They know it's a rip off, yes. And they absolutely want it to continue. Being Chicago School monetarists, they think that America's financial free ride should be built into the world economy as if it were perfectly natural for the rest of the world to adjust its economies to help the U.S. economy. But among sovereign regional blocs this kind of subservience can only be transitory.

SS: What is the role of militarism at this stage? Can perpetual war be seen as a sort of imperial Works Progress Administration that jumpstarts the domestic economy? At what point does the cycle collapse and can it do so internally - or as you've suggested, does it only stop when Asia, Europe, and the East finally refuse to buy US treasuries?

MH: The US Treasury-bill standard finances the military, but doesn't need imperial war to succeed. So far it's being accepted voluntarily, as other countries have not yet figured out how to extricate themselves from a system that is bleeding them more and more.

To date they haven't tried very hard to create an alternative, but now the system could backfire, as Bush's aggressive diplomacy is prompting Europe, Russia and China to stand up for their own self-interest. And that's what they need to do. They didn't stand up for their self-interest when the World Bank and IMF were formed, but now they have to do so.

People are now beginning to raise the question of whether countries really need their central banks, which are essentially lobbyists for the Washington Consensus, as are the World Bank and the IMF. They follow the Chicago School in lobbying for high rates and a large cushion of unemployed so as to maximize financial power relative to labor and the products it produces. Financial exploitation now exceeds the old-fashioned exploitation of labor by actually employing it, albeit for low wages.

Central banks are staffed by Chicago School monetarists, and are allowed to take only a 3% deficit whereas in the US it is limitless. Europe and Asia should abandon the false start with their central banks and should rely on their Treasuries, which are Keynesian or could be Keynesian. The national Treasuries should set up a credit system with bonds and IOUs based on euros and other currencies.

SS: Okay, but isn't it most likely that the whole thing ends in a crisis, one more devastating to the US than the "Asian Flu"? What would this crisis look like?

MH: There will be a crisis when Europe, Asia and Latin America finally break away. The U.S. has said it can't pay back its dollar debts and doesn't intend to. As an alternative, it has proposed "funding the US dollar overhang" into the world monetary system. Other countries would get IMF credit equal to their dollar holdings, but these holdings no longer would be US Treasury obligations. The US would wipe its debt to foreign central banks off the hook. This would mean that it would have got all the balance-of-payments deficits for the past 32 years for free, with no quid pro quo.

The US has been proposing this for 30 years whenever Europe raises the issue of payment for its dollar holdings. American diplomats have said that they won't allow central banks to use their dollars to buy US corporations, for instance. When OPEC countries proposed this after 1973, the US Treasury reportedly informed them that this would be considered an act of war. As for Europe, it never has pushed its own self-interest in the World Bank or the IMF.

SS: How is this related to the economic bubble?

MH: Since Europe and Asia have financed most of the US Treasury's budget deficits in recent decades, Americans haven't had to do this. As a result, their bond market has been freed from government bond issues, so US investors have been able to put their money into the stock market and real estate, for better or worse. As these markets rose during the 1980s and '90s, they attracted foreign private-sector dollars into the US market. This helped finance the bubble.

Meanwhile, America's federal budget deficits can go on without limit, precisely because of the balance of payment deficit. The larger the payments deficit, the more dollars end up in the hands of foreign central banks, to be recycled into the purchase of US Treasury securities. This means that the US government's deficit - including the military spending in Iraq, by the way - is financed by foreign governments. This will continue despite the fact the debt already has grown great