Yves here. I have to confess to not being at all keen about the discussion of dedollarization. It seems most commentators are adopting one of two positions, either defending the dollar or eagerly predicting a quick demise.
This is not how this kind of transition happens. As we stressed, it took two world wars and the Great Depression to dethrone sterling. The fact that countries are succeeding in reducing their attack surface to US sanctions by engaging in more bilateral trade does reduce the perception of US power (keep in mind sanctions never worked as well as the PR would have you believe).
The fact is that trade-related foreign exchange flows are a tiny fraction of investment-related foreign exchange trading. The level ebbs and flows, but a Bank of International Settlements study put it at 60x the level of trade flows. I have not seem more current work.
On top of that, the effort to promote more bilateral trade is already exhibiting the sort of issues your humble blogger predicted. Unless the two countries engage in close to balanced trade (not likely) one country will wind up accumulating the currency of anther country. From Outlook India in Russia Has Accumulated Billions Of Rupees In Indian Banks: Russian FM Sergei Lavrov:
Russian Foreign Minister Sergei Lavrov has said that Russia has accumulated billions of rupees in Indian banks which it can’t use.
According to the report in NDTV, Lavrov Foreign pointed to a ballooning trade surplus with India.
“This is a problem,” the report quoted Lavrov as having said in Goa on the sidelines of the Shanghai Cooperation Organization meeting.
Why is winding up with rupees different than winding up with the dollar? The US has the most liquid and deep capital markets, so countries that wind up holding them can park them in financial assets. As the Asian crisis showed, central banks lacking foreign exchange reserves were unable to defend themselves from currency crises, which put them at the mercy of the IMF. After that episode, the Asian Tigers managed their affairs so as to influence currency pricing so that among other things, they’d run trade surpluses and accumulate foreign currencies, mainly the dollar.
By contrast, India does not have a lot in the way of investible assets, so it’s not as if Russia could readily sell much of its holdings to investors. The only other sort of part that would want rupees would be a country that was running a trade deficit with India. But are there remotely enough takers of that sort?
This illustrates a wee problem. Having a more finanicialized economy is an advantage in the “desirable financial asset” category, even though, as we have seen, financialization beyond a certain models level is sub-optimal for growth (this per the IMF).
The latest trial balloon out of China is to use the SDR. But the SDR has been around for a long time and not gotten much of anywhere. You need a serious central bank behind it for banks to be willing to handle trade and investment payments. And who is in charge of that central bank?
Keep in mind incumbency also produces network effects in the form of all that payment system infrastructure. For instance, banks are very much concerned about fraud. Visa and Mastercard by virtue of the enormous volumes they run, have excellent fraud detection and protection. A newer network runs the real risk of incurring much greater fraud loss. Does the bank eat them? Or the network? If the network, it will likely wind up having to impose higher interechange fees to recover higher fraud losses. That means lower net proceeds to merchants, meaning merchant will avoid using them to the extent possible.
The US will inevitably loses its dominant position due to the continued fall in the relative importance of the US economy. But a lot of people cheering its demise are way too optimistic as to how quickly that will take place.
By Ben Norton. Originally published at Geopolitical Economy Report
BEN NORTON: Hi everyone, I’m Ben Norton and this is Geopolitical Economy Report.
I’m joined by the economist Michael Hudson, a friend of the show, a brilliant economist, the author of many books, and also the co-host of the program Geopolitical Economy Hour here with Radhika Desai.
Today we’re going to be talking about de-dollarization. Michael and Radhika just did a series on the decline in the US dollar system and the move by countries around the world to seek alternatives to the dominance of the US dollar.
Specifically, I wanted to bring on Michael today to respond to articles that were published in the New York Times by the economist Paul Krugman, arguing against de-dollarization, arguing in defense of the US dollar system.
We’re going to look at two articles that Krugman wrote, one in April and the other in May.
Michael, I’m going to start with the article that Paul Krugman published in April, called “International Money Madness Strikes Again“. He has this very dismissive tone in this, saying that it’s “madness”.
And essentially in this article, he creates a straw man, where he says that if you think that the dominance of the US dollar is in decline, that you think that there’s going to be hyperinflation in the United States.
He refers to these people as “Weimarists”, referring to Weimar Germany, where there was hyperinflation in the 1920s.
So he essentially says that if you don’t believe that the US dollar will stay dominant, you believe that it’s going to become toilet paper. It’s a straw man argument.
He also compared the dollar to the British pound. And he said, this is a quote from his article, he says, “In sum, there’s no reason to be terrified of the consequences if the dollar should lose its special international status. But that said, it’s really hard to see that happening in the first place”.
So his argument is that it’s not going to happen, but even if it did happen, it wouldn’t be important, because look what happened in Britain; the British pound was the international global reserve currency, and yet it no longer is, and Britain still is a significant economy, he argues.
So what do you make of Krugman’s arguments?
MICHAEL HUDSON: It’s not a straw man argument; it’s deliberate ignorance. You have to really have tunnel vision and not understand the most basic economic history to make the misrepresentations that Krugman said.
And if I hadn’t met him, and I didn’t know how really stupid he is as a person, I would think he’s deliberately lying, but I have met him and he really is that stupid.
In my [book] Super Imperialism and my book Trade, Development and Foreign Debt, I explained the Weimar inflation.
Every hyperinflation in history has come from an attempt to pay a debt in a foreign currency. When Germany was settled with reparations debts in the 1920s, it owed dollars and sterling and French francs.
The problem is that the United States and other countries immediately erected tariff barriers so that Germany could not earn the money to pay the foreign debts. The debts were way beyond Germany’s ability to pay because the European governments wanted to punish Germany.
So Germany made an attempt to print Reichsmarks, throw it onto the foreign exchange markets in a desperate attempt to buy the dollars to pay the allies, England, France and other countries, who then would take these dollars and they would pay the inter-ally debts that the United States insisted on for the arms that they had sold Europe before America entered into World War I.
So the hyperinflation collapsed the exchange rate of the German mark. And, as the exchange rate went down, that meant that import prices went way up.
So first of all, the exchange rate went down, then import prices went up and import prices were an umbrella over the general price level.
And then the Reichsbank had to print more domestic currency in order to enable the economy to buy and sell food and other basic needs at the higher prices that were all being forced up as a result of trying to pay foreign currency debts.
Well, the United States doesn’t owe a foreign currency debt. America’s debts are in dollars and it can always print them. It doesn’t have to throw them on the exchange market to buy rubles or yen or other currencies.
So Krugman doesn’t understand the difference between paying a domestic debt and paying a foreign debt. And that’s because he doesn’t understand foreign trade.
If he understood foreign trade and debt, he never could have won a Nobel Prize. A precondition for winning the Nobel Prize is not to understand how international finance works so that you can act to preserve the kind of financial superstition that’s taught in the universities like the University of Chicago.
And under the monetarist views that are taught in Chicago and parroted in the New York Times and the Wall Street Journal and the other major media, the governments print too much money, usually to pay workers or to pay social security or social purposes, and that increases wages and that results in inflation and that makes the currency decline as inflation makes exports less competitive.
This gets the whole system in reverse. The problem doesn’t begin with the government just creating money to spend domestically.
It starts with foreign debt and trying to pay debt beyond the ability of a country to earn the foreign exchange, the dollars, in which its debt is denominated.
And if you don’t understand that, the government should take away Krugman’s PhD on the grounds that he doesn’t know what any European historian would learn or anybody who’s read what I’ve described in Super Imperialism.
I’ve written books about this very phenomenon. Needless to say, I’m sort of the name that must not be spoken when it comes to talking about international financial crises.
So Krugman’s misrepresenting the Weimarist and hyperinflation to begin with because he doesn’t want the government to spend money domestically on social security, on labor, on social spending.
He wants it spent on, as he said again and again, we need the money to spend in Ukraine. We need the money to fight Russia and China. He’s become a neocon, which is why he’s on the editorial page of the New York Times.
And you can just look at whatever he says as the product of an ignoramus who’s become a neocon and is a useful idiot to convince people that, well, we’ve given him the Nobel Prize, sort of like the emperor’s new clothes, to somehow legitimize his wrongheadedness when it comes to how inflation works, how economies work, and how the balance of payments work.
So then we get into what you said, the dollar’s demise. Nobody’s talking about the dollar’s demise because the United States will use dollars and American companies own affiliates all over the world.
And of course they do their own business in dollars. They don’t do it in foreign currency. So nobody’s really talking about that.
What really is happening isn’t simply a currency crisis. It’s not just a problem of not accepting the dollar.
It’s the fact that America grabbed $300 billion worth of Russian foreign exchange reserves and told [America’s] satellite, the Bank of England, to grab Venezuela’s gold stock and turn it over to Mr. [Juan] Guaidó, who America said should be the Venezuelan president.
And the rest of the world, what President Putin calls a global majority, is now realizing, — We cannot do our own trade with each other in dollars because if we trade in dollars, the United States can grab our dollars.
Obviously, Saudi Arabia and the Arab countries are thinking this. They’ve said, — We’d better get out of dollars as quick as possible if America and Israel attack Syria and Iraq, they’re just gonna grab all of our money. Let’s move our money into safety.
So just as in the United States, the large bank depositors are moving their money out of small banks into the big systemic banks like Chase into safety, other countries are moving their money, the governments are moving their money, out of the dollar into their own currencies, developing currency swaps and trying to develop a BRICS bank to finance their mutual trade and investment because the world economy is breaking into two halves.
Well, that’s what Radhika and I have been talking about in our shows with you on the Geopolitical Economy Hour.
We’re talking about how what appears to be a monetary problem, what appears to be a financial problem, is actually the fact that the world is breaking into two different economic systems, finance capitalism in the United States and industrial capitalism evolving into industrial socialism in Eurasia.
And if you don’t realize the context of the balance of payments and trade and how central banks are holding their monetary reserves, [and how] in this context [governments are asking themselves]:
How are they going to develop their economies domestically?
How are they going to develop their economies to keep their economic surplus at home instead of turning it over to the United States like the NATO countries of Europe do?
[If you don’t realize this context,] then you’re really somehow imposing a tunnel vision on yourself and not seeing the political context of the economic picture.
BEN NORTON: Well said. And another point that Krugman made, in this article in April in defense of US dollar hegemony, is that Charles Kindleberger, the famous economic historian of MIT – and, in fact, Krugman studied with Charles Kindleberger – he had argued that there are three main advantages for the US dollar.
And I should point out by the way that Kindleberger, who worked at the US Treasury, was the founder of the academic discipline known as hegemonic stability theory. So he basically is a kind of imperial court economist or court historian, defending US economic hegemony around the world.
But he argued, Kindleberger, who taught Krugman, and Krugman is echoing him, they argue that the US dollar has three advantages:
One, incumbency – simply the fact that so many people are already using it.
Two, US financial markets are open – and Krugman contrasted that to China, which regulates its capital markets.
And then finally, what Krugman referred to as the so-called rule of law. And this is such crude propaganda.
Krugman wrote – I mean, it’s just laughable – but Krugman wrote, “Unless you’re a dictator planning to commit major war crimes, you needn’t fear that the U.S. government will impound your assets”.
So what do you make of Krugman’s argument, citing Kindleberger, that those three main points – incumbency, open financial markets, and rule of law – are what undergird the hegemony of the US dollar?
MICHAEL HUDSON: Well, I’ve met over the years a number of classmates of Krugman in Kindleberger’s class. And one of them told me that he had a conversation with Krugman.
And Krugman said, the one thing we’re told is, don’t discuss money. Don’t discuss the character of money. And so he never did.
Don’t question things that will somehow rattle the status quo narrative. And he’s learned that. It’s true that there’s inertia for using the dollar.
That was America’s great strength, that it’s really hard to replace one financial system and economic system and political system with another.
It takes a huge effort to sort of get over the hump of, okay, we’re actually going to design a different system.
Well, once the United States threatened to cut Russia and other Eurasian countries off from SWIFT, the bank clearing settlement system, Russia and China put money into developing their own alternative systems.
Now they’ve done it. They’ve also developed their own credit card system domestically. So they don’t have to use the dollarized Visa system or Master Card system. They’re now developing another system.
Krugman has adopted the language of President Biden, who says the world is dividing between democracy and autocracy.
So when a Kindleberger or Krugman say, well, China and Russia are run by autocrats, an autocrat is what used to be called a democrat. Somebody trying to develop their act on behalf of their own economy to raise living standards and to raise productivity and to raise basically the economic output.
By democracy, he means what used to be called an autocrat. Democracy is what they have in Ukraine. That used to be called Nazism. And it’s still called Nazism throughout much of Eurasia and the global majority.
So we’re having an Orwellian terminology here and Krugman is trying to convince people to use this Orwellian terminology where countries trying to protect their economy from American financial aggression of cutting off their banking system, cutting off their credit card system, seizing their foreign reserves, imposing sanctions against them, that somehow they’re autocrats instead of trying to defend their economy against American NATO financial aggression.
The other point he makes is that, well, an open economy, people can put all their money into dollars and they can’t put them into China and keep safe. Well, of course that’s the case.
China has no need for the kleptocrats of the world, the drug dealers, the criminals, the warlords, to lend money to China that somehow is going to do them the favor of protecting. The United States did that.
I’ve described in a number of my books how I was working for Chase Manhattan in 1967.
A former State Department person came to me and gave me a document explaining that the United States wanted to become the new offshore banking center, the new flight capital center, saying that, well, what if America could become the Switzerland?
They asked me to calculate how much the United States could get if it provided safety to the world drug dealers, to the world’s criminals, to the world tax avoiders, to the world dictators.
They said, — If we can have the United States set up banks offshore in the Caribbean and other countries, then we can have Chase Manhattan and other banks set up offices in these countries to take the deposits, and then they will take these deposits and they will send them to the head office.
— And that is how we’re going to finance the Vietnam War and foreign military spending.
And that’s exactly what the United States did.
The United States, by having an open economy, has said, — We will protect all of the savings of the criminals of the world, the kleptocrats, the client dictators that we support, the money that President Zelensky of Ukraine keeps, and that’s true.
America is the protector of dictators, not China, and that indeed makes the dollar more attractive to dictators because the United States has criminalized the financial system. It’s criminalized the balance of payments as a means of financing its military spending abroad.
And I quote the documents in the various books that I’ve written. They were handed to me in an elevator, and I gather they’re not really secret, so I was able to discuss them.
And there was a book by Tom Naylor of Canada called Hot Money, where he describes exactly how it was the United States that sent up the offshore banking centers, making America to be the safe haven for criminals throughout the world.
And Paul Krugman says, this is what’s saving the dollar. Criminals are us. If we can attract all the criminal capital to the United States, there’s so much crime that we support by supporting our dictators and calling them democrats, that we can stabilize the dollar by criminalizing the entire dollarized economy.
That’s Paul Krugman’s defense of the dollar in a nutshell. And of course, he’s right when he says that.
If America can criminalize the global economy and destroy any attempt by Russia, China, Iran, the Eurasian countries, Pakistan, India, Saudi Arabia, to be economically independent, if it can insist that there’s only one currency and a unipolar economy, then America will win, and it can reduce the entire world economy to feudalism.
That’s certainly the neocon ideal.
The global majority of the world reject this ideal, but what they’re saying, again, is not fit to be seen in the print of the New York Times or other media. So you’re not getting the context.
BEN NORTON: Now, I want to also briefly respond to Krugman’s follow-up article that he published in the New York Times in May, and it was even more dismissive in tone. The headline is, “What’s Driving Dollar Doomsaying?”
Here, you can see this kind of neoconservative ideology that you mentioned. He blames the increasing discussion of de-dollarization on what he calls “Putin sympathizers, who want us to believe that America will be punished for, as they see it, ‘weaponizing’ the dollar”, he wrote, in scare quotes.
So he is very dismissive of the idea, which is an objective fact, that the US government uses its currency as a geopolitical weapon.
He also ironically blames de-dollarization on the “crypto cult”. And I mean, we’ve been very critical of the crypto Ponzi scheme. The idea that anyone who is critical of US dollar hegemony is a crypto supporter is laughable.
And he blames Elon Musk.
It’s a very similar article, but he makes two other main points I want to ask you about.
The first point he makes is he says, again, US dollar hegemony is not in danger, but even if it were, he says, quote, “the importance of controlling the world’s reserve currency is greatly overrated”.
And then he says, “Why, exactly, should America care whether a contract between Chinese exporters and Brazilian importers is written in dollars as opposed to yuan or reais?”
And he asks how the fact that the US dollar is the global reserve currency benefits the US economy.
He estimated, writing, “considering all this together, dollar dominance is worth more to America than a fraction of 1 percent of GDP”.
What is your response to that argument?
MICHAEL HUDSON: Well, basically he’s criticizing the Biden administration and the entire American government’s policy to say, — Why are you fighting so hard to preserve the dollar centrality if it’s only 0.1%?
— Why did you bomb Libya and steal all of its gold when President Gaddafi said he wanted to have a gold-based currency for the African countries?
— Why did you go to war with them if it’s only 0.1%? Why is NATO going to war with Russia over Ukraine and threatening China for using their own currency if it’s only 0.1%?
— Why is America spending 4% of its GDP on militarily fighting countries that are seeking to become independent of U.S. financial domination if it’s only 0.1%?
What is Krugman missing here? Well, it used to be, when the status quo of beneficiaries met critics, they’d call them commies.
Well, you don’t call them commies anymore because there isn’t any communism really. You call them Putin sympathizers.
But the fact is, the CIA itself calls themselves realists. Are you going to be a realist? And if you say, a realist is a Putin sympathizer, then reality is what Putin is saying.
Then for reality, read Putin’s speeches and especially read the speeches of Foreign Secretary Sergey Lavrov that spells out exactly what the logic is.
This is what the realist school is talking about, and they call themselves the realist school in the United States. They’re the school that are being sidelined by Mr. Blinken and Victoria Nuland and Biden’s foreign state department and CIA group.
But the fact is that the whole rest of the world seems to have a reason for wanting all of their governments to have their own currency.
Well, let’s look at what difference it makes whether China and Saudi Arabia do their oil trade in yen or dollars.
If you’re doing your oil trade and other foreign trade in dollars, then you have to save up dollars to have the money to pay for the oil. You have to have a U.S. bank account. You have to hold U.S. dollars.
And that means you take your domestic currency, your domestic yen or whatever the currency is, and buy dollars, buy dollars, and that supports the dollars exchange rate.
And it provides the United States central bank with the foreign exchange coming in so that it can afford to pay for the military balance of payments costs of keeping military bases all around the yen countries that use the yen or the ruble or other foreign currencies.
So it makes a very big difference. If Saudi Arabia pays for its oil in Chinese yen, then it’s going to have to save in Chinese yen, and it will have to accumulate yen, which indeed it’s doing in its foreign reserves.
And China will hold Saudi Arabian currency in its foreign reserves instead of holding the dollar. So there will be a mutual inflow of savings into each other’s currency in order to finance their own savings investment.
And this inflow will not go into Silicon Valley Bank or Chase Manhattan or other banks to be turned over to the U.S. Treasury as part of its foreign exchange reserves. That’s the difference.
And if you leave gunboats out of the picture, if you look at an economy that exists without military spending, without balance of payments deficits imposed by having 800 military bases all over the world, then you’re missing the quantitative impact of what actually determines exchange rates and currency values and ultimately international economic power.
BEN NORTON: You mentioned a key point, which is balance of payments.
The other point that Krugman made in this article defending U.S. dollar hegemony is, he insisted that the U.S. constant current account deficit, the constant U.S. trade deficit with the rest of the world, is not related to U.S. dollar hegemony.
In fact, what he is essentially doing here is he is arguing against the idea of exorbitant privilege. That’s a term that was created in the 1960s by France’s finance minister [Valéry Giscard d’Estaing].
And [d’Estaing] argued that the fact that the dollar is the global reserve currency, and that only the United States can print dollars, gives the U.S. an exorbitant privilege.
Well, Krugman says, no, that’s not true.
Krugman argues that the dollar doesn’t help the U.S. maintain large balance of payments deficits, because if you look at different countries with their current account deficits as a percentage of GDP, technically Britain, Australia, and Canada have larger current account deficits as a percentage of GDP than the United States does.
How do you respond to Krugman’s argument there?
MICHAEL HUDSON: The trick that Krugman uses, and he’s being deliberately deceptive here, he talks about the current account deficit. The current account is not the balance of payments.
The balance of payments has capital account, and it also has transfer payments. And he leaves that out.
What is reported as the current account deficit of trade and services vastly exceeds the actual financial flows.
For instance, the Americans report the trade deficit of oil, huge trade deficit. And yet most oil is imported from U.S. firms.
And yes, it pays a lot for the oil, but very little of this payment for oil is paid in foreign currency, because the firms remit their profits to the United States.
They buy the imported capital goods that they need in the United States. They pay U.S. management in the United States.
I’ve written a monograph on distinguishing the financial flows of the balance of payments from the GDP approach as if all of these things were monetary.
So Krugman deliberately leaves out the fact that America makes an enormous amount of money on capital account.
For instance, the fact that most of the global majorities’ foreign debts are in dollars, not their own currency.
This is why the IMF forces them to depreciate their currency and impose a chronic hyperinflation on Latin American and African debtor countries.
It’s because if you look at the capital account, including the enormous inflow of the world’s criminal capital through the offshore banking centers, then you’re going to understand that the balance of payment is something utterly different than the fictitious picture that Mr. Krugman states.
And you can look very simply. You can look at the Treasury Bulletin, and you can look at U.S. liabilities to foreigners.
Look at U.S. liabilities to their own branches in the Caribbean countries and the other offshore banking centers, and you’ll see an enormous inflow of foreign currency from these offshore banking centers into the dollar accounts of the head offices of these banks.
The statistics are all right there in the Treasury Bulletin.
And when Krugman, instead of looking at the Treasury Bulletin, looks at the Commerce Department’s trade and current account figures, he’s distracting attention from what really is important. Currency values are not determined by trade.
They’re determined by capital investment, by debt service especially, and by capital flight and crime.
And if you don’t realize that capital flight, crime, warfare is the key to the balance of payments, but only goods and services, then you’re under the same illusion that Krugman is in in the American economy, that the financial sector is all about banks lending money to factories to pay workers to produce the goods and services that they buy, leaving out the stock market, the bond market, the real estate market, the commercial banking system, the private capital, and everything else that is a blank area to Mr. Krugman.
BEN NORTON: Yeah, I do have to say it is pretty incredible seeing that this is a Nobel Prize winning economist writing in the New York Times, and he conveniently leaves out any mention of the capital account.
He does not mention the capital account one time in this lengthy article.
Yet anyone who has taken a macroeconomics 101 class knows that the inverse of the current account is supposed to be the capital account. No mention of that.
No mention of all of those dollars being recycled back into the United States.
So while the US maintains this massive trade deficit, those dollars go out in the world, but they’re recycled back into buying assets in the United States, which helps keep the whole bubble afloat.
MICHAEL HUDSON: That’s why he was given the Nobel Prize, because he was able to create a seemingly readable fairy tale about how the economy would work if it didn’t have any money, if it didn’t have any debt, if there weren’t any gunboats, if there were not any crime, if the financial sector did not control the government, but governments were elected to represent the interests of the people in getting better wages and living standards.
If he can somehow provide a readable mythology, like a fairy tale, that seems to make sense, and wouldn’t it be nice if this were true, then you get the Nobel Prize. Then you get applauded, and you get hired by the newspapers that themselves are representative of the financial oligarchy that runs the country.
BEN NORTON: Very well said. Well, a final note to end on here, Michael, is probably the most insipid, frankly stupidest point in Krugman’s article, which really reflects his main talking point, which is simply that the dollar is powerful because it’s powerful.
Krugman wrote, to conclude his article, he wrote, “The bottom line in most of this analysis is that the dollar is widely used because it’s widely used — that all of the various roles the dollar plays create a web of self-reinforcement, keeping the dollar pre-eminent”.
This is a tautology. The dollar is powerful because it’s powerful, and it’s going to always be that way.
This is the ideology of people like Paul Krugman and Charles Kindleberger.
It’s, of course, why they’re elevated in the US media. It’s why they’re given awards and prizes. But it also just shows how vacuous their arguments actually are.
And I think maybe deep down, he probably knows that he doesn’t have much to argue. Because if an undergraduate submitted that argument, I mean, a philosophy professor would rip it to shreds, but maybe an economist, a neoclassical, neoliberal economist would probably take it seriously. They’re the only ones.
MICHAEL HUDSON: Well, what does “widely used” means?
Just ask yourself for a minute, why doesn’t Venezuela use dollars? Why does Russia not use dollars and moved away from it? Or euros? Why did China say we’ve got our moving away from the dollar?
Why did Saudi Arabia make the arrangements with China and other BRICS countries to trade in their own currencies, not dollars?
If you don’t acknowledge the fact that other people have another idea, then you’re very biased.
Why is it that central banks of Russia, China, and all over the world are buying gold in the last, especially in the last few months? Why are countries deciding, we’re going to sell dollars and are going to buy gold?
There must be some logic there. Why doesn’t he explain at least what the logic is?
He can say that there are counter arguments, but you have to acknowledge the fact that other people must have a reason for what they’re doing.
So Krugman is saying that other people have no reason at all for what they’re doing. And when they move out of the dollar, there’s no reason for them to do it.
And obviously, if you read the speeches of what these countries, foreign ministers and central bankers say, they explain just why they’re doing what they’re doing.
And you don’t get a word of that in the New York Times any more than you get a word of what Seymour Hersh wrote about why the United States blew up the Russian Nord Stream gas lines to Germany.
There are certain things that you just can’t discuss in polite society.
BEN NORTON: Well, that’s a great note to end on. I want to thank you, Michael Hudson, a brilliant economist, the author of many books. His website is michael-hudson.com.
And Michael also hosts a regular program here with Radhika Desai, which is Geopolitical Economy Hour.
Michael, thanks so much for joining me.
MICHAEL HUDSON: It’s really good to be here. I love these discussions. Somebody has to talk about them.
BEN NORTON: It’s always a pleasure. Anytime.
This is terrifying. Basically the MIC used the dollar dominance for hegemony. Russia called our bluff so ‘we’ seized assets and excluded them from SWIFT.
That leaves the MIC with ongoing hegemonic intentions but no dollar weapons.
And we wonder whence the drums of war.
My goodness, this is really telling:
“And if I hadn’t met him, and I didn’t know how really stupid he is as a person, I would think he’s deliberately lying, but I have met him and he really is that stupid.”
As a former Krugman cheerleader from the very early days (though not having met him), my suspicion is not that “how really stupid he is as a person” but how cheaply he sold his soul.
U.S. dollars in foreign hands are claims against U.S. dollar assets.
As demand in non-U.S. dollar priced assets increases, the U.S. dollar demand diminishes.
Because all of this is at the margin, and Financialization financed via U.S. dollars is but a casino of pledges and hypothecations, the decline via fractions has the potential to become exponential.
No Foreigner trusts the USA. Even their lying friends get no sleep.
OK, you can be stupid AND up for sale. That certainly was the case when Krugman followed me to Iceland and tried to get the P.M. to bail out London for Gordon Brown’s “soft touch” permitting an Icelandic-owned bank (NOT a branch) to engage in mass financial fraud. I was able to meet with three Icelandic Prime Ministers and write a Financial Times editorial to block Krugman’s lobbying for Iceland to commit financial suicide.
When we were in Russia to meet with then-PM Medvedev, Krugman wouldn’t meet my eyes and slunk by my table in the restaurant to sit by himself muttering — carefully left alone by everyone. It actually was an embarrassment. My position on finance and taxes was broadly accepted, and he couldn’t even discuss our disagreement in person.
I recall you saying that in an interview, but not that much detail, thank you for sharing.
I haven’t met him, I haven’t read him or the NYT in years. For me, the NYT and Paul are a source of parody, satire and sarcastic humor.
> … Icelandic-owned bank (NOT a branch) to engage in mass financial fraud
Ooooh! Was this the “IceSave” debacle?!! LOL
I wrote about that in one of my grad papers. I refer to Krugman as “The Last Court Jester Of The Dying Neoliberal Crown” – a title he well deserves. Kudos to you and Iceland!
Chris – That’s a great title for Krugman. Someone ought to get a cheap plaque at a trophy store, engrave that on it, and send it to him.
He can put it on the shelf next to his faux Nobel.
I have no idea why people are so down on Krugman’s predictive powers-
Thanks, had a good laugh
I respectfully wish you to ask them to change the “yen” to yuan or renminbi in the transcript, for that is what was meant: the Currency of China, not Japan.
Very informative, thanks!
This is sort of a basic question, but where does speculation on Forex fit into this picture? Isn’t this form of “trade” a large part of finance capitalism?
Yves noted: “The fact is that trade-related foreign exchange flows are a tiny fraction of investment-related foreign exchange trading. The level ebbs and flows, but a Bank of International Settlements study put it at 60x the level of trade flows. I have not seem more current work.”
Does “investment-related foreign exchange” include speculation?
Not sure about the comment about sanctions. That may be the case for either very large interconnected economies like China or somewhat self-reliant resource rich countries like Russia or Iran but they have been devestating to Venezuela (see CEPR report here https://cepr.net/report/economic-sanctions-as-collective-punishment-the-case-of-venezuela/ ) and have indoubtably caused quite severe hardship to the DPRK and widespread misery in Syria. If anything in Syria i think the effects of sanctions have almost been swept under the rug. It’s tragic
Sanctions require a collective effort of the many against the few, usually a single target.
U.S. policy, eagerly repeated by Europe, has de facto, sanctioned themselves.
“I shall punish you by stopping breathing. That will show you.”
Resources and competitive manufacturing are a tiny part of the Financialized Western Economies. The Social Overhead has no base upon which the load can be carried.
I think it depends on how one is defining the efficacy of sanctions. Put very simply, they are supposed to “make the economy scream” to induce a political crisis and dislodge the targeted government.
Certainly you are correct that, more often than not, sanctions meet the “make the economy scream” criteria. However, they have a relatively poor record achieving the desired “regime change.” Your examples of Venezuela and Syria illustrate both aspects. Sanctions have effectively caused great economic strife, but haven’t led to toppling the governments – despite the extreme additional efforts by imperialism to give the final shove.
While I’m not suggesting full equivalence, it’s not completely unlike the more conventional warfare the US has pursued this century. Afghanistan, Iraq, Libya and Syria have all managed to cause severe devastation, but none have brought into place an imperialism-friendly government to the liking of Washington.
Put frankly, the failure of both sanctions and conventional warfare are demonstrating the fall in hegemonic power. The US maintains the power to act belligerently with impunity, but not to shape the world to its liking. Finally, it actually seems the normal workings of the imperialist financial system – World Bank and IMF austerity demands – are more likely to drum up unrest in the global south against friendly governments. These are serious contradictions that Washington cannot seem to resolve at present, and no one believes Washington to be as clever or competent as they claim they are.
I remember back in the early 80s watching a clip on TV, probably CNN, or maybe just a photo in the New Republic, showing Reagan seated, with GHW Bush standing next to him and looking down over his shoulder at some paperwork and on the other side of Ronnie stood the mastermind of the mafia BCCI bank. They were all having a friendly chat about how to set up a new bank. They were copying the mess BLN had done – basically laundering money for as long as they could get away with it. I don’t think the USA followed the same design exactly because it lasted much longer and is still being kept alive. There’s probably something like an extra firewall between offshore banks where they do the pre-soaking before they flush the stuff to mainline financial institutions. And Hudson’s comment about taking drug and other criminal proceeds in order to pay for the Vietnam war and current military misadventures seems to be a given, though never discussed. So question: How do other countries run their laundromats? All that hot money eventually destroys economies and currencies. Not to mention the natural environment. Just rubber stamping a sovereign seal on a currency is kind of meaningless. Better to do direct spending into an economy as needed. If there were no liquidity droughts, legitimate money could function quite well. Couldn’t it?
I was going to say something like this. But I would add a point Chomsky has made—even if the US isn’t able to topple a government, plan B is to make sure that government is seen to be a failure that cannot bring prosperity to its people. Think of all the stories one sees about the suffering of people in Venezuela, Syria, Iran and other places, which rarely mention how much sanctions contribute to that suffering. If the US ca’t win, it wants to make sure that the other side is seen as a brutal failure.
I don’t know how much people outside the US buy into this preferred American narrative, but it is also aimed at Americans, including mainstream liberals ( or the PMC as we call them here) and here in the US it seems to work fine as a justification for the US and it’s “ rule- based order”.
That’s a very good observation. Here in Germany if the discussion touches e.g. Venezuela the consensus is that it’s basically the fault of the Venezuelan government that the population is suffering and fleeing en masse to neighboring countries. No acknowledgement of the disastrous effects of the (illegal) sanctions on the population at all. Propaganda works very well.
Also, when the drowning of refugees in the Mediterranean Sea is discussed, the root cause of ill-advised military campaigns in Syria or Libya never comes up.
Venezuela was going down the drain before sanctions kicked in.
Basic thing is that Venezuela, much like banana republics, was rigged during the US friendly right wing governments to be reliant on basic imports from USA in exchange for crude oil.
Thus once Chavez took over, USA could taper the imports of crude and watch the Venezuelan exchange rate take a nose dive. This very much like how Hudson describes Weimar Germany crashing thanks to imposed reparations. That BTW Keynes warned against imposing back in the day.
My brother in law’s sister had a sweet deal being a teacher in Caracas from 1979 until Black Friday on February 18th in 1983, which started 40 years of hyperinflation…
She was making about double what she could earn in the states, and then a quarter of what she could make in the USA after Black Friday, exit stage north!
Maybe. But one of our better South African economists, now dead, once told me that he felt South Africa’s economy could never get back to its former success until the Americans imposed sanctions on us . . .
Yves, I don’t think Michael Hudson’s position is so far from yours.
– China, Russia etc obligatorily accumulate dollar claims through dollar trade (they may choose to swap accumulated domestic capital into dollars via the forex market but that is a voluntary problem! From a state perspective, this is fine but geopolitically risky if this is remunerative FDI and something to restrict if this is oligarchic / bourgeois capital flight). They may also made USD denominated returns on their existing stock of USD assets.
– They want safe assets, financially (creditworthiness) and politically.
– if they can trust each other enough, they can at least create a unit of account like the SDR and transact in it for commodities and goods
– they could open it up to financial claims but, unless these are restricted to equity and banking is forbidden, the problem will arise of who provides central banking services in the currency unit. Agreeing a nationless central bank is too risky, agreeing to all parties backstopping makes each party an external currency user and potentially at risk of having to settle its share of a bill (or balance the books among the other parties) in currency it cannot earn. The major commodity exporters would hold most power because they would accumulate claims on all the others (Russia…).
– one solution is for the BRICS excluding Russia to create an SDR-like currency. Their trade is more or less balanced.
– Russia would still be able to acquire real assets in this unit, by trade and FDI. A host of bilateral current account deficits with Russia would become a common deficit (but not a common liability). (NB: the big Indian deficit with Russia is currently magnified by the Indian oil reexport trade because of sanctions on Russia, but this must be balanced by foreign currency accumulation…). Perhaps the states would issue gov bonds in the unit too. There are risks for both sides but the Chinese might think US-type leverage over Russia was worth the risk of permitting Russian investment in China.
– another aspect of a solution would be Chinese rebalancing. If China ceased to repress domestic consumption, export earnings would fall and it would move into current account deficit with the others. Opening up to foreign claims on Chinese assets denominated in a BRICS unit would recycle this capital. The change in terms of trade, i.e. a. sharp rise in the China Price, might open up space for an increase in Indian goods exports in turn, so that India ceased to run such a large deficit.
Russia does not have a large enough economy to serve this function.
And to have an SDR system, you’d need to agree on which country’s law would be governing law, which would typically mean most issuers of financial claims would want cases to be adjudicated in that court system. But the Russian court system is not trusted outside Russia. This was why Cyprus was used by not just big corps but even Russians for investment in Russia, to get access to English law agreements and courts.
You also need custodians, safekeeping, banks and payments systems coded up to handle SDR among all participants.
It took eight years of planning and three years of execution to introduce the Euro. Note countries in Europe were willing to accede to the EU law being governing law, so one potentially big hurdle was comparatively easy to solve.
I don’t see any sort of planning process like that underway. And there is more creaky bank code now, so I can’t imagine a process like that would go faster today.
And why would any country or individual borrower want to create financial claims in SDR, as in borrow in them? They’d set themselves up for precisely the same sort of bad outcomes you see now when countries and companies outside the US borrow in dollar. Unless they have a substantial business in the US, so this is just somewhat matching their borrowing to their activity profile, they are asking for Argentina and Russia 1990s banking crisis outcomes. The reason Russia had a banking crisis then but not in 2022 was dollar liabilities then but not in 2022.
What is Lavrov really saying? My guess is he is warning India that it must start producing goods and/or services that Russians want to buy, or Russia will eventually use its rupies to buy gold. Seems like a manageable situation to me.
As for possible hyper-inflation in the dollar zone, that would not become really notable until store shelves were bare. What will that take? China could presumably stop sending it’s products here one day. But what happens The Day After?
How big is the market for rupie-gold transactions? It would have to be big enough to absorb these surplus rupees (who is selling these gold and why do *they* need rupies?).
Hmm .. How about India’s rapidly growing export of refined petroleum products ? Requiring payment in INR would increase the demand for rupees. I’m guessing a solution will be available through the UAE within the next 6 months – a solution that enables the Russian inventories of INR to be cleared..
When dealing with physical goods, there will be a solution.
Let’s see what happens during the BRICS summit this summer..
The context of Lavrov’s statement was that he was asked by Indian journalists to comment about the suspension of negotiations between Russia and India on the settling of bilateral trade in rupees.
The most direct interpretation of his comment is that the suspension is bad, because now Russia can’t use the rupees it has to settle any payments to Indian producers. Indian exporters are worried that this will lead to falling exports, because of the lack of possibility to settle the payments in rupees, even when Russia have loads of them.
For the same reason India owes Russia over $2 billion for weapons, because India can’t use dollars to pay for them, and Russia is reluctant to accept rupees until the bilateral trade agreement is reached.
Of course, simultaneously India is also aiming for free agreement with Eastasian Economic Union, which means that these issues will be resolved rather sooner than later.
To Yves’ point about Russia accumulating rupees via its oil trade with India. Lavrov points out that this accumulation is “a problem”. This “problem” is exactly the right problem to have at this juncture in the evolution away from dollar hegemony.
There are several solutions to that “problem” Lavrov is highlighting. Here are a few:
a. Encourage India to produce something Russia wants. Russia would then use the accumulated rupees to buy that (new) product or service from India
b. Have Russia build productive capacity in India, using the accumulated rupees. Ideally, that new productive capacity would produce something Russia needs, further alleviating the rupee accumulation effect
c. Have India buy on the world market something Russia needs, have it shipped directly to Russia, and Russia pays for it with its accumulated rupees. That puts the onus on India to address the rupee accumulation problem on its own
d. Amend the oil purchase contracts to settle in rubles instead of rupees. That would necessitate India implementing item a or b above, so that India could earn from Russia the rubles it needs to settle the oil contracts
There are probably several other solutions. So when Lavrov says “this is a problem”, that’s simply the preamble to the conversations with India about items a, b, c, and d above. Lavrov is suggesting further economic cooperation with India.
The same logic would apply to all the rest of the countries that wish to escape financial repression from the West. Each of those countries has “the problem”.
The foreign currency accumulation problem is a symptom of unbalanced trade, and that unbalanced trade is caused by a lack of appropriate production by the accumulating-country’s trade partners.
In fact, this problem is actually the early stepping stones to more trade, which would be enabled by more-appropriate production.
So this is the right problem to have. Why? Because the first trade steps have been taken, and those early steps seem to be successful, and now it’s time to take the next few steps down the path.
For decades, I spent a lot of time on the ground in India, the most recent visit being right before the pandemic.
My sense was the India that Modi was trying to create bore little resemblance to the dreams of the 1992 opening of the India economy. My friends in India confirm this and that the trend was accelerating.
As Punditji Yoga Berra stated, “In theory there is no difference between theory and practice; in practice there is.”
So I idly searched on “Is India creeping back towards the License Raj.”
To my amazement, this trend was noticed as early as 2011, three years before Modi’s election, cf. the article: “From License Raj to License Raj: An Indian Story”
Sample quote from a Harvard MBA who returned to India:
With the rise of Hindu fundamentalism and the BJP’s grip over government institutions, this situation has gotten even worse over the past 12 years.
Alas, there are no Homo economi in power in India, and these are the sort of “conversations” that will be required by any foreign entity expecting to do business in the Subcontinent.
That was most instructive; I did a short business trip way back when to an arabic country. Doing business there was very much a process of seeking out the tribe or oligarch or otherwise-unofficial holder of power, and making your deal there. Then the official mechanisms seemed to spring into action, and function as-expected. Otherwise…not so much.
Of course, doing business through unofficial – and hence possibly transient – channels adds risk to long-term foreign-investment deals. Will the people you’re making your deal with today be in power for the full lifespan of your investment?
China seems to have made some progress on this front; they are good at making deals wherein title to the investment asset (e.g. factory, port, etc.) stays with them (China) until the debt’s been amortized.
I’ve seen (wish I could provide a link) a few example contracts that China uses for the job. Those contracts contain a number of clever mechanisms to maintain control over both the asset and the related income stream. In one case, payments for a factory’s production go through China, then are remitted to the hosting country (assuming all amortization pmts have been timely made). Sort of like a factoring receivables till the bonds are paid off, for example.
These type of problems have been around since forever. It perplexes me that there’s so much consternation and smoke about using the myriad tools that already exist, and have for centuries, to solve these sort of problems.
I’m wondering if convenience and a few risk-related basis points are clouding people’s perceptions.
Your outlook’s a bit sanguine:
A.) Why would India build “something Russia wants.” India’s going to make decisions based on its own national interest. Also, you need to consider the downside of this–if Russia’s buying this thing it needs from India, it’s not making this thing itself, or if it is making this thing itself, then suddenly its created a foreign competitor to undermine its own national production.
B.) You make it sound like “building productive capacity” in a foreign country is a piece of cake. There’s a massive risk that you spend your billions of rupees on a factory and that the factory fails. My grandfather, who worked for Goodyear, watched this exact thing happen when the company invested $$$$ to build a factory in the Congo.
C.) Then Russia would be buying this good at a markup. Why not just buy it themselves?
D.) If India’s forced to buy Russian oil in rubles, then that means Russia’s raising the price. India’s attracted to Russian oil based in part on the good deal they’re getting. Maybe India responds by looking elsewhere to meet its needs, and Russia ends up having to selling its oil at an even lower price.
In general, it’s important to remember that Indian is a rather poor and somewhat unstable country. It faces enormous challenges–the climate risk alone for the subcontinent would make any rational investor queasy.
Bazarov: Great points. Here’s rejoinder for each of your paragraphs above:
a. It is in India’s national interest to buy Russia’s oil, for reasons you know well. If India can’t buy that oil, it has to buy elsewhere, at higher prices, maybe in dollars .vs. rupees.
Russia has a shortage of people, India has plenty. Russia buys from India what India can make at competitive advantage (labor). Consider textiles, which Russia needs plenty of, and India can make. Just to name one example.
W/r/t undermining its own production : see example above. Most countries have some sort of natural competitive advantage in one product or another. Find it and exploit it. China buys plenty of stuff elsewhere, even tho they’re Global Mfg’g Central.
b. See my remarks above to Hayak’s Heelbiter. It addresses this objection to a significant degree. Generally: China is doing a good job of handling just these sort of risks. Note their behavior.
c. Because they have rupees to get rid of. Better to spend the rupees, even if there’s a skim involved, than to not be able to spend the rupees.
d. It does mean Russia’s raising the price, and the price is being raised via the transfer of responsibility to raise foreign exchange to pay for the oil. Right now it’s Russia’s problem, and Russia may elect to offer to make it India’s problem. As the trade leverage shifts over time, Russia may elect to do just that. Russia has considerable influence over the composition and timing of entry of players to SCO and the other intn’l trade orgs of Asia, just to name one point of leverage among many. The quid-pro-quo of joining these Asian trade and security orgs is to “learn to play as a team”.
To your last point…and many of you readers should know by now that this is coming….it’s time for Russia and India to develop new products….using accumulated rupees as capital…which serve to reduce the political instability you are (correctly!) pointing to.
Put the capacity to generate power, grow food, make construction materials, etc. – using tech and method that actually fixes the planet as it generates wealth…put that capacity into the hands of the many. Into the hands of the little econ players, not the oligarchy.
Many countries don’t have energy, food, ag land, water, or minerals in abundance the way the U.S. and Russia do. They need products that minimize the use of these inputs while generating new wealth.
Why not invest in that? Still have the credit risk, but if it’s many small operations instead of heavy concentration, then the credit risk abates a lot. Now you just have technical risk.
China, Russia and India all have a great number of very skilled engineers and scientists. There isn’t much technical risk. These “products” are well-known, but not widely used and manufactured.
India already has things Russia needs. Stuff like aluminum oxide that Russia used to buy from Ukraine and Australia but is now buying from India.
A few weeks ago 50 member Indian delegation of agricultural production exporters visited Russia to meet with potential buyers. They expected to sign agreements to export tea, sugar, coffee, dairy, meat, and marine products etc. from a list of 500 products Moscow delivered earlier to the Federation of Indian Export Organisations.
The organization is hoping that a bilateral trade settlement mechanism in local currencies becomes operational very soon. And that the government’s fiscal incentives on exports would be extended to exports to Russia as well under the rupee-ruble mechanism.
For now, in the absence of such mechanism, the Indian export to Russia are facing serious friction and can’t grow to their full potential.
On Prof Hudson’s point about hyperinflation only happening in countries with debt in foreign currencies:
If the world de-dollarizes, all the dollars in the possession of other countries will need to be used/spent somewhere, and the only place to do so will be in the US, by purchasing goods and services produced in the US (since nobody else would be accepting dollars).
At this point, wouldn’t the US debt cause a tremendous inflationary pressure?
MH: “We’re talking about how what appears to be a monetary problem, what appears to be a financial problem, is actually the fact that the world is breaking into two different economic systems, finance capitalism in the United States and industrial capitalism evolving into industrial socialism in Eurasia…”
I can understand all the points made in the article and can see how the world breaks into two systems.
But again, I see nothing in the world that leads me to believe any country coming out of the current order is going to be an imdustrial capitalism that turns into an industrial socialism.
I want to know what it means that XI deleted Marxism and a host of other ideologies from the govt book.
I want to know what it means when France has a govt that is able to do what it did. How quickly will that retirement age be chamged back to the way it was?
I want to know waht that means when India has the caste system that it does and I see news stories like this about India:
“The Fight for India’s 1.4 Billion Consumers Is a Fixed Match”
New Delhi’s decision to open up the economy unshackled growth, but it also concentrated power in the hands of a small circle of tycoons.
I want to know what it means for the favelas in Brazil.
I want to know what it means for the kafala system in the Middle East, which is as resistent to reform as finance capitalism.
The list could go on.
My take on Hudson’s use of the term Industrial Socialism: a government/political system that invests it resources and human capital to equitably benefit all the members of the state, not just plutocrats. The Nordic nations developed a distributive social system and China used it’s dramatic industrial growth to create a large “middle class” and attempts housing for all. So it appears that equitable distribution of economic growth is the essence of Industrial Socialism.
OMG…I know what kind of redistribution he is assuming is going to happen. I’m saying I don’t see countries headed that way.
The Nordic social safety net progams are all under neoliberal pressure. It’s not the same safety net as of old. Plenty of articles have been in NC about cuts to the Nordic safety net.
Speaking of housing. Is all of that trouble in China’s real estate market worked out? There are articles about the youth in China not seeing home ownership within their reach.
There seems to be no reality based evidence of countries headed toward a redistribution of wealth. Just theories about what can happen or looking something that went on in the past. That is not the current state of things.
Me too. If trade is such a small part of world financial interaction and investment is a huge part and we are quickly losing access to the new BRICS financial system, which means we are running out of lucrative investments, to me that means capitalism will be slowing down. and when that trend shows up as fewer profits then capitalism will be looking for a new justification. It’s the perfect time to pour investment money into environmental reclamation and begin to change our definition of “profit” from monetary profit to social and environmental well being. A velvet revolution of sorts. By default. Pun intended – but the new economy will be on a roll and the world will be improving. It’s hard to imagine a healthy planet full of healthy people actually going bankrupt.
The Five Nines (Iran, Saudi Arabia, Russia, China & India)
Are all pretty much goldbug countries, in fact the Saudis would only accept all that glitters for black gold initially in the late 1940’s, so the US Mint in Philadelphia struck 2 different sizes of ‘coins’ to facilitate the deal.
Well that explains the gold ATM then:
I am at a loss to how a gold standard (not saying they have one) with the population numbers would mean anything but austerity.
India will soon be the most populous country, and i’d guess for every American that owns #79, there are 1,000 Indians in possession, population numbers and all.