Yves here. Michael Hudson provides a useful update on Trump’s continuing efforts to shore up US primacy in both military and economic spheres via an extract from an upcoming article. I hate to have to be a stickler, but I am bothered by Hudson taking up the trope that the US will be unable to pay principal and interest on Treasuries. A sovereign currency issuer will never need to default. It can always satisfy obligations in its own currency. It can overspend and generate too much inflation. That will lead the value of its currency to fall in relation to other currencies, reducing the value of that currency to foreign holders.
The US may choose to stiff creditors, say by force extending maturities of Treasuries. But it can always pay dollar obligations.
And the reason central banks accumulated dollars was in large measure because they set the value of their currencies low so as to run trade surpluses and accumulate foreign exchange reserves. That was deliberate policy across Asia after the 1997 Asian financial crisis. Countries like the Republic of Korea and Thailand went through IMF bailouts and did not want to be on the receiving end of its ministrations ever again. A big FX reserve means that the country can defend its currency on its own without external help during a financial crisis.
Even as late as the Obama Administration, the Treasury was criticized for not designating China as a currency manipulator for running a pegged currency pegged too low relative to the greenback. That charge continued to be made into the 2010s, when China changed to a dirty float policy and allowed gradual appreciation of the renminbi to make that claim no longer true.
I also must note that SWIFT is not a clearing system. SWIFT is messaging only; clearing and settlement is not a part of SWIFT and in the dollar, happens via Fedwire.
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 Civilizatio
The National Security Strategy’s Drive to Shed the Costs of Imposing Its U.S. Unipolar Empire
The one area in which the National Security Strategy makes a claim to be realistic is to recognize that the United States cannot directly be seen to impose its control by force. This task is to be delegated more to client oligarchies and their governments, by assigning responsibility (and most important, the military costs) on a regionwide basis along lines similar to how the European Union’s foreign and domestic political policies have been made subordinate to NATO Cold War policy controlled by the United States.
Replacing at least the anti-Russian rhetoric of Biden’s and the EU’s support for the war against Russia, the NSS proposes dividing the world into spheres of influence for the major regional powers: the United States (monopolizing control of all of Latin America and the Caribbean for itself), Russia (with its Central Asian and other former Soviet republics, including what formerly was eastern Ukraine), and China over mainland Asian neighbors. A Pacific NATO-like arrangement to be shepherded (and financed) by Japan, with India as the wild card. The EU under NATO are dismissed as a waning power with little influence.
This plan is not really a division of spheres of regional influence at all, in the sense that World War II’s 1945 Yalta conference was. It does carve out a uniquely U.S. control over Latin America and the Caribbean. European and Asian countries are to keep away from investing in the major resources of these countries.[1] This is Trump’s travesty of the Monroe Doctrine. That doctrine called for a reciprocity with foreign countries: Europe would stay out of political control of Latin American countries, and the United States would not interfere in European affairs. But U.S. officials had no problem with the newly independent Latin American countries going deeply into debt to British and other foreign creditors who imposed debt dependency, much as France did with Haiti as the price of its buying its political freedom to abolish domestic slavery. The effect was for many of these countries obtained political freedom from colonialism only to fall into debt dependency. But the Monroe Doctrine was only concerned with direct political and military control.
The major U.S. violation of the original Monroe Doctrine has been to maneuvere to control Eurasian affairs. It has meddled in European elections, most notably in Italy and Greece after World War II by mounting right-wing challenges to their rising Communist parties. And it has ringed Eurasia with U.S. military bases and mounted regime change coups. The effect is that U.S. diplomats have been trying for eighty years to turn the entire world into a unipolar U.S. region of influence. But the military and related costs of this effort have been largely responsible for the U.S. balance-of-payments deficit since the Korean War, and also the U.S. domestic budget deficit (at least until the neoliberal tax cuts on the revenue side of the budget). These costs are to be shifted onto foreign countries. And the NSS realizes that the costs are beyond the ability of individual nations to bear. The costs of maintaining the U.S. diplomatic empire must be assigned on a region-wide basis under the leadership of particularly loyal U.S. proxies, much as is the case with NATO countries Europe under British, French and German dominance.
In Asia, U.S. diplomacy relies on the Quad (Japan, Australia, India and the United States) along with friendly governments in South Korea and the Philippines to prevent their economies and those of China and other countries in the region from obtaining oil and gas from Russia, Iran and Venezuela to install military basis ringing China. Much as U.S. neocons are trying to convince NATO allies that these adversaries pose an imminent military threat, Asian countries are being mobilized to support a separatist political movement in Taiwan.
How does the notion of a Chinese or Russian sphere of influence cited by the NSS deal with the problem of who is to control the islands that Japan seized from Russia after its 1905 war, and the string of islands in the China sea extending southward toward Taiwan? The United States has proposed installing missiles and other arms on these islands, as it has done in Okinawa. This interference in the promised U.S. downsizing of its empire actually shifts the costs of military confrontation with China onto Japan and other countries continuing to adhere to the U.S. bloc. Will the Japan’s LDP government agree to fight to “the last Japanese,” as that of Ukraine has forced its population to fight to the last Ukrainian?
Japan has long been viewed as a candidate for establishing its own Monroe Doctrine over China and neighboring Asia on behalf of the United States. A few years ago the United States tried to add Japan to the UN Security Council. Russia opposed this, saying that this was simply giving the United States another automatic vote.[2]Just as U.S. diplomacy has used the NATO-EU and Britain as proxies: against Russia, Japan is to lead the fight against China, while the Trump Administration renews its attempts to stir up an Indian conflict with China.
The NSS strategy seeks to shoehorn Japan into what it proposes to be a five-nation leadership in a coordinated regional diplomatic alliance headed by the United States, with its two major adversaries China and Russia, The aim is to pry Russia away from China by offering to end the trade and financial sanctions against it – and even the promise of U.S. investment in its mineral development (as if this is not Russia’s nightmare, given the history of Michael Khodorkovsky, Browder and their fellow kleptocrats and U.S. sponsors).
Within the Western Hemisphere, the U.S. policy thrust is to block China, Russia and Iran from investing in and supporting Venezuela, Cuba, Brazil and other Latin American and Caribbean countries that U.S. diplomacy aims at dominating by installing or continuing to support its own client oligarchies, kleptocrats and military dictatorships.
Trump’s dream goes beyond getting other countries to support current U.S. industry. His hope is to escalate the Biden administration’s confrontational stance by imposing high enough U.S. tariffs – along with sanctions against Russia and China – to steer other countries to relocate their industry and financial fortunes to the United States. This policy was initiated by the destruction of the Nord Stream pipeline raising European energy prices to make Germany’s auto, steel, glass and other industries no longer profitable. Trump, like Biden, hopes that this will lead major German industrial companies to move to the United States, along with their technology and even much of their skilled labor. But China, with its less financialized and lower-cost economy, is the more attractive place for relocation of German industry, whose companies already have built major steel plants in Wuhan and Shanghai. Ironically, China thus may prove to be the ultimate beneficiary from the Nord Stream affair.
Dedollarization, and Trump’s Drive to Counteract It
To cap matters foreign investors are supposed to keep their savings in the United States, or at least in dollarized investments, and even to shift their stockholdings to the U.S. market. The guiding fantasy is that trade policy and investment inflows by themselves can make U.S. industrial production more competitive.
The United States has become financially dependent on other countries to invest their foreign-exchange reserves in U.S. Treasury securities to prevent the dollar’s exchange rate from plunging as a result of the monetary drain flowing from America’s foreign military spending that has been mainly responsible for its balance-of-payments deficits since 1950 (and which today is supplemented by its spending to import the manufactures that its deindustrialized economy no longer produces).
But now the international financial system has become multipolar as other countries respond to U.S. weaponization of trade and imposition of financial sanctions by decoupling from U.S. dollar. The U.S. strategy of working with its European allies to confiscate Russian and Venezuelan official monetary reserves held in Belgium’s Euroclear system (in the case of Russia’s reserves) or the Bank of England (in the case of Venezuela’s gold) has undermined confidence in the dollar as a vehicle for holding foreign-exchange reserves and the United States and Europe as places in which to hold official monetary savings. Germany asked for its gold holdings in the United States to be physical returned to it, and other countries are refraining from increasing their holdings of central-bank monetary reserves in dollars (and now in euros in light of Euroclear’s seizure of Russian savings).
Dedollarization is a defensive policy to avoid the U.S. weaponization of international finance and banking. Most central bank dollar holdings since the 1970s have been in the form of U.S. Treasury securities. But in addition to the U.S. weaponization of the dollar, there are rising worries that America’s rising foreign debt and dangerously debt-leveraged domestic economy may make these Treasury IOUs ultimately unpayable.
So the world trend toward dedollarization is proceeding on two fronts. On the one hand, countries are settling their trade balances by trading in each other’s currencies, and holding such currencies in their foreign-exchange reserves in accordance with swap agreements. This avoids the exchange-rate for such payments. In addition, countries are holding a rising proportion of their monetary reserves in gold as a long-established international standard for settling payments balances instead of buying U.S. government bonds and notes, or even leaving their gold reserves on deposit with the New York Federal Reserve or Bank of England.
The United States itself has been the great catalyst in forcing the shift to trade in non-dollar currencies. The Bank of England has confiscated Venezuela’s gold holdings kept in Britain as collateral to back its foreign-exchange credit to support its exchange rate. A few years ago Germany asked for its gold reserves to be returned from the United States. It seems that there has been some stalling in this, as financial reporters have been unable to find any information on how much gold has actually been transported back to Germany. It has become obvious that physical ownership is needed as protection against U.S., British and EU confiscation, especially since the EU has frozen Euroclear holdings of Russia’s foreign-currency reserves held in Belgium and other countries under NATO control.
Another dynamic driving countries to withdraw the dollar-centered financial system has been the U.S. threats to abruptly exclude them from being able to process bank payment transfers through the European SWIFT bank-clearing system. Russia was excluded in February 2022 when it started its special military operation to protect Russian speakers in eastern Ukraine. The aim was to paralyze its ability to process trade and investment payments. But Russia survived, of course. And a benefit to other countries shifting away from this Western system is that China has created its own electronic payments system, which charges lower fees for processing payments and exchange-rate fees for trade and other payments other than in dollars
But on the deepest level the greatest threat to dedollarization is that the dollars that are being pumped into the international economy are largely the result of America’s foreign military spending. Nations that hold U.S. Treasury securities as the main component of their central bank reserves provide an international free lunch for the United States. When gold ceased to be a politically acceptable vehicle for holding foreign-exchange reserves after the United States stopped settling its deficits in gold in 1971, the world’s central banks had no alternative to holding their foreign-exchange reserves the form of U.S. Treasury bills, notes and longer-term bonds.
What made this arrangement so predatory was that by holding central bank savings in U.S. government debt, , other countries have been financing the U.S. military spending that has been surrounding them with bases and also U.S. regime change activities. Instead of selling gold or other assets to finance its balance-of-payments deficits as other countries have to do, the United States has been able to pay for this foreign military spending – and increasingly also the industrial imports of products that it no longer produces at home – simply by issuing IOUs.
Until recently there has been seemingly no limit to this exploitative unilateral “exorbitant privilege.” Yet President Trump has floated the suggestion for a Mar-a-Lago Accord in which foreign government holdings of dollar reserves should be converted into hundred-year notes, avoiding any pressure for the United States to redeem these dollars in the foreseeable future.[3] As President Nixon’s Treasury Secretary, John Connally, quipped at a meeting of European finance ministers shortly after the United States went off gold, “It’s our dollar, but your problem.” The present U.S. position is to tell foreign central banks and other dollars to trade U.S. government IOUs among themselves as means of payment, but that actual requests for meaningful redemption will be viewed as an unfriendly act.
The increasing risk of holding international savings in the form of U.S. dollar debts has led countries to return to gold as a politically safer settlement vehicle. That is why its price is rising. China has not reduced its dollar holdings by much in quantitative terms, but all the increase in its foreign reserves have been in the form of gold and the currencies of its major trading partners, or capital investments in the countries of its Belt and Road initiative – its port development and other internal Asian transportation, and even the Panama Canal and Middle Eastern and European ports. It seems likely that capital investments in non-Western economies will be added to the repertory of non-dollar options in which China and other governments central banks can hold their international capital reserves.
Trump’s drive to attract foreign financing to the U.S. debt market via cryptocurrency
In seeking to counter other countries’ moves away from the dollar, the most recent U.S. tactic is to try to surreptitiously get other countries to hold dollars by persuading them to invest in stablecoins – cryptocurrency that is invested in U.S. Treasury securities, not bonds of China or other countries. That would support the dollar’s exchange rate. Martin Wolf in the Financial Times points out that the largest holder of U.S. debt no longer is Japan, but stablecoin. Wolf’s fellow Financial Times columnist Gillian Tett has cited Standard Chartered bank’s prediction that “the stablecoin sector will grow from $280bn to $2tn by 2028.”[4]
The problem is that rising interest rates would reduce the price of the U.S. bonds in which stablecoins are invested, leading to negative equity. Investors would sell off their holdings, moving funds out of the U.S. economy and its dollar. The Trump Administration has raised this risk by exerting pressure to prevent regulation of cryptocurrencies as financial securities by the Securities and Exchange Commission and other oversight agencies. This deregulation (“clearing away the bureaucracy”) increases the risk of defaults as market declines cause insolvency by banks that make loans backed by stablecoins. They are not regulated, are not transparent, and their valuation tends to swing wildly, as that of bitcoin has shown with its fall of over 20% in recent months.
And a major aim of cryptocurrencies is, of course, to facilitate tax evasion and criminal activities through libertarian “privacy” (that is, secrecy from public authorities) and criminal management of such currencies themselves. The Trump Administration’s support for cryptocurrencies actually is a new version of the U.S. drive to promote offshore banking centers in the 1960s.
At that time I was working at Chase Manhattan Bank and asked to estimate the balance-of-payments inflow to the dollar from U.S. moves to attract the world’s criminal income, kleptocratic embezzlement and flight capital to such locations. U.S. banks were urged to set up branches in the Caribbean and other such centers to provide safe havens for tax evaders, embezzlers, other criminals, kleptocrats and government officials to attract their “hot money” to help offset the U.S balance-of-payments deficit. Inasmuch as criminals traditionally are the most liquid business class, they are a natural target for attracting monetary inflows.
The analogue of such havens today is cryptocurrency such as stablecoin, whose sales proceeds are invested in U.S. Treasury securities as a means of attracting foreign savings to the U.S economy to support the dollar. The hope, of course, is to avoid a selloff of such cryptocurrency leading to sale of Treasury bills and bonds, driving the dollar’s exchange rate down and interest rates up.
[1] The most notable recent example is Venezuela. Trump’s insistence on monopolizing and privatizing control its oil has led him to block Chinese and Russian investment and military support, just as Trump is insisting that China divest itself of its Panama Canal port development.
[2] General Douglas MacArthur used the Japanese criminal gangs to fight the socialists to prevent a socialist government from gaining office in Japan. The NDP is a U.S. satellite, willing to sacrifice the country at the Louvre and Plaza accords in the 1970s.
[3] The proposal was designed by Stephen Miran, the head of Trump’s Council of Economic Advisors to arm-twist “allies to hold century bonds (100-year Treasuries) as a condition of continued U.S. security support.” See Mario Solovievo and Andrew Foran, “The Non-Starter Playbook of the Mar-a-Lago Accord,” https://economics.td.com/us-mar-a-lago-accord, May 1, 2025. All this requires a constant hundred-year belief that Russia, China or other adversaries pose an imminent military threat to European and other holders of such securities out of fear of losing U.S. protection against such imaginary aggression.
[4] Martin Wolf, “Why we should worry about stablecoins,” Financial Times, December 10, 2025,
‘Yet President Trump has floated the suggestion for a Mar-a-Lago Accord in which foreign government holdings of dollar reserves should be converted into hundred-year notes, avoiding any pressure for the United States to redeem these dollars in the foreseeable future.’
Man, that’s all sorts of shade of crazy. What will the world even look like in the year 2125? Will the United States still be united by then? As a thought experiment, supposing that this had been done 100 years ago during the Calvin Coolidge administration. Look at the investors that might have gotten caught up in this scheme. Weimar Germany, the British Empire, Italy under Mussolini, Imperial France, etc. Economically, probably the Ford model T was the most popular car on the road at the time and the US itself was an industrial powerhouse with American shipping sailing the world. Socially it was the Roaring Twenties with Flappers, Speakeasies and Raccoon coats for college kids. It was a whole other world. So does any country have the confidence to buy 100 years bonds for whatever world there will be in 2125?
https://en.wikipedia.org/wiki/1925
Time, economy and human relationships are weird.
I understand what you say.
but I add – that all four of my grandparents were alive in 1925. one died when i was very young and I dont remember her. but the other three I remember very clearly and much of what they told me.
That’s a 100 year timespan by word of mouth.
if my children have children, then i can pass on those stories. go forward to their middle age in 50-60 years. now we’re talking a 150-160 year timespan on human to human to human. Two degrees of separation, oral history spanning 150 years easily.
blows my mind every time I remember that.
John Tyler’s grandson died just last May. Tyler was born in 1790–the first US president born in actual US of A.
My 99-year-old aunt, who died August of last year, told me about being a young girl (she didn’t remember how young but let’s say 12, which makes the year 1937) hearing an old lady of 80+ (i.e. born around 1860) tell how she in turn talked with an old lady when *she* was little – again, let’s say 12, so around 1870-1875 – so *that* old lady, if she was 80+ herself at that time, could easily have been born at the tail end of the 1700s, and would have had clear, vivid memories of the Napoleonic Wars being underway. Three people, three voices, speaking across well upwards of 200 years.
Austria issued 100 year bonds in 2017 — so it can happen.
Their existence doesn’t constitute a recommendation to hold them, mind.
Austria did that? I mean, 100 years ago Austria was part still of the Austro-Hungarian empire. A lot has changed since then.
Not quite. The Austro-Hungarian empire died in 1918 — 107 years ago.
True that but I was subtracting 100 years from the 2017 100 year bonds that Austria issued which would make it 1917 when the empire was still extant. I should have clarified that point.
I hate to have to be a stickler, but I am bothered by Hudson taking up the trope that the US will be unable to pay principal and interest on Treasuries. A sovereign currency issuer will never need to default. It can always satisfy obligations in its own currency. It can overspend and generate too much inflation. That will lead the value of its currency to fall in relation to other currencies, reducing the value of that currency to foreign holders.
~~~~~~~~~~~~
Aside from the first hyperinflationary episode in the west in the USA with Continental Currency-where the British cleverly counterfeited them and flooded ‘the market’ resulting in financial chaos (it wasn’t as if the currency was backed by anything as an added bonus) every last episode of hyperinflation starting with the modern period in 1919 in Austria and as recently as the early 21st century in Zimbabwe, every last one of the 100 or so countries that have gone that route were sovereign currency issuers.
None of them had anything close to $38 trillion in debt, except for maybe post Treaty of Versailles Germany, who owed a shitlode in reparations, I.e. debt.
I believe the qualifier “worldwide reserve currency” is what makes the $ more sovereign than any other. But as multi-polarity emerges inflation will bite the US in the butt, too.
(From what I understand, having abundant (cheap) access to valuable resources to sell worldwide is the equivalent of having gold. The motivation for regime change in Venezuela?)
Zimbabwe took over from Rhodesian farmers, and it turns out farming in Africa isn’t trivial. If you don’t have a good tsetse fly eradication program, all those European livestock will die of sleeping sickness. The food shortage predated any “printing” of Zimbabwean currency. Shortages and the need to import food led to the hyperinflation.
In Weimar Germany, the French were upset Germans didn’t pay their WWI reparations on time, so they sent their army into the German industrial heartland (the Ruhr), and shut it down. Germany already had a balance of payments problem because of the reparations, but now they had a shortage of manufactured goods. The hyperinflation was *after* the shortages.
Stephanie Kelton reports on a Cato study of 56 hyperinflations throughout human history. How many were the result of printing too much money? Answer: zero. typically a shortage of goods and a balance of payments problem predated the printing.
Cullen Roche wrote a whole paper about hyperinflations — they are invariably the consequence of wars, civil or foreign.
The states fail, and then their money does — it is NEVER the other way around.
Some “hard money” types are incapable of understanding this because they mistake the token as inherently valuable rather than merely representative of an underlying credit system which is itself an outgrowth of social obligation systems.
Ok,
Why did Israel go through hyperinflation in the mid 80’s, just to pick one country that doesn’t apply to the standard you’ve mentioned where a war has to be the catalyst
While we’re at it, every South American country suffered hyperinflation in the 80’s & 90’s, and aside from the Falklands gig, no wars.
Problems are exacerbated when debts are denominated in a foreign currency.
I suspect you’re not using the same definition of “hyperinflation” as Roche.
South American countries in particular, were full on hyperinflation, but in a different way in that they renamed their currencies over and over again in some instances, 1,000 of the old currency equaled 1 of the new currency, Mexico being the closest example~
Weimar hyperinflation lasted a couple years, Mexico’s bout was a dozen years, Argentina is at around 45 years, Venezuela a little over 40 years.
Zimbabwe had, during its inflationary episode, incurred dollar denominated foreign debt that’s over 150% of its GDP. It actually needs to earn (not print away) dollars to repay those debt.
Sorry Wuk but charm does not change reality ….
The idea one could reduce all of human history to the notion of a inanimate object, which controls all other aspects of a nation and its society is not supported. I mean can Robert Mugabe be distilled to a idea of value attached to a currency at the time. His bio is simple, what is not is how ideological agendas can blow up a nations economics. Due to his view on the past and how it effected his nation he did a hard redistribution of farm land to soldiers that sided with him. People with no idea of farming which was its core export to the U.K. and E.U. Hence its ability to secure sufficient FX reserves and the consequences of that decision. Would have not mattered if they were on a hard or soft currency.
It might bemuse you to consider everything going on in the world today as a war of accountancy … see sanctions and tariffs which have the opposite effect intended. How could these ideologues – freedom and liberty free markets sorts get it so wrong …
We’re in a different epoch, in that I don’t really know how you get hyperinflation in our digital age-you need a prop that’s rectangular with a bunch of serial numbers on it-which was the time honored way of a country going fiscally bankrupt.
The only player currently is perennial backetcase Argentina-and their economy runs on Yanqui $’s, more than Pesos, it seems.
I maybe wrong but isn’t it through federal tax collection USA pay government debt? If true then that maybe explain why USA can’t pay the debt in the future, sure they can print it but then people would realize government can print own money to pay the debt. They would never allow this to happen,more likely they will go austerity to collect the money
Please do a search for “Modern Monetary Theory”. That will answer your question.
No, Federal taxes do not fund spending. This is a political convention, and not how it works operationally. The Treasury debits its account at the Fed. Bond issuance is a holdover from the gold standard days. Federal taxes serve to drain demand (contain inflation) and provide incentives and disincentives, and effect redistribution.
There is also utility to investors in having a risk free asset which in finance has also served as the benchmark for financial analysis.
thanks to you, and Kelton, all that makes perfect sense to me.
what i question is…appearances. if the usa just mints the 30 trillion dollar coin and “pays its debs”, wont that send a giant flashing message to the world that we are a broke and broken defunct empire with a worthless currency?…and that they should keep well away from any investments in our stuff?
(and this is on top of the recent theft of others’ sovereign wealth and property…and on top of what the world can see on us news every day: ie: everybody already knows,lol…its just theres been no good alternative)
It seems to me if the US chose to mint a platinum coin, settle and pay off its debts to creditors, those creditors would take the ‘dollars’ and go seeking assets all over the world at the speed of light. So, asset classes get bid up…. and it would make the present wealth aggregation seem tame.
Seems that taxation, deficit spending, are simply a matter of Political Will and Political Won’t.
We could have single payor cradle to grave health care, we could have high speed rail, we could have clean drinking water, nutritious healthy foodstuffs, secure warm housing, and world-class education.
We choose to not expect nor demand it from ourselves. Not much we in US.
The popular concept of inflation is goods and services cost more. But that is just in the affected currency. The reality of inflation is the currency is worth less. See discussion of good debt / bad debt on: Has Public Debt Become Unmanageable?
Good debt contributes to future prosperity. Bad debt steals from the future. If the coin is minted to just pay off the bad debt it will dilute the value of the dollar but those assets that are valued in dollars, the S&P 500 for example or wheat, will in most cases rise to reflect that change, which is kind of the definition of inflation.
It is not at all simple. We have all lived through the largest demographic expansion this side of lemmings. Growth has pretty much been a given. There has been the business cycle ups and downs but there is no memory of a real demographic decline. Should Trump really turn out to be one of the four horsemen then you only want to be holding hard assets. Currency will not hold moneyness. You will be better off with potatoes or, of course, gold.
Actually, you’ll be better off if you live communally and share the ability to grow food, build shelter, and protect against natural disaster. Most importantly acquire solar PV panels to provide light at night so you can spend time relearning essential survival skill ;)
We were discussing money equivalents not survival strategies but certainly circle the wagons.
My understanding is that Treasury bond/bill issuance also serves to reduce the level of reserves in the banking system to a low enough level that the Fed can maintain a short-term interest rate target [above zero] through open market operations. (though control of short-term rates could also be accomplished through Fed payment of interest on reserves, which IIRC it has done at times in the recent past)
My recollection of Randall Wray’s MMT Primer is that MMT theorists tend to think that short term interest rates should be close to zero, so high levels of reserves in the banking system do not worry them.
Wouldn’t it be more accurate to say that taxes not funding federal spending is a MMT convention? Before MMT, taxes funded government and if the government spent more than it took in, it would go into debt. According to MMT a government is a monetary sovereign and it can create its own money to finance spending. Since this created money is debt, governments can create their own debt.
It is not an MMT convention, it is an operational reality. Money needs to be there in the first place before they can be taxed, the US treasury accepts only Fed reserves as payment of taxes (and purchase of government debt) and these can be created only by the government (the Fed specifically).
Concur Domenico … a state has to have the gold to issue in the first case in order to tax it e.g. not a matter of taxing to get the gold. Then again the whole idea of a hard currency is anti all the free market/libertarian proselytizing. Its a forced[tm] value of exchange that is completely obvious to all social outcomes. Cropper comes when it all blows up as it always does it a moral outsource via elite narrative about personal responsibilities, such is the natural order or boom and bust e.g. rentiers can rebuild society in their own image.
Are we talking about chickens or eggs? At the start of the industrial revolution in Britain, there wasn’t enough money so business people wrote bills of exchange that they used to pay for goods and services, and accepted other bills as payment. You can call that MMT money creation, but they were not sovereign governments.
When someone takes on a loan, money is created because the bank puts money in your account. They are not a sovereign government either.
In both examples the money creation is a debt instrument. I do get that governments can create their own debt, and the country is liable for that debt. Just like the US is liable for the over $1 in annual interest payments on the debt it has created.
How is it that the US used to have an economy with real growth of over 4% and the national debt was declining as a percent of GDP and now it has growth of close to 2% with deficits that are 6% of GDP. How does MMT explain that? How does it fix that? Or, does it just say debts don’t matter.
Money is always debt, even if the government is not involved. David Graeber “Debt: The First 5000 years” is an excellent read on the topic, pure commodity money was very rare through history.
The bank money creation you describe is credit money, you cannot pay your taxes or buy government bonds with credit money, you need (not you, your bank) reserves or physical cash (a government liability) and these are not created by the banks, they are created by the Central Bank, part of the government. You can have an economy growing faster the government debt if your productivity grow faster or the foreign sector net spend (meaning you have a current account surplus). The post WWII US you are describing in the past had huge productivity growth and the country enjoyed a trade surplus for few decades. Private debt always grow with the economy, as long as that debt is used for productive activities, it is not a concern.
The reason productivity grew in the US and most of the West, was because companies were taking profits and investing in Western economies. There were also less inequality because unions back then could negotiate for a share of the growing pie. Now growth is half of what it is because Western companies have offshored their production to low-wage countries – private investment is what drives growth. Now Western governments have to compete for investment so they cut taxes, deregulate, push for free trade and weaken labor’s power. The also pump money into the economy to be able to tell the story that everything is wonderful. In the US case it is spending at least 40% more than the government takes in through taxes and fees. The US government takes in about $5 trillion and spends $7 trillion.
Where is MMT on this? Well for starts, “deficits don’t matter” and “taxes don’t fund government” ignores continuous deficits as a symptom of a structural problem with the economy. Saying, we “don’t need to rely on billionaires to fund programs” ignores the need for more democratic control over the economy to bring back domestic investment and reduce inequality.
MMT recognize this problem, Prof. Randy Wray wrote extensively on this, MMT is not the cure that can fix structural problems. The following is Wray comment on the topic in last weekend nakedcapitalism post: “Has Public Debt Become Unmanageable?”
I cannot speak to the British budget but in the case of the USA the joke is that government consists of a military with an attached welfare system. The Federal government doesn’t “invest”; bailing out banks is not an investment (most of the bail-out after the GFC was done by the Fed, anyway, not the Treasury–meaning no “spending” occurred). Transfer payments net of taxes increase private sector income and what Murphy is arguing is that given the gross inequality in the modern capitalist economy, far too much of the income goes to high income households and much of that is “saved” in a wide variety of forms. (In the USA high income households now account for half of all consumption–so not all of it is saved!) What is going on in financial markets, stock markets, and crypto is just shifting savings about and creating financial capital gains. It is not investment. In the US the driver of investment is now data centers, most of which are never going to be used.
It is a valid observation, however it doesn’t provide any MMT strategy to address the problem.
Some wise person wrote “It’s easy to create money; to get people to accept it is difficult.”
Years ago there was a fascinating comment on Bill Mitchell’s blog clarifying private banks’ money creation via lending.
The money that a private bank lends is that bank’s own fiat: the borrower has it purely because the bank says so. but in order to get that money generally accepted, the bank has to peg it to the national currency. So when some vendor comes in with one of the borrower’s checks, the bank has to honor the peg, and pay the vendor (usually this means the vendor’s bankers) in state money.
The interbank clearing system does this at industrial scale, swapping state-issued money between the various banks reserve accounts to balance their customers’ money flows.
In the bank situation, the borrower has the money because of a contractual agreement with the bank. Money now for payments, including interest, in the future.
When a government taxes to spend, it takes a share of the country’s production, in the form of money, and then uses it to either spend it directly, or transfer it to people or businesses for them to spend.
When a government creates money, it does the same thing but it hasn’t taken a share of the country’s production. Demand is created and supply follows, and the economic entities that supply this created demand now have a claim on the domestic economy.
It’s easier to see if we look at a situation where the created demand is spent on imports from another country like China. Money is created, spent on Chinese imports and now China holds it as a claim on American assets – paying with money means paying with debt. If the US had a competitive manufacturing sector, then China could buy from them and trade is balanced. Since it doesn’t, China has the option of buying assets in America like real estate, businesses or government debt and this helps maintain the value of the US currency. Holding American assets has become more dodgy, because the US has a habit of punishing countries if they do something it doesn’t like.
If China doesn’t buy American assets, then it would either hold US money as a cash reserve – which is a limited amount, use it to buy from other countries or use it to buy something like gold or platinum as a way holding value without holding US money. Not buying US assets means lower demand for the assets and the US currency. A lower dollar means inflation, it means higher interest rates on US debt, it also means finding ways to push up the value of assets like businesses.An example of this would be Obama bailing out Wall Street while ignoring Main Street, when he was trying to get the economy moving again.
MMT doesn’t address the difference between taxed money and created money. To me it seems to be a reaction to Conservatives who don’t have money for social programs but want to cut taxes and increase military spending. It wants to say that, “under MMT there is money for everything”. The problem is that the US has weakened itself by not being able to pay for imports with domestic production not that the country doesn’t create enough money.
Where MMT description of our current modern monetary mechanics is definitely correct, I take issue with the statement “Taxes do not fund government spending” where at the same time we know that taxes are the fundamental method for a sovereign fiat money system to force acceptance of the currency and control inflation. It seems a contradiction in logic, taxes do indeed fund government spending, without taxes the currency would be a useless piece of paper (or electronic bits in modern times). Even if the sequence is backwards (spending precedes taxation) and we do not need to account for a set amount of tax revenue to pay for this or that specific public service, taxes are needed for the government to function and to provision itself through money creation…what I’m missing here? I would love your comment on that.
The popular notion is that tax revenue is what the government spends. That is not the case. It is the fact that the government taxes, not the amount, that enables it to spend by issuing new money.
Exactly, the government does not need a specific amount of revenue but it needs that act of taxing and removal of money from the economy.
If the Federal Taxes don’t pay for the spending, where does the US govt find or get the money? Then why does the Congress go through the drama of increasing the deficit level almost every year? I just don’t understand your logic.
Federal spending and private savings are to the penny Rao. What is salient is it social[tm] outcomes e.g. accrued to a few at the top or flowing through the broader economy. Fixing that dynamic is the drama as wealth had political power.
If Federal Taxes don’t fund the spending, where does the US Govt get the money to pay for the expenses? Also we go through the drama of increasing the debt limit almost every year, if US Govt can spend money why do we need to go through this drama? I just don’t get it. Thanks
The US Federal government (technically its US banker, the Fed) creates new money every time it spends, and destroys old money every time it collects taxes. So it doesn’t “get” money, it issues money. Because of this it cannot “save” money either, any more than the scorekeeper at the game can “save” points.
The “debt limit” is self-imposed kabuki theatre to gull the groundlings, most of whom do not understand fiat monetary operations and assume incorrectly that the US Federal government is currency constrained like their own households. They’re mostly lying to you, though in fairness most of them don’t understand it either! Which actually helps sell the con, I guess.
A certain Upton Sinclair quote about understanding and salary comes to mind…
So politicians can claim “But we can’t AFFORD it!” when asked about concrete material benefits for the working class like #M4A, and people will believe them.
Meanwhile there’s always money for the MICIMATT.
Of course the Treasury CAN pay the interest and principal on its IOUs. I’m one of the original MMTrs.
My points were different. First, foreign fears that the debt is “too large to be paid.” It’s a false fear, but not everyone understands MMT.
Second, that U.S. price inflation or dollar depreciation will eat away at the purchasing power of U.S. debt by foreign holders.
And Third, that the US simply will “freeze” redemptions, or unilaterally convert them into “hundred-year notes” or simply nullify holdings by foreigners whom in countries that the U.S. designates as opponents. In other words, the political risk.
i thought that I had outlined this, but I hurried to finish the article to get it to Yves in time for her to post.
I am sorry but this is not what the version of the article you sent me said, and I received it shortly before you wanted it to appear, hence no time to get a reply as to why you wrote what you did.
Second, since the US can always pay its debts, I do not see why anyone should care about these foreign fears, as in I do not understand why you are amplifying them given MMT. Look at all the whinging about Japan’s massive deficit spending and burgeoning debt to GDP over decades. Many like hedgie Kyle Bass have predicted hyperinflation and a collapse, neither of which has happened. Japan is proof that investors worries are irrelevant.
> Japan is proof that investors worries are irrelevant.
Yep! If one had [some meaningfully large amount of money] per article written in the Western financial press about the imminent collapse of the Japanese economy due to their “debt”, one would probably be a billionaire.
Bill Mitchell covered this topic (hyperinflation worries) years ago (via billmitchell.org).
The real fear – currently being amplified – is not fear of payment (or lack thereof), but fear of asset freeze, as had happened with Venezuela and Russia. The latter, I believe, has become a major catalyst for movement toward multi-polarity. Who (in the Global South) wants to park more USFX at the Fed, when they see a (former) G8 member having their money seized?
Not trying to be annoying here, but…,
Hyperinflation/collapse is not the only possible negative outcome. Consider Japan’s Lost Decades.
No hyperinflation. Just prolonged financial stagnation.
https://en.wikipedia.org/wiki/Lost_Decades
“The Lost Decades are a lengthy period of economic stagnation in Japan precipitated by the asset price bubble’s collapse beginning in 1990. The singular term Lost Decade, originally referred to the 1990s,[1] but the 2000s (Lost 20 Years,)[2] and the 2010s (Lost 30 Years)[3][4][5] have been included by commentators as the phenomenon continued.[4]”
(I omitted the Japanese kanji translation of “The Lost Decade” included in the Wiki definition.)
Much shorter: Yes, Japan continued to pay its bond investors. But… what happened to its domestic economy?
You have the causality backwards.
The state of the bond market was irrelevant to the domestic economy.
The domestic economy was in the crapper due the deflationary impact of the collapse of the massive real estate and stock market bubbles.
adding one last thing, and going on too long, I recommend this 10+ years old movie based on Richard Werner’s best selling book of his economic research into Japan’s economic crisis. utube, ~1hr 32+ minutes.
Don’t be put off by the opening scenes. It is not a polemic. It’s an economic examination of the central bank’s roll in Japan’s economy.
Princes of the Yen.
https://www.youtube.com/watch?v=p5Ac7ap_MAY
Thanks for all the responses! I’ll watch the video over the holidays. Yours truly is in “transit” mode. And please don’t feel like you’re being annoying … :)
I would, as a cursory response, suggest that any apparent disconnect between the point I am making, and the one you are making is cleverly captured in the Wiki description of the Lost Decades: ” … economic stagnation in Japan precipitated by the asset price bubble’s collapse beginning in 1990″.
Now … :) one of my favorite terms in Econ is “transmission mechanism”.
And the debate to be had is whether debt, specifically the issuance/creation of money for the purpose of treasury maturation constitutes a sufficient transmission mechanism such that one can reasonably lay blame for an asset price bubble on the debt itself (or primarily on it).
I would disagree. Minsky is your guy on this … :)
One tenet of MMT that goes overlooked at times is the endogenous money supply part. The money supply grows through loans – the opposite of the “deposits create loans” (a.k.a. loanable funds) orthodoxy. Leveraged risk is what leads to the collapse. And what happens as risk begins to appear? More savvy investors will move money out of risky investments into less risky investments of which the least risky type iiiiiiiiiiis … :) treasuries.
The casino inflates values, returns and also risk. As the chickens come home to roost, money moves to bonds and inflates debt.
One could surmise then that flight to treasuries is in fact a transmission mechanism in the opposite direction during times of increased asset risk aversion.
Thanks again for your responses!
I’ve always found it strange: why do American economists generally consider Japan’s long-term GDP stagnation a rather lamentable thing, yet view the long-term stagnation of U.S. real manufacturing output as a satisfactory outcome?
The Plaza Accord (1985) hobbled Japan’s ‘economic miracle’.
See Bill Mitchell’s ‘Talk of a Plaza Accord 2.0 should heed the lessons of Plaza Accord 1.0’
“… The collapse in 1991-92 marked the beginning of what has been termed the – Lost Decades – which was marked by a trend slowdown in economic growth, deflation, and for the purposes of this post, cuts in real wages as nominal wages stagnated.
Mainstream economists claim that the bubble and the burst were due to excessive domestic stimulation rather than anything to do with the Plaza Accord.
But the fact is that the Plaza Accord deliberately undermined the Japanese economy to benefit the US lobbying interests…”
Concur … and as such the mechanism was geopolitical and not based on non ideological economic grounds.
No, that it not correct. I was working for Sumitomo Bank at the time.
If you look at the GDP stats, there was only a small six month blip and it went quickly back to its former rate of growth.
The Plaza Accord did lower Japan’s export growth for a bit but it did nada (contrary to Western intent and expectations) to increase Japanese imports. Japanese regarded foreign products as inferior and a lower price would not induce them to switch.
What did in Japan was the US-forced rapid deregulation of its banks, which blew its already big bubbles higher and created new ones, such as in stock warrants.
But poor domestic political decisions leading to the stagnation weren’t caused by the existence of the public debt, flora, though they likely were caused by poor macroeconomic understanding.
Japan after 1991 hasn’t been truly terrible, has it? Over the past three decades, it has maintained its status as a developed country. Another point to consider: Japan is a country that, in theory, is unwilling to accept any foreign immigrants. In the past thirty-plus years, it has accepted very few foreign immigrants. The United States is quite different from Japan in this regard.
Yves, you know very well that the US does not operate with a sense of MMT financial sovereignty and goes through the bond-selling magic to manage its deficits. What will happen is that no one will be willing to buy US debt and its fundamental theory and practice will collapse. And since its base premise is “All debts must be paid”, it will be in a conundrum. Already I have heard talk of exchanging Treasuries with 100 year, no interest bonds, which seems a sneaky way to pay its debt. As for the hyperinflation fear, Michael has shown that historically, hyperinflation occurs when debts are in foreign currency, which is not the US case, but once the US ‘defaults’, I imagine dire events.
No, the Fed will monetize the debt by buying the bonds. That precedent was set in QE.
But won’t that (excessive “printing” – used colloquially) potentially lead to a confidence crisis in the currency as anything other then a medium of exchange and “savings”, so to speak, seeking any real (real estate, bullion, heavy equipment) or more ethereal asset (stocks, bonds, futures contracts, etc.)? And if that is the case, isn’t it incredibly inflationary?
We would see the housing bubble taken to utterly absurd heights if hyperinflation comes calling and people need to get rid of greenbacks in a hurry, there being so little in real assets of value for them to buy.
Imagine a 1958 fixer-upper in Pacoima fetching $85 million?
Yves, you have likely forgotten more about economics than I will ever understand, but:
“Second, since the US can always pay its debts, I do not see why anyone should care about these foreign fears, as in I do not understand why you are amplifying them given MMT. ”
Is it not true that everyone understands that while their investments in U.S. Treasuries will be fully repaid in nominal terms, the related fears revolve mainly around the expected real value of those Dollars 10, or 30 years down the road?
And if the answer is “yes”, are those fears not both rational and real, despite MMT?
We can create money to pay for anything and pay off any loan; but, if relations keep getting worse, can we create enough to exchange for refined rare earths?
I’m very far behind, but that thing of Keen’s re loans do create new money …it was interesting folks with degrees maintain that doesn’t really happen!
The sentence that bothers me is this one:
“…But in addition to the U.S. weaponization of the dollar, there are rising worries that America’s rising foreign debt and dangerously debt-leveraged domestic economy may make these Treasury IOUs ultimately unpayable.”
With the words ‘in real terms’ added at the end I think it would more accurately reflect Prof. Hudson’s intended meaning – and the reality.
We only have to pay them in nominal terms so I don’t understand your point.
If foreign countries stop buying U.S. financial assets, would the U.S. return to an era of trade surplus?
Thanks for this post.
Adding from Bloomberg. paywalled, the headline gives the flavor. A warning sign?
Foreign Holding of Treasuries Fell in October as China Sold.
https://www.bloomberg.com/news/articles/2025-12-18/foreign-holdings-of-treasuries-dipped-in-october-as-china-sold
And from the Japan Times a year ago:
Two of America’s biggest debt holders are dumping Treasurys
https://www.japantimes.co.jp/business/2024/11/19/markets/japan-china-treasuries-sale/
Whatever their reasons for selling, if Treasury and the Fed ever find it necessary to raise interest rates on treasuries just to find enough buyers then that could present a problem for the US internal domestic finances, imo.
The Fed would just buy the treasuries with magic money, no?
Carpooled with some Tulane economists years ago. Would amuse myself by moving a handful of coins from pocket to pocket to pocket during our conversations.
I’m a bit confused over the misunderstanding. I don’t see where prof. Hudson wrote that the US will default on debt or will not be able to service debt. From what I can tell, he has been writing about this sort of thing for decades. He was MMT, before it was called that, if memory serves. Maybe we are conflating de-dollarization with default? My take is that Yves and Michael agree, just a misunderstanding
It all seems to come back around to the same question: At what point will vassals lose confidence and stop buying treasuries and USD assets? How many slaps in the face can they take? It gets very messy in speculating how this could happen in future, and building new international institutions and practices to replace the Bretton Woods architecture, and break the path dependency is a huge conundrum. This has also been discussed quite a bit by both Yves and Michael. Perhaps another post is in order to clarify the fine points.
As always, thank you for posting outstanding material on NC
US hegemony was always essentially a media/propaganda concept, as anyone who’s been involved in bilateral relations with the US will happily testify. Allies and smaller nations adopted a variety of policies for quietly getting what they wanted out of the US, whilst the latter strutted around the world thumping its chest. Techniques for smaller powers to get what they want while persuading larger powers that it was their idea in the first place have been around for centuries, and indeed probably go back to the Romans. (Herod Antipas was always complaining to Rome about how difficult it was to get the Jews to do what he wanted.) And any objective assessment of the state of the world in the last generation (Iraq, Afghanistan …) would suggest that a hegemon that can’t get its own way isn’t much of a hegemon. Now, the legacy of a dysfunctional military, a dysfunctional political system and a collapsing economy is too obvious to ignore. A number of countries are starting to wonder whether the political investments they have made in the US are really justified any more.
Of course, if you start from the emotional conviction that the US is a hegemon, then you are forced to argue that everything that happens is what the US wanted, no matter how torturous the logic, and to take on faith that what the US says it wants to happen will happen, although this has often not been the case in the past. But then we are at a very early stage in trying to understand what the new world will be like when US decline becomes too obvious to ignore.
Why is it that the message MMT of Stephanie Kelton, Randall Ray, Bill mitchell et al, despite the evidence of the FDR program during the great depression, the huge bailout of the banks and the entire financial system, and the actual operation of the Federal reserve, has never been able to dispel the numerous false notion concerning a nations sovereign currency and debts denominated in its currency. The beliefs supporting the ‘physicality’ of money and debt are practically at a religious level, with the high priests being the economists, the bankers, and many of big fund manager? Reagan’s and Thatchers’s memes were very destructive? I wonder how this nonsense can be combatted, as it is so pervasive…
Anybody have any thoughts?
This quote come to mind:
“The process by which money is created is so simple that the mind is repelled.”
— John Kenneth Galbraith, Money: Whence It Came, Where It Went
IMHO money just “feels” so tangible, it’s hard to shake that idea. Accepting MMT ideas is viscerally scary.
Isabella Kaminska wrote one of the best articles IMO on why MMT is so simple yet repellant to the orthodoxy: Why MMT Is Like An Autostereogram (via NewEconomicPerspectives.org).
I can think of a couple of contributing factors. Think of your very first encounters with money. You likely received some coins (or if you were very lucky some bills) from a relative as a child and learned that you could exchange these tokens for things you wanted — probably sweets or small toys. As you grew older you probably came to understand that you had to GET money first in order to spend it, and to one degree or another you likely experienced the common condition that there were more things you would like to have than money available to you in order to get them. I think it’s difficult to overstate the extent to which the habits of mind associated with these constant daily household realities cements a perspective from which it is then later very difficult to escape. Thus does the fallacious “household budget analogy” take root in everyone’s mind — available for weaponization by political entrepreneurs of every stripe. Except, of course, the sovereign currency issuer is NOTHING like a household! Your experience as a householder tells you as little about fiat monetary operations as your experience with household electrical outlets and light switches tells you about operating the entire hydroelectric system. Yet, bizarrely, everyone is willing to make a fool of themselves by making sweeping, ignorant pronouncements about sovereign budgets when they would likely be far more reticent about analogous claims about nationwide electricity networks 🤨
So that’s a “bottom up” sort of contributor. Simultaneously there is a “top down” process at work. I don’t think it’s controversial to observe that our systems are run by and for the wealthy. And they have an interest in sustaining the illusion that “money grows on rich people” since it reinforces the notion that we somehow need them (the gross “job creators” canard is adjacent) and that only their good stewardship comes between us and “the deluge.” Thus spring up university chair endowments and think tanks and the whole priesthood devoted to establishing a normative framework around economics — with suitable neoclassical orthodox mathematical arcana (never mind that it no more bearing upon reality than the gibberish produced by Jonathan Swift’s Laputan “scientists”) to further cow the uninitiated. And in this way entire cohorts are miseducated in order to better fall prey to a likewise bought and paid for political class which finds the “but how are you going to pay for it?” dodge useful to avoid investments in public welfare much desired by working people yet inimical to the interests of their donor class.
I don’t doubt there are more, but maybe these two provide a useful point of departure?
> That will lead the value of its currency to fall in relation to other currencies, reducing the value of that currency to foreign holders.
And to Americans. 90% of Americans will get crushed. Civil unrest IS a limit. Devaluing the currency IS default.
eg:
As the struggle for power becomes more intense within the United States as Trump begins to recede into the background, how exactly would you use your understanding of our monetary system for the good of the people?
What is your operational vision?
Oof. Well, there’s no excuse whatsoever for unemployment, so I would start with a Federal Job Guarantee at a socially inclusive wage — let all the chiselling business owners whose profit model depends upon exploiting poorly paid labour go to the wall. Second, institute Medicare for All, releasing a lot of useless rent-seekers back into the labour force. Finally, start using the increased available labour from the first two to build infrastructure and low income housing. All of which to be “paid for” by dispensing with the whole bond issuance canard — and if the mythical “bond vigilantes” don’t like it and try to generate a “Truss tantrum” just instruct the Fed to buy up bonds as far out the curve as it takes, Draghi style, to drown them.
And if you want to bite off even more, why not take a gigantic bite out of the Pentagon by REALLY retrenching from a bunch of anachronistic forward positions which no longer serve any purpose where the security of the US mainland is concerned?