Shooting King Dollar In The Foot

This essay appeared at Naked Capitalism way back on March 7, so I’m assuming it’s OK to republish it rather than allow it to slip down the memory hole. I came across it thanks to commenter NFO, who linked to Moon of Alabama’s terrific post today: Some Other People's Thoughts On The U.S. Role In The Ukraine And Europe.

It fits in very well with Alex Mercouris’ ruminations today about the utter disarray we’re witnessing in Europe, due to its blindly following US diktats. The basic bottom line is that “A truly new international economic order is emerging, although it is not yet clear just what form it will take.” This is happening thanks, in large part, to the Neocon belief that they can create their own preferred reality without regard to the hard truths of economics. It’s a reminder that nothing ever stays the same, and food for some very serious rethinking of what things that we’ve taken for granted. I’ve cleaned up some typos and added some links.

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 “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year

Empires often follow the course of a Greek tragedy, bringing about precisely the fate that they sought to avoid. That certainly is the case with the American Empire as it dismantles itself in not-so-slow motion.

The basic assumption of economic and diplomatic forecasting is that every country will act in its own self-interest. Such reasoning is of no help in today’s world. Observers across the political spectrum are using phrases like “shooting themselves in their own foot” to describe U.S. diplomatic confrontation with Russia and allies alike.

For more than a generation the most prominent U.S. diplomats have warned about what they thought would represent the ultimate external threat: an alliance of Russia and China dominating Eurasia. America’s economic sanctions and military confrontation has driven them together, and is driving other countries into their emerging Eurasian orbit.

American economic and financial power was expected to avert this fate. During the half-century since the United States went off gold in 1971, the world’s central banks have operated on the dollar standard, holding their international monetary reserves in the form of U.S. Treasury securities, U.S. bank deposits and U.S. stocks and bonds. The resulting Treasury-bill standard has enabled America to finance its foreign military spending and support its deindustrialization-driven chronic trade deficits  by creating dollar IOUs that other countries accept. U.S. balance-of-payments deficits end up in the central banks of payments-surplus countries as their reserves, while Global South debtors need dollars to pay their bondholders and conduct their foreign trade.

This monetary privilege – dollar seignorage – has enabled U.S. diplomacy to impose neoliberal policies on the rest of the world, without having to use much military force of its own except to grab Middle Eastern oil.

The recent escalation of U.S. sanctions blocking Europe, Asia and other countries from trade and investment with Russia, Iran and China has imposed enormous opportunity costs – the cost of lost opportunities – on U.S. allies. And the recent confiscation of the gold and foreign reserves of Venezuela, Afghanistan and now Russia, along the targeted grabbing of bank accounts of wealthy foreigners (hoping to win their hearts and minds, along with recovery of their sequestered accounts), has ended the idea that dollar holdings or those in its sterling and euro NATO satellites are a safe investment haven when world economic conditions become shaky.

So I am somewhat chagrined as I watch the speed at which this U.S.-centered financialized system has de-dollarized over the span of just a year or two. The basic theme of my Super Imperialism has been how, for the past fifty years, the U.S. Treasury-bill standard has channeled foreign savings to U.S. financial markets and banks, giving dollar diplomacy a free ride. I thought that de-dollarization would be led by China and Russia moving to take control of their economies to avoid the kind of financial polarization that is imposing austerity on the United States. But U.S. officials are forcing them to overcome whatever hesitancy they had to de-dollarize.

I had expected that the end of the dollarized imperial economy would come about by other countries breaking away. But that is not what has happened. U.S. diplomats themselves have chosen to end international dollarization themselves, while helping Russia build up its own means of self-reliant agricultural and industrial production.

This global fracture process actually has been going on for some years now, starting with the sanctions blocking America’s NATO allies and other economic satellites from trading with Russia. For Russia, these sanctions had the same effect that protective tariffs would have had.

Russia had remained too enthralled by free-market ideology to take steps to protect its own agriculture or industry. The United States provided the help that was needed by imposing domestic self-reliance on Russia. When the Baltic states lost the Russian market for cheese and other farm products, Russia quickly created its own cheese and dairy sector – while becoming the world’s leading grain exporter.

Russia is discovering (or is on the verge of discovering) that it does not need U.S. dollars as backing for the ruble’s exchange rate. Its central bank can create the rubles needed to pay domestic wages and finance capital formation. The U.S. confiscations thus may finally lead Russia to end of neoliberal monetary philosophy, as Sergei Glaziev has long been advocating in favor of MMT.

The same dynamic undercutting ostensible U.S aims has occurred with U.S. sanctions against the leading Russian billionaires. The neoliberal shock therapy and privatizations of the 1990s left Russian kleptocrats with only one way to cash out on the assets they had grabbed from the public domain. That was to incorporate their takings and sell their shares in London and New York. Domestic savings had been wiped out, and U.S. advisors persuaded Russia’s central bank not to create its own ruble money.

The result was that Russia’s national oil, gas and mineral patrimony was not used to finance a rationalization of Russian industry and housing. Instead of the revenue from privatization being invested to create new Russian means of protection, it was burned up on nouveau-riche acquisitions of luxury British real estate, yachts and other global flight-capital assets. But the effect of making Russian dollar, sterling and euro holdings hostage has been to make the City of London too risky a venue in which to hold their assets. By imposing sanctions on richest Russians closest to Putin, U.S. officials hoped to induce them to oppose his breakaway from the West, and thus to serve effectively as NATO agents-of-influence. But for Russian billionaires, their own country is starting to look safest.

For many decades now, the Federal Reserve and Treasury have fought against gold recovering its role in international reserves. But how will India and Saudi Arabia view their dollar holdings as Biden and Blinken try to strong-arm them into following the U.S. “rules-based order” instead of their own national self-interest? The recent U.S. dictates have left little alternative but to start protecting their own political autonomy by converting dollar and euro holdings into gold as an asset free of political liability of being held hostage to the increasingly costly and disruptive U.S. demands.

U.S. diplomacy has rubbed Europe’s nose in its abject subservience by telling its governments to have their companies dump the Russian assets for pennies on the dollar after Russia’s foreign reserves were blocked and the ruble’s exchange rate plunged. Blackstone, Goldman Sachs and other U.S. investors moved quickly to buy up what Shell Oil and other foreign companies were unloading.

Nobody thought that the postwar 1945-2020 world order would give way this fast. A truly new international economic order is emerging, although it is not yet clear just what form it will take. But “prodding the Bear” with the U.S./NATO confrontation with Russia has passed critical-mass level. It no longer is just about Ukraine. That is merely the trigger, a catalyst for driving much of the world away from the US/NATO orbit.

The next showdown may come within Europe itself as nationalist politicians seek to lead a break-away from the over-reaching U.S. power-grab over its European and other Allies to keep them dependent on U.S.-based trade and investment. The price of their continuing obedience is to impose cost-inflation on their industry while relinquishing their democratic electoral politics to subordination to America’s NATO proconsuls.

These consequences cannot really be deemed “unintended.” Too many observers have pointed out exactly what would happen – headed by President Putin and Foreign Secretary Lavrov explaining just what their response would be if NATO insisted in backing them into a corner while attacking Eastern Ukrainian Russian-speakers and moving heavy weaponry to Russia’s Western border. The consequences were anticipated. The neocons in control of U.S. foreign policy simply didn’t care. Recognizing its concerns was deemed to make one a Putinversteher.

What foreign countries have not done for themselves to replace the IMF, World Bank and other arms of U.S. diplomacy, American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away out of their own calculation of their long-term economic interests, America is driving them away, as it has done with Russia and China. More politicians are seeking voter support by asking whether they would be better served by new monetary arrangements to replace dollarized trade, investment and even foreign debt service.

The energy and food price squeeze is hitting Global South countries especially hard, coinciding with their own Covid-19 problems and the looming dollarized debt service coming due. Something must give. How long will these countries impose austerity to pay foreign bondholders?

How will the U.S. and European economies cope in the face of their sanctions against imports of Russian gas and oil, cobalt, aluminum, palladium and other basic materials. American diplomats have made a list of raw materials that their economy desperately needs and which therefore are exempt from the trade sanctions being imposed. This provides Mr. Putin a handy list of our pressure points to use in reshaping world diplomacy and help European and other countries break away from the Iron Curtain that America has imposed to lock its satellites into dependence on high-priced U.S. supplies.

But the final breakaway from NATO’s adventurism must come from within the United States itself. As this year’s midterm elections approach, Republicans are likely  to harp on  price inflation led by gasoline and energy as a Biden failure. It’s not clear if the pro-Ukraine propaganda will have lost its effectiveness due to over-exposure. But if Russia wins the war in short order, the Republicans could hammer on Biden for relying on costly, arguably ill thought out, and ineffective economic sanctions.  America needs  Russian oil and gas exports. Gas is necessary not only for heating and energy production, but to make fertilizer, of which there already is a world shortage. That has been exacerbated by blocking Russian and Ukrainian grain exports to send U.S. and European food prices soaring.

Trying to force Russia to respond militarily and thereby look bad to the rest of the world is turning out to be a stunt aimed simply at demonstrating Europe’s need to contribute more to NATO, buy more U.S. military hardware and lock itself deeper into trade and monetary dependence on the United States. The instability that this has caused could have the effect of making the United States look as threatening as Russia.

European officials did not feel uncomfortable in telling the world about their worries that Donald Trump was crazy and upsetting the apple cart of international diplomacy. But they seem to have been blindsided at the Biden Administration’s resurgence of visceral Russia-hatred by Secretary of State Blinken and Victoria Nuland-Kagan. Trump’s mode of expression and mannerisms may have been uncouth, but America’s neocon gang has much more globally threatening confrontation obsessions. For them, it was a question of whose reality would emerge victorious: the “reality” that they believed they could make, or economic reality outside of U.S. control.