Yves here. Michael Hudson kindly provided an article to distill and extend some of his recent YouTube discussions about where US imperialism and the dollar are headed. Hudson’s makes clear that Trump’s aspirations (they have not yet been reduced to plans but soon will be) have considerable internal tensions and contradictions. But even though Trump seems intent on intensifying the use of the dollar as an implement of US power, and that seems certain to backfire eventually, as we have pointed out repeatedly, there are not any near or even intermediate-term alternatives. For instance, at the Kazan BRICS summit, the declaration reaffirmed that the participants expected the US-dominated IMF to be the lead actor in country rescues. This comes at a time, when Jomo and other development economists have warned, that financial crises look set to begin across many Global South countries. So even though terrible US stewardship ought to, on the merits, lead to a quick reversal, what seems more likely is lots of unnecessary harm (to the US and others) and more slow erosion.
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 The Destiny of Civilization
Trump has promoted a number of plans to make America strong – at other countries’ expense. Given his “we win; you lose” motto, some of his plans would produce the opposite effect of what he imagines.
That would not be much of a change in U.S. policy. But I suggest that Hudson’s Law may be peaking under Trump: Every U.S. action attacking other countries tends to backfire and end up costing American policy at least twice as much.
We have seen it become normal for foreign countries to be the beneficiaries of U.S. policy aggression. This is most obviously the case for America’s trade sanctions against Russia. If the United States is not itself the loser (as in cutting the Nord Stream pipeline led to its soaring LNG exports), then its allies will bear the cost. The cost in a few years may be that the United States has lost Europe and NATO as a result of the pressure by European countries to declare their independence from U.S. policy.
To speed the parting European guest, NATO leaders are demanding sanctions against Russia and China, saying that “imports equal dependency.” What follows will be Russian and Chinese counter-sanctions blocking other raw-materials from sale to the EU.
In past shows we’ve discussed Trump’s plan to raise U.S. tariffs, and to use them much like imposing against countries that seek to act in ways that don’t dovetail into U.S. foreign policy. There is a lot of pushback on this proposal from vested Republican interests, and ultimately it is Congress that must approve his proposals. So Trump probably threatens too many vested interests to make this a big fight early on in his administration. He’ll be busy fighting to clean up the FBI, CIA and the military that have been opposing him since 2016.
Will Trump’s Attempt to Weaponize the Dollar Succeed Any Better Than the U.S. Trade sanctions?
The real wild card may turn out to be Trump’s threats weaponize the dollar. At least that foreign-policy sphere is more under control of his Executive Branch. Along with his drive to control the world’s oil trade and key media platforms, Trump wants to be able to hurt other countries. That is his idea of a negotiation and being transactional.
In the weekend edition of the Financial Times, Gillian Tett’s article on Trump’s proposed “Maganomics” quotes Stanford professor Matteo Maggiori pointing out that national power “touches not just goods, but money too. We estimate that the US geoeconomic power relies on financial services, while Chinese power relies on manufacturing.”[1]
So, along with aiming to control the world’s oil and LNG supply, Trump wants to base US power on its financial system. He recently threatened to punish BRICS countries to seek an alternative to the dollar.
That strategy is based on countries needing access to U.S. dollars and financial markets, just as they need oil and information technology under U.S. commercial control. The US tried blocking Russia and other countries from the SWIFT bank-clearing system, but as usually happens with sanctions, Russia and China have created their own fallback system, so that plan didn’t work.
The United States got the Bank of England to confiscate Venezuela’s gold supply and offer it to the right-wing opposition. That worked. And the EU and United States together confiscated Russia’s $300 billion of foreign dollar holdings. That worked, and the EU just gave the interest (about $50 billion that had accumulated) to Ukraine to help fight Russia.
But first, the United States seized all of Ukraine’s monetary reserves as safe keeping, ostensibly to help it pay back the debts it has been running up. I don’t think this gold will be made available for Ukraine’s rebuilding. It simply reflects a U.S. pattern of asset grabs. The U.S. military grabbed Libya’s gold supply when Gaddafi tried to use it to create an African gold-based alternative to the dollar for central banks to hold. And the US also grabbed Syria’s gold supply on its way out, leaving only the oil exports as a U.S. trophy of its conquest. It did the same with Afghanistan’s gold reserves on the way out. So obviously the United States anticipates gold returning to a major role in the world’s monetary system. (To add insult to injury, when U.S. officials finally gave back Iran money that it had seized from its reserves, it called this a gift and Congress attacked the act.)
The big question is how aggressive U.S. financial policy can work over the long run? Will it drive other countries away? Will it become as self-defeating as other U.S. international game-playing?
Let’s Talk About How the World’s Monetary System Is Likely to Evolve in Response to American Attempt to Gain Financial Control
To me, any such attempt seems impossible to achieve. How can America or any other nation imagine that it can base its international power on finance alone? All countries can create finance and money. But not all countries can industrialize – or in the case of the United States and Germany, to re-industrialize.
The United States has deindustrialized, and its neoliberal privatization policies have loaded down the economy with an enormous overhead of debt service, health insurance costs and real estate costs. the FIRE sector (Finance, Insurance and Real Estates) has increased its share of reported GDP, but its income is not really for a “product” at all. It is a transfer payment from the production and consumption economy to the rentier sector. That makes America’s GDP much “emptier” than that of China and its socialized market economy. When the cost of credit and rents go up, so does GDP.
Money today is created on the computer. Any strong and self-sufficient nation or regional grouping can create its own money. They no longer need to base their money and debt on silver and gold bullion.
So I think that Trump is living in a past world – especially given the right-wing Republican “hard money” crowd pining for the old gold-exchange standard, insisting that government money creation is inherently inflationary (as if bank credit is not at all). I guess that’s what makes him a genius: He’s able to hold two opposing views at the same time, each with its own logic that contradicts his other view.
The United States was very strong in the bygone world when gold was the major asset of central banks. In the wake of World War II the U.S. Treasury was able to monopolize 80% of the monetary gold of the world’s central banks by 1950, when the Korean War broke out. Other countries needed dollars after World War II to buy U.S. exports, and to pay debts denominated in dollars, and they sold their gold to get these dollars.
But by 1971, U.S. foreign military spending had dissipated that control. The statistics that I compiled for Arthur Andersen in 1967 showed that the entire U.S. balance-of-payments deficit – the deficit that was draining U.S. gold – was U.S. military spending abroad. So the monetary reserves of central banks came to consist mainly of U.S. Treasury debt that they spent their dollar glut on. That was the change that my book Super Imperialism described in 1972. But U.S. attempts to weaponize finance has led countries not only to try to avoid holding more dollars, but to avoid leaving their gold in storage in the United States or Britain. Even Germany has asked for its gold reserves to be sent back to it from the New York Federal Reserve bank where much of Europe’s central bank gold holdings have been held since the 1930s saw a flood of flight capital to the United States as World War II was looming.
Like domestic currency, international money is debt, unless it is a pure asset such as gold. The US was able to replace gold with U.S. government and private debt largely because it provided a platform for international payments. That seemed to make it “as good as gold” for international reserves.
This does not look like it’s going to be a permanent state of international affairs. Anyone can create money. But how do you get it accepted? That’s the problem facing the United States today. As U.S. debt grows, how long can it get the dollars accepted by other economies if there’s no inherent need for other countries to use it to make payments on their own foreign trade, lending and investment?
Money is public debt. Whether it is issued in paper or electronically, it preserves its value ultimately by being accepted to be paid in taxes. But Trump and the Republicans want to cut taxes. If there’s no need to obtain dollars to pay taxes, why hold them?
The Foreign Debt Tangle
One support for the dollar is the need for Global South and other debtor economies to obtain dollars to pay the foreign debts that they have run up. But how long can this last? Here’s the problem: If they pay the foreign debts that they have run up by following destructive IMF, World Bank and other Washington Consensus policies, they will not have money to invest in their own economic growth. Whose interests will they put first: those of U.S. bondholders and banks, or those of their own economy?
Stated another way: How long will debtor countries agree to remain in a system that had promised to help them grow, when all it has done is leave them further in debt and forced them to sell off mineral rights, infrastructure and public enterprise to raise the money to pay these debts in order to maintain their exchange rates? The system is rigged against them.
This problem is being exacerbated today by the dollar’s rising exchange rate against many other currencies. Trump’s ideas are very muddled in trying to confront this problem. On the one hand he has talked about wanting a lower exchange rate for the dollar. He believes that competitive devaluation would somehow be able to make U.S. exports more competitive. But the U.S. economy already is too de-industrialized under neoliberalism to rebuild its industrial power in the foreseeable future. So forcing the dollar lower is impractical as a means of spurring U.S. exports.
Trump has spoken about reducing interest rates to help fuel a stock and bond-market boom. For many countries – such as Canada – lowering interest rates leads to a capital outflow to foreign countries paying higher rates. But the U.S. economy is different. QE’s lowering of interest rates actually attracted foreign capital, thus raising the dollar’s exchange rate. Lowering U.S. interest rates after Paul Volcker’s interest-rate peak of 20% in 1980 led the biggest bond market rally in history, along with a booming stock market attracting international investors.
For starters, anticipation of Trump’s policies have been driving it way up. Just since last October the Canadian dollar’s exchange rate has depreciated so that the US dollar buys C$1.44 up from C$1.34. The price of a euro against the US dollar has fallen from $1.12 to $1.03. And the currencies of Global South countries are under heavy pressure as a result of trying to keep current on their US dollar bonds and other loans denominated in dollars.
So for better or worse, it looks like we’re in for a strong dollar this year. And Trump has made it clear that he wants to keep the dollar’s “exorbitant privilege” of being able to simply prin money, leaving other countries to keep their currencies from appreciating and hurting their exports by recycling their dollar inflows to keep buying US Treasury IOUs. But these IOUs are soaring as the budget deficit explodes.
A related problem is how long easy Federal Reserve credit can keep inflating stock and bond prices, given the rise in arrears and defaults. The largest threat is that of commercial real estate, whose schedule mortgage payments exceed current rental income as older buildings face rising vacancy rates. Take commercial real estate. 40% occupancy rates in old buildings. And they can’t be gentrified for residential use, because they don’t have open windows for fresh air, or good views—or neighborhood support. Like London’s financial City area, Wall Street and other U.S. financial centers in high-rise glass buildings no amenities, views, mixed-use neighborhoods, or fresh air from opening windows.
In the consumer sector, automobile loans, credit-card debt and student loans are falling deeper into arrears.
Something has to give. And this will affect not only U.S. financial markets, but the balance of payments as foreign capital flees to safety by leaving the United States. That would be the first time in more than a century when this flight to safety is away from the United States, not to it.
The U.S. economy has been re-designed to inflate financial gains, even while de-industrializing by outsourcing its labor force. So what seemed to be U.S. industrial has been replaced by financialized de-industrialization.
That means that the drive by BRICS to defend themselves collectively against U.S. hegemony implies really a fundamental broad and split in what is a desirable way to organize economies. opposing finance capitalism as predatory. Esp. as Trump is trying to push it, by imposing sanctions against countries moving away from dollars.
[1] Gillian Tett, “That is Maganomics,” Financial Times, January 4, 2025.
The problem with weaponizing the dollar is that like any weapon, when you use it against your opponents, you are teaching them how to fight back against you and showing them your weaknesses. Furthermore, weaponizing the dollar means that trust in it is undermined as counties will know that using it can be turned against them. A few examples of how this can play out in terms of trust. SWIFT, though based in Belgium, now reveals that it is the US that decides which countries can have their currencies cleared using it or not. And who here can trust having their gold held by the US or the UK? How many countries and big investors are now wondering if their money might be frozen because of a casual flip in US policies. If that $300 billion stolen from the Russians is actually spent – which I suspect as already happened – then you will hear a big whooshing sound as all that investment is pulled out of the US and the EU. What I am saying that international finance at the end of the day depends on trust and that includes the US dollar. You blow that trust away and it will be Katy bar the door.
To paraphrase a line about lawyers from the off-Broadway play, OPM (Other Peoples’ Money), Dollars are like nuclear weapons… everyone’s got them, but once they’re used, everything’s f****d up.
I strongly recommend everyone reading this book… emmm… “The End of History” by some Fukuyama. So prescient it was! Yes, running like beheaded chicken to the end of history, and anything else human, including specially all those arbitrary things like dollars, debt, laws, rules, treaties, deeds, properties… you name it. I might of course be exaggerating a little or a lot but that is the feeling. The times they are changing. Faster than anyone could anticipate.
When Money Dies-by Adam Fergusson, would be a most timely read about right now.
Probably better off reading Mosler’s Soft Currency Economics
Here’s a link to the PDF at Mosler’s site: https://moslereconomics.com/mandatory-readings/soft-currency-economics/
Another timely read is “Extraordinary Popular Delusions and the Madness of Crowds”, Adam Mackay, 1849. At the time there had already been a few financial bubbles, and he writes about them. Mackay had a very clean, modern writing style.
https://www.gutenberg.org/files/24518/24518-h/24518-h.htm
The sections on financial bubbles gave me a very fine-tuned sense of what it is like living through such a bubble. My bubble-senses are tingling very loudly right now.
«He’ll be busy fighting to clean up the FBI, CIA and the military that have been opposing him since 2016. … Along with his drive to control the world’s oil trade and key media platforms, Trump wants to be able to hurt other countries. »
The spooks and Trump align on that second sentence, so they will compromise. The spooks will give up Ukraine, as it’s already lost, and I predict they will soon work together.
We might see less us interest in Taiwan and more in ME and Central Asia, no matter oil is in the process of being replaced by ever cheaper green, particularly in China. Perhaps a shift to more focus on small bribable countries and less on direct confrontation with peers… imo trump more concerned with ww3 than the neocons, and more likely to have learned the lesson regarding peers from Ukraine.
I used to think oil would hit 300+ as it became rare, now the price in some regions may be too low to be produced. But a green world is still in the future; neither trump, our oligarchs, deep, or neoliberals give a fig about that.
But after Ukraine Russia might push back against western mischief in asia by moves of their own in central/south America. Africa looks already lost to the west. Eu might be shaky after Ukraine and a few more elections.
A nation whose politics are fueled by militarism and national security paranoia is not going to favor the rational pursuit of world economic development. The U.S. is in the situation of the cartoon character that is sawing off the tree branch on which he is seated. Asset confiscation, tariff wars, sanctions, and destabilization campaigns are undermining the long-term economic interests of the U.S. In short, our international report card now indicates that we do not play well with others.
Hudson hasn’t provided enough theory and evidence to show that the US is unique in having a reduction in interest rates result in net capital inflows. The case of appreciation during the GFC can be explained as flight to safety where the interest rate reduction is a symptom rather than cause. The case of appreciation after Volcker’s interest rate reduction can be explained by Japan and Germany doing their currency manipulations, and also by the invention of securitization and revitalization of the junk bond market. None of these factors appear to be at play today.
“The case of appreciation during the GFC can be explained as flight to safety where the interest rate reduction is a symptom rather than cause. The case of appreciation after Volcker’s interest rate reduction can be explained by Japan and Germany doing their currency manipulations, and also by the invention of securitization and revitalization of the junk bond market. None of these factors appear to be at play today.”
I thought the default answer to questions about growth these days was “because AI.”
Still uncertainty about how all of that will evolve.
The FX markets are too deep to manipulate without participation of nearly all major players, see the later Plaza and Louvre Accords, particularly with respect to the dollar. The dollar also rose strongly v. all currencies, such as the pound as mentioned, which would sit outside manipulation of the $-JPY and $-DM currency crosses.
I don’t know if I would use the term capital inflows. That would make sense if foreigners were building factories in the US. My sense is that the foreign inflows are focused on buying assets like shares in companies or even whole companies, real estate and debt instruments. These purchases drive up the prices of assets but don’t really add to the country’s productive capacity.
Many thanks for this. Although analogies between the fate of sterling as the leading international currency and the dollar are often misplaced, I cannot help but note the way in which sterling was ‘weaponised’ by means of the blocking of sterling balances, which was in itself a symptom of acute weakness, as Catherine Schenk has described on a number of occasions (notably here https://www.routledge.com/Britain-and-the-Sterling-Area-From-Devaluation-to-Convertibility-in-the-1950s/Schenk/p/book/9781138865792?srsltid=AfmBOoo9rwZsPBHdImi-4bS-NC7jHOzGZALIUBr63QYQOl-48xxPkbF3 and here https://www.cambridge.org/core/books/decline-of-sterling/EE3FBC1B3858EA9076D60F1B6A7F6493). Perhaps the increasing weaponisation of the dollar via OFAC is also a symptom of weakness, although not the same sort of weakness as that which afflicted the UK (which was of an order of magnitude more acute). Of course, the US presently has many more weapons in its arsenal than the UK ever enjoyed.
So, it seems to me that Trump #2 will seek to relieve domestic pressure for the reform of the regressive political economy of the US and to maintain some semblance of the 1992 Wolfowitz Doctrine chiefly at the expense of Europe. I assume that this will be done as follows:
(i) having Europe swallow the cost, or the greater part, of the >$600bn cost of reconstructing Ukraine (though US private equity firms have already secured control of the commanding heights of the Ukrainian economy);
(ii) forcing Europe to increase defence spending, so as to put an end to the free ride on the US defence shield, which has been the constant complaint of successive administrations since Truman;
(iii) continuing, and perhaps amplifying Biden’s CHIPS and IRA legislation, so that it becomes ever more of a quota system;
(iv) imposing tariffs, so as to offset persistent deficits with China by means of reducing deficits with the EU/UK;
(v) the imposition of tariffs and quotas will accelerate the desire of European manufacturers to offshore production to the US, with some of the production of such plants perhaps being exported to Europe to the benefit of the US current account;
(vi) ‘freezing’ the conflict with Russia (Trump having presumably reasoned by now that Russia cannot be prised from China), which means that Europe – whose LNG stocks are presently dangerously low during a cold snap – will continue to be forced to procure US LNG at a premium; and
(vii) forcing other US ‘allies’ to impose restrictions on Chinese goods in order to forestall attempts by China to divert its trade from the US to other parts of the world (a process which is fast gathering pace, as Brad Setser has noted recently:https://www.cfr.org/blog/will-china-take-over-global-auto-industry and https://www.cfr.org/blog/chinas-stunning-2024-export-growth).
Much of this would necessitate transfers within Europe away from investment in productive capacity and/or welfare systems, often to the benefit of US arms manufacturers. This, in turn, would accelerate the collapse of centrist or leftist parties, to the advantage of the Far Right. Presumably, many within the new Administration would perceive this increase in the number of ideological allies to be an added bonus.
Also, at least some or all of these ruses may serve to reduce pressure on the exchange rate, and so neutralise the impact of the tariffs on domestic living standards. It often strikes me that foreign policy is the outworking of domestic problems. In this instance, Trump has to hold together a coalition whose objectives are mutually exclusive: the neocon/neoliberal faction which – thanks to Adelson and Musk – has bought his Administration, and the MAGA faction which was wanting lower immigration to generate higher middle class incomes. If incomes risk being under further pressure thanks to a combination of the high immigration desired by Musk/Ramaswamy and tariffs, then it makes it that much more important that imports do not become even more expensive and that the overall current account deficit does not deteriorate still further, so as to protect the exchange rate and moderate import prices. In this way Trump can ‘triangulate’ his base *and* the donors who now own him. Of course I am thinking aloud here, and I am sure there are other, more credible, perspectives.
Perhaps this model can be kept going for a while, given that Europe still has a fair bit of prosperity to burn through before things get truly desperate. After all, most parasites only want to debilitate their hosts rather than kill them. Moreover, this will surely be ‘payback’ for the 80 years during which Europe has had an opportunistic and parasitical free ride on the US, the military spending of the US in Europe playing a major factor in the erosion of US surpluses in the 1950s, thus subverting the basis of the Bretton Woods system, as Prof. Hudson rightly notes.
A lot of commentary in the UK (notably in organs like the Guardian) is talking about how the EU needs to band together in resistance to the US, and how the UK needs to fold itself back into the EU as part of that prospectus. That does not strike me as being a plausible solution, given the number of cards the US now holds. Moreover, Europe’s escape route during the 1950s and 1960s was its influence in West Asia and Africa, which has now collapsed: just in the last few days French troops have been ordered by Ouattara of Ivory Coast and Diomaye of Senegal (two of France’s most important former African colonies) to get out, on the back of recent losses in Burkina Faso, Chad, Mali and Niger. That France is now trying to recover its position in Africa by propitiating Anglophone nations within Africa, is a sign of how just desperate Europe’s strategic position that continent and beyond has now become.
The most reconstruction needed in”Ukraine” is on the part that will be under Russian control. WHat is going to stay in Ukraine needing reconstruction will be the power plants. That will not cost 600 billion.
“…forcing other US ‘allies’ to impose restrictions on Chinese goods in order to forestall attempts by China to divert its trade from the US to other parts of the world…”
Only a comical Brad Setser could consider this remotely possible. The point is the US really does not control the world and the Chinese understand this and go about developing precisely on their own terms. Look to BRICS members now relative to the G7:
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?a=1&c=119,&s=PPPGDP,PPPSH,&sy=2007&ey=2024&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
GDP
BRICS ( 76,229)
G7 ( 56,579)
Many thanks, but I think that Setser is presently noting that China’s control of its supply chains at all levels, and its huge pricing advantages over its European and American competitors will greatly accelerate its industrial dominance, especially in the automotive sector, and the sheer extent of that dominance will become ever more evident over the course of this year.
However, what he has also observed in a number of pieces is that this will, inevitably, provoke a response. The EU implemented tariffs on Chinese EVs in late October, quite separately from the US, because European producers simply cannot compete on price or quality. It is possible that the US may push the Europeans in a more aggressive direction towards China, and we shall see. Different European countries may have different approaches towards the ‘threat’ of Chinese competition depending on the configuration of their trade. The British chancellor of the exchequer has just been in China in order to deepen the UK’s bilateral relationship with China as part of the UK’s increasingly desperate quest for growth (after all, if the largely stagnant UK deepens its relationship with the largely stagnant EU, the sum of zero and zero will still equal zero), but then the UK exports relatively few vehicles to China, unlike Germany which is torn between wanting to protect its own ailing manufacturers and retaining its declining markets in China.
Yes, this is a superb comment. Now to think through the whole again and ask myself just what does the UK have to offer China in trade even though UK investment has been too little emphasized for several years. Immediately, I think research and development of medical products is a core UK strength…
I am sorry but I disagree vehemently with your dissing of Setser, who has done meticulous analysis of capital flows into the US, including making estimates of Treasury buys out of London (attributed therefore to the UK) actually made by Chinese official bodies.
I also have never seen him say anything like what you claim he said, so this looks like a monster straw man.
Thank you for your comment.
With your added perspective, everything seems to make finally sense. Unfortunately!
Ever since the start of Ukrainian war, me and my congolese colleague, we were raking our brains over the nonsensical European politics. He is the only person with whom I can discuss this without being mocked or accused of being brainwashed by Russians. With the Gazan genocide it is even worse! I don’t understand why. It got worse after Trump won the election. Now If I mention anything bad done by Biden, I am automatically a Trump follower…. I live in Switzerland and I am Czech and married to a Zimbabwean … My mother is preparing for a Russian invasion. If I mention the war she’s close to tears – apparently Putin is attacking Europe. People are insane.
I was sure something was wrong ever since I was trying to make sense of the job market and of the economy after 2008… Then I opened a taxi service and got shortly involved with Uber and was horrified when I discovered the true nature of their activities. Then I found David Graeber’s books and next thing a year later he died… That was a blow. As was the attack on Richard Stallman. It just keeps getting worse, journalists are being attacked, killed, dissenters get their homes ransacked by the police.
Now for me, Naked Capitalism is the only place where anything makes sense at all.
Thanks to Professor Hudson and thanks for your educated comments. Thanks to you all.
P.S. every day I drive past a Russian plane sitting and rotting in the same spot on Geneva international airport tarmac since february 2023. The airport’s employees told me that nobody can touch or even approach the aircraft. It was just confiscated like that but by whom and why? (Dont see any airplanes from other countries getting confiscated for war crimes here.) Even then, if you take that aircraft, for whatever weird reason. Why would you let it rot and go to waste ?
People are insane, but not to the same level. It turns out Slovaks are different than Czechs.
Yes,
I am worried for Slovak Prime Minister….
I think I am not alone.
Look at the headlines : Fico criticizes Ukraine, Fico was shot, Fico criticizes Ukraine “again”.
Europe is slowly collapsing into its former early 15th century irrelevance.
Yea, if you count the biggest country in Europe as not being in Europe.
There won’t be one replacement/alternative and none would be trusted if it existed. But there is and always has been a general alternative: Use a basket of currencies and assets. Instead of leaving money sit in US denominated bank accounts gaining interest, that money is now seen as under risk and so will be leaking out elsewhere to find an acceptable return. The elsewheres are likely to be non US non EU controlled financial systems and economies. You don’t need a BRICS for this to happen, just loose/no capital controls.
Please no fantasies. China, the most important non-dollar actor, is committed to capital controls.
And how do you assemble and keep rebalancing this basket of currencies? Who is in charge? You also need a supra-national legal regime with teeth for this to work…a huge reduction in national sovereignity.
This is deep into economists’ “Assume a can opener” terrain.
When one reflects on all the strange permutations of currency baskets the EEC burned through before they finally fobbed the Euro on us, it clearly demonstrates just how hard it is to install a monetary link up between countries with even converging interests in maintaining it. It finally took setting up a central bank. That seems to be the only way it works. And we still don’t have a common fiscal policy.
Can anyone imagine China and India as members of a common basket of currencies? Nope. Not today at least.
Thank you very much for providing the example. I admit to being too frustrated to take the argument further.
My own can opener is ‘assume China moves towards balanced trade’, which imo would be good for China, more internal consumption, more labor/ resources directed to support families/retirees to boost child bearing and reduce saving. Plus good for row that is having a tough time competing with China’s low costs, and that would reduce somewhat row’s financial crises.
Clearly, china’s rulers don’t, or don’t yet, see the advantages of, say, taxing exports/ boosting wages etc. however, their labor shortages may anyway force their hand.
[ My own can opener is ‘assume China moves towards balanced trade…’ ]
Balancing trade is precisely what China has long intended to do.
Remember however that the US has long limited what China could buy. Also the Chinese study and learn how to make things, and invest in making especially the things they are not supposed to buy.
President Obama and Hillary Clinton decided in 2011 that China should not be able to buy products for space exploration or even work on space exploration with NASA. China then built all that was needed for space exploration and is building more now.
does china have a over production problem? yes, but it was not china’s doing. it was and still is the crack pot free trade polices of the west, driven by the likes of bill clinton/tony blair.
so how can china cut back, or encourage more internal consumption, when the crack pot polices of said towering mental midgets, stripped the west of its capabilities to make just about everything.
if china was to voluntarily cut back, the west would collapse. the west has no real excess production capabilities anymore. and a lot of what china makes, no one else does.
tariffs might help if we still had those capabilities that were free traded away.
No-one. What I mean is every man for himself. Every magnate, oligarch, bank and large corporation outside of the US/UK/etc and most of the EU will all start hedging their bets. Putting all your money in SWIFT accounts or within reach of sanction-happy western states is too dangerous now. I don’t mean the will move it all, or at once, but they will move it elsewhere. Not just into account, but assets in other countries.
That has not been happening. China floated a dollar bond offering in Saudi Arabia. It was massively oversubscribed by private investors.
The dollar is software. Software as a physical war weapon.
“War against a foreign country only happens when the moneyed classes think they are going to profit from it.” -George Orwell
“No protracted war can fail to endanger the freedom of a democratic country.” -Alexis de Tocqueville
“It is a universal truth that the loss of liberty at home is to be charged to the provisions against danger, real or pretended, from abroad.” -James Madison
I didn’t quite understand if the US is exploiting Israel via finance and dollar hegemony. The typical way the neocons (politicians and Pentagon folk who use military force to enforce neoliberalism), the MIC (military industrial complex), the blob (three letter agency folk and media warmongers), and the financial and oil sectors operate is to run up a ton of dollar denominated debt and insist that these debts have to be paid. If the debtor—sometimes an entire country—can’t pay, then we (powerful interests in the US) will take some unfortunate nation’s public infrastructure. Or the US and the IMF will encourage this nation to exploit the entire labor force by lowering its wages and imposing austerity.
Is the US keeping a running tab of all the arms that enable Israel to continue the genocide? For WWII, the US demanded payment from Britain for supplying materiel, and British power declined dramatically. American vassal countries are typically dominated by making that country dependent on the US for finance, grains, and oil. Thus, the Americans can threaten an entire nation by turning off the food or energy. Is that the plan for Israel? Why doesn’t the US insist on Israel paying debt service and tribute and ruin Israel in the process? Did the neoliberals get superseded by powerful Zionist interests? Why aren’t they trying to exploit Israeli labor? Is Israel a special case where the unconditional American support is truly unconditional? Hudson said in a previous post that the American neocons are using Israel as a cat’s paw and a battering ram to ensure Middle Eastern oil flows to American oligarchic interests first. I certainly don’t doubt this, but when is the US going to realize that Israel might not be up to the task in fulfilling its Greater Israel goals?
When are the moneyed classes going to realize that using Israel to steal Middle Eastern oil and land is not profitable? This seems like a impossible task because the moneyed classes profit irrespective of who wins and loses in violent conflict. Is there not a way to profit and steal directly from Palestine, Syria, Lebanon, etc.? Would it not be easier for the US to seize the dollars or gold of any particular Middle Eastern nation, as the US did with Russia’s dollar holdings or Venezuela’s gold?
My above questions likely make some incorrect assumptions that expose my own ignorance. I spend a good amount of time with self-observation and studying health and medicine. I am certainly not an expert with geopolitics.
Are these rhetorical questions?
The “always has been” meme would be appropriate. Imho, until there is a gross falling between the various oligarchic and religious factions that have an interest in maintaining the illegitimate state of Israel as an imperial outpost, it will be indemnified by all means available. Look at how China treats it with kid gloves for instruction.
Perhaps it would be helpful to look into sociology of the (neo)colonizer’s psychology. Racism permits those differences, mythology and folklore to support segregation should be minded here in your analysis, because there are tinges in your words that seem to hint at a greater good that just hasn’t been “seen” yet.
They are not looking for logical answers; they are not here to “realize” when the noble “modern” culture relies on looking away and specifically *not* realizing anything at all. They are not keeping tabs because it is their job to not keep tabs, to otherwise rewrite history in favor of those maintaining dominance, and to continually reinforce those structures of dominance.
These are questions I ran into myself when I was analysing systems of greed without the ideological component of racism considered – questions that hint at a competence or “logic” problem that “they’ll see eventually” – rather than the dredging truth of pure evil, oppression and subjugation.
After the debacle of Continental Currency, the fledgling USA had lost all credibility on the world stage as the first Western country to have hyperinflation via banknotes, so every gold coin issued from 1795 to 1838 actually had slightly more gold in content than the actual face value, a $5 coin would be worth around $5.08 at melt value, that sort of thing.
I’d call our current efforts more like financial gunboat diplomacy, that is if we had any means to produce said ships.
” US geoeconomic power relies on financial services, while Chinese power relies on manufacturing.”
Indeed, one way of looking at this is the different way the two countries leverage economies of scale – China through its tapping of integrated supply chains, an effective “strategic planning from above, market initiative from below” has created extraordinary supply side, manufacturing scale economies; whereas the US leverages demand side economies of scale, or network externalities. The dollar is more valuable to each user the more people/countries use it, like the telephone, or the English language – yet another weapon, albeit a soft one, of the Anglo sphere. That’s why it’s difficult to dismantle this network…but there are many weak points that the rest of the world is going to probe, as Prof Hudson points out. Years ago, Colin Renfrew, the linguist, noted how networks of established languages decay….there are some pointers there. One of those was a reverse lingua franca effect through decoupling, fragmentation, new alliances and creation of alternative modes of communication and trade.
I’m skeptical of Hudson’s claim:
Like Gromen has been banging what I believe to be an accurate, related drum for some time now. The essence of his argument is that the USD must be weakened, and significantly, or Treasury market disfunction will force the action. The result? A weakening Dollar, and rise in nominal values of gold and stocks, etc.
A few excerpts:
***
Hudson is a life-long balance of payments expert, staring in the later 1960s.
The history is the overproducing manufacturer is the one that takes the currency value hit in a global crisis. The US in the 1930s. Japan in the 1990s. The then banker to the world, England, despite having a totally shitty economy in the 1920s, got through the Great Depression with less damage than most other advanced economies.
And the 1930s were in the gold standard days. The US today does not need to sell debt to fund spending. It’s a political convention.
5% is hardly a high value for the 10 year by longer historical standards. If he’s trying to argue from the 2007-2008 crisis, he is totally discrediting himself. That had nada to do with government debt or trade balances and everything to do with derivatives referencing subprime mortgage debt.
Yves, with all due respect, please listen to Luke Gromen in his own words rather than arguing with straw men or poorly chosen excerpts. Gromen’s analysis is nuanced and well considered.
Afaict, his primary argument for dollar devaluation seems to be that the defense complex is pushing fiscal policy and the hollowing out of the U.S. industrial base is a national defense issue first and foremost, and the dollar will necessarily become the release valve between bond rates and reindustrialization of the USA.
Here’s a recent conversation he had with Julia LaRoche about the dollar.
https://www.youtube.com/watch?v=7kUj3sgxJ18
Verbal financial analysis is unserious. Can you provide a link to an written analysis?
I see that he uses phrases like “printing money”, which means he does not understand how the Fed works, and is a gold and crypto bug. So there’s plenty additional reason to doubt him.
Gromen has been predicting double digit inflation in the US since 2022. Almost everything he had predicted turned out to be wrong.
These people don’t understand how the financial system works and keep on saying “printing money” is what causes the inflation in the US.
At this point, the MMT folks are the only ones demonstrated to have the most accurate grip on the situation.
Inflation is going back up, which means higher interest rates, which leads to a stronger dollar. Weakening the dollar through lowering interest rates will set a bigger flame under inflation. I actually think in the long run, the dollar is headed towards something like we are seeing with the LA fires.
Recommend to examine how Ronald Regan won the cold war. The Dollar went up and the crude oil and natural resources including gold went down and our adversaries went bankrupt. There is a logic behind Trump’s posturing. Moreover, recommend to look at the circular map of The Arctic and see the size of Russia’s coastline. In order to balance our adversary, we need to get all the coastline on our side under one command. There is a cold rationality behind Trumps proposals, it’s called Fortress America. Now imagine Congress deploying Trillions of USD to develop and weaponize The Arctic. Not an investment advise.
No, Reagan had NOTHING to do with it. Carter Fed chief Volcker threw in the towel on super high rates. The dollar started running up massively then. I was at Goldman when word went out to Treasury dealers, The response was electric. It hit a peak of 1.03 to the pound in 1984, as in the pound was markedly lower then v. the “crisis” we are seeing now.
Let me restate it, the long term charts are showing DXY – USD index from 89 to 160 , and Brent crude oil from 40 to 9 , gold from 850 to 300. My interpretation – the strong Dollar with a low crude oil price policy, during the Regan time in office was our best weapon to win the cold war. We could repeat the same policy right now and win again. The Dollar is our best weapon, use it.
It was a race to get rid of all that glitters by most every country, with the UK and Swiss selling at near historical lows-
Reagan benefitted from the enormous decline in the 10-yr from volcker’s hugely excessive 14% to 9%. Imo ussr collapsed from the enormous costs of their satellites, not anything Reagan did – Cuba alone cost them 4.5 b/yr, back when a billion was real money. I certainly don’t think it was us mil spending, we out spend Russia 10:1; if mil spending was so bad for an economy we’d have collapsed long ago.
>”mil spending was so bad for an economy we’d have collapsed long ago.”
For Germany this is the very issue now. Higher mil spending – ?
Resulting in destruction of civil society, and short-term gains for subsidizing the domestic “MIC”.
With that comes the insight that there is mil spending and there is mil spending.
For Germany and most EU it means throwing money at the US.
In the US it’s domestic redistribution and pushing certain US industrial sectors. The level of harm to the countries is thus different. But it’s still harming in the end. At least I have been believing this for most of my life.
Or asking differently – where is the substantial and long-term economic gain of mil spending (as in consumption v. investment)? Especially if the rest of the industrial base is ailing as in Germany.
This in the light of an argumentation by I assume e.g. Russian technocrats and old-style American advocates of high mil spending who would argue that war demands the highest level quality and therefore makes mil spending a sine-qua-non for technological progress as such.
Which I would like to contradict. But I lack the serious knowlege to do so. All I can do is – like a parrot – quote various experts for each view, those who oppose mil spending and those who favour it.
But what is the true structure behind it?
Apart from the assertion that building killing machines is part of human nature and cannot be overcome so we better incorporate it (which I do not think is scientifically viable. There is no final proof for how human nature truly is.)
Sorry for making it such a complex question/thought…
A strong dollar means saying bye bye to a manufacturing renaissance.
Sorry, still incorrect. The US was in no position to engineer a low crude price.
This has the sound of the “big arrows on the map” thinking that’s been so useful in Ukraine. “get all the coastline. … under one command”. Command what? Rocks and lichen? There’s nothing there. (Just for the humor – just go through a back of the envelope estimate of the logistics needed to put an F-35 squadron on Ellesmere Is., and keep them operational at -50C.)
The Artic is sea lanes and dreams of minerals (with some hand waving away of the engineering and logistics costs needed to extract those imaginary riches). So what’s really needed before anything else are lots of icebreakers. Wake me when the Navy finally gets around to building the dozen or so they’ll need before any of the rest of this pipe dream becomes doable.
As an example, Korean shipyards will gladly build icebreakers. Print Dollars and place your order.
Moreover, the most of the aircraft operates at the -50C and less, that is the ambient temp where the planes fly. We operate military aircraft from Greenland, so Ellesmere Island is doable as well. Development of Arctic is doable, it just needs a lots of Dollars and there is only one entity who can pay for it .
You would be far less optimistic on the tarmac at -50C, protecting all the lichen and rocks. Kerosene gels at -40C.
Commodity prices falling so drastically would really cloud all that glitters. Arctic and Subarctic mines would be the first to shutter.
it’s not called Fortress America (because no one is interested in attacking), but imperialism without bounds and greed without end. You people are insane.
My only issue with this article is the title … :)
The dollar is already weaponized … as these excerpts point out:
The real question is will the Trump administration double-down on this approach? And the answer from all indications is “Yes”.
As has been discussed here – and particularly advocated by Yves – BRICS coming up with their own currency is not something on the near term horizon. However, I think it will eventually come to pass in some form. Countries have to accumulate dollars because of original sin – many industrialized countries simply won’t accept global south monetary units in payment for imported goods. And then there’s the petro-dollar paradigm, which lays at the heart of any development since energy is foundational – gotta gas up all those lorries and heavy duty construction equipment!
The US is forcing countries to choose, but it’s an increasingly ugly affair. Trump should break from the uber imperialist excursions from the Biden-Blinken admin – instead he looks to amp it up, and this is not going to end well. My final question is to China: along the lines of TheWizardOfKalorama™’s back-stabbing of Bernie, does China choose to accelerate the end game here? Does China effectively say, “OK, if that’s the way y’all want it, we’re gonna go around the global south using development and diplomacy to draw a sharp distinction between US confrontation and Chinese co-operation, and let the chips fall where they may”. Of course, however, the presence of US Embassies in the global south remains a constant source of coup concern.
We shall see.
Imo China’s huge trade surplus is the biggest obstacle to an alternate exchange system; if countries have large trade imbalances you need a large economy to be willing to soak up those imbalances by running complementary deficits, which imo conveniently also supplies the world with the liquidity needed for economic and population growth. And the us has large capital markets while allowing free capital flows.
Imo BRICS either need a substitute country to take up us’ role of running vast deficits, or the alliance needs to shift to balanced trade. Imo the question is why China doesn’t tax exports/boosting wages and move towards a trade balance, which would seem to be in its interest.
> if countries have large trade imbalances you need a large economy to be willing to soak up those imbalances by running complementary deficits, which imo conveniently also supplies the world with the liquidity needed for economic and population growth.
Exactly …which I why I believe a transnational construct works better for this purpose. It would just be a new unit of account with net exporters essentially agreeing to issue as deficit. See my explanation of such a currency, “the B”, here (via NC).
Hi, ChrisRUEcon,
Now that “B” currency Idea sounds exactly like what the people from “Léman” currency in Swiss Geneva Canton are doing.
They have as of today 450 businesses that accept this money. Including it is endorsed by the administration of the Geneva State. They want to force a closed circuit of exchanges in the Canton and neighbouring France and cut out the Finance industry. There were even talks of paying salaries in Lemans. (Named after the lake Léman) and the Idea of businesses and farmers that could run up debts without interest at the Léman bank.. I don’t really understand how that would work as well as the exchange rate that remains constant 1 Léman – 1 Swiss Frank – 1 Euro. It looks more like a “club” – “if you buy Lémans you engage yourself to follow their Chart” – than a currency. They have banknotes and digital currency.
Now if I swap “450 businesses” for “countries” – you get close to your description of “the Brick”. (More complex)
https://monnaie-leman.org/le-leman-concretement
Hi A. Shahadat,
> Now that “B” currency Idea sounds exactly like what the people from “Léman” currency in Swiss Geneva Canton are doing.
Thanks for sharing the link!
The Leman appears to be partially based on blockchain and there is this notion of exchange rate to convert from francs. Both of these aspects are undesirable to me … :) (#MMT guy here) but I can see how the construct might appear similar to what I proposed at a high level. My B concept would be non-convertible – i.e. use/denominate or do not.
> Now if I swap “450 businesses” for “countries” – you get close to your description of “the Brick”.
Correct. When I explained to concept of “the B” to a Serbian friend, I intimated the same thing. It’s one thing to think that Chinese car companies could purchase Lithium from Serbia with B’s they got from exporting automotive goods to same. It becomes another thing entirely if holders of the B could buy oil from Russia.
This is just another private currency. See Heisenburg Report on that. Sadly the germane report is not indexed in search engines but perhaps a kind subscriber will see this and provide a link. They don’t work at any scale beyond frequent flier miles.
I think this is the discussion.
https://heisenbergreport.com/2022/11/09/dear-crypto-you-have-no-lender-of-last-resort/
If Trump in his infinite wisdom puts a backstop on crypto… Lmao
Thank you both!
@Yves: I didn’t quite suss that. So it’s not even like a Bristol Pound. Tokens at a games arcade, more like it … :)
@Bugs: LOL … yes, making the Fed the LOLR for every crypto and crypto-adjacent (See NFTs) rug-pull is going to result in a Finance sector collapse that’ll make the GFC look like a $20 bill that fell out of someone’s wallet at Target.
If you want to know the dollar’s direction take a look at the first year of the first Trump administration.
On January 17, 2017, Trump publicly said the dollar was too strong. The dollar then declined from a peak on that day of about 106 on the dollar index to 99.40 by the end of May 2017.
We are currently at about 109.50 on the dollar index. Recently Scott Bessent said that a weaker dollar and reserve currency status are not mutually exclusive.
A weaker dollar is a form of easing. As someone mentioned re Luke Gromen, we are about to run out of “backup” liquidity in the form of a slush fund of reverse repos left over from covid stimulus. In 2025 Treasury needs to roll over a huge amount of T-bills, and Bessent even says he’s going to refinance them into longer maturities this time. Dollar is about to get a lot weaker. Trump/Bessent are telling you what’s about to happen and it will be the same as 2017.
https://fred.stlouisfed.org/graph/?g=yeYT
January 15, 2018
Real Broad Effective Exchange Rate for China, United States, India, Japan and Germany, 1994-2024
(Indexed to 1994)
https://fred.stlouisfed.org/graph/?g=lv0w
January 15, 2018
Real Broad Effective Exchange Rate for China, United States, India, Japan and Germany, 2007-2024
(Indexed to 2007)
After bottoming in 2008, the USD Index has been in a steady uptrend. The long term chart of DXY points higher, significantly higher, 118.5 in 2025 and 129.6 latter. Presently we have all the ingredients for a currency crisis in place. From the non US investor point of view , one wants to be in USD money market ETF. The turning point was in late September, The FED mishap likely propelled Dollar higher. We’ll have a panic buying of USD in coming weeks, Euro bellow the parity will be the point of dissatisfaction for the investor class in EU. I don’t think that Trump/Bessent can change the trend, they could ride the trend and use the strong Dollar as a weapon to get their way. The strong Dollar is a powerful tool, use it.
It is hard to take you seriously when you get basic facts so wrong. The dollar ROSE strongly during the crisis and started falling when Bernanke implemented QE in 2009 to drive down longer dated Treasury and mortgage rates.
https://www.macrotrends.net/1329/us-dollar-index-historical-chart
Unfortunately, the attached chart of DXY is incorrect. The two most important numbers are missing :
2008 bottom at 71.11 and 1985 top at 165.77. Based on these two numbers, one can see DXY Index reaching 120 area in 2025 ( 50% retracement level ). This info provides hints of what’s on the way : the long line of foreigners begging for US Dollars. Our street smart politicians could utilize and ride this trend instead of fighting it.
Are you serious? You provide no source and make the claim that Fed data is wrong? This is “Interactive chart of historical data showing the broad price-adjusted U.S. dollar index published by the Federal Reserve”. Perhaps the “price-adjusted” is the reason for less authoritative data sources depicting something different.
And in any event, it in no way invalidates that your depiction of the trend of the dollar during the crisis is incorrect. It starting rising sharply as of the Bear Stearns bust and continued to do so until QE kicked in.
Looking at Africa, i think these nation will never get away from dollar or Franc. The elites in most country’s use dollar to launder money. If am honest to you after Syria, i see that USA is back in the game, Iran will also fall soon, the new leader of Iran is lib, so USA don’t need to do much to get Iran.
New leader of Iran? Did Khamenei die overnight? If not, then your honesty sounds like a wet dream. Speaking about new leaders that are lib, Russia got one 25 years and 12 days ago, and is expected to fall any day now.
Concerns me greatly if a sovereign state like Russia can have its funds stolen in Western banks and in EUROCLEAR – a state with enormous military power to end life on earth – what hope have ordinary people got of avoiding Expropriation by the New Gangsterism ?
It is not unknown for gold to be seized or assets appropriated. My family lost its corporate accounts in St Petersburg after 1917 despite London assurances the deposits were safe
There are not many Currency Blocs and there is little propping up those that are traded. Euro depended on German trade surpluses ◽️U.K. Pound on dreams
It is hard to envisage a non-Hobbesian future
We have long had asset seizures in the US. If the cops catch you with a lot of cash, they take it and make up an excuse (even assuming they report it properly). Ditto other types of asset forfeiture. Assets are seized all the time in war. Japanese Americans property taken from them when they were interned in WWII. This practice started in World War I. See: https://www.smithsonianmag.com/history/us-confiscated-half-billion-dollars-private-property-during-wwi-180952144/
My grandfather was a smarty and thought he’d outwit the Nazi party by depositing 15,000 Pounds in an English Bank on Wenceslaus Square in Prague in 1938.
When the good steppers came in without knocking in 1939, English and French banks in Prague were still in an appeasing mood, adios 15,000 quid. (about $75,000 at the time or around $5 million in constant gold value now)
He tried to get restitution after the war, but the Brits weren’t obliging.
ADDENDUM:
Gillian Tett, “Dollar power means tariffs are not only game in town,” Financial Times, January 11-12, 2025, renews her commentary on weaponizing the dollar with a curious comment the Trump’s proposed Treasury Secretary “Bessent has also suggested that countries with military protection from America should be forced to buy more dollar debt, as a qui pro quo” by going to these countries ‘and say we have these 40- or 50-year military bonds [to buy],’ he said, citing Japan, Nato members and Saudi Arabia.’”
But surely such large purchase would bid up the price of the dollar, driving down the euro’s exchange rate and that of the yen. On the one handthe Trump administration wants a new version of the 1985 Plaza Accord that “bullied others into a revaluation,” but Trump has announced his aim both to lower the dollar’s exchange rate – as if this will make its industrial exports more competitive – and to demand that other countries buy more U.S. Treasury securities, bidding up the dollar.” As a Chinese proverb says, “He who tries to go two roads at once will get a broken hip joint.”
All this makes me wonder if everything isn’t going according to plan. Did the Brexiteers foresee this? They certainly knew that the Euro was going to be useless without political sovereignty. Merkel always said the EU practiced a shared sovereignty – a comment that precluded much discussion. (Talk about an abstract expression!) But without the US telling the EU what to do I doubt their shared sovereignty will be very effective as a political force. The Eurasian Economic Union will absorb them easily, especially after the transportation corridors are established. Follow the roads. It starts to make perfectly good sense that Greenland becomes part of the USA. Possibly Denmark and the UK as well. It’s possible that once financial “power” is spread across the planet, US/UK financial power will be just one more bag of nickels. But if we have coherent geographic political blocks, adjustments between systems will be fairly logical. Including ecologically, socially, fair trade for natural resources, and etc. And thus it is also conceivable that war and its bff profiteering will fade to green. Maybe.