Thursday, January 24, 2008

Debtor Nation

Michael Hudson is a name I've been seeing a lot of lately, particularly through the recommendations of Stan Goff. Hudson is a Wall Street financial analyst, and author of the book Super-Imperialism (which I really need to read). Today, I read this interview (pdf) with Hudson, conducted by Acres USA (link again found via Stan Goff, in a comment he posted to this post--"Bubble Bubble"--at Feral Scholar). The interview is titled "Debtor Nation: The Hijacking of America's Economy" and is well worth reading. It begins with a discussion of the sub-prime crisis, covers the Chicago Boys in Chile, the looting of Russia, the "anti-country" of Panama (including its purposes for the trade in oil), and hits on Thorstein Veblen, Paul Volcker, Alan Greenspan, and the Democratic candidates for president. Here is a fascinating passage in which Hudson talks about the Unites States' balance of payments deficit:
HUDSON. [...] The United States became a true deficit country after August 1971, when President Nixon took the country off gold. Once European and Asian countries and their central banks could no longer turn in their surplus dollars for gold, they had only one choice, and that was to invest their international monetary reserves in the form of U.S. Treasury bonds. Central banks don't invest in the stock market, they don't buy real estate, and they don't buy companies — at least not until recently. They buy government securities because those are the most secure. So the United States found that the larger the balance of payments deficit became, the more dollars it would pump into foreign economies. The recipients of these dollars, either exporters or sellers of companies, would turn the surplus dollars over to their central banks in exchange for domestic currency, and then the central banks had a problem — what do they do with these dollars? The only thing they could do was to buy U.S. Treasury bonds.

ACRES U.S.A. That would add up to a lot of bonds.

HUDSON. Yes, the balance of payments was so large and pumped so many dollars bonds, or they wouldn't buy these dollars — they would let them be sold on the market, and their currency would appreciate against the dollar. This would have raised the price of their exports to foreign countries, causing unemployment in their export industries. When they complained about the U.S. payments deficit, the U.S. government said "That's your problem, not ours." The United States found that it could run a balance of payments deficit without ever having to pay for it — and today, the U.S. Treasury owes $2.5 trillion to foreign central banks.

ACRES U.S.A. That's an astronomical debt!

HUDSON. There is no way in which the U.S. economy can repay $2.5 trillion. Of this amount, about half is owed to China, and all the while dollars continue to be pumped into the global economy. In effect, the United States is exporting paper dollars, or paper bonds, and other countries are exporting goods and services and selling their corporate stocks and natural resources in exchange. The dollar is getting a free ride from this. As far as it is concerned, the debts owed to foreign central banks are never going to be repaid.

ACRES U.S.A. Don't these nations know this?

HUDSON. Yes, but as yet they have no political response. That would require changing how the overall international payments system works and also break the U.S. economy out of the global orbit, isolating it until it can give a quid pro quo for what it buys. A change would also require restructuring European and Asian domestic economies to replace dollar-export markets with their own domestic market. So foreign countries could indeed refuse to accept more excess dollars, refusing to sell out to Americans, and try to develop their internal market. But the German government is so anti-labor that it refuses to build the internal market, and the Chinese — like the Germans — continue to produce chiefly for export.

ACRES U.S.A. Why did they do this? Why does Germany with its high unemployment rely on this world trade, and the same with China, when they have their own internal economies they might service?

HUDSON. Because they don't seem to care about their internal economies, except to go on waging the old class war. That is how mainstream economics is taught these days — and why I stopped teaching academic economics for many years. Many people have tried to explain why European central bankers are so idiotic when it comes to this system. One suggestion is the "Stockholm Syndrome": When somebody is kidnapped, the victim tends to identify with the kidnapper, the victimizer — and there is an idea in Germany, in England, and other countries that no matter what, they have to do whatever the U.S. government recommends. It's a passive mentality. But for Europe and Asia to behave in this way violates every theory of how international relations are supposed to work. In theory, every nation is supposed to act in its own self-interest. But in today's world it seems that only the U.S. government is acting in this way. It is understandable why the United States would love to pay paper dollars and get foreign resources for nothing. It's not understandable why foreign countries go along.

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OpenID caindevera said...

Thank you for the link. Very useful, especially as I was just having an argument with someone about this very subject: the weakness of the US economy being so big in the news and all.

January 24, 2008 11:00 PM  

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