Super Imperialism: Michael Hudson on Dollar Hegemony

One year after the United States dropped its currency backing from gold, Michael Hudson saw a new power formation taking shape and wrote a book called Super Imperialism: The Origins and Fundamentals of U.S. World Dominance. He saw a new dynamic taking place that few would notice in the 1970’s and that few notice still today: America has either planned for or stumbled upon a technique for Imperial rule across the globe that has never before been seen in history. The United States has found a way to use their situation as a heavily indebted nation as leverage for forcing nations around the world to pay it modern day imperial tribute. Due to the complex relationships and mechanisms of central banks and international economic power disparities, America has built an empire based on debt, consumption, currency values, and war that has never appeared before on the earth. I will focus on Chapter 15 of his big book The Bubble and Beyond called America’s Monetary Imperialism for its short, dense explanation of Super Imperialism.

The dynamic that allows for this economic imperialism is very much graspable – it only requires a few steps of reasoning – but it is clouded in economic-speak. Michael Hudson has done a brilliant job in making understandable Super-Imperialism, but I am going to try and explain it again without inducing too much headache. It has taken many weeks of reading, rereading (an excessively marked up text), talking with friends, and talking in the Politics of Debt reading group to come to grippes with it, but this is perhaps the most important phenomenon encircling the earth and the most formidable barrier to enacting global change.

To begin, money in Europe has been backed by a material substance like gold or silver (bullion) since the rise of colonial empires ransacking the Americas and the end of the Middle Ages. The U.S. officially joined the gold standard crew in 1944 during the Bretton Woods system, and since it had most of the gold had the dollar become the reserve currency. In 1971, President Nixon took the United States, by far the most productive and affluent nation on the planet, off of the gold standard. No longer would the value of the American dollar be “pegged” or “coupled” to a fixed value denominated in the weight of gold. Having a steady, base supply of some universally acknowledged material to rest behind the value of a currency makes international trade easier and the currency value less erratic. A standard system of weights and measures allows for many parties to feel safe in exchanging currencies, knowing full well what everyone else will value the money they possess in the same way. A stamped bullion coin or paper money redeemable in a bullion substance would be trusted and retain its value in spite of fluctuating particular country’s currency values – so the logic goes. But this bullion system fixes the value of money so well that the coins or paper needed to pay taxes and conduct business can become scarce. When the supply of a currency runs out, people and states will no longer have the means to conduct trade and might default on their obligations to pay back loans, bonds, and other debt/borrowing instruments.

Today, to facilitate global international trade, currency values are measured against the dollar of which it appears there is no limit. Due to the U.S. leaving the Bretton Woods System of a common gold standard, the standard shifted from the gold backed dollar to just the dollar. Instead of the base measure of value being something scarce as in gold and other bullion, the dollar itself became the standard and could be printed and keyboard-stroked into existence at the behest of the Federal Reserve and lent out wherever – creating a glut of money. Sound inflationary? It is. Since the Federal Reserve was created in 1914, the dollar has lost ~95% of its purchasing power. In other words, things should be a lot cheaper to buy.

The United States of America had been borrowing heavily to finance its deadly and ill-fated war in Vietnam. The costs were skyrocketing and other nations were demanding that the U.S. be able to repay for the bonds it issued – in gold. The American economy was in a recession and its currency was shrinking relative to its supply of gold. The result of these pressures including the limitations on how much money could be spent by the U.S. military due to it’s massive debt run-up was the executive decision to simply unpeg and decouple the US dollar from the gold standard:

“A double standard has been implicit in the world’s economic rules since the dollar was decoupled from gold in 1971, when the U.S. trade deficit of $10 billion was the equivalent of more than half the U.S. gold stock. But today there is no gold convertibility and hence no major constraint on U.S. spending abroad or at home. The United States has not subjected itself to any of the distressing fiscal conditions that all other countries feel obliged to follow.” (Hudson, 368)

The US dollar could now be printed without limit. The US military could spend without limit. The deficits that the US treasury could run up had no limit. The United States could only do this because of its privileged position relative to the rest of the world nations: it was a military powerhouse and had a bustling economy. Other nations relied on the US consumer-based economy to sell their exports to, while they worried about the great disparity created by their military build up:

“The world still remembers how it was the Vietnam War that forced America off gold, as the US balance-of-payments deficit during the 1960’s stemmed entirely from overseas military spending. By 1971 the United States stopped redeeming foreign-held dollars in gold, and the dollar ceased to be a gold proxy. As the U.S. payments deficit shifted to the private sector, it expressed itself in the form of a demand for foreign products. This was welcomed by foreign countries on the grounds that at least it helped spur their domestic employment. But America’s military adventurism has no visible side benefits for Europe, Asia, or other countries. It has given the U.S. Treasury-bill standard the coloration of a political and military threat as well as being merely an economic form of exploitation.” (Hudson, 369)

The standard of gold had been shifted to the standard of US Treasury bills. Now that the burden of a fixed relationship between the dollar and gold had been removed, Treasury bills could be loaned out and dollars could be printed on the promise that America could pay them back with interest. Dollars would be loaned out to “developing countries” through the IMF and World Bank (which, of course, submit to the dollar standard) and any surpluses that these countries earn must be recycled into more U.S. Treasury bills by market constraints I will describe below. The size and scope of the US economy and the flood of money coming in to developing countries (as well as the coercion of economic hit-men and the neoliberal austerity/free-trade theories) convinced them to receive the glut of dollars to finance their industrial expansion. Mainly, developing countries would use these dollars to build up their productive enterprise and sell their exports on the world market, with the US sucking in much of the goods produced overseas.

“Now that the dollar had been demonetized, all that foreign central banks can do with their excess dollars is send them back to the U.S. Government by buying Treasury Bonds. If they do not do this, their currencies will surge against the dollar, threatening to price their manufacturers and food exporters out of foreign markets.” (Hudson, 368)

The constraints forced on non-U.S. countries to pay back their debts were not felt by the U.S. itself: being the primary hegemony both militarily and economically, the U.S. can spend whatever it likes and go into debt as much as it wants. Doing this actually helps the U.S. maintain the Imperial order of global trade and resource appropriation from developing countries via the asymmetry in the demand to repay debts and global market competition. This is the strange opposition, whereby an indebted country has been de facto colonizing other nations with surpluses from their trade: the U.S. goes into debt to finance military build up among other things (though obviously not for improving the lives of its own citizens) and the rest of the world must send their surpluses back to debt-empire, if they make a surplus at all. Of course, if “undeveloped” countries do not do well on the world market by selling all of the goods from their land with modernized production and (usually) cheap labor, they must pay back their debts (unlike the U.S.). To ensure this happens, austerity ravages the national purse and sucks the money out of an economy more forcefully and public agencies, enterprises, and infrastructure are privatized. The U.S. elite will get their tribute, whether by dollar-backed “ordinary” market means (a flood of dollars which must be used continually or else leave them at a trade disadvantage) or else austerity enforcement that demands the debts be payed with interest regardless of the performance of the economy in the world market.

Hudson summarizes a bit:

“Unlike former modes of Imperialism, it is a strategy that only one power, the united stares has been able to employ. Also novel is the fact the U.S. Treasury-bond standard does not rely on the corporate profits or the drives of private companies investing in other countries to extract profits and interest. Monetary Imperialism operates primarily through the balance of payments and central bank agreements, which ultimately are government functions. It occurs between the U.S. Government and the central banks of nations running balance of pavement surpluses. The larger their surpluses grow, the more U.S. Treasury securities they are obliged to buy.” (Hudson,370)

All non-U.S. countries are in a bind that forces them to support America’s military “adventurism” abroad. If the massive loans they receive to industrialize do not work out, their debts are collected on at the expense of public services, jobs are lost, and the people flee the destitution in their own land. If they succeed in world markets and play ball with the dollar, they enable the U.S. Treasury to continue selling it’s Bonds and Bills and increase the disposable money or liquidity (money is a very liquid substance under the fiat system vs. solid gold) to finance credit creation all over the globe. Their currencies being tied to the dollar standard, they are obliged (read: economically constrained) to keep currencies devalued, which in turn keeps them tied to the international market system and sends their natural resources away as exports.

The crux of this phenomenon is the dollar standard: because every other currency is denominated in dollars when they trade internationally, the U.S. feels empowered run up its national debt and continue to pay back the interest on the Treasury Bonds it sells with even more Treasury Bonds.

The people clamoring about the national debt astronomic expansion don’t usually make the connection between the debt and its imperial function of suppressing foreign currency values. Likewise, Modern Monetary Theorists who believe the national debt can be run-up without limit because of the governments status as a currency issuer also fail to take into account international dollar hegemony and the effect it has on global markets and the geopolitics of imperialism. A currency does not need to be created with debt attached to it: “[Foreign countries’] Treasuries can create their own money based on their own economic needs rather than letting their central bank reserves be a derivative of the U.S. payments deficit.” (Hudson,378). The IMF-American hegemony on world markets has built up such a giant house-of-cards that getting off of the dollar standard would be risky and upset the by far and away most superior military force on the earth. America’s massive national debt is proportional to its military might.

“Using debtor leverage to set the terms on which it will refrain from causing monetary chaos, America has turned seeming financial weakness into strength. U.S. Government debt has reached so large a magnitude that any attempt to replace it will entail an interregnum of financial chaos and political instability. American diplomats have learned that they are well positioned to come out on top in such grab-bags.” (Hudson,374)

In other words, if any country tries to subvert the dollar standard the military will bring down the hammer. This is why the Russia-China deal to strengthen economic ties in Asia and Eastern Europe in response to sanctions put on Russia for the Ukraine-Crimea episode is so important: a new block that could successfully subvert the dollar hegemony would be a major geopolitical power maneuver. Hudson sees this dollar hegemony mechanism at work in the Ukraine standoff between Russia and America. It is probably the main reason why the U.S. is pushing so hard on “fast-tracking” the Trans-Pacific Partnership, forcefully and secretly opening up Asia and pretty much the entire Pacific Ocean to unregulated, wild-west Capitalism to counter China’s growing influence as a trading power. As long as these major economic zones with resource-rich lands and cheap labor are using the dollar standard, they will be forced into the vicious cycle of buying Treasury Bonds and exporting their goods overseas – further financing military spending.

Again, thanks to dollar standard and the double standard, whereby the U.S. gets to run up its debts while other countries must honor them and other countries must measure their currency value relative to the this debt-based currency, it doesn’t matter that the U.S. debt climbs sky-high. The national debt actually solidifies America’s position as the central market player regardless of how well it does in GDP growth. The black hole of American debt and consumption draws in all of the money that countries make on the private market from exports back into the Treasury Bonds that will guarantee a decent return, but just add on to the U.S. national debt. America feels it can keep printing dollars and loaning them out to whomever because in between the time it takes to pay off the debt that comes attached to the Treasury Bond credit, private businesses have already sucked in the goods of these productive and indebted borrowing countries. If they don’t pay it back, the austerity hawks come flying in. America gets to continue running up its debt because the countries it imports from get loads of dollars, which they can only recycle back into more Treasury Bonds. The dollar becomes like a black hole that all currency must spiral back into when countries with different currencies profit off of global market trading.

Hudson:

“[The United States] pays for its net imports and buyouts of foreign industry [typo] with Treasury bonds that its diplomats have long hinted they have little intention of paying off. Central banks end up with paper or electronic IOUs bearing 4 or 5 percent interest, which the U.S. simply adds to the balance of what it owes, while U.S. investors but foreign companies, resources and hitherto public enterprise expected to yield in the neighborhood of 20 percent in earnings and capital gains.” (Hudson,374) *my italics.

The dollars received for real tangible things like public infrastructure, products shipped out on the supply chains, and the benefits of the land are nearly universally valuable in the short run, but, if confidence in the U.S. Treasury to pay back the ever-increasing debt and growth in the U.S. economy dwindles, the long term viability of the dollar will be made obvious and collapse. And since the Federal Reserve has decided to rescue insolvent predator banks that are massively leveraged against real assets with securities and derivatives, the hopes for a return to growth and an even more bustling U.S. economy not burdened by parasitic banksters are looking more and more bleak. On the domestic side,

“… the U.S. real estate and financial bubble has been welcomed as post-industrial “wealth creation,” it is rendering the American economy uncompetitive in world markets and hence unable to pay off its foreign debt by running a trade surplus. U.S. labor is obliged to pay for high-cost housing and pay debt service on the loans it needs to stay afloat in today’s economy.” (Hudson,372)

The infinite demand of debt repayment extends not just to foreign countries but to America’s own people. When the latest speculation caused bubble popped in 2008, the Fed decided to bail out insolvent banks and let them continue their destructive easy-money siphoning behavior while most Americans are teetering on the edge of missing their monthly expense payments. As has been well reported (but never enough), America is one of the most unequal nations on earth, far more than the population even believes it to be. This is largely because of a minuscule amount of financiers earning economic rent on artificially inflated assets, which Hudson details in other parts of the book.

All of this means bad times are ahead if the system of money flows and debt repayment disparities are not drastically altered. The biggest and most glaring issue is that the U.S. has demonstrated that it is willing to flex its military muscles at the behest of its elites and could very well spin the almost totally corporate controlled media into believing that it is checking some other nation’s aggression by going to war. An economic alliance of non-dollar using countries like the industrially productive nations of Brazil, Russia, India, and China (BRICs) could subvert the U.S.’s hegemony by selecting an alternative currency to base all of their transactions on, but how anyone could challenge the United States militaries intervention on behalf of the bankers and capitalists is anybody’s guess. Delegitimizing domestic protest and other internal strife that threatens the life of the vampire squid is where one of the most important sites of conflict will be in the global market dominance game.

The American war machine, coupled with the financiers is a powerful block that is desperately trying to maintain the massive wealth and power it has built up. With looming earth-systems collapse on the horizon, the military will do what it has always done in times of crisis and financiers will never let go of the money they have gained by their political maneuvering. Achieving reform like the tariffs for the sake of monetary symmetry that Hudson recommends will be difficult and receive hard pressure with all of the tools at the disposal of an elite financier-capitalist class. Hudson is a rare thinker who understands the need for large debt write-downs for those which cannot and where not designed to payed back in full. The economic gains of the financial class are entirely debt-leveraged and should be taxed away. What comes after a potential jubilee debt-cancellation or Debt Strike will be the really interesting part: a return to competitively growing global markets and military imperialism would only raise the specter of disastrous global warming. A steady-state economy that is built on stopping expansion of production as well as allocating money more equally is the only kind of “reform” that earth and its unfortunately “developed” people could be grateful for.

Be sure to check out his website as well as videos like these:

http://youtu.be/sjV5FEKVs8A

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3 thoughts on “Super Imperialism: Michael Hudson on Dollar Hegemony

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