Saturday, August 23, 2008

The world’s need for financial autonomy from dollarization


Super Imperialism by Michael Hudson
Extract world’s need for financial autonomy from dollarization

The Washington Consensus would not be so problematic if America used its free ride to invest in productive capital that yields future profits by putting capital in place.

Unfortunately, it has pursued for the less productive policy of maintaining an imperial military and bureaucratic superstructure that imposes dependency rather than selfsufficiency on its client countries. This is what makes the international system parasitic, in contrast to the implicitly productive and profitable private-enterprise imperialism depicted prior to World War I by critics and advocates alike. Far from being the engine of development that Marx, Lenin and Rosa Luxemburg imagined the imperialism of Europe’s colonialist powers to be in their day, the United States has drained the financial resources of its industrial Dollar Bloc allies while retarding the development of indebted third world raw-materials exporters and, most recently, the East Asian “tiger economies” and the formerly Soviet sphere. The fruits of this exploitation are not being invested in new capital formation, but dissipated in military and civilian consumption, and in a financial and real estate bubble.

The early system was supposed to grow stronger and stronger until it culminated in armed conflict, but economically developing the periphery in the process. But the tendency of today’s Washington Consensus is to retard world development by loading down the economies of almost every country with dollar-denominated debt, and to require America’s own dollar-debts as the medium to settle payments imbalances in every region.The upshot is to exhaust the system until local economies assert their own sovereignty and let the chips fall where they may.

In today’s world the form of breakdown is likely to be financial, not military. Vietnam showed that neither the United States nor any other democratic nation ever again can afford the foreign-exchange costs of conventional warfare, although the periphery still is kept in line by American military initiatives, most recently in Yugoslavia and Afghanistan.

The lesson is that peace will be maintained by governments refusing the finance the military and other excesses of the increasingly indebted imperial power. Yet Europe, Japan and some third world countries have made only feeble attempts to regain control of their economic destinies since 1972, and since 1991 even Russia has relinquished its fuels and minerals, public utilities and the rest of the public domain to private holders. Its overhead in acquiescing to the Washington Consensus has been to sustain a capital flight of about $25 billion annually for the past decade.

Asian and third world countries have permitted their domestic debts to be denominated in dollars, despite the fact that domestic revenues accrue in local currencies. This creates a permanent balance-of-payments outflow as a result of the privatization selloffs that provided governments with enough hard currency to keep current on their otherwise bad dollarized debts, but demand future interest and dividend remittances, while the state must tax labor,not these enterprises.

This is a system that cannot last.

But what is to take its place?

If foreign economies are to achieve financial independence, they must create their own regulatory mechanisms. Whether they will do so depends on how thoroughly America has succeeded in making irreversible the super imperialism implicit in the Washington Consensus and its ideology.

Financial independence presupposes a political and even cultural autonomy. The economics curriculum needs to be recast away from Chicago School monetarist lines on which IMF austerity programs are based and the Harvard-style economics that rationalized Russia’s privatization disaster.

Money and credit always have been institutional products of national economic planning not objective and dictated by nature. The pretense that monetarist policies are technocratic masks the degree to which the financial austerity programs enforced by the IMF and World Bank serve U.S. trade and investment objectives, and incidentally those of Western Europe and East Asia with regard to the terms of trade between creditor and debtor economies.

A great help to promoting the Washington Consensus has been its control over the academic training of central bankers and diplomats so as to remove the dimension of political reality from the analysis of international trade, investment and finance. Economists assume, for instance, that the gains from trade are shared fully and equally.

But in practice the U.S. Government has announced that its economy must get the best of any bargain, just the opposite of the situation portrayed by academic trade theorists and the idealistic assumptions of international law. Although the preambles to most international agreements contain promises of commercial reciprocity, the U.S.Government has pressed foreign countries to reduce their tariff barriers while increasing its own non-tariff barriers, getting by far the best of an unequal bargain.

The trade theory promoted by the monetarist Washington Consensus neglects the degree to which countries that have let their development programs be steered by the World Bank have fallen into chronic deficit status. Economics students seeking to explain this problem get little help from their textbooks, whose logic ignores the defining characteristics of global affairs over the past thirty years.

This hardly is surprising, as the criterion by which the economics discipline calls theories scientific is simply whether their hypothetical and abstract assumptions are internally consistent, not whether they are realistic.

The tactics by which global credit flows are controlled are a secret that U.S. financial diplomats are not interested in broadcasting. But without such a study being given a central place in the academic curriculum, the minds of central bankers and money managers throughout the world will be inculcated with a narrow-minded view of finance that misses the dimension of national geo-economic strategy, the failures of IMF austerity programs, the dangers of dollarizing foreign economies, and the free-ride character of key-currency standards.

The required study would show that in place of the competing national imperialisms that existed before World War I, only one major imperial power now exists.And instead of disposing of financial surpluses abroad as in Hobson’s and Lenin’s day, the U.S. Treasury draws in foreign resources, even as its American investors buy up controlling shares of the recently privatized commanding heights of French, German,Japanese, Korean, Chilean, Bolivian, Argentinean, Canadian, Thai and other economies, capped by that of Russia.

The above view of American financial imperialism differs not only from the traditional economic determinist view, but also from the anti-economic, idealistic “national security”) rationale. Economic determinists have tended to neglect the full range of economic and political impulses in world diplomacy, and have limited themselves to those drives directly concerned with maximizing the profits of exporters and investors.

This view by itself fails to note the drive for national military and overall economic power as a behavioral system that may conflict with the aim of promoting the wealth specifically of large international corporations. On the other and, “idealistic” writers (Bemis, A. A. Berle and so forth) have satisfied themselves simply with demonstrating the many non-economic motives underlying international diplomacy. They imagine that if they can show that the U.S.
Government often has been impelled by many non-economic motives, no economic imperialism or exploitation occurs.

I elaborate these points in Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy (London: Pluto Press, 1992, 2 vols.) and, more generally, “The Use and Abuse of Mathematical Economics,” Journal of Economic Studies
27 (2000):292-315.

But this is a non sequiter. It is precisely America’s drive for world power and to maximize its own economic autonomy (whether viewed simply as an expression of “national security” or something more expansionist in character) that led it to innovate its parasitic tapping of the world economy through such instrumentalities as the IMF and World Bank. Its military-induced payments deficit led it to flood the world with dollars and to absorb foreign countries’ material output, increasing its domestic consumption levels and ownership of foreign assets – the commanding heights of foreign economies, headed by privatized public enterprises, oil and minerals, public utilities and leading industrial companies. This again is just the opposite of the traditional view of imperialism, which asserts that imperialist economies seek to dispose of their domestic surpluses abroad.


The key to understanding today’s dollar standard is to see that it has become a debt standard based on U.S. Treasury IOUs, not one of assets in the form of gold bullion.While applying creditor-oriented rules against third world countries and other debtors, the IMF pursues a double standard with regard to the United States. It has established rules to monetize the deficits America runs up as the world’s leading debtor, above all by the U.S. Government to foreign governments and their central banks. The World Bank pursues its own double standard by demanding privatization of foreign public sectors,while financing dependency rather than self-sufficiency, above all in the sphere of food production. While the U.S. Government runs up debts to the central banks of Europe and East Asia, U.S. investors buy up the privatized public enterprises of debtor economies.

Yet while imposing financial austerity on these hapless countries, the Washington Consensus promotes domestic U.S. credit expansion – indeed, a real estate and stock market bubble – untrammeled by America’s own deepening trade deficit. The early 21st century is witnessing the emergence of a new kind of centralized global planning.

It is not by governments generally, as anticipated in the aftermath of World War II, but is mainly by the U.S. Government. Its focus and control mechanisms are financial, not industrial. Unlike the International Trade Organization envisioned in the closing days of World War II, today’s WTO is promoting the interests of financial investors in ways that transfer foreign gains from trade to the United States, not uplift world labor.