CounterPunch Radio – July 15, 2022 – Michael Hudson
The History of Finance Capitalism
ERIC DRAITSER: Hello and welcome to CounterPunch Radio. My name is Eric Draitser, thanks so much for tuning in, and coming back to the show. First-time listeners finding the show, welcome aboard. Thank you so much, we really appreciate your support. If you want to support CounterPunch, the best way to do that is to get a subscription to CounterPunch Plus, that way you get access to all of our exclusive content. Remember folks, this is basically the print magazine, now online. We have discontinued the print magazine and taken even more content, but it behind a little paywall just like everybody else is doing these days and it’s there for you. CounterPunch is unlike any other space on the left online. You have competing ideas, competing perspectives, all of which are welcome on Counterpunch, and providing that platform is something we have been doing for nearly 30 years. If you appreciate that, get that CP+ subscription and also, consider getting some books from Counterpunch, including from the wonderful author that I have with me today, whose brand-new book is available from CounterPunch we are going to talk about it. He is the incomparable Michael Hudson. He is back with us. I just realized in talking with him before we started recording that it has been like seven years since he was on this show, so long overdue appearance. Michael Hudson is the president of the Institute for the Study of Long-Term Economic Trends. He is an economist and an author. You probably all already know him, but the book probably most famously Super Imperialism: The Economic Strategy of American Empire, that is a classic, one that has shaped a lot of our thinking. And of course, the most recent book, published by CounterPunch, Destiny of Civilization: Finance Capitalism, Industrial Capitalism, or Socialism. Available from Counterpunch. Michael Hudson, welcome back.
HUDSON: Well, it’s good to be here, Eric.
DRAITSER: Thank you so much for giving me some time, and for this really important book, because it provides the kind of long-term perspective that I think we really need to understand everything that has happened economically in, I guess, the modern period. So, let’s begin by talking about that. The book began as a series of lectures around recent lectures around US globalization, the role of China and its development, but it kind of expanded from there talking about finance capitalism versus industrial capitalism. I guess we could start there and have you explain this juxtaposition. What are the differences? How do we understand these two ideas?
HUDSON: Well, most textbooks talk about industrial capitalism as if the function of banks is to make loans to factories to build plants and equipment and hire more labor to produce goods and keep the economy going, and that’s what everybody expected banks to do in the late 19th century. They expected banks to stop just lending to governments and being predatory and somehow become part of the industrial economy. And that was happening in Germany until World War One, but after World War Two you had the rentiers fight back. You had banks merge with real estate. The fight of classical economics and of industrial capitalism was to get rid of the landlord class, to get rid of everything that increased the cost of living to workers, so that they could pay workers less, not to lower workers living standards, because they know that if you’re going to hire labor, and you want high productivity labor, it has to be well-fed, well- educated, well-dressed, and have good housing. But the industrial class certainly in America and in Germany wanted government to pick up as many of these costs as possible. They wanted government to pay for education and that’s what you had in the United States. In England they wanted government to pay for health care, and it was a conservative Prime Minister Benjamin Disraeli that said “…health is everything, that’s what we really have to do”. So you had public health, you had public pensions in Germany under Bismarck to help build up the industrial working class. And the objective was to make every industrial economy into a low-cost economy by getting rid of the rentiers, getting rid of the landlords. You don’t need a class just collecting income without contributing to production. You don’t need a banking class, you don’t need monopolists.
Well, everybody thought in the late 19th century that industrial capitalism was evolving naturally into socialism, and there were many different kinds of socialism: there was Christian socialism, anarchist socialism, Marxian socialism, Co-op socialism, but one form or another, everybody thought that the government was going to pick up natural monopolies and basic needs. All of that changed after World War One and really changed after 1980 with Margaret Thatcher and Ronald Reagan. And by that time the financial class had merged with the real estate class and as land landlords were phased out, because of taxes and the whole political shift: democracy, you had private owner-occupied housing. But if you’re an individual how are you going to get a house? You have to go to a bank. So, while industrial capitalism had gotten rid of the landlord class, capitalism still had economic rent, but instead of being paid to the landlord class, it is now paid to the banks in the form of interest.
In fact, most of the economic surplus today isn’t taking the form of profits, it’s taking the form of interest payments and financial charges. In fact, if you’re a credit card company, your late fees and penalties give even more profit than the interest rate, and the gross national income and product accounts treat late fees and penalties and interests as if it’s a contribution to production, and they count all the money going to monopolies, and to landlords, as a contribution to production and output when actually it’s a transfer payment–it’s an overhead charge, which is how the classical economists treated it all.
So somehow instead of having industrial capitalism evolving into socialism, we’ve had finance capitalism whose policy is not to raise living standards but to impose an IMF-type program of austerity. And that’s what we have in the United States today, especially since 2008 and the financial crash. The American economy, the European economy, have been in a debt deflation even though our prices are going up, the prices that are going up are monopoly prices for the energy industry, monopoly prices for medical care. But the households are left with less and less money after paying for finance, after paying for insurance, and after paying for real estate, they have less and less to spend on goods and services. So that’s why the economy is being squeezed today, and my book explains how this transformation took place. We’re not in the kind of capitalism that is in the textbooks, and not really the one Marx and the socialists expected to see.
Marx in volume three of Kapital described the horror story of what would happen with finance capitalism, and then he expressed the hope that “industrial capitalism is going to prevent this from happening and fortunately with industrial capitalism we’re going to make the banks part of the financing real production.” But that’s not what banks do. Banks make loans mainly against assets and property that’s already in place. Then 80% of the loans are real estate mortgage loans, the rest are corporate takeover loans speculation loans, loans that are collateralized by stocks and bonds, and of course that’s what the American central bank had been spending $9 trillion just collateralized by stocks and bonds and junk mortgages and junk bonds. So we’re having a perversion of everything that capitalism promised to be, and it turns out that the road to serfdom, the literal road to serfdom, is not a strong state like Hayek said, but a state that’s too weak to control the financial sector and steer it to serve the economy as a whole.
DRAITSER: Michael, we’re gonna get to the Austrian boys in a few minutes, but before we can jump over to Austria and some of these other larger historical questions I just want to deviate for two seconds just to illustrate the point you’re making that now we’re in a period just as you mentioned since 2008 where this process of this sort of financialization of these assets in rent extraction has reached a sort of zenith or something, where the financial institutions themselves have become the literal landlords, buying up the real estate and then turning around and renting it out. So, it’s not just lending of money for individuals to have mortgages, they are literally buying the land and the buildings.
HUDSON: That’s right, and that is a result largely of what happened in the Obama administration. Obama decided to bail out the banks and evict the seven million American families. At the same time, he decided not to write down the debts to the real levels but to keep the fraudulent junk mortgages on the books. Then 69% of Americans owned their own homes, now it’s down to 61% as of last year and it’s plunging probably towards 55%–way, way down and the reason is that Obama directed the central bank to lower interest rates to such a low rate that it would keep the stock market, and the bond market, and the real estate market inflated. The policy of the central bank since 2008 has been asset price inflation. All of this $9 trillion has been spent just to support the stocks and bonds held by the wealthiest 10% of the Americans who own 72% of the stock market and much of the bond market.
Well, now that interest rates were down to 0, you had the emergence of these companies you’ve just described like Blackstone and the private capital companies and they said, “Well we can’t make our money just by lending anymore because the interest rates are so low because of the Fed. What we can do now that the economy is being deflated by the post-Obama policies let’s just begin to buy up real estate ourselves”. You have more and more real estate being bought up by private capital companies without borrowing money because they say we can’t even make as much money as we would have to pay as a mortgage rate but we can buy up property and begin to monopolize property and now that the financial class has replaced the old landlord class we can shift back and become the new landlord class. You’re right that’s exactly what’s happening. Rents are rising, the homeless rates are rising, the evictions, here in New York City, are rising. If you take a subway, you’re going to find a lot of homeless people sleeping on the seats there. The homeless camps are rising all over the United States as this is occurring.
DRAITSER: So, your book talks a lot about financialization and there’s a word that is used, and maybe it’s overused in our modern lexicon, that I think is relevant here and I would just ask you to define it to help us because it’s so nebulous sometimes. Neoliberalism, we hear the term neoliberalism over and over again. Neoliberal policies etc. What is neoliberalism, can you define it for us, and is it just a synonym for a financialized economy? Or is there more to it? Is it about the international flow of capital? How would you describe neoliberalism?
HUDSON: Well, neoliberalism has always meant getting rid of the state. It means reduce the state. The liberals in the 19th century wanted to get rid of the state when it was controlled by the landlord class. The House of Lords in England, the upper House of Parliament in Europe. Or the Senate of the United States. Liberalism was to get rid of the hereditary landlord monopoly class to get a free market, but Neoliberalism reverts this. Neoliberalism says, “we want to get rid of any state that is strong enough to regulate finance, to regulate monopolies, or to protect the public interest against the rentier class”. So, neoliberalism is the counter-revolution against classical economics and against the whole dynamic of industrial capitalism which was trying to get rid of the rentier class. It’s basically a counter-revolution.
DRAITSER: So that would be Milton Friedman pushing back on John Maynard Keynes or is that an oversimplification?
HUDSON: No, that’s pretty much it. When Friedman said “the corporations should not take into account the public interest” he added that “the government itself should not take into account the public interest. The job of the government,” he said, “is to simply let everybody make as much money as they can, however they can”. Of course, the big advocates of Neoliberalism are the criminals! The gangs! The gangsters! Because they don’t want the police. Well, the monopolists don’t want the regulatory antitrust police. The drug companies don’t want any kind of anti-monopoly. Essentially you have what is called a free market. A free market means the wealthiest people that dominate the market and the supply of credit, the management of the economy that allocates credit, and who gets what should shift from Washington to Wall Street. It should shift from the government to the financial sector, and the financial sector should essentially do the planning. Well, the problem with this is the financial sector lives in the short run. So, neoliberalism means only plan for the next three months, the next year’s balance sheet, because the free market is so complex you don’t know what’s going to happen. Well, of course, if you’re managing it from Wall Street you do know what’s going to happen but you don’t want to tell people exactly what’s going to happen.
DRAITSER: So, are neoliberalism and financialization intimately intertwined in that way? Can one exist without the other?
HUDSON: It is the financial sector that has pushed neoliberalism, because the financial sector wants to prevent any government from controlling the supply of credit. Just compare the US system to China’s system, for instance. What makes China unique is doing what industrial capitalism in the 19th century hoped would occur. The government creates the credit, and by creating money and the credit with a Bank of China, that creates credit to spend into the economy. To build high-speed railroads. To build housing. China’s banks do not make money for corporate takeovers or for speculative purposes but for the real economy. Neoliberalism tries to essentially make money financially because that’s the quickest way to make it. Neoliberalism focuses on creating credit not to create new means of production, but to buy existing means of production. This began already before World War One. When the Federal Reserve was created it took out of the treasury, all of the functions the treasury had. The Treasury Representative was not even allowed in the Federal Reserve. Everything was shifted basically to Wall Street and Philadelphia and Boston and other financial centers.
So, at that time banks were known as the “Mother of Trusts.” If you wanted to make money financially you would buy all the different copper companies and you would make a copper trust. You’d merge them. You’d buy up all of the steel companies and make the steel trust and charge monopoly prices. The easiest way to make money is not to produce, but to be a rent extractor, a monopolist, and get in a position where people have to buy what you’re producing and don’t have any regulatory agency to prevent you from charging whatever you want for basic needs, like you’re seeing in healthcare, education, and everything that’s driving the economy into debt. So, the effect of neoliberalism is to drive more and more families into debt. The more debt they have, the less money they have to spend on goods and services. So we end up looking like a country that has to borrow from the IMF going into an austerity program.
DRAITSER: You just touched on it but let’s explore it a little bit further. Can you explain a little bit how the Reagan/Thatcher period entrenched the phenomenon that you’re describing? How it put all of this into overdrive.
HUDSON: Well, let’s begin in England. After World War Two the government of England had undertaken a huge public housing program. They developed most of the basic utilities as public enterprises so that they could provide telephone service, railway service, a bus service, and housing, at a low cost. Thatcher said “let’s sell everything off”, and the first thing she sold off was British telephone. She sold off the company at such a low rate that all the customers were allowed to buy a few shares in them and they could double their money overnight because they underpriced the shares that they sold a British telephone. Well, of course the big underwriters were given enormous commissions. The underwriters, the banks, who said we promise you’ll get X amount for the stocks that we sell, they usually get a 3% Commission because they have to do research on little companies. But now, the biggest companies in England, the commanding heights, were sold off at huge commissions, and the big underwriters would buy British telephone, I don’t remember the exact right numbers, but let’s say it was issued a $3 a share, it doubled to $6 a share that day, $12 a share in the next day. All of the wealthiest banks got huge fortunes. Thatcher then said, “let’s privatize all the housing. You can sell your public housing”. All of a sudden, instead of housing being available to people at low rents they could afford, everybody began to grab for the real estate which is now so expensive that workers in London can’t afford to live in London, they have to live outside London, and that means they have to take a train or a bus in.
Well, very soon after Thatcher took, over the wealthiest lady in England became the daughter of a bus driver because Thatcher privatized the bus lines. The father, one of the bus drivers, was able to borrow money to buy out, buy control, of a very small bus line company. What he did was he sold the bus line terminal, which was very convenient in the middle of London so everybody could get it to go wherever they were going, he sold the terminal to real estate speculators, made enough money to pay off the money that he borrowed to buy the bus line, and moved the terminal way to the outside of London so you had to take a long subway ride to get to the bus line and he bought up all of the different bus lines and all of a sudden it became much harder to take a bus in England. Of course, once the bus line is privatized, they cut all of the services to smaller outlying areas of London or areas that weren’t making a profit and there weren’t many buses going many places. The same thing happened with the railroads. They privatized the railroads. Railway service went way down, the prices tripled. By privatizing Public Utilities, you added not only a huge monopoly rent but you also added a huge interest charge because you add financiers coming in and saying, “Let’s buy this railroad, let’s buy this bus line, let’s buy this”. The banks would lend money to speculators or takeover artists or raiders to buy these big companies, and they immediately would buy a public utility like an electricity or water company that was selling water at a low price. They would triple, quadruple, or increase by prices 10 times sometimes. So all the prices went up so high that England was deindustrialized. Something similar happened in the United States under Reagan. He began to privatize as much as possible. When he would privatize a company, he would not only privatize them and they would be sold at whatever they were earning it was sort of a multiple of their earnings, a price-earnings ratio, but then Reagan deregulated everything. They were called the Crazies from Utah. Mrs. Gorsuch, the mother of the Supreme Court justice, wanted to deregulate absolutely everything, give away the public domain, let timber companies cut down the forest without charge, let oil companies drill without charge. It was a bonanza for the rentier class. It was a bonanza for the rent extractors. The cost of living went way up. Same thing with banking. Banking was deregulated and the first thing you had was a gigantic savings and loan fraud. The most money in banking you can make by fraud.
My colleague at Kansas City, Bill Black wrote a book, The Best Way to Rob a Bank is to Own One. He was one of the prosecutors in the savings and loan crisis. Then Reagan appointed a corporate lobbyist, Alan Greenspan, as head of the Federal Reserve and he essentially refused to regulate the banks. He said, “It wouldn’t pay a bank to actually be dishonest because then people wouldn’t use it”. Well, if a bank is dishonest and you’re a robber, that’s the bank you want to use! You wanna say, “I’m gonna buy money so that I can buy up this industry, triple the prices, and hurt the economy. That’s how I make money!” And there was no oversight. There was no idea of the public interest. And that’s what neoliberalism is. If neoliberalism means there is no government, then there is no public agency that’s looking for the public interest and trying to shape the market to serve rising living standards, lowering the cost of living, and promoting industrial growth. You have a reversion to what life was like before capitalism, and it’s something like neo-feudalism.
DRAITSER: I’m gonna be very unfair to you and ask you a large question, and ask you to try to answer it in a short amount of time, but you mentioned somebody very important in the book, and it’s somebody whom I think, to a large extent, is unknown by a lot of our contemporary listeners and viewers and that’s Joseph Schumpeter. You talk about Schumpeter and the idea of creative destruction, and this is one of these principles of capitalism that I think does need to be understood and discussed at length. How does creative destruction relate to our traditional understanding of what we might call classical economics or economic orthodoxy, and then the second part of that is: how has the financialized capitalist system inverted the concept of creative destruction?
HUDSON: Well, Schumpeter tried to put Marx’s ideas in middle-class language without the socialist tinge on it. Marx had said that “industrial capitalism was a competition to lower cost” and Marx said, “capitalism is revolutionary” and what was revolutionary was getting rid of all of the false costs of production, the needless costs. Society doesn’t need landlords to produce. It doesn’t need bankers, really, just to make unproductive loans. It doesn’t need monopolies. The industrial countries fight against each other to lower the cost of production so that their labor can undersell other labor. Largely by having government pick up the cost, as I mentioned. Well, look at when the steel industry in America was built, the head of US steel had just built a factory, and then all of a sudden they heard about how the Germans were building their factory. This brand-new factory they just built was torn down and a whole new modern technical factory was built. Schumpeter said, “as science advances, capital becomes more and more productive with higher technology” that’s counted in America’s labor productivity. But he says “there are new ways of organizing capital and you have a new industry, and a new firm, that is going to adopt the new technology and undersell the price that the old firms sold and it’ll be the innovators are going to end up underselling the old guard who don’t innovate and that’s going to lower the cost and that’s how capitalism drives forward by driving costs and what you’re destroying is the old technology that really doesn’t pay anymore”.
When Marx talked about creative destruction, he meant really creative destruction. In other words, you’re destroying a whole economy that had a rentier class. Schumpeter only talked about technological creative destruction, he didn’t go whole socialist and say wait a minute what you’re really doing as a nation is competing with another nation to minimize the cost of production by getting rid of its overhead class, getting rid of its landlords, getting rid of everybody who’s unproductive, getting rid of its military spending for that matter. So, all of a sudden, what the neoliberals picked up was the word destruction. They said destruction is good. One way that we can lower costs is to deindustrialize the United States. American labor is paid too much. Let’s lower labor costs. What we really want to do is exactly what the current head of the Federal Reserve wants to do: cause unemployment. Marx called this the reserve army of the unemployed. In the 1980s and especially under Clinton mainly in the 1990s, they said: “Well we can cause permanent unemployment so the capitalist can really have low priced labor let’s move everything to China and Asia where there’s low price”. So, what creative disruption meant for the neoliberals was “let’s destroy the United States industrial economy and we can make money by shifting it to China.” China will be the innovator, and the innovator is having cheaper labor that doesn’t cost as much as American labor and that sort of turned the idea of creative destruction from something driving economies forward towards more productivity, to deindustrializing and leaving a hollowed-out economy.
DRAITSER: And the other part of that that should be noted is the fact that you now have an economy where there are thousands, maybe tens of thousands of companies and various other enterprises that should have long since been destroyed, but continue to exist as these zombie entities sort of feeding off of capital.
HUDSON: Well, many of these zombies are zombies because of the debt that they’ve taken on. There’s been so much corporate raiding–that was the other thing that happened under Reagan. Before the 1980s banks wouldn’t lend money to corporate raiding it wasn’t considered very nice. But first, Drexel Burnham and their law firm Skadden, Arps said, “Well, let’s begin borrowing money to buy companies and we can essentially loot them for profit.” And I go into great detail there as I did in my earlier book Killing the Host and it became a predatory takeover, not a productive takeover. Banks didn’t lend to create new companies they created debt to take over companies and the debt was added onto the company’s expenses you were adding to the cost of production, just the opposite of creative destruction and cutting costs that Schumpeter talked about. Schumpeter’s creative destruction was cutting costs. Reagan and neoliberalism creative destruction is to destroy companies by adding the costs and then letting them go bankrupt after you’ve already looted them and paid out all of their capital to yourself.
The End of Globalization
DRAITSER: Let me just reiterate the point CounterPunch is where you can go to get an eBook The Destiny of Civilization: Finance Capitalism, Industrial Capitalism, or Socialism if you are like me and desperately want a physical hardcover book in your hands that you can carry with you to the beach and get stained with drinks and so forth then you should go and get yourself a hard copy online wherever you can find them so these books are essential, really all of my Michael Hudson’s books are essential so I highly recommend that you do that. Alright Michael, coming back to the conversation. I want to shift gears a little bit and talk about the financialized global economy but specifically as it regards debt. What role does debt play in this financialized global economy because debt today functions very differently than it has historically, doesn’t it?
HUDSON: Well, the theory historically, a century ago, was that if you run into debt, debts can be paid by investing the proceeds productively to make enough money to pay. Adam Smith said the rate of profit is usually two times the interest rate because you make a profit of $100 you pay half of that $50 to the banker or the financier and you have 50% profit that ends up, you’re in a 50/50 profit sharing with the creditor. But now debt is not created to actually make an income. If you buy a house to live in that doesn’t add to your income. If you borrow from a credit card that doesn’t give you an ability to earn more. Or, if you’re a global South country, Latin American country, the IMF will lend you money to help the domestic kleptocrats get their money out of the country before there’s a devaluation then you devalue, and all of a sudden, you’re in trouble.
Well, people borrowed anyway to buy houses because under today’s economy and under finance capitalism you don’t get wealthy by making profits. Almost all the wealth of the richest Americans the richest Europeans they didn’t save up their wages, they didn’t save up their profits, they make it by capital gains. And they make capital gains by the banks lending so much more money to real estate. A house is worth whatever a bank is going to lend, and banks are lending more and more of the house’s value to whoever is willing to pay them more. So, finance capitalism doesn’t add to production, it doesn’t add to profits, it adds to paper wealth by inflating the prices of stocks, inflating the prices of bonds, and inflating housing prices. But suppose you’re a global south country in Latin America. Look at what’s going to happen this summer: oil prices are going way up because the Biden administration has put sanctions against Russian oil and gas and that leaves American oil companies in control of the world oil trade and they raise their profits enormously. The stock market may be going down while oil companies are going way up. Biden has also said you can’t buy grain from Russia, so grain prices are going way up and that’s one of the mainstays of America’s balance of payments, grain exports! Essentially, think of America as a gas station and farm with atom bombs. I think that’s how John McCain had described Russia, but he was describing America. Very often when you accuse a country of being something, you’re accusing yourself.
So, America is making a killing on oil and on grain prices and it’s raising its interest rates, while telling other countries like England and Japan keep their interest rates low, so the dollar is getting much more expensive relative to European, English, South African, and other third world currencies. How are these countries going to pay their debts? How are they going to get by this September? They have a choice. If they buy enough food to avoid starvation, if they buy enough energy and oil at the higher prices from American companies to run their factories and to keep their lights on at night, then they can’t afford to pay all of the dollar debts that they’ve borrowed. These dollar debts were simply lent to governments. They won’t lend to companies or governments to build more means of production to earn the money to repay the debt. They were just lent at the cost of telling of the government to do something to earn the money to repay us and the IMF advised governments, “well, you earn money by forbidding labor unions, you earn money by lowering wages, and by devaluing your currency.” But what you really devalue is the price of Labor, because there’s a fixed price for world materials everybody pays the same price for machinery, everybody pays the same common price for oil. A devaluation means you’re just lowering the price of labor and squeezing it. So, there’s going to be a huge labor squeeze and hence a political crisis in Latin America, Africa, and much of Asia. What is going to happen this fall is that countries are going to decide: do we want to go along with the American dollar standard and continue to pay debts and impoverish our country or do we want to join a new bank the BRICS Bank that China and India and Russia and Iran and other countries are all creating?
You’re having a whole split of the world into two opposing economic systems. China is not a rival for America. America is not trying to industrialize like China is. America’s trying to deindustrialize and make money financially. China is not trying to make money financially. It is trying to develop its economy and that of its allied countries in the Belt and Road Initiative to produce more. So, you’re having for the first time a choice: are you going to have industrial capitalism evolving into socialism like people expected a century ago, or are you going to have American-style neoliberal finance capitalism, which is just going to make you poorer and poorer and impose austerity programs on you?
DRAITSER: I’m coming right back to that issue of the US dollar in just a minute but I want to finish up this issue of debt. You describe debt and talked about it and its economic terms and that’s obviously critical but debt is also a political weapon. It’s one of the primary political weapons that has been used by the US. You talk about it in Super Imperialism and you talked about it in some of your other books as well. Can you explain how debt becomes a political weapon? You mentioned the IMF and austerity that’s an obvious example. What are some of the ways that the United States and other former colonial powers are using debt and have used debt as a weapon?
HUDSON: Right now by following the World Bank and the US investment strategy, countries are not able to break even in the balance of payments. So in order to avoid devaluation, they have to borrow from the IMF. And the IMF will not lend to a left-wing government. The big explosion in IMF loans now is to Ukraine. They’ll lend money to Ukraine, they would not lend money to left-wingers in Argentina. But now that Argentina would have a right-wing head the IMF will lend money to countries to support right-wing client oligarchies and if it looks like there’s going to be an election and the client oligarchy is going to be outvoted as people vote for socialists, then you’re going to have the big oligarchy moving its money out of its currency into dollars or into foreign currencies.
So the IMF will lend the right-wing government enough money to keep their currency high enough so that their oligarchy can move their money out of Venezuela or Argentina or Brazil especially, at a high rate, and then when the socialist government comes in the IMF won’t lend them money. The banks will gang up in a currency raid against these currencies, the currency will devalue causing a crisis and the IMF will say, “well you see that’s socialism when you don’t have a neoliberal running that’s what it is” and all of a sudden the dollars that Brazil or Argentina, I should not have mentioned Venezuela, have borrowed all of a sudden they have to pay much more of their domestic currency to repay the dollar debts and if they can’t repay them then the bondholders can grab whatever property they have. In the case of Venezuela, the IMF refused to lend money to Venezuela, because it said you are a socialist government, we’re not going to lend money to you, we only lend to right-wing governments.
The American government grabbed Venezuela’s holdings of oil distribution companies in the United States. England grabbed Venezuela’s gold holdings, and America said “look we’re for democracy against autocracy. We are the democracy in the world, we get to say who Venezuela’s president is, because we elect them, because we’re America that’s why we’re a special country. And we’ve appointed Mr. Guaido, who doesn’t get many domestic votes, but we want Mr. Guaido to be the Venezuelan Boris Yeltsin, who’s promised to sell all of your resources to the United States and so they just grabbed Venezuela’s money just like they’ve just grabbed all of Russia’s foreign exchange reserves and in the West.” So, Venezuela couldn’t pay the foreign debt and as a result, it’s not able to finance its trade and investment on credit, because almost all trade and investment is just like buying a house, it’s done on credit. The idea is supposed to be that well, the credit is going to enable you to invest in more production and you’ll make a profit or if it’s a government infrastructure the economy will grow and you’ll get enough tax revenue to pay the creditor. But that’s not what’s happening at all. It’s the reverse of everything that the textbooks talk about. So we’re in an inside-out world where what the textbooks talk about is 100 years out of date. They don’t talk about predatory credit. The assumption is that all debts can be paid if you just can lower the wages and lower living standards enough to pay the upper 1%.
DRAITSER: You’ve also already touched on it a little bit, but I’d like you to go a little bit further and explain the role of the US dollar specifically in a financialized global economy. We know this is the global reserve currency, oil is traded in dollars etc. A lot of talk from a lot of different quarters both on the left and the right about a move away from the dollar toward a bifurcated global economic system. I’m a little bit skeptical of that, at least in the nearer term. If you look at some of the numbers, global reserves held by all countries combined were in dollars of like 72% and now they’re like 66%. So, it’s an extremely slow process that we’re witnessing, but it is happening. So, my question is what is the role of the dollar in the modern financialized global economy and what will the role of the dollar be given all of these changes–the sort of East/West split–that we’re seeing?
HUDSON: Well, that’s really what my book Super Imperialism is all about, but I summarize it in its economic form in The Destiny of Civilization. The whole dollar hegemony began in 1971 when the United States went off gold. Before 1971 when a country would run a balance of payments deficit it would have to pay in its foreign reserves, mainly gold. In the 1950s, 1960s, early 70s, America’s entire balance of payments deficit was military spending and so America’s gold stock went down and down and down, because as America would spend money dollars would be converted into local currency in Vietnam and Southeast Asia. Vietnam and Southeast Asia were French colonies; they would send the dollars to their head office in France and General de Gaulle would decide, well let’s take these dollars and get gold. So, the United States stopped paying in gold. All of a sudden what were people going to use to settle their balance of payments deficits? The United States as a result, of emerging from World War Two so strongly, controlled the world oil trade. Oil was priced in dollars, most products are priced in dollars, so the United States continued to spend money abroad and even accelerated its military spending abroad, so it was pumping more dollars into the end of the world economy. But what happened to these dollars? People would get them; they turned the dollars into their central bank for domestic currency. German mark, or Swiss francs, or whatever. And what were the central banks going to do with the dollars? In order to prevent their currency from going up, they would recycle the dollars to the United States and buy treasury bonds. So in effect, the United States was getting a free ride internationally it could simply print dollars and other countries would end up keeping their savings in dollars. Imagine that you went to a grocery store and you buy your groceries by writing an IOU. Then you go back the next week and say well you know another IOU and the grocery store would say, “Well, wait a minute what am I gonna do with these IOUs. Can you pay?” “No, I can’t pay, maybe you can use these IOUs to pay your suppliers the people that give you your vegetables and your milk and your meats, but I can’t pay”.
That’s the position the United States is in. Other people have kept their savings in the United States thinking that the United States was secure, because everybody knows the United States can simply print its own dollars. It can’t go bankrupt because it can create as many dollars as it wants, as we’ve seen in quantitative easing. So, all of a sudden the United States has been able to spend whatever it wants, and other countries, if they’re running a balance of payments deficit, have to borrow dollars by raising their interest rates to borrow. And raising the interest rates will slow all their economic activity. But the United States doesn’t have to raise us interest rates, it can do whatever it wants. That’s why the US is the exceptional country, right now. But since it’s begun to grab the foreign reserves of Venezuela and Russia, everybody is afraid to hold dollars anymore. They’re beginning to move out of it. It is a very slow move so far, but they’re moving out every single month. Russia, China, other countries, are replacing dollars with gold or with Chinese currency, or with each other’s currency. It’s still happening very slowly, but amazingly enough, President Biden’s war, the NATO war in Ukraine, and the grabbing of Russian foreign reserves has ended this free ride! You’d think that the one thing that the United States would try to do was keep this idea of writing debts without any idea of how you’re going to repay. Well, all of a sudden countries are cashing in. They’re getting rid of the dollar, and if they don’t use the dollar if they begin to denominate trade say, between India and Russia in rubles and Indian currency and Chinese currency, then there won’t be any need for the dollar and it won’t have this free ride. How is it going to be able to keep spending on its almost 800 military bases around the world, if the dollar goes down and down and down because all of a sudden people are treating the United States like a third world country.
DRAITSER: Michael, that all sounds well and good but the pushback from that would be, but no investors around the world look at China as a safe place to park their money. It still remains the US treasury’s market that people are rushing back to park their assets, their wealth, to protect themselves against global instability, etc. China doesn’t seem to have any interest in moving towards an open market model. So, the idea that China, or a bank sponsored by China, is somehow going present a true alternative to this US-centric capitalist system seems a bit far-fetched, no?
HUDSON: You’re right, China has no intention at all of becoming a home for other countries borrowing. It wants to minimize. If China would do with the United States did and create an investment vehicle itself, then dollars and British sterling and others would flow into it and then China would be in debt. If you put money into a bank, then this is a liability, the bank owes you money. China doesn’t want to any money at all from foreign private investors and it doesn’t want to provide a safe haven for foreign investors. So, when people talk about the BRICS Bank they’re not talking about a bank for private investors at all, they’re talking only about a means of settling balance of payments deficits among governments. This bank is only going to be for governments to create its own special drawing rights or arrange its own currency swabs. Private investors will continue to invest in, and put their money in US treasury securities because the US treasury can keep on printing them. It’s still the measure of value by which oil and raw materials and minerals and movies are transferred. So, you’re having a bifurcation between a monetary system that only works for governments and the monetary system that works for the private sector.
DRAITSER: And one of the aspects of this bifurcation or this split that has really come to the fore since Russia’s invasion in Ukraine is this idea of US financial imperialism. I think this is something that a lot of people didn’t really pay close enough attention to in the previous decade. The US tried this out with Venezuela. We saw that with Iran, a number of other countries: the freezing of reserves, the sanctions, all of the other tools that the US treasury uses. So my question to you is: has U.S. financial imperialism, or the tools of US hegemony on the financial side, has that exposed the US too much in the world, in your view?
HUDSON: Here’s the problem that most of the debts of the global South, Latin America, all countries, are denominated in U.S. dollars. The idea of debts is they bear interest, and you have to keep rolling them over. You have to pay interest and amortization, just as if you have a mortgage. Well, all of this is coming to a head, as I mentioned, this fall, because if you’re the average Latin American or African or South Asian country something has to give. You can’t afford to buy your food and energy and pay your foreign depts, so there’s going to be the threat of default and if there is a threat of default, then this whole superstructure of debts where banks guarantee debts, their derivatives betting on whether the debts will be repaid or not, what will the value of the debts be. You’ll have something like what occurred in the 1980s after Mexico couldn’t pay: interest rates for Brazil and Argentina went up to 45% and in Mexico interest rates on government, dollar debts went up to 22%. Something like that’s going to occur again.
The prices of bonds in these countries will fall. The countries are going to say to Russia, for instance: we would like to buy your oil, you know we’re not going to follow the US sanctions. We’d like to buy your grain, and they’ll say to China, we’d like to buy your manufacturers. Russia and China can say, “well we’d like to lend you the money, and then you’ll repay us ’cause we know you don’t have the money now but if we lend you the money I don’t see how you can afford to repay us, the money we would lend you to buy our oil and food would just be enough money so you could pay your dollar debts, why would we want to do something like that?” That’s the crisis that’s going to occur in the fall. People are going to have to decide: can we default on the dollar debts? If they default, what will the US do? Brazil could say, “well we’ve we’re part of the BRICS bank and they’re going to lend us money, but we can’t afford to pay you in dollars.” Now the United sSates will say, “well you know if you do that then we’ll put sanctions on you.” And then Brazil will say, “well if you put sanctions on us and you can’t buy our exports, then you’re just hurting yourself! You’re hurting your own exporters and you’re driving us to countries that will export for ourselves.” And the United States is going to have to say, “Who are we going to put in first? Whose interests are we going to look after? Will it be our dollar bond holders in the banks or will it be our corporations that make the exports to these countries?” Something has to give. There’s not enough money both to buy our exports and to pay the bondholders what’s going to happen? Well, nobody knows yet, but that’s what the fight is going to be about.
DRAITSER: And to your point about financial imperialism, the United States has, I think for the first time, or at least for the first time of notable example, essentially manufactured a major economy’s default. And that’s what’s happening with Russia. They’re claiming that Russia has defaulted on its deb,t but that’s because they have prevented Russia from actually repaying that debt because the debt has to be repaid in dollars, and the Russians can’t do that for all of the reasons that are obvious. So, the question is do you believe that this is going to cause a shattering of faith in the United States as a good faith partner for other countries that might also find themselves in the crosshairs?
HUDSON: Well, everybody is talking about that. This is exactly what Global South meetings are all about and you’re even having Saudi Arabia, which is one of the biggest dollar holders, I talk about that and that’s what that president Biden’s meeting with Mohammed bin Salman Al Saud (MSB) was about. Everybody realizes that we’ve run to the end of a whole cycle of expansion, debt expansion, that begin in 1945 when almost the whole world emerged from the war with no private sector debt. Now there’s a huge private sector debt. Government debt went way down, because there wasn’t a war on but now there is government debt just to finance the failure of the global South countries to develop. Something has to give. And that’s not what was supposed to happen in the textbook, but that’s what’s happening. My book is really about the different dynamics that are shaping the way in which the world is going to be dividing into these two separate trade and investment and monetary blocks.
DRAITSER: Final question. Between the war in Ukraine, all of the turmoil surrounding that, and then of course everything that has happened since the beginning of COVID, the disruption to global supply chains, all of these things, does this mean that we have reached what might be called the end of the globalized neoliberal era?
HUDSON: Absolutely. That’s the one thing that, for the last two years, if you read the speeches of President Putin, President Xi, the Indian speeches, they’ve all realized that globalization is over and especially if you read what President Biden and what Donald Trump had said. Donald Trump said we’re now ending globalization. We are putting America first. Any deal we make, America has to come out on top, and that’s pretty much it. It was the United States itself that has led the breakup of globalization by becoming so exploitative and one-sided with other countries that it’s gaining at other countries’ expense, and other countries are driven to protect themselves by de-dollarizing. Everybody had been talking about de-dollarization for maybe three or four years, but nobody expected that the United States itself would lead the de- dollarization during the Biden administration. The word used is “shooting yourself in your own foot”. Which basically is what the neocons are doing in the Biden Administration. Both from US point of view and from China, Russia, India, Iran, the BRICS countries there’s a common interest in going their own way.
DRAITSER: But it wasn’t that really a product of the capitalist forces that were behind Trump and those elements that Trump represented? I mean there was clearly a divide in capital. You have a neoliberal globalized capital that opposed Trump and a lot of those ideas and then you had a sort of a domestic petrochemicals capital formation that was supportive of Trump, the dirty polluting industries, theconstruction industries, the petty-bourgeois, small business owners, etc. So, to me, I mean not to get too Marxist about it, but it represented a split within the ruling class. A split within the capitalist class, more than, you know, America necessarily deciding to go its own way.
HUDSON: Well, the split you describe really is between raw materials suppliers, oil, gas, mining, and monopolists on the one hand against industry on the other. So we’re right back to the fight that industrial capitalism was supposed to sweep aside these rentier interests and the rentiers are fighting back. And the question is, can America become a prosperous economy just by making money financially? And just by making money by controlling monopolies that other people have to pay special commissions for, and a monopoly rents like they’d have to pay for a Hollywood movie, intellectual property rights, information technology? Can a country preserve its living standards and get richer without industry? The answer we saw from Trump is; “Well, the country is us, the 1%. We can get richer maybe not the 99%. So when we say America gets richer, we mean our companies in our sector, not the people. The people don’t really fit into the equation that we’re talking about.”
So yes, there’s a fight between which companies will prevail and whether America will be a rentier society? Will Biden appoint anti-monopoly regulators to lower costs? Can America continue to function with 18% of its GDP going for healthcare, instead of providing lower healthcare costs? How can American industry, even information technology companies, compete if it has such expensive healthcare overhead that people have to pay, if it has such expensive housing for rental or for purchase that people have to pay? Can America really get rich, just on capital gains for its real estate stocks and bonds and monopoly companies? That’s the question. The idea of the 19th century is no, that’s that was what feudalism was all about. It can’t survive that way. So can America have a new feudalism for it’s 1% and somehow survive? That is the question.
DRAITSER: I suppose that’s the $25 trillion question isn’t it.
DRAITSER: So okay, we will leave it there. Michael Hudson thank you so much for being so generous with your time. I know I kept you over the time I said I would. Michael Hudson is the president of the Institute for the Study of Long-Term Economic Trends, he’s an economist and author, many books to his name. I of course recommend Super Imperialism to understand so many of these dynamics and the brand new book The Destiny of Civilization: Finance Capitalism Industrial Capitalism or Socialism get your eBook from CounterPunch, get your hard copy wherever books are sold. Michael Hudson thank you as always for coming to CounterPunch and helping us understand all of these issues.
HUDSON: well I’m glad we were able to cover the ground that we did, thank you.
DRAITSER: Thank you and listeners thank you as always and we will chat again next time.