Michael Hudson – Changes in Super Imperialism

Yves here. Get a cup of coffee. This is another meaty talk with Michael Hudson, this time focusing on his classic Super Imperialism. Hudson has an updated and expanded version set to go to print soon.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year

Oscar Brisset:

Welcome to the first event of the Oxford Economics Society for this academic year. I’m Oscar, the Co-President of our society, and I’m glad to welcome you back for another term of exciting discussions. Although we were hoping last term to be back in-person by January, due to the worsening Covid-19 situation in the UK our events this term are going to remain online, so that everyone at home can still participate.

A new year calls for new resolutions, and our society’s resolution for 2021 is to increase the diversity of economic topics discussed. To give you an idea, we’ll be hosting a presentation on Decolonising Economics and its role in Emerging Markets by Dr. Ingrid Kvangraven, the executive board member of Diversifying and Decolonising Economics. We’ll be hosting Prof. Randall Wray, a strong proponent of the much-discussed modern monetary theory, who was also as I just discovered, professor at the University of Missouri-Kansas City, like our guest today. We’ll also be hosting a presentation on the Young Scholars Initiative run by the Institute of New Economic Thinking at Oxford, a community some of you will definitely be interested in joining that brings together more than 15,000 young economists from around the world. Finally, we’ll be organizing a moderated discussion with the FT’s Chief Economics commentator Martin Wolf, and many other events of course.

To start us off, we are proud to host Michael Hudson, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, former balance-of-payments economist at Chase Manhattan, and an economic advisor to governments worldwide, including Iceland, Latvia and China, on finance and tax law. Now, nearly 50 years after the original publication of “Super Imperialism“, Professor Hudson will be discussing “Changes in Super Imperialism: The position of the USA & China in our Global Economic System”. How has the rise of China and the Covid-19 pandemic affected the USA’s capacity to control financial flows? How will the USA modify its behaviouras a result?

The talk will last 45 minutes, with 15 minutes of questions at the end. Make sure to send in your questions throughout the talk through our Pigeonhole page. The link should be in the description of this event. If you would like to re-watch our events, they’ll be posted to our YouTube channel afterwards.

Thank you for joining us, Professor Hudson…

Prof Hudson:

It’s good to be here. Thank you for inviting me, especially since you mentioned people that I’ve known for a long time. Randall Wray, both of us are now at the Levy Institute and working in other places, and Martin Wolf I’ve been friends with.

The reason that I’m writing a new version of Super Imperialism is that I was asked to by China, and I thought, “As long as they want to bring out a new translation and basically an update of the book, I might as well do it in English too.” I bought the rights back from Pluto and in about two or three months I will be reissuing the English language edition. The context for de-dollarization today by China, Russia and other countries is basically “How do you make an alternative to an international financial order that really was designed from the beginning to benefit the United States in its own self-interest?”

This issue was discussed after WWI when the intergovernmental debt system broke down into Allied debts and German reparations. It was discussed again at the 1930s when the United States sort of scuttled the London Economic Conference of 1933, and it was especially discussed in 1945 in December, in parliament. In the House of Commons, the British parliamentarians were discussing, “Do we want to accept the terms of the British loan?” which ended up being 3.75 billion USD, written down from what Keynes had wanted, or “Do we want to go it alone?”

It was the Conservative pro-empire Members of Parliament that wanted to reject the loan. Churchill wanted at least to abstain, but there was no alternative. In 1945 and again in 1971 when America moved off gold, in every case the alternative seemed to be anarchy. The U.S. strategy was to say, either you accept U.S. rules that favored the United States – in the beginning creditor rules, but debtor rules after 1971, and essentially gave it control of the world economy – or you go it alone and risk anarchy.

Britain was not able to go it alone in 1945. I did not include the parliamentary discussion in the first version of Super Imperialism, but I’ve included that discussion in the new version, because Britain said very clearly: “The United States basically wants to absorb the British Empire and the Sterling area into the Dollar area on its own terms and leave us almost broke. What can we do about it?” Both parties said: “We see that the United States is treating us, its ally in WWII, as a defeated party.” They came right out and said that. “But we don’t have an alternative because we can’t go alone. We have to rely on the United States.”

Let me review what the U.S. strategy is, and what’s led to major changes over time. Dollar supremacy was established after World War I by America’s creditor position. Something very novel happened after. In every previous war, for instance the Napoleonic wars and the earlier wars England had been involved with, the allies had forgiven all of their mutual debts at the end of the war. There was something that the British called “shared sacrifice”, and the idea was “We’re going to have a clean slate after the war.”

Tis idea goes all the way back to Babylonia in the second millennium BC. Throughout history there was a debt cancellation. There was no carryover of war debts after victory was achieved, because the idea was that if you leave war debts in place, that’s going to bankrupt the allies that you had during the war. It’s also going to bankrupt the defeated countries, and leave them no choice except to fight back.

The laws of Hammurabi showed this. His whole dynasty showed this. My book on Forgive Them Their Debt is a whole history of debt cancellations. But the United States broke this practice after WWI and said: “The debts have to be paid.” The amazing thing is that Europe went along with it. It had a pro-creditor ideology. It believed in the sanctity of debt, and was not going to question that because there was a guiding assumption – which is erroneous – that all debts somehow can be paid if only countries will either devalue or transform their economy, or impose austerity.

Keynes had a long debate with the anti-German Jacques Rueff of France and the American-Swede Bertil Ohlin. Keynes explained that there was no way that debtor countries like the allies or Germany could pay their debts to the creditor unless the creditor is willing to buy their exports, to provide them with the foreign exchange to pay. That debate obviously he won in reality, but that assumption was rejected by the United States, and continues to be rejected by the International Monetary Fund today. The junk economics that was brought in after World War One to consolidate the American position was: “Of course you can pay: simply destroy your economy and let us take you over, and sell out all of your industry and raw materials out to us, and that will enable you to pay.” That’s what the American demanded. It’s what the creditor demand has always been. Essentially you have to be willing to destroy your economy in order to pay your debts.

Keynes said this was crazy and he was right, but Europe went along with it and said, “Yes, we are willing to destroy our economies; we are willing to create the resentment for World War II rather than question the assumption that all the debts have to be paid.”

What Keynes pointed out was that there was a distinction between the budget problem – in other words, taxing the economy to raise a domestic fiscal surplus in German Marks or British Sterling – and the transfer problem of paying foreign currency. What happened was that the Allies said, “If America is going to insist that we pay, we’re not going to wreck our economies. We’re going to make Germany pay reparations.”

As you all know, the result was to bankrupt Germany, causing a hyperinflation there that was only solved by Germany essentially borrowing the money from the United States. German municipalities would borrow the money in dollars for local spending, use the Dollars to turn over to the Reichsbank to pay the Bank of England and the Bank of France, in turn to pay their dollar debts to the United States. That was a circular flow.

It could only be kept going by the Federal Reserve making interest rates very low here in the United States to promote an outflow of foreign investment to Germany. But those low interest rates also created a stock market boom that crashed in 1929. In the end, the Inter-Ally debts had to be canceled. There had to be  a moratorium, along with German reparations as the system broke down in 1931. There was an attempt to reconstruct the economy at the London Economic Conference of 1933 but Roosevelt scuttled that and said, “We’re going to go it alone.”

The basic principle of American foreign policy is that no other country can tell us what to do. We can tell other countries what to do, but they cannot tell us what to do. So we will not join any agreement in which we don’t have a veto power that gives us control of the World Bank and the International Monetary Fund, or the veto power in the United Nations and any international organization that the United States will join. So the question is: how could this supremacy be established all over again as World War II came to a close?

In 1944 and 1945, America made plans for the postwar economy. Its guiding logic was that: “In order to have full employment in the United States we have to have an export-based industry. Now that we’ve destroyed Germany and Japan our major enemy is the United Kingdom.” It became very clear that America’s enemy immediately on the ending of World War II was not Russia or the Soviet Union, but England. It developed a strategy that was designed to essentially bankrupt England with  the 1946 British Loan, to force England to accept to end Imperial Preference, to break up its empire, to make it free the about 10 billion pounds Sterling, to be used for spending not in England as blocked currency as the British Board of Trade expected, but in the United States. So England was stripped of all of the blocked currency, stripped of the currency area, stripped of its exclusive Sterling Area, and thereby the empire that became absorbed into the Dollar Area.

The parliamentarians and members of the House of Lords said, “We know that we’re bankrupting Britain, but the alternative is to go it alone, and we can’t really make an alternative.” Keynes said, “Of course you could create your own currency and trading area with India, Canada and other countries, but that would involve a great shrinking.”

At the time they believed still that there had to be some means of settling international payments on creditor terms with gold. The United States had most of the gold in 1945. The British understood very clearly that what seemed to be the gold exchange standard – for countries that settled their balance of payments deficits in gold – was really the Dollar standard, because the dollar was defined in terms of gold. What seemed to be a gold standard was actually the Dollar standard, and in fact the arrangements that America created in 1945 were so one-sided that by 1950 it had drawn another five billion dollars’ worth of monetary gold into the United States out of Europe. There was a refugee flight of gold in the 1930s that was followed by a post-war flight out of Europe. British banks and the wealthiest classes began to move their money to the United States.

By the time of the Korean War in 1950 and 1951, America’s balance-of-payments deficit changed abruptly. From 1951 through the 1960s and 1970s, the entire U.S. balance of payments deficit was military. At first this deficit was welcomed by Europe and by other countries because finally the United States was providing the rest of the world with dollars that it needed to grow. The dollar outflows became the basis of Europe’s central bank reserves along with gold. Some of the dollars were cashed into gold especially by France, and by Germany even more.

The U.S. balance-of-payments deficit was entirely due to America’s military spending. The U.S. private sector was exactly in balance. All of the deficits were on government account, and were entirely military. American foreign aid actually made money in balance-of-payments terms. In the 1960s when I was working at the Chase Manhattan Bank, every Friday the Federal Reserve would publish statistics on the gold cover. All of the paper currency in the United States had to be backed 25 percent by gold. Every Friday we would look at what is the gold cover – how much over the 25 percent does America have in free gold to sell, to settle the military deficit from spending in Southeast Asia, in the Vietnam War and other military operations throughout the world.

It was obvious already in the mid-60s that the United States at some point would run out of gold if it continued its military spending. That led Chase Manhattan’s Chairman of the Board George Champion to oppose the Vietnam War, saying was fiscally irresponsible. It was the business community and the right-wing in the United States that opposed America’s foreign war, not the labor movement. The labor movement was for the war because it was causing an inflation and helping wages rise. The golden age of American labor was the 1960s and 1970s, resulting from the balance of payments deficit. It was the business community that opposed the war – but not David Rockefeller when he took over from George Champion. Rockefeller wanted to “do the right thing.” He sort of followed what the Treasury asked Chase to do and the other Wall Street leaders followed suit.

Already in the mid-60s the United States faced the problem of how to avoid its balance-of-payments deficit. The solution was to make America the haven for criminal capital in the world. Somebody from the State Department joined Chase Manhattan, and asked Chase to set up enclave affiliates in the Caribbean to essentially attract the criminal capital of the world. As they explained it to me: “We want to be the new Switzerland.” They said the most liquid people in the world are the criminal class, the drug dealers. “We want the drug dealer money; we want the criminal money because it’s liquid. They have nowhere to go. Let’s make America safe for the flight capitalists, for the kleptocrats, for the crooked heads of states of the world for putting their money. Don’t have them put them in Switzerland to push up the Swiss currency. Have them put it in the branches of Wall Street banks that then would take this money in the Caribbean tax evasion and offshore banking center enclaves and then send the money to the head offices.”

The Federal Reserve every three months would publish statistics on head office bank liabilities to their branches in the Caribbean and Panama and Liberia and other countries that were used as tax avoidance centers. We were following that quite closely. Despite trying such stratagems, the United States went off gold in August 1971. At the time it worried about what on earth was going to happen. “Are we going to lose the creditor position that has enabled us to dictate the trade rules and the financial rules and political diplomacy of the world when they went off gold?”

In 1972, a year after the United States went off gold, my Super Imperialism was published. Its theme was that American diplomacy was in an even stronger position now that its deficit was not having to be paid with gold. What were other countries to do? How were foreign central banks going to hold their international reserves? There was only one currency that they could hold, and that was the U.S. dollar. So the fear by Wall Street and the U.S. Government that the dollar would be devalued as a result of its military spending didn’t materialize, because foreign central banks were in a quandary: If they did not recycle the dollars that they received from the America’s balance of payments deficit, their currencies would rise and that would hurt their export interests.

From the American point of view, central banks recycled dollars into Treasury bond holdings, because foreign central banks at that time could only invest in official government securities; they were not creating sovereign wealth funds. America’s balance-of-payments deficits thus financed its domestic budget deficits.

The response to my book on Super Imperialism was not primarily from the Left but from the U.S. Government, especially the Defense Department. I went to work for the Hudson Institute with Herman Kahn, and immediately we got a contract from the Defense Department to explain to them how Super Imperialism was working. I didn’t want to call the book Super Imperialism. I wanted to call it Monetary Imperialism,but the publisher thought differently. Most of the copies were sold in Washington to the Defense Department, the State Department and the CIA, and Herman Khan brought me numerous times down to the White House to discuss this. The Americans made it very clear that – for instance when OPEC quadrupled its oil prices in 1973 and 1974, after America quadrupled its grain prices – Kissinger and the State Department and Treasury told them that they could charge whatever they wanted for the oil, but whatever they charged they had to recycle into U.S. financial markets, mainly into government bonds. They also could buy U.S. stocks and U.S. corporate bonds, but couldn’t buy majority ownership of any big American industry. American had to be in control of its industry. The Arab countries were told “you can buy all the stocks you want through the stock market”. I think one of the Saudi Arabian kings bought a million shares of every company on the Dow Jones Industrial Average.

So you had a recycling. The more dollars Americans spent abroad on its military deficit, the more money flowed into the bond market to finance America’s budget deficit. What the American government had achieved by its creditor status before 1971, it achieved by its debtor status after 1971. Once again, it told the rest of the world: “What’s the alternative? The alternative is anarchy.” Essentially it used that threats. President Johnson insisted that Europe give America special trade favoritism, special advantages, and the rest of the world felt that it had to go along to survive.

At the time there was a discussion concern the advantages of gold. Herman Khan was a monetary right-winger, and believed that gold should be reintroduced into the international monetary system. He and I went down and gave a presentation to the U.S. Treasury, saying, “Gold is a peaceful metal because it’s a constraint on the balance of payments. If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.” That was pretty much accepted and that was why the United States basically responded, “That’s why we’re not going back to gold. We want to be able to go to war and we want the only alternative to hold central bank reserve to be the United States Dollar.”

The United States also arranged the World Bank and the International Monetary Fund to favor the U.S. economy. In the World Bank it would only make foreign currency loans to other countries. It sent out missions to foreign countries to say “What does the country need?” and almost every mission said “What Latin America, Africa and the Near East need is not foreign currency. They need domestic currency for agricultural development.” You had a latifundia problem in Latin America. The United Nations came out with two wonderful reports on the need for land reform throughout the Third World in order to grow domestic food. But the World Bank was set against other countries becoming food independent. The most important heads of the World Bank were former Secretaries of Defense like McNamara and John McCloy. You can look through who the heads were. The Americans said that any foreign country wanting to grow its own food instead of depending on U.S. grain exports was counted as an Act of War and would be overthrown. That was the explicit reason why the United States established military dictatorships and client oligarchies in Latin America.

The World Bank did promote plantation agriculture but the plantation agriculture was for tropical export crops to compete with other exporting countries, to lower the price of export crops, of tropical crops that could not be grown in the United States. These countries were not supposed to grow their own food supply.

The World Bank became a huge market for American firms to build dams etc. I was told that the World Bank person in charge of designing dams had been a chronic bed-wetter as a child, sort of acting it all out. It also got countries into debt, and once countries were in debt they were forced into the International Monetary Fund, which said basically” “In order to pay your debts, you have to engage in a vicious class war against labor”. You have to lower wages because it’s the only variable in world trade. There’s a common world trade [price] in raw materials: All countries pay the same price for copper, machinery, and other materials. There’s a common world price for oil; there’s a common world price for capital goods. The one variable in foreign trade is the price of labor. So the IMF said, “You’ve got to prevent unionization, you’ve got to prevent any kind of pro-labor reform. Your only way of paying debts is to polarize your economy and impoverish your labor force.”

That is exactly what the opponents of Keynes had urged in the 1920s, and you saw the result in Germany. The same thing was imposed on the Third World countries. That is why, until a few years ago, all the countries of the world tried to get free of the IMF’s “conditionalities,” the terms on which the IMF would lend money. You should essentially think of the IMF as a small office in the basement of the Pentagon, deciding what countries to support, and what countries are following policies that the United States do not want and therefore wants to wreck. That explains why the IMF will give loans to completely non-creditworthy countries such as Argentina under the dictators, or the Ukraine with no visible means of paying off the debt.

The loans to Ukraine, the loans to Greece recently that ended up bankrupting it, the loans yet again to Argentina have demoralized the IMF staff.  They complained that every forecast they make shows that the debts can’t be paid, but the IMF continues to make them anyway. The IMF has become a pariah among competent financial analysts throughout the world. The United States is still trying to force countries into the IMF as a means of controlling them, saying “Either you engage in a pro-American war against labor and [engage in] neoliberalism, or the alternative is wreckage.”

Ironically what’s changing all this is the United States’ cold war against Russia and China. The United States has begun to impose sanctions on the Russian and other post-Soviet economies, and on China. This is driving them into a position where their only defense is to do what Britain could not do in 1945L to create an alternative economic order with its own rules. So for the last five years or so China, Russia and other countries are discussing how to de-dollarize their economy.

What do they want to do? They say: “The first thing we have to do is we don’t want to hold our international reserves in loans to the U.S. Government, because that finances the United States military deficit, building its 800 military bases all around us, to try to threaten us militarily. If we withdraw from this international financial system based on the U.S. dollar free-lunch, then dollars can’t be spent ad infinitumwithout any constraint on military policies that we don’t agree with – right-wing and anti-labor policies that we don’t agree with. So we’re going to take the lead in creating a new grouping – China, Russia, Iran, the Shanghai Cooperation Organization members basically – to do this.”

They’re trying to do what the world began to talk about doing in 1933 at the London Economic Conference: “How do we make a fair system?” What Keynes outlined his plans for Bretton Woods in 1944, his alternative was the Bancor. He said there should be a central bank that can make loans, creating fiat money to enable deficit countries to pay. So that if they ran a balance-of-payments deficit, they wouldn’t have to impose austerity. Austerity and anti-labor policies never enable a country to pay debts. It makes them less able to pay, and even more dependent on creditor countries. So the Chinese and Russians are discussing today “How do we create a currency, a central bank that will help us actually develop? We’ll use international reserves to promote the industrialization and the upgrading of labor and public infrastructure investment, instead of the U.S. demand to privatize infrastructure development and sell it off to foreign rent-seekers.”

What China and Russia found out very quickly is what initially seemed to be an economic rivalry between America and China and other countries was not really an anti-China rivalry as such. It’s a conflict of economic systems. The conflict is between neoliberalism – a financialized world order that wants to privatize all infrastructure and create monopoly rents for transportation, education, healthcare, like what occurs in the United States – and having these basic investments in the public domain, to be subsidized and their services provided at minimum cost. The question at issue is what kind of economy the world is going to have. Will it be a neoliberal economy, a privatized economy – Reaganized, Thatcherized and financialized, organized by central planning in Wall Street – or is the government going to plan?

China and Russia do not want a centrally planned economy anywhere near as centralized as the United States is promoting with Wall Street. In the United States the center of economic planning has been shifted from Washington to Wall Street financial institutions. Banks create credit not to create new means of production, not to build new factories and plant and equipment, but essentially to extend credit against assets already in place. Eighty percent of bank loans in the United States and in England are mortgage loans for real estate, against real estate that’s already in place. I think three percent of mortgage loans are for new construction as long as these loans are already collateralized with promises to buy apartments etc.

So the question is what kind of financial system are you going to have to back up a central banking system and credit creation? Is credit going to be a public infrastructure enterprise as it is in China, where the banks of China are able to decide who is going to get the loans. A public bank is not going to make corporate takeover loans or loans to corporate raiders. It’s going to make loans to actually increase the tangible economy, not to take it over and turn public infrastructure – the education system, healthcare, transportation and communications – into rent extraction.

We’re having today finally a revival of the kind of debate that classical economics was all about in the 19th century – Adam Smith, John Stuart Mill, down through Marx and Alfred Marshall. At issue was how to minimize unearned income as economic rent. At that time, the main form of economic rent they were trying to minimize was land rent. The idea was to get rid of the hereditary landlord class, which was treated as a form of overhead. In today’s economy the main rentiersare financial. There’s not a landlord class anymore, because two-thirds of Americans own their own home (on credit, to be sure). Home ownership rates are higher in continental Europe and England. You don’t have a hereditary landlord class living off land rent. What you do have is a financial class that’s emerged after World War I in a way that they have become the new central planners. It’s a new concentration of wealth, engaging in a new kind of economic war, not only against labor but against government as well, to appropriate the public domain by financializing it. This is done by getting governments into debt and having them sell off the public infrastructure. That’s happening in America at the state and local level, for indebted cities and states like New York.

How do China and Russia avoid their economies becoming financialized? How do they avoid a financialized economy from becoming a high-cost economy and losing their international trade advantage? What’s at stake in de-dollarization is how to create an alternative to a financialized, dollarized economy, one that is going to try to minimize the cost of living and minimize the cost of doing business, instead of a high-cost economy as is occurring in the United States.

The answer they have is that to some extent there’s going to be gold as a means of settlement. But most of all China, Russia, Iran, and other countries are going to mutually hold each other’s trading currencies. They’re replacing dollars with gold and with each other’s currencies. That essentially is the response that the world could have taken after World War One and didn’t, and could have taken after World War II if it had followed Keynes’s policies. Finally, with the help of Donald Trump isolating China and Russia, U.S. diplomacy is creating an independent bloc and helping them do what was unthinkable in the past.

Oscar Brisset:

Great, thank you very much. We’ve got some questions coming in.

To start off, yesterday Joe Biden was inaugurated, making him the 46th President of the United States. What are your expectations regarding his stance on China? We’ve heard him talk a lot about democracy as a guiding foreign-policy principle to distinguish between what is good and what is bad for the U.S. Which measures are likely to be used to advance the USA’s interests: will it be tariffs, sanctions or could we even see a military buildup and embargoes?

Prof Hudson:

The question is, what arethe U.S. interests? Again and again in the 1920s, the 1930s and today, the U.S. Government interests were the opposite of U.S. industrial interests, opposite of U.S. economic interests. Just because the Biden administration has an emotional hatred of Russia does not mean that it’s in the U.S. interest. The Biden administration said, “On second thought we’re not going to join the Iran agreements because we’re going to talk to Israel first,” and Blinken, his neocon Secretary of State, said that we won’t do anything without Israel’s approval regarding Iran. Biden also said that the United States will not do anything about solving the world problem of global warming that the oil industry doesn’t like, because basically what’s called the “interest of the United States” is that of his political campaign contributors. So almost his first act was to approve more oil drilling. Here we have Supreme Court’s Citizens United ruling that lets campaign contributors dominate U.S. policy, not the voters. The American voters were not given a choice in this election. Biden did not do well in the early primaries and Kamala Harris got only one percent of the primary vote.

Polls show that what American voters want is basically a Bernie Sanders type policy. They want what you have in Europe. They want public healthcare, universal healthcare. They don’t want to have to pay 18 percent of America’s GDP for medical insurance and medical expenses, because there’s no way that American industry can compete in markets and American labor be employed in export industries, having health care monopolies protected by successive administrations.

The American public didn’t want the Obama administration to evict 10 million American families, and it looks like the Biden administration is going to outdo Obama. Biden basically says, “We’re going to evict another 10 million American families. What Obama did I can do more.” Many families have not been able to pay the rent or even pay the mortgage if they’ve been unemployed or if their income is reduced because of the Coronavirus. There’s going to be a huge wave of evictions in the United States that will be even larger than the Obama evictions.

The Obama evictions were targeted mainly against Black and Hispanics, who were the victims of the junk mortgage loans. Biden has made a point of appointing many Black women and men to administer positions as a cover story for the fact that his policies are going to be just as viciously anti-Black and anti-minority and anti-Hispanic as the Obama administration’s were. They found that as long as you can have identity politics front and center you can do whatever you want economically to crush the people that you pretend to be representing in identity politics.

Nobody can see really any way in which the American economy can recover. The stock market can recover. because the Federal Reserve credit and quantitative easing has been going into supporting stocks and bonds, including junk bonds. Sheila Bair wrote a Wall Street Journaleditorial on that. But the underlying economy is shrinking rapidly while the stock market’s going up. That’s what the American economists call a K-shaped recovery – up for the One Percent, down for the 99 Percent.

Oscar Brisset:

I’m going to ask one more question on the China topic and then talk a bit more about historical things you mentioned. China has been building up a network of support and trade deals to drive its expansion. You mentioned some of the policies. It’s also been growing its presence in the U.N. system and even putting together alternative international organizations like the Asian Infrastructure Investment Bank. Is there a line that the U.S. would not tolerate China crossing, after which the U.S. would start devoting much larger resources and spending to contain China, or is the U.S. already at full power?

Prof Hudson:

The United States is muscle-bound. Despite its huge military budget it can’t field an army. It has a foreign legion. ISIS, for instance, is part of its foreign legion. The European NATO is part of its foreign legion. But there’s no way American can ever have a land war again, so you can never invade and conquer a country with a military army. All America has is the Atom bomb, and that’s muscle bound. It cannot go to wage any kind of war except atomic war. There’s nothing in between.

I think Russia and China know that, and Russia at least has taken steps to protect itself and said, “If the United States wants atomic war, we’ll be wiped out but it’ll be wiped out too, and Europe will be wiped out.” I think probably the first exchange would be to wipe out England and Europe, to say “We don’t want to go to war with you and really blow up the world, America. Let’s just show you what we can do. Let’s blow up England and Europe so at least you won’t have your colonies there.” If America persisted, it would be the end of the world. Will America really do that? There was worry that Donald Trump would do that so he could go down in history as the man who destroyed civilization, but I don’t think other people are going to do that.

Oscar Brisset:

Moving now into some of the historical things you mentioned, for example in the 19th century the most powerful European empire was the British Empire. I am trying to see if there’s a parallel between the UK and the American. Did the UK establish such currency dominance similar to the one the U.S. has today? Did it use similar methods to the U.S. to establish its dominance, for example creating international organizations in which it had an institutional advantage, or for example through the control of key energy deposits?

Prof Hudson

England thought that it was establishing currency dominance with the Sterling area. In other words it would spend money abroad and other countries would save their money in Sterling. All during the 1930s the surpluses earned by India and by other members of the Sterling area were basically kept in London, paid to England. But then England ran a deficit with the United States so ultimately the benefit of England’s Sterling area, the financial benefit, was all spent to the United States already in the 1930s. You can look up the balance of payments articles on that.

In 1945, as I mentioned, England thought, “We have 10 billion Pounds of all the savings of Argentina and India, countries that have been providing the raw materials for the World War that we fought, World War II. Now there is going to be a demand for English exports and we can recover by employing our labor to make exports.” But the terms of America’s British Loan said: “No, you have to open up the Sterling area and let these countries cancel their contracts with England.” England had long four-year and five-year capital purchase contracts from India, Argentina. “They can cancel them all and buy from the United States”. England went along with that. So the attempt to create a currency area was smashed by the United States.

Ever since the 19th century America looked at England as the great rival, not the Soviet Union. The Cold War in the 19th century was against England. The fight for protectionism in the United States went so far as to create state colleges and universities that would teach an alternative to Anglo-centered free-trade economics and Anglophile moral philosophy. There was a feeling in the late 19th century of America creating a new civilization and it would not be the religious-based, unscientific civilization of Europe. It would be a new secular civilization. That feeling of a new civilization in America is what led Americans to think, “We will never let other countries tell us what to do because they’re part of the decadent old world and we’re the new world. We’re going to make our own rules.”

Oscar Brisset

You also discussed Bretton Woods. Would it be beneficial to recreate, very hypothetically, a system similar to the Bretton woods one today? I think a key question that underlies that is, “Does the country that runs such a system reap a benefit from running it or are they just constrained?” Will there be an interest for China to set up such a system?

Prof Hudson

They realize that they cannot set up any system in which the United States is a member because the United States will insist on veto power. If it has veto power, then they can’t do the kind of economic system that I described. Bretton Woods was designed one-sidedly to give all the benefit to the United States, and to make other countries dependent on the U.S. economy, on U.S. exports – largely of agriculture, but also industry – and also on the U.S. dollar. Obviously, that’s not going to be done. The agreement that is being developed on an ad hocspontaneous basis between China, Russia and neighboring countries is their own system of international payments that will be based on mutual benefit, of holding of each other’s currencies, of preventing any payment surplus country – and it could be China – any payment surplus country ending up with so much credit in a creditor position vis-a-vis debtors. The new system will not impoverish the debtors.

The IMF system was designed to impoverish debtors. The purpose of the IMF was to make other countries so poor and dependent on the United States so they could never be militarily independent. In the discussion of the British loan for instance, in the 1930s the discussion in the London Economic Conference was, “Yes, we’re bankrupting Europe, but if we give Europe enough money to avoid austerity, they’re just going to spend the money on the military.” That was said by the Americans in the State Department and the White House again and again, especially by Raymond Moley who was basically in charge of President Roosevelt’s foreign policy towards Europe.

The question is: how do you create an international financial system designed to promote prosperity, not austerity? The Bretton Woods is for austerity for everybody except the United States, which will have a free ride forever. The question that I’m involved with in the work I’m doing in China and with other countries is how to create a system based on prosperity instead of austerity, with mutual support between creditors and debtors, without the kind of financial antagonism that has been built in to the international financial system ever since World War I. Financial reform involves tax reform as well: how do we end up taxing economic rent instead of letting the rentierstake over society. That is what classical economics is all about: how do we revive it?

Oscar Brisset

Final question: these austerity and anti-labor policies which the IMF imposes on countries of the global South seem to be well known practices from before the IMF was created, from what you’ve discussed. Did the IMF invent anything new? In addition, in the 19th century, was predatory lending something common, or was direct invasion always the go-to method for subjugating a territory?

Prof Hudson

The 19th century was really the golden age of industrial capitalism. Countries wanted to invest to make a profit. They didn’t want to invest in dismantling an existing industry, because there wasn’t much industry to dismantle. They wanted to make profit by creating industry. There was a lot of investment in infrastructure, and it almost always lost money. For instance, there was recently a criticism of China saying, “Doesn’t China know that the Panama Canal went bankrupt again and again, and that all the investments in canals and the railroads all went broke again and again?” Of course China knows that. The idea is that you make investment not to make a profit on basic large infrastructure. The 19th century was basically inter-state lending, inter-governmental lending, public sector lending. That’s where the money was made. The late 20th century was one of financialization, dismantling the industry that was already in place, not lending to create industry to make a profit. It’s asset-stripping, not profit-seeking

Oscar Brisset

Thank you very much for joining us today. Our next event will be on February 4thand we look forward to seeing you all then. Thank you very much Professor Hudson.

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    1. rosemerry

      Thanks so much, Yves for this marvellous interview and transcript, to be returned to many times as it is so full of useful information, most of which is not found elsewhere. Michael Hudson has such a breadth and depth of experience plus a way of expressing it that even those of us with little economic acumen can understand and appreciate it.

  1. PlutoniumKun

    Fascinating read. I love the historical depth of Prof. Hudsons analysis.

    Its always puzzled me as to why the UK establishment has always been so pro US when its been so clear the US did everything it could to break Britain as an economic power. Its financial policies after WWII were an astonishing betrayal of trust. The US essentially treated Germany and Japan better than it did the UK (although Japan was more an accidental beneficiary of Korean War spending). And yet still, the UK establishment has seen the US as a natural ally in a way that it never accepted continental European nations as such.

    One result of course is Brexit, which ironically was not (so far as I know) wanted by the US foreign policy establishment, as the UK was always a key instrument of control over Europe. I think one outcome of Brexit will surely be the Franco-German axis being less anglocentric in their outlook and more sympathetic to Russia in many respects.

    1. Patrick

      Brexit is capture into the US corporate sponsored neoliberalism – deregulation, privatization (eg. healthcare), financialization (again, think healthcare), austerity, etc. and an uncoupling from a Eurozone system that by comparison protects the public sphere as discussed by Hudson. Brits will now be eating M&Ms colored with cancer-causing artificial dyes rather than natural dyes as required in the EU

      1. Patrick

        Ps. I was waiting with bated breath to hear his response to questions about China but it seemed to me that when asked, Hudson talked about Russia (or other things). Dang.

        1. NotTimothyGeithner

          To a large extent, China isnt interesting. Its a less isolationist Middle Kingdom. The key to the Chinese centuryy isnt to replace the US in its hegemony status because no one wants that. Its too realign the world. A Russian autarky state without imperial status (such as the USSR) working with China solves problems for countries who want to dump the US but are worried about being overwhelmed by China. Russia is interesting because it straddles East and West and no the various power centers and did spheres of influence.

          Lavrov wasn’t running his mouth when he said the US only has vassals and enemies. It was an announcement of Russia becoming a junior partner to China.

            1. Yves Smith Post author

              No, because to achieve that, you need to be an importer, as in export jobs, to get your currency widely circulated abroad. China absolutely does not want that.

      2. PlutoniumKun

        The thing is, the UK has long been captured by neoliberalism (arguably, they invented it). The UK was the trojan horse for the worst forms of neoliberalism in the EU. Which is why I thought it was ideal for neoliberals wherever they were based for the UK to be in the EU. I think one problem is that the UK somehow regressed from neoliberalism to a dream of some form of old style 19th Century liberalism.

        1. Patrick

          My reading attributes the term (aside from an obscure French usage) and the ideology to Friedman and Austrian ex-pats Hayek and von MIses. When I think UK in the context of neoliberalsim, naturally I think Thatcher. So yes, at least since Thatcher neoliberalism has been the prevailing wind in the UK for which – imho – Brexit is both a symptom and a solidifier.

        2. jsn

          Slobodan’s “The Globalists” is a great look at Von Mises and Hayek peddling NeoLiberalism to to the last hereditary aristocracy standing in Europe in the interwar years.

          The Charlatan and Saint of NeoLiberalism didn’t really get traction until the US set up the BIS to help the Germans keep the debt cycle of dependence from the Versailles treaty liquid, with German payments through France and the UK back to the US.

          To my mind, this set up a deracinated pseudo-nazism, a comfortableness with exterminatory exploitation so long as it’s exercised though debt contracts, that has persisted to this day in Western finance, where debt is absolute but lives are fungible.

          1. Michaelmas

            Slobodan’s “The Globalists” is a great look at Von Mises and Hayek peddling NeoLiberalism to the last hereditary aristocracy standing in Europe in the interwar years.

            It’s Slobodian, Quinn.

            To my mind, this set up a deracinated pseudo-nazism

            So you’re on to something.

            Hayek is the Grandfather of neoliberalism and the primary influence on Hayek’s thought was the Vienna of his youth: the go-go years after Franz Josef surrendered to the Hungarians, created the dual monarchy, and there was the great cultural efflorescence of Vienna that preceded the Austro-Hungarian empire’s collapse.

            Two ideologies emerged after WWI from Austria in reaction to the traumatic experience of that collapse — ideologies formulated by Austrians that then deeply damaged the rest of the world.

            Neoliberalism was one, of course. The other? Well, someone once asked Ernst Hanfstaengl aka Putzi, Hitler’s confidant, what caused Hitler’s antiSemitism.

            Hanfstaengl replied: ‘Anyone who did not know Vienna before 1914 cannot understand.’ Hanfstaengl then explained that before WWI Vienna was full of beautiful people, the soldiers in their uniforms, the Hapsburg Empire’s citizens in their local traditional clothes etc and ‘then these strange people came from the East all dressed in black and speaking a strange kind of German’. These were the Orthodox Jews who came from Silesia, a part of the Austro-Hungarian Empire. Kaiser Franz Josef had done much to emancipate and help the Jews, so many crossed over to Vienna to start a new life.

            Now, to further put Hitler and Nazism’s policies in their historical context, it’s necessary to understand the situation in Germany prior to their appearance.

            In 1871, Bismarck had nationalized healthcare, making it available to all Germans, then provided old-age pensions as public social security. Child labor was abolished and public schools were provided for all children. The Kaiser implemented worker protection laws in 1890. After WW I, the Social Democrats’ influence had remained strong. Germany had an active union membership. An official “Decree on Collective Agreements, Worker and Employees Committees and the Settlement of Labor disputes” enabled collective bargaining, legal enforcement of labor contracts as well as social security for disabled veterans, widows, and dependents. In 1918, unemployment benefits were given to all German workers.

            In the 1932 elections, the Nazi Party didn’t have an outright majority. According to the Nuremberg Trial transcripts, on January 4, 1933, German bankers and industrialists had a secret backroom deal with then-Chancellor Von Papen to make Hitler the Chancellor of Germany in a coalition.


            According to banker Kurt Baron von Schröder:

            “In February 1933, as Chancellor, Hitler met with the leading German industrialists at the home of Hermann Goring. There were representatives from IG Farben, AG Siemens, BMW, coal mining magnates, Theissen Corp, AG Krupp, and others bankers, investors, and other Germans belonging to the top 1%. In this meeting, Hitler said, “Private enterprise cannot be maintained in the age of democracy.'”

            In 1934 the Nazis outlined their plan to revitalize the German economy with the reprivatization of significant industries: railways, public works project, construction, steel, and banking. Hitler guaranteed profits for the private sector; many American industrialists and bankers flocked to Germany to invest.

            The Nazis had a thorough plan for deregulation. The Nazi’s chief economist stated,” The first thing German business needs is peace and quiet. It must have a feeling of absolute legal security and must know that work and its return are guaranteed.” Likewise, businesses weren’t to be hampered by too much “regulation.” On May 2, 1933, Hitler sent his Brown Shirts to all union headquarters. Union leaders were beaten, and sent to prison or concentration camps. The Nazi party expropriated union funds — money workers paid for union membership — for itself.

            On January 20, 1934, the Nazis passed the Law Regulating National Labor, abrogating the power of the government to set minimum wages and working conditions. Employers lowered wages and benefits. Workers were banned from striking or engaging in other collective bargaining rights, and worked longer hours for lower wages. Their conditions so deteriorated that when the head of the AFL visited Nazi Germany in 1938, he compared an average worker’s life to that of a slave. .

            The Nazis also privatized medicine. One of Hitler’s economists was the head of a private insurance company. These private for-profit health insurance companies immediately started to profit from Anti-Semitism. In 1934, they eliminated reimbursements for Jewish physicians, which allowed them to profit further.

            And so on.

            Philip K. Dick once wrote a novel whose particular ontological riff was that the Roman empire never really ended and in the 20th century people lived in an imposed illusion under the same elite, or their heirs, that had headed the Roman empire.

            That sort of science-fictional novel could be written based on our own reality, riffing on the theme: The Nazis won.

    2. jsn

      Reading Blacks biography of Roosevelt, Hudson’s work, Talbot’s “The Devil’s Chessboard” and Douglas’s “JFK and the Unspeakable” one discerns a clear line between the UK interwar Foreign Office, military intelligence and rentier class and the Dulles brother’s post war ascent to the pinnacles of back room power.

      Before the war the brothers arranged IP shares between the soon to be contending German and Anglo-sphere industries, during the war they tried to arrange a separate peace with post Hitler Germany, after Roosevelt’s death and particularly in their con job on Truman, they made the CIA the collective tool of the transatlantic financial elite, David Rockefeller explicitly included.

      These books all rely extensively on previously lightly touched primary sources.

    3. ObjectiveFunction

      Well, Great Britain’s performance in the first half of the 20th century has hardly inspired America to treat it with much respect:

      1. Excepting their heroic 1940 defense of Britain, and beating an overextended (and mainly Italian) army at Third Alamein, they were either thrashed or bled white in every major battle of both world wars, relying on US armies/navies and materiel to prop them up. For all the eloquent theorizing, Britain’s strategies were visibly self-serving, beyond its power, or outright quixotic, not to mention criminally incompetent (Somme, Bengal, soft underbelly, etc.)

      2. Their vast colonial empire was becoming a crazy quilt of gigantic monocropped plantations and mines, increasingly nonviable as functional societies, and the locals knew it.

      3. The US, Germany and Russia had all eclipsed Britain as industrial powers and had overtaken it as an innovator as well, although it remained strong in this sphere with an influx of Eastern Europeans.

      ….So to the emerging American technocratic elites, by 1945 the Mother Country must have seemed a mere shell: still supercilious, but myopic, exhausted and consistently unable to walk its talk.

      (apologies to my British friends)

      Prof. Hudson, many thanks for another good read, although I do continue to feel you view China through very rose colored glasses. Harmony and fairness are rather different concepts, but I’m eager to hear more from you on this topic in the future.

      1. HotFlash

        Well, Great Britain’s performance in the first half of the 20th century has hardly inspired America to treat it with much respect:

        Well, move forward a half century and sub ‘US’ for ‘GB’ in your entire comment. Look familiar?

  2. Jonny Appleseed

    I am curious as to why Prof. Hudson does not describe the holding of mortgages by financial entities as de facto landlordism, even if it is decentralized and theoretically time-limited (tho’ not so with infinite re-fi and heloc).If the mortgage lenders are granted the monopoly of literally creating a debt on a ledger, rather than it being a public utility, and the benefits (read as: interest payments) accrue solely to those private entities, how is that substantially different than hereditary land title and rent? I concede that at the end of the lengthy mortgage term, the aristos cede the deed, but the parasitism is considerable, often over the entire working life of a person or couple.

    1. michael hudson

      My whole point, which I hope I’ve stated repeatedly clearly enough, is that “Rent is for paying interest.” The financial class today has replaced the 19th-century’s post-feudal landlord class.

      1. Mikel

        Loans are also taken out against financial assets such as stocks/bonds. Is that another reason for propping up the stock market to the bizarre levels now seen?

  3. Carolinian

    Great stuff. While some of us are resistant to using money and debt to explain everything, who can deny that this country has always been about money above all with a not altogether insincere love of freedom on the side. Perhaps that latter is the source of the “you’re not the boss of me” approach to the rest of the world that Hudson talks about.

  4. gsinbe

    Interesting and well-written. If I had the chance, I’d ask Prof. Hudson a couple of questions. I’m sure the powers that be see the same threats to their dominance as he does. What are they doing, or will they be doing to counter the movement away from US dependence? Second, the longer this transition takes, the more opportunities the US has to monkey-wrench the process. While you can’t build a new international order overnight, I’d think Russia, China, Iran, et al. would be moving on this with some alacrity. Any educated guesses at how long before these countries wean themselves from the dollar?

    1. JTMcPhee

      One wonders whether there might be some vigorous recourse to uranium/plutonium as a basis for US hegemony, more so than is being patently done right now. The activities of the CIA and related entities, and the (feckless) application of Imperial military force in a (vain) attempt to establish a unitary “force structure” through “coalitions” of “interoperable” national militaries and national police forces doesn’t seem to be working out too well, except for those whose rice bowls it fills and who keep the idiocy going.

      What’s the end point for all of this churning, one wonders? Maybe there’s a sense that it’s just a death wish working itself out…

  5. ex-PFC Chuck

    Although I’m more text than video oriented, this time I watched the latter first instead of reading the transcript. It was like sitting in a master class about the ongoing pernicious influence of the American financial sector on our country’s foreign policy since early in the 20th century. Even if you’ve already read the transcript you should watch the video as well.

  6. Richard H Caldwell

    Thank you again for consistently posting Michael Hudson’s appearances and work. I first learned of him through NC, and have ready many of his books, including “And Forgive Them Their Debts…”, one of the most-difficult to get through books I’ve ever read. It was worth it.

    The breadth and depth of his experiences and scholarship is mind-boggling. His insights are incredible and captivating. I put him, along with Daniel Ellsberg, in the category of Living National Treasure. They were both witnesses at the center of power, Zelig-like, during many key periods in our history.

    I look forward to re-reading Super Imperialism in the new edition. I think Hudson in China will be like W. Edwards Deming in Japan after WWII, in that he is only taken seriously by people outside the U.S., while here his insights are unwelcome and inconvenient. Just as Japan showed the U.S. how to manufacture in the post-WWII period by adopting Deming’s insights about quality, so Hudson will show China how to construct an equitable alternative to the U.S. dominated global payments system in the 21st century.

    It makes me sad to look back over the long arc of U.S. history and count the many lost opportunities to lead in building a more equitable and sustainably-prosperous planet. Michael Hudson’s work gives me a glimmering of hope.

    1. JTMcPhee

      I’d not be hopeful that the Chinese rulers are any more interested in a more equitable and sustainably-prosperous planet than the Gotterdammerungers who fill out the financial-military-“security”-policy elite in the US Empire.

  7. Dftbs

    As always Professor Hudson is great, thank you for sharing this. I would note that it goes very well with the subsequent post on the site, dealing with negative rates.

    I’d quibble ever so slightly with two things, the first the historical vacuum with regards to the Soviet Union and communism as a historical force which shaped the contours of this American system. The submission of the British Imperial system to the American one was driven by the fear of communism, not necessarily Soviet Communism but even the domestic sort. The American distaste for the overt imperial structure of the UK wasn’t driven solely by economic sadism or democratic character, but the fear of communism as the vanguard of anti-imperialism: America and the UK as best of allies, but leave the Suez alone or Nasser will go commie.

    The 2nd quibble is that the American collapse in this regard is already well underway. While I love profesor Hudson’s historical analysis I disagree with his economic determinism. The notion that the system whose creation he described was guided by actions bounded by the rules of economics. And that the next stage of historical development will follow those rules just in different contexts. As opposed to understanding that those rules are largely artifice.

    Beneath the economic collapse, the conundrum the US finds itself in is that of its ruling class. As opposed to the British ruling class which understood that submission to the American system would protect their ancient privileges. The American ruling class can’t find the same concordat with China. The Chinese are communist, and as Jack Ma’s case demonstrated to the world recently. They aren’t intimidated by the myths around wealth that sheepishly guide Americans.

    So those same rules that governed balance of payments and modified American behavior throughout the Cold War don’t apply today. They only applied then because they reinforced the interests of the American ruling class. As a matter of fact they subverted those very rules quite easily, note the talk of negative interest rates on the site today.

    The Chinese BRI initiative seems less about generating profit for China and more about exposing the inadequacy of the current dollar system.

    Professor Hudson correctly notes that the US is powerless against this. It can only act via proxy and those have been neutralized, see Syria. And that both Russia and China now are just trying to manage American decline and avoid the only American option left, nuclear war.

    1. rosemerry

      I often wonder if the “threat of communism” was genuine, as if there could not be cooperation among states with different systems of government. This is seen in the continued hatred of Russia in the last thirty years when it is no longer communist-in fact I think that Pres. Putin seems to be a far more Christian leader than any in the USA or other Western powers!!!
      The arrogant attitude to Russia in the recent development of vaccines, when derision and skepticism a few months ago are replaced by amazement and acceptance now that the “West” has realized that the sputnik V seems to be among the best vaccines available. The USA does not yet seem to realize that the Russian defense (yes it IS for defense) is actually effective, unlike the US aggressive actions.

      1. Dftbs

        I think it was genuine if you were “Lord something or other” or a Dulles brother. That’s not to say the world would’ve suffered from it. Simply those predecessors of our current tormentors may have suffered from it.

        I think the interesting thing is that, for the US, that ship has sailed. There is submission to it, but no cooperation with it; and I doubt there ever will be again.

      2. jrkrideau

        This is seen in the continued hatred of Russia in the last thirty years when it is no longer communist

        I often get the impression that Western, US in particular, politicians and political analysts have failed to grasp that the USSR has collapsed and that one part of it, the Russian Federation is now a capitalist country.

        We also have to remember that the USA elite always needs an external enemy to blame. The loss of the USSR must have been traumatic and they have substituted the Russian Federation in its place.

        1. Krombopulus Michael

          Remember during Bush Snr’s time, the “Peace Dividend” now that the Cold War had been ‘won’? Yeah, turns out that reallocating massive funds for the military into other projects (god forbid, infrastructure, world power grid, you name it) was not in the cards. Though I think to myself that if Halliburton were in the business of building residential homes, we’d probably be required to have 2 for each person in America just to keep the contract shored up. We’ve kept up (R or D administrations) massive amounts of interventions (and death) going for no real benefit to the avg citizen over the last 30 years.
          Peace (or sanity) was never an option for US policy.

    2. Guy Brandenburg

      I disagree that the Chinese government is communist. They have more (corrupt) billionaires than anywhere else. State capitalist instead.

  8. Nels Nelson

    I am curious to know Professor Hudson’s thoughts on the role U.S. banks (i.e. J.P, Morgan) played in the US entry into WW1 and the creation of the Creel Committee propaganda campaign.

    With Russian withdrawal from the eastern front giving Germany the ability to transfer resources to the western front, it became highly probable that Germany would win the war and US banks would suffer considerable losses.

    In other words was US entry into WW1 a bailout of Wall Street.

    1. Mikel

      It’s never lost on me how the establishment of the fed was in a knick of time for the outbreak of the big number 1.

    2. Yves Smith Post author

      World War I and the end of the Gold Standard due to the inability to ship gold greatly diminished the power of the House of Morgan. JP Morgan had been the conduit for foreign capital into the US. He was trusted as a vetter of promising investments. That role became less important and less profitable after the US became a creditor nation. World War I accelerated that process.

  9. Glen

    Wow, great post.

    Are China and Russia are working to establish currency exchanged based on gold again?

    And what actions should President Biden take to reform our finance system? (Note: I know he told Wall St he would not change anything, but let’s assume in a fit of sanity he tries to do some reform.)


  10. Alex Cox

    This is a great piece, but I’m not sure its nuclear war-fighting take is accurate. If the US and Russia engage in nuclear war, there is no way it can be limited to Europe and the UK. France and England have hundreds of nukes of their own. The atomic destruction of Europe would result in a nuclear winter of indeterminate length and disastrous consequences.

    Orange Man Bad actually asked an interesting question re. US nuclear policy: does the US really want to start an atomic war in order to ‘defend’ Lithuania or Japan? Would it not make more sense for them to acquire their own nukes, or [fill in saner alternative]?

    1. HotFlash

      I think that what Prof Hudson points out is true: The US has not won any land war since (at the least) 1948, they have not the smarts to win an economic war (as have the Chinese), and the only arrow in their quiver is E=mc2. Talk about bringing a nuke to a knife fight!

  11. Edward

    The discussion about how Bretton-Woods was designed to benefit the U.S. sounds similar in spirit to how the E.U. was designed to benefit Germany. Are there parallels between Bretton-Woods and the design of the E.U.?

  12. Susan the other

    It’s interesting to me, my own interpretation of this history of super imperialism, that the lesson we have finally come to, the big takeaway, is that national sovereignty is extremely important. It has been the missing cog all throughout the push of neoliberalism in the 20th C. And national sovereignty is now having a renaissance. Because the missing element, the one almost made extinct by super-neoliberalism, is sovereign money and direct spending. Our financial rube goldberg world became too specialized to survive.

  13. Mikel

    Re: “Epidemic of Despair Could Haunt America long after ….” NC post from a couple of days ago.

    Mikel February 4, 2021 at 1:23 pm
    “As long as there are plenty of countries around the globe with suppressed development, they don’t need to improve the lot of most citizens here.”

    It’s like this post provided a link to expound on that statement.

    Good info presented here and much to keep in mind for further review. And…

    I don’t know if I share the confidence that the devastating arsenal in the USA is in or will remain in the hands of “stable” elites. With the levels of delusion and corruption so apparent, I would need more convincing. The end of, or viable threat to, their status and/or the outrageous wealth for some is equivalent to the end of the world for them. And…

    “Is there a line that the U.S. would not tolerate China crossing, after which the U.S. would start devoting much larger resources and spending to contain China, or is the U.S. already at full power?”


  14. Dftbs

    As always Professor Hudson is great, thank you for sharing this. I would note that it goes very well with the subsequent post on the site, dealing with negative rates.

    I’d quibble ever so slightly with two things, the first the historical vacuum with regards to the Soviet Union and communism as a historical force which shaped the contours of this American system. The submission of the British Imperial system to the American one was driven by the fear of communism, not necessarily Soviet Communism but even the domestic sort. The American distaste for the overt imperial structure of the UK wasn’t driven solely by economic sadism or democratic character, but the fear of communism as the vanguard of anti-imperialism: America and the UK as best of allies, but leave the Suez alone or Nasser will go commie.

    The latter is that the American collapse in this regard is already well underway. While I love profesor Hudson’s historical analysis I disagree with his economic determinism. The notion that the system whose creation he described was guided by actions bounded by the rules of economics. And that the next stage of historical development will follow those rules just in different contexts. For instance does China

  15. Hayek's Heelbiter

    Typically awesome and informative, but one quibble.

    Home ownership rates are higher in continental Europe and England. You don’t have a hereditary landlord class living off rent.

    Hudson surely must be familiar with the English leasehold / freehold system, a holdover from the Norman invasion. I don’t own my flat, the council as the freeholder owns it. And when my lease expires, the council owns my flat.


    Half of England is owned by less than 1% of its population, according to new data shared with the Guardian that seeks to penetrate the secrecy that has traditionally surrounded land ownership.
    The findings, described as “astonishingly unequal”, suggest that about 25,000 landowners – typically members of the aristocracy and corporations – have control of half of the country.

    Had Hudson said, “…Europe and Scotland,” he would have been correct, as leasehold/freehold has been abolished in Scotland, and when you buy a property, it is 100% yours.

    1. michael hudson

      Leasehold and ground rent are also being phased out in England. I know London owners of flats in buildings that have bought back the leaseholds so the home is owned free and clear. This is spreading.

      The land concentration in England is largely rural. That is mainly because in the 1930s, some well-meaning parliamentarian made rural property exempt from the estate tax, ostensibly to help “family farming.” Wealthy families have bought up the rural land to avoid the estate tax.

      1. Hayek's Heelbiter

        Respectfully as I think you work is awesome and groundbreaking.

        Yes, leasehold is changing slowly. But mostly in new builds after various leasehold scandals. Existing leaseholders in older units don’t see much relief on the horizon. I know, I’m a member of the National Leasehold Campaign living in a flat whose freehold is owned by the council.


        And as far rural ownership of land, you might be interested in the following article about Hugh Richard Louis Grosvenor.

        The new seventh Duke of Westminster has inherited his father’s £9bn estate at the age of just 25 and has been described as now owning “half of London”.

        He owns the freeholds, and ultimately, whatever sits atop them.

        In any case, keep up the fantastic work.

  16. barnaby33

    While I really enjoyed some the professors points of view, he seems to rob agency from EVERYONE but the US. WWI wasn’t started by us. The US had nothing to do with it and entered quite reluctantly. Another point, gold standards are inherently deflationary. Not just public debts get harder to maintain, private ones too. Russia, Iran, China! Anytime these 3 countries are mentioned, let alone in the same sentence, you know some batshit crazy stuff is about to be said. America is indeed an empire, an economic one which has kept a mostly peaceful century. China, and Russia are absolute exporters of war. True we were dumb enough to believe that by admitting China to the global dollar denominated trading system we could buy them off or get them to slowly democratize, but that hardly makes us evil.

      1. barnaby33

        Russia is actively engaged in subverting it’s neighbor Ukraine, you’d kind of have to really not pay attention to that one. They invaded Crimea, which despite their point of view wasn’t theirs. They are constantly propping up Syria and did so long before the US came along. Russia was one of the legs of the great game of the 19th century.

        China itself is an agglomeration of conquered peoples and not conquered in ancient times. Take Tibet for instance. They are also actively pushing their de facto borders out with India and Pakistan. Chinas neighbors are scared enough of the ham fisted resource grabs that China is engaging in in the South China Sea that they are willing to come back to the fold of US hegemony to fight it. China invaded Vietnam in 1980. Chinese company’s actively foment war around the world in that their state diplomacy is to trade for resources and never insist on human rights. In most places around the world this ends up benefiting kleptocratic rulers while immiserating the people.

        That doesn’t excuse our bad behavior but lets put some perspective in place.

        1. Acacia

          You might take a break from the U.S. state dept’s line on Russian foreign policy, as it has been ventriloquized through the NYT, WaPo, et al. I have spoken with residents of Crimea who laugh at the claim that they were “invaded” — have you?

        2. ObjectiveFunction

          Umm, which Ukraine are we arguing about here again?

          Ukraine (Okrajina, etc.) means ‘borderlands’ in old Slavic, which is relative to the heathen Tatars (Mongols) and Turks.

          The actual Ukrainian heartland is the Dnieper river basin, the Viking raiding and trade route that linked the Bug headwaters (Belarus), skirting the Pripyat marshes, to the Byzantine outposts that are now Odessa and Crimea. The Kievan Rus subjugated local Slavs (hence the word ‘Slav’) and then interbred, with Cossacks (Tatars), Jews, Germans, etc. mixing in over centuries. So while Ukies are ethnically distinct from Russians, it’s more like Scots (more Viking blood) vs. Irish than say, Scots vs. English.

          That said, the Kievan Rus gentry began ‘Russifying’ in earnest with the 16th century rollbacks of the Tatars by Muscovy. They also had deep links though to their Carpathian neighbors (Poland, Wallachia, Vojvodina), which also floated back and forth between Austrian and Russian satrapy.

          The steppes of east Ukraine (the Don basin) were empty wastes, at best pasturage, until the agricultural and mining revolutions of the late 18th century. This brought in a further influx of Russian soldiers and settlers, even though these lands were ‘Ukraina’ for adminstrative purposes. So ‘East Ukraine’ is a Russian colonial project, although to be sure a lot of Ukrainians (and others) settled there.

          During Soviet industrialization and postwar repression (Cossack deportation, etc.), Stalin and then purposefully settled even more Russians in urban oblasts, where they now form solid majorities. Ukraininian Russophile Khrushchev enacted ambitious affirmative action programs to weld the nations together permanently, but by Chernenko’s time it still hadn’t been achieved. As we see today.

          So all this is to say, it’s futile to make, still less to execute, grand statements about sacred Ukrainian ‘nationhood’ based on Czarist or Soviet mapwork, or at the other end, unlimited ‘rights to self determination’ for any group well armed enough to demand them.

          Is a core US or EU interest served by mucking about in this stew? Hell no! Are Ukrainian claims to Crimea or Kharkov as its inviolable mother soil based on anything real? Meh, show us your Turco-Mongol DNA. Even then, so what?

          But that doesn’t make the Russian agenda (arming paramilitaries creating ‘facts on the ground’) benign either. Nor does it mean there is no Ukrainian nationhood beyond what ‘Langley’ bamboozles local skinheads and oligarchs into imagining.

    1. Edward

      “America is indeed an empire, an economic one which has kept a mostly peaceful century.”

      Are you kidding? The U.S. has been at war in one form or another for most of its existence. Some people credit Trump as one of the few presidents that hasn’t started a new war. (Yes, this is debatable, but it is a measure of how belligerent the U.S. is.)

      “China, and Russia are absolute exporters of war.”

      I don’t see signs of this today. Russia is responding to U.S. aggression in Ukraine and assisting Syria fight a Jihadist insurrection which has been supported by the U.S., Saudi Arabia, Israel, and Turkey. That hardly qualifies as being an “exporter of war”.

    2. The Historian

      “True we were dumb enough to believe that by admitting China to the global dollar denominated trading system we could buy them off or get them to slowly democratize, but that hardly makes us evil.”

      That is an odd statement. When has the US ever been interested in ‘slowly democratizing’ any other country? Wasn’t the US’s real interest in China purely to get access to its markets and make more wealth for our corporations?

    3. jsn

      Pax Americana:
      US clandestine agencies, and the State Department and Pentagon to varying degrees, have been involved in non-stop regime change efforts towards the global integration of populations and resources in this system of private, capitalist control. Mostly successful since WWII, these efforts began with Greece in 1948, followed by Syria in 49, Albania from 49-53, Iran in 53, 54 Guatemala, Syria again in 56, Haiti in 57, Indonesia 57, Laos 58-60, Cuba 59-present, 59 Cambodia, 60 Ecuador, 60 Congo, 61 Dominican Republic, 62-64 Brazil, 63 Iraq, 63 South Vietnam, 64 Bolivia and Brazil, 65 France, 65 Indonesia again, 66 Ghana, 67 Greece again, 70 Costa Rica, 71 Bolivia again, 73-75 Australia, 73 Chile, 74 Portugal, 75 Angola, 75 Zaire, 76 Argentina, 76 Jamaica, 79-89 Afghanistan, 79 Seychelles, 80-92 Angola again, 80-89 Libya, 81-87 Nicaragua, 82 Chad, 83 Grenada, 82-84 South Yemen, 82-84 Suriname, 87 Fiji, 89 Panama, 91 Albania again, 91 Iraq, 93 Somalia, 99-2000 Yugoslavia, 2000 Ecuador again, 01 Afghanistan again, 02 Venezuela, 03 Iraq again, 04 Haiti again, 07 to present Somalia again, 11 Libya again, 12 to present Syria for a third time, 14 Ukraine, Brazil again in 16 and Bolivia and Ecuador in 2018. Ongoing destabilization efforts are underway in Venezuela, Iran, Russia and China.

  17. Susan the other

    I thought Christine Lagarde had her nerve saying the US had an exorbitant privilege by owning the reserve currency. After WW2, according to a better view of our goals, the United States wanted a Pax Americana. We wanted to actually police the world and bring all boats up with a rising tide of prosperity via free trade. We had been too frustrated by tariffs imposed on our goods by the old empires, specifically the British Empire for too long. It makes some sense that we willing bought everyones manufactured goods and went into a big deficit to do so because holding the reserve currency we made money on loans and financial services to make up for it. All the while controlling foreign military dust ups. And for a while, through the 50s, we manufactured all sorts of things. Interesting to learn that the funding from having the reserve currency paid for the military. (and for the FIRE industry too) It makes sense knowing this because the military and finance can get anything they ask for from the budget. Nothing is too much. Because the money coming in, as protection money for our military, more than covers it. But when it comes to sufficient social spending, there has never been enough. The Empire always neglected its home base. Other countries do not operate that way. So Ms. Lagarde, I’d hardly call that exorbitant. It was simply two separate economies.

  18. Janet L McCarter

    I adore, Michael! He is one of the very few Economists that actually tells us the truth, the history, and what may be coming. I wish we could all come together like a Reddit Team, and make our Country whole again with his guidance of Monetary Policy!

  19. VietnamVet

    The Powell Memo and Ronald Reagan/Margaret Thatcher counter-revolt that seized the Western Empire merged new money within the neoliberal framework of the Austria-Hungarian Empire’s surviving intellects together with the old money plantation caste to create a supra-money-making global autocracy. This superseded democracies that were bought and subjugated.

    The fatal flaw was that the new/old aristocracy firmly believed that government (especially democracy) is a hindrance, pointless. As a result, the US federal government failed on 9/11, let coronavirus become endemic, threw its essential workers into the trash, and has had two fiscal crises in 12 years. Government is necessary. Without it, the Rich and Middle Class are vulnerable to the chaos that the poor already live with.

    For the Long Island Hamptons to survive; democracy, the rule of law, and good government are necessary. Blaming 75 million Trump voters and Russia will only bring on a civil or a world war. This is a multi-polar world again. The withdrawal to North America, and a return to peace and health, is the only survivable future.

  20. Sound of the Suburbs

    Why does China have an advantage?
    Chinese policymakers aren’t using that dodgy, old, 1920’s neoclassical economics are they?
    You can tell because they are making all the classic mistakes everyone makes with this economics.
    The Chinese are then doing something we don’t see elsewhere.
    They are learning from those mistakes.

    Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
    The black swan flies in under our policymakers’ radar.
    They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
    The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.

    A year later, and they had made further progress.
    Davos 2019 – The Chinese know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.
    They had pumped bank credit into areas that don’t grow GDP, and the private debt-to-GDP had risen to a level they were on the verge of a financial crisis.
    Everyone does that with neoclassical economics, but they don’t usually see the financial crisis coming, like the US in 1929 and US, UK and Euro-zone in 2008.

    The Chinese wanted to increase internal consumption, but they were using neoclassical economics and let real estate rip.
    The equation makes it so easy.
    Disposable income = wages – (taxes + the cost of living)
    The cost of living term goes up with increased housing costs
    The disposable income term goes down.
    They didn’t have the equation, they used neoclassical economics.
    The Chinese had to learn the hard way and it took years, but they got there in the end.
    The Chinese have now realised high housing costs eat into consumer spending and they wanted to increase internal consumption.

    Someone from the CBI (Confederation of British Industry) has just seen the equation.
    Disposable income = wages – (taxes + the cost of living)
    Two seconds later …..
    They realise the UK’s high housing costs push up wages and are actually paid by the UK’s employers reducing profit.

    Employees do get their money from wages, so employers are actually paying through wages.
    Everyone pays their own way.
    Employees get their money from wages.
    The employer pays the way for all their employees in wages.
    Off-shore from the West ASAP to maximise profit.

  21. Keith Calder

    The equation comes from Michael Hudson’s work.
    He looks at how this affects workers.
    No one cares about workers, so I have looked at it from an employer’s perspective.

  22. Pelham

    Perhaps US flyover should consider something like China, Russia and Iran are considering: a currency and investment system separate from the dollar that invests in asset building rather and asset stripping. I’ve been thinking along these lines for a while, also believing that it’s impossible and loopy to boot. Maybe not.

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