Michael Hudson: Who Writes the New Rules as Power Shifts Away from the US?

Yves here. In a wide-ranging discussion, Michael Hudson discusses some of the implications of the US loss of economic dominance, which Trump is accelerating via his misguided attempts to preserve US hegemony. He points out that debt levels in Global South countries are often crippling and require writedowns, not mere restructurings. He also describes the ongoing project of developing non-dollar payment systems, Ukraine corruption and China’s development-oriented approach to lending.

Originally published at China Academy

1. How do you view Southeast Asia’s market opening to the US?

Even if they open their markets, as Japan also just did, this doesn’t mean that Asian countries are actually going to import more American autos or American rice or American products, because Asians prefer Asian cars, like so many Americans prefer Asian cars. The Japanese especially prefer their own rice or even Korean rice to American rice. So on the surface, it looks like the United States is going to achieve huge new markets. The question is whether the Asians are going to respond in the way that Canada did to a kind of nationalistic resentment against the United States bullying them into trying to open their markets and make America the main winner in any deal. If America is the winner in an international trade deal, that means the other country must be a loser. And the populations of other countries don’t like to be losers. They’re feeling increasing resentment. So what seems to be a victory for Trump in the very first look turns out to be he planting the seeds for resentment and a reaction against The United States. You’re seeing this already in Japan, for instance, when Japan is beginning to talk with Korea and China about Plan-B, how do they shift away from their reliance on the United States, given the fact that the United States is going to push them to make more and more sacrifices of their own economy, just to benefit the United States. It’s a one sided unfair philosophy of how to negotiate international trade that’s supposed to be of mutual benefit. The idea of mutual gain is now replaced by American First policy that the United States has to be the gainer; other countries have to be the losers. You can imagine what other voters and other countries are going to respond and their own buying practices.

2. De-Dollarization Gains Momentum Amid US Pressure

I think it will be more than a short-term change, because Trump is putting pressure on the Federal Reserve to lower interest rates. Meanwhile, American prices are going up. If America lowers its interest rates, if the Federal Reserve is forced to reduce it, there will be a large outflow from the dollar into foreign currencies. Already, there is an outflow into even the Euro, despite the Euro’s economic problems, and into Asian currencies, and most of all into gold. So the BRICS countries, like all the other countries in the world, realize that they’ve lost a 10 percent of the value of the US dollar and hence, US stocks and US bonds is valued in their own currencies. So if you’re a foreign central banker, and even if you’ve made 4.5% on your holdings of treasury securities, if the dollar’s exchange rate goes down 10%, then you’ve actually suffered a 5% loss. Other countries, especially the BRICS are moving into gold, they’re moving into each other’s currencies. They’re looking at some kind of safe haven away from the dollar. So what Trump is doing in trying to spur the American trade balance by lowering the dollar’s exchange rate is causing a dollar outflow that is offsetting any benefit to the United States. The question is, the BRICS can’t really have their own currency yet, because that would require political integration like you’d have in Europe. What they can do is create a new central bank that would only deal with credits and debts among governments themselves among central banks and national treasuries to help finance trade deficits and trade surpluses. Meanwhile, transacting trade, imports, exports, and investment in their own currency and their own payment systems, such as China’s developed, is much more efficient and lower-priced, lower-cost than using the SWIFT system.
So you’re having an outflow from the US banking system and the Euro banking system also. And that will cut the profits of the US banks in their foreign exchange, commissions or foreign exchange dealing. It will be much more efficient for BRICS countries to trade among themselves. There will be large gains, especially for their central banks, but also for the populations.

3. What Role Do U.S. Inflation and Domestic Issues Play?

If interest rates are, say, 4.5%, but inflation is 8%; and Nouriel Roubini, for instance, expects inflation to be 8% in a year or two. You can imagine that means that the price adjusted return on an investment at 4.5% actually involves a loss of about 6%. So, it’s self-defeating basically, the inflation is going to spur an outflow from the dollar, because the role of central banks, including the Federal Reserve, no matter what Donald Trump may tell them to do that, the central bank’s role is to prevent inflation and its idea of doing this is to raise interest rates.
When a central bank raises interest rates, the effect is primarily on stock and bond prices, not on consumer prices. So the rise in interest rates to deal with the inflation is going to cause the stock and the bond markets to go down. And investors are going to see they’re going down, and they’re going to move their money out of the dollar into foreign currencies, foreign stocks, foreign bonds, and into gold, that doesn’t have this prospect for loss.
We’re dealing with a perfect storm against the dollar as a result of Donald Trump’s fantasy about how the economy works. The inflation that he’s caused by imposing the import tariffs that he’s doing is going to accelerate the move out of the dollar and raise interest rates and cause a financial outflow into foreign currencies that is going to catalyze the move by the BRICS to say we’ve got to protect ourselves from taking a loss in the dollar holdings that we have.

4. Is the US Economic Crisis a Problem or a Quandary?

Instead of a problem, it’s a quandary. A problem has a solution. A quandary doesn’t have a solution. A quandary is that there’s no way out. Anyway, any direction in which the United States moves at this point is going to be destructive. For instance, in addition to imposing the tariffs that raise prices here for consumers. The Trump administration has stopped all anti-monopoly enforcement. Companies in the United States are raising their prices using the excuse of Trump’s tariffs as a kind of umbrella permitting them to raise it. And the Federal Reserve says, well, this is not a monetary problem. Tariffs raise prices, which have nothing to do with the money supply and interest rates. Monopoly pricing is independent of the money supply. It’s going up all by itself, but the only tool that the Federal Reserve has to counteract it is to raise interest rates. So, all of this is putting such a squeeze on foreign dollar holders that it’s leading to a flight for the exit from the dollar. The problem is how are the BRICS countries have not yet gotten together and created a common alternative. That’s what they’re trying to do right now. It’s up to them to create a political alternative to this that is just beginning to take shape. What Trump has done is catalyze this movement that is inevitable at some point. Maybe 2 years, 5 years, 10 years from now that other countries will break free of the dollar system. Trump has now accelerated this greatly. He’s created almost an emergency pressure to leave the dollar now. And the question is how it’s going to be done because the BRICS countries have so many different economic philosophies. I think we’re talking about mainly China and Russia are taking the lead in all of this for other countries. So it’s going to be up to China, Russia, and the agreements that they make with neighboring Asian countries is going to determine what the BRICS system is. And it may be that not all BRICS countries will go along with it. So we’re talking about a China-centered system, because China is the only economy that is large enough to provide an alternative to the United States. The question is how it is going to do this.

5. Postwar Debt Blocks Development

The Global South countries have lost their economic sovereignty as a result of their financial debt. There is no way that the Global South countries can pay the debts that they’ve run up really since 1945 and have enough money for the government to invest in the infrastructure that is necessary for them to take off. The dollar system is more than just using dollars. It’s an international tax system and a legal system. And so the Global South countries for the last 200 years, have operated as part of an entirely different kind of economy than the European and North American economies. The whole takeoff of the industrial revolution in Europe was getting rid of the landlord class, getting rid of land rent, getting rid of economic rent, getting rid of monopoly rent, and creating their own banking system.

The Global South countries didn’t have any of this. They’ve let instead of dealing with a landlord class like Britain did in 19th century, their land and their mineral rights, their oil rights, their privatized public utilities, are all owned by foreign investors. The foreign investors essentially are extracting all of the rental value of the natural resource rents of their oil and raw materials. The only way that the Global South countries can get sovereignty is number one, saying these debts that we emerged from World War Two with a lot of international reserves, we had surpluses that we sold our raw materials to the countries that were fighting World War Two. But then it’s all been depleted the trade policy that has been enforced by the International Monetary Fund. The World Bank has led us into chronic balance of payments and trade deficits. It’s imposed a kind of economic theory that’s driven us into debt. As a result, the creditor countries that have invested in our bonds that have lent money to us, including the IMF and foreign governments have made loans to us without any idea how we can repay the loans. The fact is that if we are to be a sovereign country and use our own national patrimony of natural resources and our own income to develop our economies and to diversify, to do for our economies, what for instance, China has done for its economy. We cannot afford to use our economic surplus to pay foreign bondholders, the debts that we have are odious debts. There are debts that were imposed on us by the International Monetary Fund, by the World Bank, by us economic policy, without our benefiting at all. And that’s the legal definition of odious debts. So the Global South countries will have to say now that president Trump has imposed heavy tariffs on us. He’s prevented us from exporting to the United States and earning the dollars to pay foreign bond holders. So we are together calling for a moratorium on all Global South debts. Just as in 1931, there was an international moratorium on German reparations and inter allied debts, because they realize that the debts cannot be paid. And the Global South countries cannot repay their foreign debts if they are to be sovereign. They also would have to do, what Adam Smith and John Stuart Mill, and all the classical economists advised the European countries and later, the United States for their industrial takeoff, you tax economic rent of raw materials. If you have a natural land or natural resources, or of public utilities, you tax away their super profits, their unearned rents and you use that as a tax base instead of taxing labor and industry. The IMF tells countries you can get rich if you only impoverish your labor force, lower your wages, prevent labor, unionization, and you’ll be more competitive. But that hasn’t made them more competitive that economic austerity, that the IMF and the United States has forced on Global South countries prevents them from getting out of their debt dependency and their financial dependency.

So the question is, whose interests the Global South countries are going to be first. Their own economic growth? Or payment to foreign bondholders and payment to foreign investors who’ve bought up their natural resources and who have been forced by the International Monetary Fund and World Bank to privatize their public domain, their public enterprises, their transportation, their communications, their water supply, all to privatize all of these into monopolies that extract all the profits and rents and send them abroad?

The Global South countries have to keep their economic surplus at home instead of paying foreigners. That’s going to be the great question that’s going to shape the economic and political discussions for the next few decades.

6. Debt Restructuring Is Not Enough

Just restructuring the existing debts is not enough. Restructuring is saying we’ll lower the interest for right now. We’ll just kick the problem down the road in the future. The fact is that the depths have to be explicitly repudiated. That’s the first thing and not restructuring. There’s no way these debts ever can be paid if the Global South countries are going to use their surplus to rebuild their own economy in a way that they’ve prevented from doing for the last 200 years. This is a problem that goes way back to the 1820s when their independence from the European colonial powers, Haiti, Mexico, and in Europe, Greece, Egypt, Tunisia, they all won their independence. But once they got political independence, they were able to free the slaves in Haiti and Latin America. But they had to borrow money to build up the industry that the colonial powers never provided them with. And as soon as they issued bonds for Haiti and Greece, they defaulted almost right away, and the defaults ran up. And by the end of the 19th century, the Global South countries succumbed to the problem that they have today. Foreign creditors were assigned to take over there are national monetary commissions. And all of these countries of Egypt especially as an example, and the foreign monetary commissions took control of the fiscal policy of the Global South countries that were indebted. And that’s all of the Global South countries. A state and a government is really a tax system who’s going to be taxed? What are you going to spend the tax revenues for? And the foreign monetary commissions that took over the Global South countries in the late 19th century? And then again, after 1945, the Bretton Woods International Monetary Fund, the foreign monetary commissions put the interest of the creditor nations, the industrial nations that were running trade and balance of payment surpluses first, and the interest of the debtor nations at the very bottom. The Global South countries need to say it’s time to put the indebted countries first, 85% of the world is indebted to 15% of the population. The entire financial system, the tax system is all run for this 15%, and it’s denominated in foreign currency. It’s time to put the interests of the 85% first. And that requires an ending to the whole system that has been put in place, not only since 1945, but all the way back to the 19th century, there has to be a political restructuring of the economy. And that will lead to the ability of the Global South countries to tax the profits and the rents of the oil companies, the mining companies, the forestry companies, the foreign agricultural owners, the foreign investors in public infrastructure, all of the money that they’ve been extracting from the economy and sent abroad, will be kept in the host countries themselves.

Even the word host country, the world host is a biological term for the host of a parasite that finds the host. You could say that the whole international economy is divided in that same way in the Global South countries and the BRICS and the global majority don’t want to be hosts anymore. They want to be sovereign countries that can do for themselves, what the industrial nations of Europe did. What china has done in following pretty much the same economic policy, reinventing the wheel that was first developed by industrial, Britain, France, and Germany, and then the United States in developing its own industry.

And most of all keeping its banking and its money creation in the public hands, instead of letting foreign banks siphon off all of the credit in a form of interest and sending it to their home offices abroad.

7. China Lends to Build, the West to Bind

The key is on what terms are the debts undertaken. The Western debts are emergency credits to finance trade deficits that are part of a trade dependency and financial dependency system by the Global South countries and the BRICS countries. The International Monetary Fund and bondholders will lend countries the money to pay the interest in the carrying charges on their rising foreign debts. And these foreign debts grow exponentially. The arrangements that China makes with countries are different. It is extending most of this credit in the process of developing the Belt and Road Initiative and putting in place the ability of other countries of its partner countries to increase their economic surplus. So the principle of Chinese lending is to make loans that will increase the ability of the creditors to pay. That’s called productive lending. The Western philosophy of credit and of banking doesn’t have anything to do with productive lending. All the bankers care about is we’re lending you money. You have to pay without any regard for the effect of our loan and your payment on what it does to your economy. If paying the debt destroys your economy, that’s not our problem. That’s your problem. But China realizes that this is a blind alley. And its whole philosophy of mutual gain in development says that if we lend money to an economy and that enables the economy to grow by enough to pay the debts for the infrastructure that we’re creating and roads and ports and other basic public utilities, then that’s a productive loan and both countries gain. You can say that if a bank or a bondholder, makes a loan to a country without any idea, any calculation of how this debt is going to be repaid, then it’s not simply a bad debt. It’s a bad loan. And the loan should be nullified in principle. The creditor should have an obligation to take into account the debtor’s ability to pay. China does that. The European and American neoliberal banking does not do that. So we’re dealing not only with a different banking and financial philosophy, but a whole different economic philosophy and a philosophy of international diplomacy of international gain, instead of mutual gain, instead of mutual exploitation.

8. Europe’s Economic Self-Sabotage

If you look at what countries are growing the fastest in the world, China’s economy is the fastest growing economy. Those of its Asian partners are also growing fast. The Western economies are shrinking. The US economy as a whole is de-industrializing. The euro-zone is de-industrializing and gone into a chronic depression now, as a result of its sanctions that the United States has forced against buying Russian energy, Russian gas, and oil, and other imports from Russia, even fertilizers. You’re having a shrinking economy in the Western economies, and a growing economy and a growing market in China and Asia. So it’s obvious that any country that’s looking for where is their market for trade and investment going to rise, is with countries whose economies are growing, not countries whose economies are shrinking.

That’s the problem for Europe. The United States is telling Europe, in order for Donald Trump not to impose heavy tariffs on you, that’s going to bankrupt your automobile industry, your computer industry that’s going to create economic dependency on Europe, you’re going to have to stop your commerce with China and impose sanctions and blocking on your trade with China, just like we’ve imposed tariffs and sanctions against your trade with Russia for energy, just as you’ve sort of cut your throat economically by the sanctions on Russia. We want you to sacrifice the growth that you had hoped to do by trade and investment with China.

How do you think the European population, forget European leaders, the European leaders are so pro-American, and they’ll say we’re willing to sacrifice our economy, because our loyalty is to the United States. And it’s the US state department that determines if we’re going to be promoted or not. But the European voters and the European industry and the European agriculture and European investors generally saying, well, we would like to make our trade and investment with kind of markets that are growing, and they’re blocked from doing that by US policy.

So what you’re going to be seeing in the next few years is a crisis in US and European diplomacy. As at some point, Europe is going to have to put its economic interests first. That’s the materialist approach to history. Who are you going to put first? The American obsession with war against China and Russia, or with the interest of domestic European, you could say Japanese and Korean industry in trading with the most a rapidly growing market in the world.

Obviously, the economic tendency is to say China’s doing exactly the form of development that the Western Europe, the United States did in its industrial takeoff. We want to be part of this new industrial takeoff instead of the deindustrialization that we’re seeing in Europe and the United States.

I think the real break is between the dollar and its European satellites and the emerging group of BRICS countries along with the global majority, with the Global South. The world is dividing into two economic systems. The United States is treating Europe, not as an independent entity. Europe has become a failed economy basically, so has the United States become a failed economy. And Europe cannot be a system in itself, because it’s already isolated itself industrially from other countries,

Europe is too small to be an independent financial system. It has cut itself off from trade with Eurasia, from trade with Russia, from trade with China. It has tied its trade so much to the United States, and it’s restructured its economy into a military economy.

So that almost all of the increase in European GDP goes for military spending, for the war against Russia, and for military spending to support America’s buildup of war against China. This military spending is a drain on the economy, not helping the economy. Europe has given in to the American insistence that it de-industrializes. And despite the fact that the population is voting for nationalist policies wanting to break away, the leaders of Europe, the political leaders are basically loyal to the United States, because that’s how the whole international political system is designed. And that’s how the euro-zone, the European Union has given up national economic policy, too, the heads of the foreign secretaries of the European Union that is part of NATO. Europe is not an independent economic actor. Europe is part of NATO as of the American military buildup. And its economic growth is sacrificed to supporting the American new cold-war policy. The rest of the world, the 85% can only react to this and try to avoid having to militarize their own economy, to avoid this kind of parasitism by the United States and avoid the de-industrialization policies that have led to American industry moving to China and European industry moving to China.

So we’re seeing the dollar system and the euro system is a de-industrialized debt ridden system running very rapidly into debt beyond the ability to be paid. And essentially, that is forcing other countries to go it alone to say, we don’t want to have happened to us in Asia, what is happening in Europe. The Asian countries are looking how Europe has sacrificed its growth in order to become part of the United States cold-war military spending, and of in transferring its economic authority to US policy makers. So the question is are other countries going to be independent of American diplomacy or not.

9. Solving Global Debt: Return to Keynes

That is the logical way to go. That is exactly the system the way to go. The Keynes’ Bancor that he designed in 1944 was an alternative to the International Monetary Fund. It’s a statement that if there is a country running a chronic trade surplus, then at a certain point, this accumulation of savings from it will be given up. And if a country or group of countries is in chronic deficit, moving more and more into debts, too, this new central bank that is extending credits and debt among the central banks, then they all have to be a clean slate. The idea of Keynes’ Bancor was to prevent debts from growing up beyond the ability to pay. When he says that countries that run a chronic balance of payments and monetary surplus, as the United States did after 1945, when it increased its proportion of gold holdings, all the way to 80% of the world’s monetary gold by 1950, when that happens, then the increase is wiped out, basically, because you realize that if countries fall into a debt trap that they can’t pay the debt, they have to be rescued and free themselves from debt so that they can use their money to grow.

So this forces the creditor countries, in this case, largely China to make sure that when it makes a loan, its lending policy is not like that of the International Monetary Fund, not like that of the United States’ banks and bondholders, but it makes sure that it makes loans that are solvent loans and can help countries generate the money to pay back the creditor by making tangible capital formation.

In the West, the financial system does not make loans for capital investment. They’ll make loans to buy a corporate raiders to buy an industrial corporation, then carve it up. They’ll make loans to corporations to buy their own stock and pay dividends and increase the stock price, but they won’t make loans to finance industrial investment to the extent that China and other countries make loans to increase capital investment above all, by governments in the form of infrastructure to lower the economy’s cost of doing business by having better transportation, better communications, better public infrastructure in general. Then this is a productive loan that’s Keynes’ bancor was designed to make sure that countries followed this philosophy of make productive loans, not unproductive usury type loans.

10. Ukraine’s ‘Anti-Corruption’ System Was Built to Protect Corruption

Long before Russia had to mount its special military operation in 2022, Ukraine was already the most corrupt country in Europe according to the World Bank and according to everyone else. The Ukrainian economy was created as a kleptocrat economy. In fact, that was the neoliberal plan for Russia and for all of the post-soviet countries after 1991. The idea was to take all of the public wealth of Russia and other countries and turn it over to individuals. The factory owners were given instead of running a factory for the state. The fact the ownership of the factory was turned over to the head of the factory or to Gazprom or to mineral rights. So the whole neoliberal idea of post-soviet development from Ukraine to Russia to everywhere was Kleptocracy and corruption and insider dealing.

The agency that the landscape cancelled was set up specifically by the Democratic Party to promote its main donors in Wall Street and the financial sector to take over the economy, especially Burisma. And the job of the anti-corruption agency was to protect the corruption, to make sure that there was no other authority that could interfere with the corruption that was put in place by the Biden administration and earlier American administrations to essentially use a client oligarchy to support the United States and drain this country. The Zelensky essentially abolished that when the corruption agency began to find that apparently the most corrupt individual was president Zelensky, who members of parliament said had taken $10 billion dollars a year, all this money that’s being poured into Ukraine from the Americans went to the government to maybe 1,000 Ukrainians and the money that was given to Ukraine by the International Monetary Fund in the United States wasn’t really given to Ukraine. It was given to the managers of Ukraine, the politicians, and the kleptocrats, the large few, four or five families that control the Ukrainian economy. And it was all corrupt. If you’re going to be corrupt and you want to protect your corruption, you want to control the police force; you want to control the corruption commission. So you go after the little guys, the individuals and protect your own corruption. That’s the role of almost any police force in the West, in any anti-corruption organization. We’re dealing with an Orwellian  rhetoric here.