Michael Hudson: The Collapse of America’s Economic Empire

Yves here. Get a cup of coffee. Below is yet another fine talk by Michael Hudson, here on the sweep of his argument in Super Imperialism, starting with the handling of war debts to the US in World War I, and how that series of decisions had ramifications even through today. Even though Hudson explains in detail why the dollar system of the US running current account deficits to finance its overseas military has gone well beyond its sell-by date, the lack of any plausible alternative leaves US counterparties in the position of needing to prop up, or at least accommodate, the current order.

I do have a small quibble. Hudson points out that the US is now in the position of having raised interest rates, yet having the dollar fall, which is the reverse of the relationship everyone has come to expect, of a high yield on a country’s bonds attracting hot money and therefore producing currency appreciation.

First, high interest rates = currency appreciation is not a relationship set in stone. When I was starting out in finance, a high interest rate on government bonds was seen as a sign of weakness, of needing to pay a yield premium to compensate for an expected devaluation in the not-too-distant future.

Second, the “currency depreciation despite an interest rate rise” did not happen until the Trump era, and is a direct response to Trump policies, as opposed to the US’ declining status generally. Mind you, the US likely would have eventually wound up in the “currency depreciation despite an interest rate rise” boat eventually, but Trump greatly accelerated that occurrence.

It was only after Trump took office that he made clear that he intended to make massive tax cuts and would try to fill the gap with spending cuts and tariff proceeds. Pretty much everyone who was not a Trump cheerleader recognized that this program would only widen the government deficit, putting pressure on interest rates and making the dollar less attractive.

In addition, increasingly erratic Trump behavior, particularly his tariff whiplashes, confirmed the worst fears that Trump would be wildly unpredictable, and was also tearing down institutions and norms that somewhat curbed the raw exercise of power. His tariffs, no matter how he implements them, will lower GDP and increase inflation on a sustained basis. The wild policy swings have a second effect, of increasing investor uncertainty and increasing the risk premium foreign investors require to commit funds to the US. These risk premia can be substantial. I once was asked by a US manufacturer to help evaluate a proposed investment in Mexico. The gap between the seller’s ask and what my buyer wanted to pay was massive, literally a 10x difference. When you analyzed their situations, the gap was entirely rational. Some big factor were that the American buyer would face higher taxes, labor costs, and tougher regulation. But the biggest was that the American buyer should also assign a Mexican risk premium to the expected cash flows from the investment, which then was 15% to 20%.

By Glenn Diesen. Originally published at his YouTube channel

GLENN DIESEN: Hi everyone and welcome. Today we are joined by Michael Hudson, Professor of Economy, to discuss the strategies for the American Empire. Now when we look at empire, we often tend to look at military capabilities and deployment but, as we know, empires also require an economic foundation. So to explore this, we’re gonna look into one of Professor Michael Hudson’s great books, which is Super Imperialism, the economic strategy of American Empire. So I will put a link to the book in the description. So please make sure to have a look and yeah welcome back to the program.

MICHAEL HUDSON: Thanks for having me, Glenn.

GLENN DIESEN: And yeah, after we address the, we’ll look at the economic strategy for the American Empire it would be interesting to get your take on how some of these economic foundations are, well, less stable now than they were when your first version of this book came out. But I thought a good place to start would be how you see the, well, what you name one of the sections of your book, the birth of the American World Order. What is the foundation for the economic strategy of the American Empire?

MICHAEL HUDSON: Well, the Americans never attempted, apart from the War of 1898, they have not attempted military overt colonialism in the sense that Europe did. It has turned out to be financial colonialism and financial imperialism. And the actual attempt to create an empire as such wasn’t really implemented until 1944 and 1945, when World War II ended. But the roots of all of it were found at the end of World War I, when the settlement of World War I ended up imposing American demands for repayment of the war debts that the United States had lent to Britain, France, and other allies before the United States had entered the war.

Well, when the war ended, the Europeans expected what would be normal practice and what was the practice after the Napoleonic Wars, for instance, that the Allies would forgive the debts to each other because this was all supposed to be part of the war effort, not only supplying armies, but supplying the funds and the money to buy the arms. But the United States said, well, we agree with you. Of course, we will not think of charging you for all the expenses of the war once we entered it on your side against Germany. But before we entered the war, that was something else. We were a neutral party, and we expect you to pay the war debts that you took on. A debt is a debt.

Well, the Allies then turned on Germany and said, well, we don’t want to have to pay the debts to the United States. Quite frankly, we don’t have the money to pay the debts that the United States has calculated that we owed. We’ll make Germany pay reparations. And by 1921-22, when all of this was set up, that essentially became the rule.

So I have to say that Europe was somewhat complicit in this. All of the European countries, including Germany, believed that a debt was a debt. And if that was the official debt, if it was the reparations imposed on Germany to pay for the war by the Allies against it, it was clearly beyond its ability. All of the parties in Germany, even the Social Democrats and the anti-war parties, agreed that the debts had to be repaid.

Well, we know the result. Germany had only one way to pay because it had lost its main, most productive steel industry, its lands, Alsace de Lorraine. It was financially crippled by the Versailles Treaty. And the only way that it could pay the debts was to throw reichsmarks, its currency, onto the foreign exchange market to buy the dollars, what ended up the dollars, to repay its debts to the Allies that the Allies simply passed on to the United States as their payment of the inter-ally debts. Well, the result is that Germany had hyperinflation. The United States didn’t want to enable Germany to earn the money to pay the Allies and to pay it because that would have threatened American industry.

So the United States passed a tariff against importing currencies with depreciating currencies, namely Germany. So Germany was left without any way of paying. What happened was the American investors lent German cities and local states money to borrow. The cities that borrowed their dollars in order to fund their own local budgets turned the dollars over to the Reichsbank. The Reichsbank used these dollars to pay the Allies, and the Allies paid the United States.

So what was established was a circular flow, and it was all based ultimately on the demand for gold. And America’s buildup of international power between World War I and World War II all reflected its increasing power of gold, against which all of the major currencies were convertible. And during, by the time that Germany collapsed into Nazism, there was a massive flight of capital out of Europe to the United States that led to the U.S. gold supply growing even more. So that by the time World War II ended, the United States controlled the great bulk of the world’s monetary gold. And because Europe was devastated, the United States was also in a position to dictate how the international trade and financial system was going to operate upon the return to peace.

And so the United States used its power to create the International Monetary Fund, the World Bank, international trade organizations, and bilateral diplomacy, basically to very quickly absorb what had been the British Empire. The United States had kept the sterling afloat by lending sterling the money to balance its international payments and recover after World War II.

The condition was that Britain had to open the sterling area to let India and other countries that had built up their gold and their sterling balances during World War II to be able to spend these balances, not limited to British industry, but to the United States. And so the United States, basically, there were a number of plans to try to, by John Maynard Keynes, to create some assurance that the post-war order wouldn’t be so unbalanced that all the gold and all the power would flow to the United States.

The United States rejected them. And they created the IMF and the World Bank basically to serve U.S. national interests. I don’t know if you want me to go into the details. For instance, the World Bank was supposed to lend other countries money to develop their economies. But first, Europe, and then what are now the Global South countries, were called developing countries at that time.

But the World Bank policy from World War II, ever down to today, was not to provide loans for countries to be self-sufficient in any kinds of commodities that the United States controlled. And the United States balance of payments since World War II was based very largely on food exports as well as control of the oil industry, as we’re seeing today. And so there was no attempt at all by the World Bank to follow the recommendations of its own economists.

The World Bank undertook a series of country studies and every study that it did of Latin America or the Middle East said, well, you have to have land reform. You have to enable farming to do in these countries what the United States did in the United States with its Agricultural Adjustment Act, very strongly organizing government support of farming to support grain to become independent and be able to feed yourself. That was a prime aim of self-sufficiency, historically. The United States and the World Bank basically made loans to finance international trade dependency on the United States, and that was where the International Monetary Fund came in. The monetary fund applied the same self-destructive economic philosophy that the United States and Europe had followed after World War I.

There was a great debate after World War I between John Maynard Keynes in England and the anti-German economists from France and from the United States, saying, Yes, the debts really are not unpayable. Any country can pay any foreign debt volume at all if it depreciates its currency to such a low point that its exports become competitive. And in practice, the IMF philosophy is if countries simply lowered the cost of labor, it had a labor theory of value, as it were, if countries can impose austerity and cut back government budgets not to run a budget deficit to pump money into the economy, then deflation and low wages will enable these countries to pay their foreign debt. That has been the policy of the International Monetary Fund ever since its foundation in 1945.

And that deflationary austerity philosophy has been largely responsible for preventing the Global South countries and Middle Eastern and Asian countries from being able to finance themselves at the same time that they have to pay foreign debts to pay the loans that they had to undertake in order to finance their trade deficits with the United States since World War II. And as these trade deficits have grown and grown and grown, countries have scrambled to obtain the dollars. And in effect, that meant the gold to pay the debts that they had to pay, putting the interests of foreign creditors, the United States government above all, but also United States bondholders and banks above their own domestic development.

Well, you can imagine what happened to threaten this dynamic that the United States had put in place to make essentially to make itself the beneficiary of the division of labor and the specialization of production between the United States as the leading industrial nation and other countries as suppliers of raw materials to it and low-wage manufacturers. There was what was called a dual economy structure. One economy for the United States and to a lesser extent Europe, and the other economy of the Global South countries and countries that were not self-sufficient. Well, what ended all of this started in 1950-51 with the Korean War.

Between 1945 and 1950, the United States gold stock had actually increased to 80% of the world’s monetary gold. Now, that meant that the United States owning gold and the insistence that all the currencies of major countries be defined in terms of gold meant that the United States had an overwhelming financial power. In 1950, for the first time, the United States moved into a balance of payments deficit as a result of its military spending connected to the Korean War. And from the 1950s on, right down through the end of the 1970s, the United States moved into balance of payments deficit that was settled by having to pay gold to the countries that were receiving the dollars that the United States was throwing off. And the entire deficit was a result of military spending.

I worked first for the Chase Manhattan Bank as their balance of payments analyst, and then for Arthur Anderson, the accounting firm, analyzing the U.S. balance of payments, showing that the entire deficit was military in character. Well, you can imagine what happened during the Vietnam War of the late 1960s. When I was at Chase, every Friday morning, we would look at the Federal Reserve reporting of what is the U.S. gold stock doing this week. How much gold did America have to send to France when General de Gaulle was receiving the dollars that America was throwing off in what had been French Indochina, Vietnam, Cambodia, Laos? These dollars were all sent to France that were cashed in for gold by France.

Well, Germany was also obtaining a lot of dollars that other countries receiving, American military spending, were spending on German industrial exports. So we would watch, week by week by week, the claims on the American gold stock rising. And it was obvious that if America’s Cold War spending continued at the rate it was going then, at some point, it would run out of enough gold that was needed to legally cover the U.S. paper currency. Every dollar prior to 1971, the dollar bills that you had in your pocket had to be backed 25% by the gold supply. And by 1971, President Nixon realized that this was no longer the case.

He closed the gold window and said, we cannot afford to pay the cost of our military spending in Asia and the whole world in gold anymore. There was some panic within the United States government. Well, a year after, almost to the month, a year after the United States went off gold in August 1971, my Super Imperialism was published in, I think, August, September 1972. And it turned out that the largest purchasers, I’m told, were the CIA and the Defense Department, who’d bought it through the Washington bookstores.

And my friends at Drexel Burnham, the investment bankers, came to me and said, look, what are you doing in academia? We’re going to invite you to address our annual meeting. Herman Kahn will be there. He’s going to love your presentation and he’s going to offer you a job. Accept it, leave academia.

So indeed, I explained to them that the ending of America’s payment in gold did not have to mean the end of American power. Just the opposite, that once foreign countries no longer could use their dollars to spend on U.S. gold, they had only one practical choice, given the arrangement of international financial diplomacy at the time. What did they use their dollars for? They bought the safest investment there was, U.S. Treasury securities, Treasury bonds, Treasury bills.

And so what happened was, as the United States spent military spending abroad, it got the recipients, the, turned their dollars over to the central banks for their own local currency. The central banks invested these dollars in U.S. Treasury securities, and that financed not only foreign military spending by the United States, but it financed the budget deficit that within the United States was primarily military in character, the military-industrial complex. And I pointed out that what had happened was that, instead of being a disaster by ending the United States control of the world economy through its gold supply, other countries really had no alternative but to have their own central banks themselves finance U.S. military spending domestically by recycling their dollars. Well, Herman Kahn hired me. I went to work for this Hudson Institute.

He said, you know, why are you hoping that your classes of maybe 50 graduate students at the New School are going to end up, maybe somebody’s going to be a senator or something later. If you join the Hudson Institute, I’ll take you to the White House and introduce you and we’ll get a contract and you’ll become a government advisor in all of this. And it seemed to make sense. And so the Defense Department gave the Hudson Institute an $85,000 grant, much more than I’d gotten as an advance for Super Imperialism, for me to go back and forth to the War College and to walk to the White House and other venues to explain what I just said. That the U.S. dollar standard, which I called the Treasury Bill Standard of international finance, had replaced the gold standard and that essentially locked other countries into the financial support of Americans spending abroad. And that going off gold essentially removed the limit on military spending.

I gave one talk at the White House to Treasury officials with Herman Kahn, and we said, gold is, you can think of it as the peaceful metal, because if other countries have to pay their balance of payments deficits in gold, any country waging war, any country entailing a very major military expenditure abroad and to fight a war, always entails running a big deficit, is going to have to run out of gold and lose its power in a system that’s based on gold.

Well, immediately the Treasury people said, well, we don’t want that. We don’t want because it’s America that is going to war. It’s America that’s spending almost all of the world’s military budget. And we don’t want gold to play a role in any system that the United States cannot control. And we can’t control gold outflows if we have to convert our dollars into gold. So, actually, to deprive other countries of any ability to cash in their dollars into gold means they’ve been co-opted into a financial system.

And it’s at that point that America truly became an empire because the entire world’s financial system and it was therefore its tax system, its fiscal system, its money creation was basically directed by the U.S. Treasury to finance the costs of what America claimed were the needs of its empire in creating its 800 military bases all over the world and then waging the wars that it’s been fighting since the 1970s. And that is until this year, other countries were willing to be part of this system because the facts of geopolitics led them to support U.S. military spending, but also because there wasn’t an alternative.

Well, today, with President Trump’s budget that he and the Republicans have sent to Congress, the American debt, domestic debt has been so great, and it’s foreign debt to foreign central banks and to foreign investors, including private quasi-government funds, such as Saudi Arabia and Norway, have realized that the foreign debt that central banks hold that was supposed to be as good as gold and the safest asset to buy, cannot be paid. There is no way that the United States can or would or is willing to somehow pay the amount of money that other countries hold as loans to the United States, mainly treasury bills, but also U.S. agencies, Fannie Mae, government agencies pay a little bit more than the Treasury, and even corporate securities such as Saudi Arabia holds and Norway holds. There is no way that America is willing to pay these debts, either by exporting because it’s deindustrialized and it’s not running an export service anymore, or by selling off its industry to foreign buyers.

The United States until this year has said that if foreign countries could not pay their finances and their balance of payments deficits, they had to do so by privatizing their public utilities, selling off their infrastructure to foreigners, selling off their mineral rights, selling off their land to foreign investors. The United States is not willing to do what it’s insisted that other countries do as the basis of world trade and investment that it’s created. So other countries realize this double standard, that they’re really not getting savings that can be converted into ownership of U.S. industry or agriculture or infrastructure or anything else. They’re just paper dollars.

And so for the first time, you’re having a move to seek an alternative to the U.S. dollars. Well, the only alternative so far that people can agree upon is gold. And when Herman Kahn and I went to the White House in 1973, Herman brought a map of the world. And there was a map of countries that trusted governments. And that was Northern Europe, Europe as a whole, the United States, the English-speaking countries, countries whose populations did not trust governments. Well, you could call them the global majority. Most people didn’t.

Then he had countries that supported gold and commodity money. Well, there were countries like India, Asia, Global South countries. They wanted something secure, not an IOU. The countries that trusted paper money were Northern Europe and the English-speaking countries. So you have this faith in paper money that is “A debt is a debt.” And that was the principle on which America began to accumulate gold after World War I.

But the United States, certainly the current budget that is before Congress, is saying, well, yes, a debt is a debt on the balance sheet. Yes, on the balance sheet, we owe foreign countries more money than there’s any way we can see can be repaid. But that’s it. It’s a debt that will never be repaid.

It’s as if you went to the grocery store and tried to pay in an IOU, and the grocery store would say, well, you run up quite a tab in the last week. You know, you got to pay it. And the customer will say, well, I can’t pay. But you can use this debt to maybe you can give this IOU to the farm that’s giving you the eggs and the dairy or the vegetables that you’re selling. And somehow, if only this IOU could be circulated as a claim on the customer, then it would be, technically, it’s a debt.

Well, a lot of the financial system and the world financial system are now based on that kind of debt that there’s no ability to pay behind it. And that is what has become the key, you could say, to the American empire, because it’s the key to America’s ability to spend abroad and be really the first nation in history that does not have to pay its war debts or other debts that it has run up to foreign countries. That’s the double standard that America has been able to achieve to make it the unique nation, or the indispensable nation. And that is why, right now, other countries are buying gold, and you can see the gold price going up and why they’re trying to realize, well, we can’t spend all of our dollar holdings on gold.

Isn’t there some way we can create an alternative paper currency owed by other countries? Well, you have the BRICS talking about that. And you really can’t have such a currency by other countries because to issue a currency, you need a parliament to say, well, who’s going to get the benefit of this currency? And if you issue the currency, what’s it going to be spent on? Who’s going to spend it?

You’d have to have something like a real Europe deciding who’s going to get the result of Euros that are being created, except the United States created the Eurozone in a way that it really can’t run enough of a deficit to recover from the downturn that it’s now been forced into. So, the world is in a quandary. And that’s what my Super Imperialism is all about. And I’ve tried to update it to the present, but that’s the basic theme.

GLENN DIESEN: Well, I find this to be fascinating that the U.S., initially, the massive power after World War II, was obviously based on America’s position as a credit nation. And obviously, yeah, the military forces, privileged position in the World Bank, IMF, and the U.S. dollar. But it’s quite unique, though, isn’t it, that it became its, as a deficit country, its growing debt became the source for further imperial strength. But nonetheless, this seems to have always been a temporary model. I do remember back in the 90s and early 2000s when you had political leaders in Washington arguing that, well, actually, our debt is a sign of strength.

It shows that the world trusts our economy and trusts our currency. However, this, if it’s not sustainable, at some point you’ll hit a wall. And I looked at the debt clock this morning and it’s almost running into 37 trillion and this rise has only intensified. So at some point you do need alternatives which appear to be emerging.

You also mentioned, you said facts of geopolitics. I guess one of the facts of geopolitics during the Cold War was simply that the main two rivals, be it the Soviets and the Chinese, were Communist states, largely decoupled from this kind of economic statecraft, while the allies of the United States in the capitalist world all had to prioritize, as you said, the facts of geopolitics. That is, you couldn’t really allow too many economic squabbles to go along. So, you know, there were some incentives to prevent rivalry between the capitalist industrial nations as you’ve had prior to World War II.

But where are we heading now, though? Because, again, the debt model seems to have exhausted itself and the facts of geopolitics have changed. Now you have the key rivals, be it China, Russia, and others, who are also embracing economic statecraft. How are the foundations, I guess, of the American empire eroding?

MICHAEL HUDSON: The debt model has not exhausted itself. And Trump has given a number of speeches, and Congress has backed him up, saying any country that is moving to establish an alternative to the dollar, we’re going to hit with special tariffs, up to 500% even. He said, any attempt by countries to shift out of the dollar to the Chinese payment system towards China will be treated as an enemy and we will block their access to the United States market. What he’s, he realizes that America’s power is no longer a creditor country, but its power is precisely because it’s a debtor country.

Keynes made a joke saying that if you owe a thousand dollars to a bank, then you’re in trouble. If you owe a billion dollars to the bank, the bank’s in trouble. And that’s the United States’ strength. It owes so much money to other countries that if it doesn’t pay, for instance, if it grabs the Russian savings that were held in the United States and in Brussels, it’ll confiscate it, then the savings, poof, disappear. The debt is basically annulled.

The United States is unwilling to annul Global South debt that can’t be paid, but it has any attempt by countries to break away from the United States dollar and the dollarization is treated as an act of war. Now, that was explained to me by the Treasury Secretary, already in 1974 and 75, with the oil war when Saudi Arabia and the OPEC countries quadrupled the price of oil in response to the United States quadrupling the price of grain. And the United States told them that if they could charge whatever price of oil they wanted to, that was fine with the United States because the United States controlled much of the world’s oil industry, including domestic oil production. And the United States oil companies had a price umbrella as the price of oil went.

However, the condition for letting OPEC countries raise the price of oil was that all of their export earnings would be recycled into the United States. It didn’t have to be only in Treasury securities. It could be in stocks and bonds, but only a minority ownership. So the Saudi kings bought, I think, a billion dollars of every stock in the Dow Jones Industrial Average. They spread their savings over the U.S. bond and stock market in a way that did not involve any ability to control the companies whose stocks they owned, in contrast to most stockholders who try to have some voice in the company’s management. So that’s the situation we have today.

Imagine what’s happening in the Near East now when Saudi Arabia, Kuwait, and the United Arab Republics all own and have huge holdings of U.S. securities. They’ve seen the United States grab Russia’s savings. They’ve seen the United States through England confiscate Venezuela’s oil gold holdings and the Bank of England. And the whole process began with the Iranian Khomeini, the Iranian revolution against the Shah, when Iran tried to pay the interest due on its foreign debt and Chase Manhattan refused to make the payment.

Iran was counted as default and immediately foreclosed upon. The rest of the Near Eastern countries that are major holders of American debt are locked in to, they’re fearful of acting in any way that would oppose the current fight U.S. buildup against Iran because anything they do, whether it’s to support the Palestinians or to support Iran or anything that is at odds with U.S. diplomacy in the Near East, would result in the United States holding all of their savings in its own pocket under their control, able to freeze them or confiscate them at will. That’s the power that America has as a debtor over other countries and that’s why Trump has said, any attempt to de-dollarize is an act of war today just as they were told 50 years ago in countries were told way back in 1974, 75.

GLEN DIESEN: Well, there’s also an old truth though that is any system which becomes too dependent on coercion will eventually begin to, I guess, degrade over time and there’s, well, the whole thing that the whole world, that America owes money to the whole world so America sits on their piggy bank or their savings and can’t take it whenever they want. It’s it seems as if it only works to such an extent and I can appreciate the theft of Venezuelan gold and all of this. But it looked as looked as if the stealing of the Russian sovereign funds was really one step too far because when there’s no trust anymore in the system, it can’t really work.
And we see not just the opponents such as China being worried because they know they’re never going to get all their money back but also countries like India are concerned about secondary sanctions and other American allies.

So, how long can this, I guess, a new changing character of the American empire continue?

Because, well, from my perspective, one of the key things driving China these days is exactly the search for alternatives because they are preparing themselves for an almost never-ending trade war with the United States, and they can’t really outsource everything from their financial stability to the goodwill of the United States. So, surely the rest of the world is looking for alternatives to escape U.S. financial control.

MICHAEL HUDSON: Well, you’ve summarized the dilemma perfectly. Trust is gone, but so far there’s no alternative. So, the answer to your question is to how long this system can last until there’s an alternative. And that’s why the United States’ foreign policy, now, to maintain what you could call its financial empire and control of world trade and investment is based on preventing any alternative that might come, be developed.

Obviously, the countries running the strongest balance of payments and trade surpluses are the logical sponsors of such an alternative, China, oil-producing countries. This is why the United States has designated China, and any country that looks powerful enough to create an alternative is viewed as an enemy. And the U.S. tries to prevent and preempt their creating an alternative form of international monetary savings by imposing sanctions on them, which are counterproductive, but it’s the United States strategy, or trying to organize European diplomacy and diplomacy of its proxies and satellites to somehow delay this development that, as you point out, it’s inevitable.

Yes, someday the United States cannot get a free lunch anymore. And the first step in preventing a free lunch is for other countries to recognize that there is a free lunch and that they’re essentially giving up money that loses their control over it and actually funds the United States willing to take aggressive actions against them if they do anything to try to ensure real value for their money. Well, the question is, how long can the U.S. ability to control German politicians, European politicians, Asian politicians, especially OPEC country politicians, how long can it actually threaten them to live in the short run?

In the long run, they realize the U.S. cannot do it. But living in the short run, they can do tactics. The problem is that the tactics that they’re using are so heavy-handed that they’re the opposite of strategy. The more they go to tactics of enforcing and threatening and bullying other countries, the more they’re destroying the strategy of actually making the United States a sufficiently viable economy to promise to actually have something to repay other countries with.

I think the U.S. plan is what the Trump administration hoped for; it is that America can create an internet monopoly, a computer monopoly, an artificial intelligence monopoly, a chipmaking monopoly, and somehow use its monopoly earnings to reverse the balance of payments deficit and reestablish world power. That’s a pipe dream because, in order to achieve technological dominance, you need research and development. And because the financial sector and corporations, the private corporations that are supposed to be developing this technological lead, live in the short run, they’re using most of their income for Apple and the other countries and buying off their own stocks and paying out as dividends to support their stock prices. So, the way in which the American economy is being financialized is actually undercutting its ability to maintain its financial power over the world because it’s resulted in deindustrializing the United States economy, which makes other countries feel even more queasy about what’s happening to their savings invested here and what on earth can they do?

So, what you’ve seen in the last two weeks, last month, is something very surprising. The United States’ interest rates have been going up and up, but the dollar has been going down. This is the first time in history that when a country has raised its interest rates, like the United States, it actually loses. There’s an outflow of currency instead of attracting other countries to the world. Arbitrage, as European and Asian countries say, well, we can make a higher interest rate by borrowing cheap in our countries and buying these high-yielding Treasuries, 10-year Treasury securities at 4.5% interest.

Well, all of a sudden, it doesn’t work anymore. And that is what is panicking the Treasury and people who are actually trying to figure out how are we going to pay. The United States is turning into the condition that England was in after World War II of limping along and being unable to survive. The difference is that there, right now, is no alternative that European and Near Eastern countries are willing to accept as long as they refuse to accept China and Asia and Russia as an alternative. That’s exactly what is underlying the war, of America’s insistence of the new Cold War, saying that China is our existential enemy. We are going to try to drain Russia’s economy by the war in Ukraine.

We’re doing everything we can to disrupt the ability to other countries to be an attractive alternative to the dollar. This attempt to maintain dollarization and prevent de-dollarization and therefore ending the Treasury Bill standard in a way that America cannot benefit either from the Treasury Bill standard or a gold standard. This is the key to understanding not only American diplomacy, but the American military action against Iran today is part of its attempt to control the entire Near East, partly using Israel as its proxy and ISIS and al-Qaeda in Syria and Iraq as its proxies. This is the key to why you have such a seemingly bizarre international military situation.

How on earth would it can, people are saying, how is Iran a threat to the United States? Well, it’s a threat to the United States because it exists, and the United States does not control it as the key to controlling the overall Near East and all of the balance of trade surplus that Near Eastern oil draws in from the rest of the world. That’s what makes the United States think of Iran, the war in Iran, and the destruction of Iran as being in the United States’ interest. It’s the role of Iran as the last potential alternative in the Near East to U.S. control of making the Near East a client economy, like it has made Latin American economies clients for so many years.

GLENN DIESEN: But this is the only path out of the current dilemma that is either establish some important tech monopolies in this new industrial revolution or establish, I guess, quasi-colonies around the world. I mean, it just appears that all of these initiatives, even if one is optimistic, amounts to just kicking the can down the road. What are possible pathways? I mean, if you wrote a sequel to your book now on super imperialism, where could the United States go from here if you want something more sustainable?

Because it appears that the tech leadership is not going to monopolize anything with the presence of China and it’s also these colonies. Obviously, it’s not going to be able to make a colony out of Iran either, it seems. So, what exactly are we looking at? Well, if you had a, not an attractive option for an academic, but if you had a chapter of future speculation where we’re heading, what would you see?

MICHAEL HUDSON: The only way that the United States can remain a solvent economy is to give up the attempt to run the world with an empire. Empires do not pay. That’s the lesson of history. Empires cost a lot of money, and in the end, the imperial power goes broke, just as Britain went broke with its empire, ending up turning its monetary power over to the United States. The French Empire went under. Empires don’t pay.

So the only way the United States can exist is re-industrializing. That means definancializing its economy. You point out that we’re living in the short run. How do we move to the long run? The financial sector lives in the short run. As long as the United States economy has shifted its central planning away from government to Wall Street and to the other financial centers, these financial centers have a timeframe of three months to a year.

They’re looking at what is the stock price doing for this quarter, because that’s what the bonuses of the chief financial officer and the CEOs are based on: their stock price. So you’re having an economic mentality in the United States that is essentially the neoliberal mentality of living in the short run, making money financially instead of in a productive industrial, agricultural, and commercial way. So the United States would have to be just another country, like all other countries. It would have to be an equal.

There would have to be parity between the United States and other countries, all following the same set of rules. That is anathema to Congress. There’s still a nationalism and a populist nationalism here that says we don’t want to be another country. We don’t want to have to live by the rules that other countries live by. We want to continue to be able to dominate other countries because we worry that if other countries have the ability to become independent diplomatically, they may do something that we don’t like.

Well, as long as you have this mentality, you’re going to end up setting yourself against the rest of the world. You’re going to lose your ability to trade and make your economy an investment magnet for other countries. There’s no way that other countries can invest in the United States with the hope of making money from American corporate growth because the growth that’s occurring is only financial in character. Stocks and bonds, real estate prices, asset price inflation financed by debt, creating more and more debt to bid up the price of real estate, bid up the price of bonds, and bid up the price of stocks. That’s what the zero interest rate policy was all about after 2008.

The United States has been transformed from an industrial capitalist economy into a finance capitalist economy that actually is not old-fashioned capitalism at all, but is purely financial. You could say it’s closer to a neo-feudal economy than to the kind of industrial economy that Britain, Germany, and the United States were becoming after World War, at the end of the 19th century, up to World War I, the kind of economy that gave them all of their world power in the first place. That kind of industrial, productive, non-financial power no longer exists in the West. So the problem’s not only the United States, it’s the neoliberal economic philosophy that has spread from the United States, Western Europe, and America’s major allies. So the real conflict between the United States and let’s say China, Asia, and the Global South is not simply a conflict over how they’re going to hold and save their balance of payment surpluses; it’s a conflict of economic systems.

Are other countries going to create an economic system that is not military in character, that does not base itself on making financial wealth, but makes itself by creating public infrastructure, such as China does, base itself on actual industrial growth, not rent-seeking. And that’s sort of been left out of the economic models that are made. America’s turned into a rentier economy, not an industrial economy. It makes money financially. It makes money for interest rates. It makes money by creating monopolies, such as in the tech sector.

But none of these are based on the actual cost of production and cost. It’s all based on special privileges and special distortions of the market away from everything that Adam Smith and John Stuart Mill and even Marx talked about. What you have today is a form of capitalism that none of the classical economists or Marx anticipated. They all thought countries are going to act in their self-interest. And if you’re forecasting what is going to happen to the United States and what the alternative is for Europe, and you think, well, they’ll act in their self-interest, you have to deal with the fact that countries are, none of these countries are acting in their own self-interest.

They’re acting in an economic model, a neoliberal model, a military model, a diplomatic institutional model that turns out not to be in their self-interest, but is self-destructive. So all I can do is explain why it’s self-destructive. And I think that the natural tendency, as I think you’ve hinted at, is for other countries to follow the creation of real wealth, not financial wealth. And there’s a reason why China has been growing so rapidly with its real GDP and Russia with its GDP. China’s GDP and Russia’s GDP does not include an increase in rents, an increase in interest and financial penalties, and capital gains. It’s not financial in character. It’s real in character.

The fight is between living in unreality in the short run or reality in the long term. How are you going to bring that about? For me, all I can do is say what I’ve just said to you today. If people understand this, at least that’s step one in trying to accept the alternative that the empire is, any country dominating another country is over. China would not be able to do it. No country is able to be an empire at the rest of the world’s expense without the rest of the world pulling back and trying to create an alternative.

GLENN DIESEN: Yeah, the lack of rationality these days is one of my main concerns because you do see foreign policy and economic policy being less and less dictated by national interest and reason. But this was the need to adjust is one of the reasons I was a bit optimistic about Trump’s presidency, because at least he talked about reindustrialization. At least he talked about the need for the US to have a different role. He challenged NATO expansionism, which was a key manifestation of this hegemonic system.

It looked as if he kind of, if he didn’t put words on it, more or less intuitively recognized that, you would have to let go of the empire in order to save the republic. So he, it looked as if he was, but, of course, he made a mess out of everything. And of course, this attack on Iran now makes it even more so. But yeah, well, before we wrap this up, what do you think is, not the long term, is going to happen now in the short term? You mentioned that the United States attempts to raise interest rates to attract capital, but instead you have capital flight. So how, what do you expect, if not over the months to come, the weeks to come?

MICHAEL HUDSON: Other countries are running for the exit and Trump’s policies are driving them to the exit. His tariff policy essentially threatens to deny them the U.S. market if they don’t agree to stop trading with China, to refuse to de-dollarize, and essentially to surrender their economies to U.S. directions. They’re not going to do it. And the response by other countries is going to say, well, we’re not going to accept your terms.

If you’re going to raise the tariffs to 40%, 60%, do it. Of course, we will. What you’re doing is stopping us from trading with the United States. We’ll have tariffs against you, and you go your way. We’re going ours. So Trump himself is, if there were any plans of any plans, how do I break up the American empire? I would do just exactly what Donald Trump is doing. You drive other countries away and you prod them to say, you think there’s no alternative? I’m going to be so aggressive towards you, just as I’m aggressive towards Russia, towards China, towards Iran and the Middle East. I’m closing the U.S. market to you.

Trump has said that if you try to move your, to buy U.S. Treasury bonds yielding 4.5%, I’m going to charge a fee and a tariff fee on your buying bonds of 10%. So you’ll actually lose money on the bonds. And even if the United States does pay 4.5%, the dollar will be falling against the Euro. It’s fallen 10% against the Euro already. The Euro was up to 120 before. Now it’s back near parity.

Other countries are losing in their own currency the valuation of the dollars they have. So Trump is speeding up the parting guest. He’s closing off the U.S. market to them. And that means go it alone, folks. Make your own agreement. And certainly there will be, despite the fact that the politicians of America’s client countries, Germany, France, and the United Kingdom, Britain, are all basically voting against what their own populations vote for, just as American Congress in wanting to press for war in Iran is voting against what the opinion polls sold the Americans for.

This cannot last. It has to be temporary or there’ll be a revolution. And you have to remember that industrial capitalism itself in the 19th century was revolutionary. In order for British industry to become competitive, the industrialists had to end the power of the most powerful vested interests of their day, the real estate interests. They had to overcome the power of the House of Lords. They had to change the whole political system. They had to widen the vote to democratize politics. That was a revolution.

This is the kind of revolution that is recurring today in the global majority countries. Industry in Europe had to throw off the remnants of feudalism. The landlord class, the monopolies that had been created by international bankers to help kings pay the war debts that they ran up. Well, today, these were all rentier interests, land rent, monopoly rent, and interest. This is the problem that the Global South and global majorities are fighting. It’s like the equivalent of what were the feudal interests that Europe overthrew to industrialize and become capitalist countries, are today, foreign interests.

Foreign investors own their raw material rents, their natural resource rent, their land rent. Foreign investors own their major monopolies. And now that they’ve privatized public infrastructure into monopolies, like Thames Water in England, and run these countries into foreign dollar debt so that they own interest. The fight by other countries today to gain control of their own destiny, their own autonomy, their own sovereignty is very similar to the fight that Europe had against its own domestic interests that were carried over from feudalism. The world today, the rest of the world outside of the United States, has to cope with the fact that we don’t have feudalism anymore, but what we have is a superstructure of rentier interests that are not part of the production economy.

We’re back in the position of Adam Smith and John Stuart Mill and Marx saying, they’re two parts of the economy. There’s a production economy, and then there’s the rentier economy, the circulation economy, finance, industry, real estate, and monopolies. There has to be a way of thinking about, what is gross national product? What is a product? Is a product really all the money that the financial sector and the real estate sector makes in rents, or is it what we actually produce, like what China is producing without a rentier class?

The fight of de-dollarization is really involves getting rid of the rentier class that these countries have, and also they cannot afford to pay the foreign debt that they’ve run up. Trump’s tariffs prevent other countries from earning enough export returns to earn the dollars to pay the bondholders and banks that have debts owed in U.S. dollars. So they’re going to be huge defaults that turn into a very conscious and deliberate debt repudiation of what are odious debts, because all these debts that have been run up since 1945 as a result of a U.S.-sponsored philosophy of the International Monetary Fund and the World Bank on essentially predatory pro-U.S. lines have ended up not helping other countries pay, but preventing them from paying. And if a creditor country will not let a debtor country pay by exporting enough in competition with its own industry, then there’s no economic or moral claim that this foreign debt is a viable debt. It’s unviable.

So not only is the American empire unviable, but the whole superstructure of debt, the superstructure of monopolies, the superstructure of privatization and financial Thatcherizing and Reaganizing the world economy are unviable. So we’re dealing with a real clash of economic systems. Some people call this a clash of civilizations, but it’s really a clash of economic systems. And you could say it’s between the promise of industrial capitalism as it was developing in the beginning in the 19th century and the disastrous reality of finance capitalism with a single geopolitical center in the United States run increasingly in its own interest in exploitative, predatory fashion.

GLENN DIESEN: Well, Michael, thank you so much. And for anyone who wants to know more on the economic strategy for the American Empire and also why this is collapsing, again, go to the description and look for the link to Michael Hudson’s book, Super Imperialism. So thank you for going through these important topics and I hope to have you back on soon.

MICHAEL HUDSON: Well, thank you for giving me a chance to explain my philosophy, Glenn.

Transcription and Diarization: hudsearch
Editing and Review: Chris Platania-Phung