America's Financial-Military Empire
The Yekaterinburg Turning Point
by Prof. Michael Hudson
The city of Yakaterinburg, Russia's largest
east of the Urals, may become known not only as the death place
of the tsars but of American hegemony too - and not only where
US U-2 pilot Gary Powers was shot down in 1960, but where the
US-centered international financial order was brought to ground.
Challenging America will be the prime
focus of extended meetings in Yekaterinburg, Russia (formerly
Sverdlovsk) today and tomorrow (June 15-16) for Chinese President
Hu Jintao, Russian President Dmitry Medvedev and other top officials
of the six-nation Shanghai Cooperation Organization (SCO). The
alliance is comprised of Russia, China, Kazakhstan, Tajikistan,
Kyrghyzstan and Uzbekistan, with observer status for Iran, India,
Pakistan and Mongolia. It will be joined on Tuesday by Brazil
for trade discussions among the BRIC nations (Brazil, Russia,
India and China).
The attendees have assured American diplomats
that dismantling the US financial and military empire is not their
aim. They simply want to discuss mutual aid - but in a way that
has no role for the United States, NATO or the US dollar as a
vehicle for trade. US diplomats may well ask what this really
means, if not a move to make US hegemony obsolete. That is what
a multipolar world means, after all. For starters, in 2005 the
SCO asked Washington to set a timeline to withdraw from its military
bases in Central Asia. Two years later the SCO countries formally
aligned themselves with the former CIS republics belonging to
the Collective Security Treaty Organization (CSTO), established
in 2002 as a counterweight to NATO.
Yet the meeting has elicited only a collective
yawn from the US and even European press despite its agenda is
to replace the global dollar standard with a new financial and
military defense system. A Council on Foreign Relations spokesman
has said he hardly can imagine that Russia and China can overcome
their geopolitical rivalry,1 suggesting that America can use the
divide-and-conquer that Britain used so deftly for many centuries
in fragmenting foreign opposition to its own empire. But George
W. Bush ("I'm a uniter, not a divider") built on the
Clinton administration's legacy in driving Russia, China and their
neighbors to find a common ground when it comes to finding an
alternative to the dollar and hence to the US ability to run balance-of-payments
deficits ad infinitum.
What may prove to be the last rites of
American hegemony began already in April at the G-20 conference,
and became even more explicit at the St. Petersburg International
Economic Forum on June 5, when Mr. Medvedev called for China,
Russia and India to "build an increasingly multipolar world
order." What this means in plain English is: We have reached
our limit in subsidizing the United States' military encirclement
of Eurasia while also allowing the US to appropriate our exports,
companies, stocks and real estate in exchange for paper money
of questionable worth._
"The artificially maintained unipolar
system," Mr. Medvedev spelled out, is based on "one
big centre of consumption, financed by a growing deficit, and
thus growing debts, one formerly strong reserve currency, and
one dominant system of assessing assets and risks."2 At
the root of the global financial crisis, he concluded, is that
the United States makes too little and spends too much. Especially
upsetting is its military spending, such as the stepped-up US
military aid to Georgia announced just last week, the NATO missile
shield in Eastern Europe and the US buildup in the oil-rich Middle
East and Central Asia.
The sticking point with all these countries
is the US ability to print unlimited amounts of dollars. Overspending
by US consumers on imports in excess of exports, US buy-outs of
foreign companies and real estate, and the dollars that the Pentagon
spends abroad all end up in foreign central banks. These agencies
then face a hard choice: either to recycle these dollars back
to the United States by purchasing US Treasury bills, or to let
the "free market" force up their currency relative to
the dollar - thereby pricing their exports out of world markets
and hence creating domestic unemployment and business insolvency.
When China and other countries recycle
their dollar inflows by buying US Treasury bills to "invest"
in the United States, this buildup is not really voluntary. It
does not reflect faith in the U.S. economy enriching foreign central
banks for their savings, or any calculated investment preference,
but simply a lack of alternatives. "Free markets" US-style
hook countries into a system that forces them to accept dollars
without limit. Now they want out. _ _This means creating a new
alternative. Rather than making merely "cosmetic changes
as some countries and perhaps the international financial organisations
themselves might want," Mr. Medvedev ended his St. Petersburg
speech, "what we need are financial institutions of a completely
new type, where particular political issues and motives, and particular
countries will not dominate."
When foreign military spending forced
the US balance of payments into deficit and drove the United States
off gold in 1971, central banks were left without the traditional
asset used to settle payments imbalances. The alternative by default
was to invest their subsequent payments inflows in US Treasury
bonds, as if these still were "as good as gold." Central
banks now hold $4 trillion of these bonds in their international
reserves - land these loans have financed most of the US Government's
domestic budget deficits for over three decades now! Given the
fact that about half of US Government discretionary spending is
for military operations - including more than 750 foreign military
bases and increasingly expensive operations in the oil-producing
and transporting countries - the international financial system
is organized in a way that finances the Pentagon, along with US
buyouts of foreign assets expected to yield much more than the
Treasury bonds that foreign central banks hold.
The main political issue confronting the
world's central banks is therefore how to avoid adding yet more
dollars to their reserves and thereby financing yet further US
deficit spending - including military spending on their borders?
For starters, the six SCO countries and
BRIC countries intend to trade in their own currencies so as to
get the benefit of mutual credit that the United States until
now has monopolized for itself. Toward this end, China has struck
bilateral deals with Argentina and Brazil to denominate their
trade in renminbi rather than the dollar, sterling or euros,3
and two weeks ago China reached an agreement with Malaysia to
denominate trade between the two countries in renminbi. Former
Prime Minister Tun Dr. Mahathir Mohamad explained to me in January
that as a Muslim country, Malaysia wants to avoid doing anything
that would facilitate US military action against Islamic countries,
including Palestine. The nation has too many dollar assets as
it is, his colleagues explained. Central bank governor Zhou Xiaochuan
of the People's Bank of China wrote an official statement on its
website that the goal is now to create a reserve currency "that
is disconnected from individual nations."5 This is the aim
of the discussions in Yekaterinburg. __
In addition to avoiding financing the
US buyout of their own industry and the US military encirclement
of the globe, China, Russia and other countries no doubt would
like to get the same kind of free ride that America has been getting.
As matters stand, they see the United States as a lawless nation,
financially as well as militarily. How else to characterize a
nation that holds out a set of laws for others - on war, debt
repayment and treatment of prisoners - but ignores them itself?
The United States is now the world's largest debtor yet has avoided
the pain of "structural adjustments" imposed on other
debtor economies. US interest-rate and tax reductions in the face
of exploding trade and budget deficits are seen as the height
of hypocrisy in view of the austerity programs that Washington
forces on other countries via the IMF and other Washington vehicles.
The United States tells debtor economies
to sell off their public utilities and natural resources, raise
their interest rates and increase taxes while gutting their social
safety nets to squeeze out money to pay creditors. And at home,
Congress blocked China's CNOOK from buying Unocal on grounds of
national security, much as it blocked Dubai from buying US ports
and other sovereign wealth funds from buying into key infrastructure.
Foreigners are invited to emulate the Japanese purchase of white
elephant trophies such as Rockefeller Center, on which investors
quickly lost a billion dollars and ended up walking away.
In this respect the US has not really
given China and other payments-surplus nations much alternative
but to find a way to avoid further dollar buildups. To date, China's
attempts to diversify its dollar holdings beyond Treasury bonds
have not proved very successful. For starters, Hank Paulson of
Goldman Sachs steered its central bank into higher-yielding Fannie
Mae and Freddie Mac securities, explaining that these were de
facto public obligations. They collapsed in 2008, but at least
the US Government took these two mortgage-lending agencies over,
formally adding their $5.2 trillion in obligations onto the national
debt. In fact, it was largely foreign official investment that
prompted the bailout. Imposing a loss for foreign official agencies
would have broken the Treasury-bill standard then and there, not
only by utterly destroying US credibility but because there simply
are too few Government bonds to absorb the dollars being flooded
into the world economy by the soaring US balance-of-payments deficits.
Seeking more of an equity position to
protect the value of their dollar holdings as the Federal Reserve's
credit bubble drove interest rates down China's sovereign wealth
funds sought to diversify in late 2007. China bought stakes in
the well-connected Blackstone equity fund and Morgan Stanley on
Wall Street, Barclays in Britain South Africa's Standard Bank
(once affiliated with Chase Manhattan back in the apartheid 1960s)
and in the soon-to-collapse Belgian financial conglomerate Fortis.
But the US financial sector was collapsing under the weight of
its debt pyramiding, and prices for shares plunged for banks and
investment firms across the globe._
Foreigners see the IMF, World Bank and
World Trade Organization as Washington surrogates in a financial
system backed by American military bases and aircraft carriers
encircling the globe. But this military domination is a vestige
of an American empire no longer able to rule by economic strength.
US military power is muscle-bound, based more on atomic weaponry
and long-distance air strikes than on ground operations, which
have become too politically unpopular to mount on any large scale.
On the economic front there is no foreseeable
way in which the United States can work off the $4 trillion it
owes foreign governments, their central banks and the sovereign
wealth funds set up to dispose of the global dollar glut. America
has become a deadbeat - and indeed, a militarily aggressive one
as it seeks to hold onto the unique power it once earned by economic
means. The problem is how to constrain its behavior. Yu Yongding,
a former Chinese central bank advisor now with China's Academy
of Sciences, suggested that US Treasury Secretary Tim Geithner
be advised that the United States should "save" first
and foremost by cutting back its military budget. "U.S. tax
revenue is not likely to increase in the short term because of
low economic growth, inflexible expenditures and the cost of 'fighting
At present it is foreign savings, not
those of Americans that are financing the US budget deficit by
buying most Treasury bonds. The effect is taxation without representation
for foreign voters as to how the US Government uses their forced
savings. It therefore is necessary for financial diplomats to
broaden the scope of their policy-making beyond the private-sector
marketplace. Exchange rates are determined by many factors besides
"consumers wielding credit cards," the usual euphemism
that the US media cite for America's balance-of-payments deficit.
Since the 13th century, war has been a dominating factor in the
balance of payments of leading nations - and of their national
debts. Government bond financing consists mainly of war debts,
as normal peacetime budgets tend to be balanced. This links the
war budget directly to the balance of payments and exchange rates.
Foreign nations see themselves stuck with
unpayable IOUs - under conditions where, if they move to stop
the US free lunch, the dollar will plunge and their dollar holdings
will fall in value relative to their own domestic currencies and
other currencies. If China's currency rises by 10% against the
dollar, its central bank will show the equivalent of a $200 million
loss on its $2 trillion of dollar holdings as denominated in yuan.
This explains why, when bond ratings agencies talk of the US Treasury
securities losing their AAA rating, they don't mean that the government
cannot simply print the paper dollars to "make good"
on these bonds. They mean that dollars will depreciate in international
value. And that is just what is now occurring. When Mr. Geithner
put on his serious face and told an audience at Peking University
in early June that he believed in a "strong dollar"
and China's US investments therefore were safe and sound, he was
greeted with derisive laughter.7
Anticipation of a rise in China's exchange
rate provides an incentive for speculators to seek to borrow in
dollars to buy renminbi and benefit from the appreciation. For
China, the problem is that this speculative inflow would become
a self-fulfilling prophecy by forcing up its currency. So the
problem of international reserves is inherently linked to that
of capital controls. Why should China see its profitable companies
sold for yet more freely-created US dollars, which the central
bank must use to buy low-yielding US Treasury bills or lose yet
further money on Wall Street?
To avoid this quandary it is necessary
to reverse the philosophy of open capital markets that the world
has held ever since Bretton Woods in 1944. On the occasion of
Mr. Geithner's visit to China, "Zhou Xiaochuan, minister
of the Peoples Bank of China, the country's central bank, said
pointedly that this was the first time since the semiannual talks
began in 2006 that China needed to learn from American mistakes
as well as its successes" when it came to deregulating capital
markets and dismantling controls.8
An era therefore is coming to an end.
In the face of continued US overspending, de-dollarization threatens
to force countries to return to the kind of dual exchange rates
common between World Wars I and II: one exchange rate for commodity
trade, another for capital movements and investments, at least
from dollar-area economies.
Even without capital controls, the nations
meeting at Yekaterinburg are taking steps to avoid being the unwilling
recipients of yet more dollars. Seeing that US global hegemony
cannot continue without spending power that they themselves supply,
governments are attempting to hasten what Chalmers Johnson has
called "the sorrows of empire" in his book by that name
- the bankruptcy of the US financial-military world order. If
China, Russia and their non-aligned allies have their way, the
United States will no longer live off the savings of others (in
the form of its own recycled dollars) nor have the money for unlimited
military expenditures and adventures.
US officials wanted to attend the Yekaterinburg
meeting as observers. They were told No. It is a word that Americans
will hear much more in the future.
1 Andrew Scheineson, "The Shanghai
Cooperation Organization," Council on Foreign Relations,
Updated: March 24, 2009: "While some
experts say the organization has emerged as a powerful anti-U.S.
bulwark in Central Asia, others believe frictions between its
two largest members, Russia and China, effectively preclude a
strong, unified SCO."
2 Kremlin.ru, June 5, 2009, in Johnson's
Russia List, June 8, 2009, #8.
3 Jamil Anderlini and Javier Blas, "China
reveals big rise in gold reserves," Financial Times, April
24, 2009. See also "Chinese political advisors propose making
yuan an int'l currency." Beijing, March 7, 2009 (Xinhua).
"The key to financial reform is to make the yuan an international
currency, said [Peter Kwong Ching] Woo [chairman of the Hong Kong-based
Wharf (Holdings) Limited] in a speech to the Second Session of
the 11th National Committee of the Chinese People's Political
Consultative Conference (CPPCC), the country's top political advisory
body. That means using the Chinese currency to settle international
trade payments "
4 Shai Oster, "Malaysia, China Consider
Ending Trade in Dollars," Wall Street Journal, June 4, 2009.
5 Jonathan Wheatley, "Brazil and
China in plan to axe dollar," Financial Times, May 19, 2009.
6 "Another Dollar Crisis inevitable
unless U.S. starts Saving - China central bank adviser. Global
Crisis 'Inevitable' Unless U.S. Starts Saving, Yu Says,"
Bloomberg News, June 1, 2009. http://www.bloomberg.com/apps/news?pid=20601080&sid=aCV0pFcAFyZw&refer=asia
7 Kathrin Hille, "Lesson in friendship
draws blushes," Financial Times, June 2, 2009.
8 Steven R. Weisman, "U.S. Tells
China Subprime Woes Are No Reason to Keep Markets Closed,"
The New York Times, June 18, 2008.