How the U.S. turned being in debt into power

SUPER IMPERIALISM: The Economic Strategy of American Empire by Michael Hudson (1972, 2003, 2021)

You’ve shown how the United States has run rings around Britain and every other empire-building nation in history.  We’ve pulled off the greatest rip-off ever achieved.  [==Herman Kahn to the author, in 1972]

The USA as a nation  consumes more than it produces, borrows more than it saves and imports more than it exports.

All the supposed laws of economics say that we should be bankrupt.  But instead we are the world’s dominant economic power.

Michael Hudson’s Super-Imperialism, written 50 years ago, explained how this came to be.  Almost everything he described is still in place today.

U.S. Treasury bonds have replaced gold as the world’s store of value.  The bonds don’t have to be repaid because they are treated as valuable in themselves.

Americans buy oil from Saudi Arabia or electronics from China, and pay for them with dollars.  The only thing of value these dollars represent is Treasury bonds.  So the dollars come back to the United States in the form of Treasury bond purchases, which makes it possible to sustain the twin deficits—the U.S. government budget deficit, and the trade deficit.

It is as if I could go to the grocery store or hardware store, pay for my purchases with IOUs and get the world to use the IOUs as if they were money without ever paying the IOUs off.

So as long as the world is willing to use the U.S. dollar as its basic currency, there is no upper limit on the United States ability to issue money to pay for its wars or bail out its failed businesses.

This has gone on for 50 years, and counting.  It stands to reason that it can’t go on forever.

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Hudson’s book is in three parts.

The first part, covering 1917 to 1946, shows how the United States used its position as the world’s leading creditor nation to undermine its economic rivals, especially the British Empire.

The middle part shows how the United States set up the World Bank, the International Monetary Fund and other international economic institutions so as to lock in its dominance of the world financial structure..

The last part shows how the United States went from world’s leading creditor to world’s leading debtor, but in a kind of economic jiu-jitsu, leveraged its debtor status to maintain its economic supremacy.

There are brief epilogues bringing the story up to date, and an introduction that summarizes the main points of the book.  If you just read the introduction, you’ll understand the gist of the book.

Adam Tooze on the global financial crisis

The great economic historian Adam Tooze, in his just-published book, CRASHED: How a Decade of Financial Crises Changed the World, showed me things I hadn’t known, and made me rethink things I thought I understood.

Above all, he jolted me out of thinking of the 2008 financial crisis as primarily an American crisis.  It was global in nature, its consequences are still rippling through the world economy and its basic causes have not been dealt with

It is a kind of bookend to his earlier book, THE DELUGE: The Great War, America and the Remaking of Global Order, 1916-1931. 

In the earlier book, Tooze described the continuing debt crisis following World War One, with Germans unable to pay reparations and the Allies unable to pay their war loans, and how the ongoing debt crisis shaped international relations and governmental policy in that era.

The United States, as the world’s top industrial power and top creditor nation, dominated the world financial system, but American leaders lacked both the understanding and the political means to resolve the crisis.  All the United States could think to do was lend money to Germany to keep the system from crashing.  In the end the financial system crashed anyhow..

Prior to the 2008 crash, the United States was in the opposite situation.   U.S. industrial power had been hollowed out and the United States was the world’s top debtor nation.  Economists feared the “twin deficits”—the U.S. trade deficit and government budget deficit—would cause runaway inflation.

This didn’t happen.  The U.S. dollar continues to be the medium of world trade, and the financial markets continue to consider U.S. Treasury bonds the world’s safest financial asset.

American financial leaders such as Ben Bernanke, Timothy Geithner and Larry Summers acted boldly to meet the crisis. They bailed out banks, stabilized the financial system and averted a 1930s-type great depression, which was a real possibility.

That was no small achievement.  What they failed to do was to reform the system so as to reduce the possibility of a second crash.

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I had put the blame for the crash on Clinton-era deregulation, which gave free rein to speculation and to unethical and illegal (but unprosecuted) manipulation of the subprime mortgage market.   Financial markets have always been subject to cycles of expansion and recession, but removing the brakes made the crash a disaster instead of just a problem.

What I learned from Crashed is that deregulation was international.  Prime Minister Margaret Thatcher’s government completely deregulated British financial markets in 1986, in what was called the “Big Bang.”  Her hope was to make the City of London, the British equivalent of Wall Street, the world financial center, and she succeeded.  American, European and Asian banks all made London their major hub, even though they did business in dollars.   The purpose of Clinton-era regulation was to enable Wall Street to catch up with the City of London.

John Lanchester on the financial crisis

John Lanchester

The financial crash of 2008 was worldwide, and the failure of governments to address the causes of the crash also was worldwide.  Because the same thing happened in different countries under different leaders, the reasons for failure are systemic, not just the personal failings of particular leaders.  The solution must be systemic.  A mere change in leaders is not enough.

John Lanchester, writing in the London Review of Books, wrote an excellent article about the crash and its aftermath.  I hoped to call attention to it in my previous post, but, as of this writing, there has been only one click on the link.

I know people are busy and have many claims on their attention.  If you don’t want to bother reading the full LRB article, here are some highlights.  If you’re an American, bear in mind that, even though so much of what he wrote applies to the USA,  his focus is on British policy.

The immediate economic consequence was the bailout of the banks.  I’m not sure if it’s philosophically possible for an action to be both necessary and a disaster, but that in essence is what the bailouts were. 

They were necessary, I thought at the time and still think, because this really was a moment of existential crisis for the financial system, and we don’t know what the consequences would have been for our societies if everything had imploded.  But they turned into a disaster we are still living through.

The first and probably most consequential result of the bailouts was that governments across the developed world decided for political reasons that the only way to restore order to their finances was to resort to austerity measures.  The financial crisis led to a contraction of credit, which in turn led to economic shrinkage, which in turn led to declining tax receipts for governments, which were suddenly looking at sharply increasing annual deficits and dramatically increasing levels of overall government debt.

So now we had austerity, which meant that life got harder for a lot of people, but – this is where the negative consequences of the bailout start to be really apparent – life did not get harder for banks and for the financial system. In the popular imagination, the people who caused the crisis got away with it scot-free, and, as what scientists call a first-order approximation, that’s about right.

In addition, there were no successful prosecutions of anyone at the higher levels of the financial system.  Contrast that with the savings and loan scandal of the 1980s, basically a gigantic bust of the US equivalent of mortgage companies, in which 1100 executives were prosecuted.  What had changed since then was the increasing hegemony of finance in the political system, which brought the ability quite simply to rewrite the rules of what is and isn’t legal.

Ten years after the financial crisis

Canary Wharf financial district in London. Source: Quartz.

Ten years after the financial crisis of 2008, the U.S. government has failed to do anything necessary to avoid a new crisis.   I just read an article in the London Review of Books that says that the U.K. government’s policies are just as bad.

Like the U.S.-based banks, the British banks engaged in financial engineering that was supposed to create high profit on completely safe investments—which, as experience proved, couldn’t be done.

The British government had to bail out the banking system in order to save the economy.  There probably was no alternative to that.  But it then proceeded to put things back just the way they were before.

John Lanchester, the LRB writer, said there was no attempt at “ring fencing”—what we Americans call firewalls—to split up investment banks, which speculated on the financial markets, and retail banks, which granted small business loans, home mortgages and other services to the real economy.

The UK, like the US, engaged in “quantitative easing”—injection of money into the banking system through buying bonds.  The basic idea was that if banks and corporations had more money to invest, they would invest more, and the economy would grow.

This didn’t happen.  Instead banks and corporations bid up the prices of existing financial assets and real estate, which added to the wealth of the already rich.

Ordinary Britons faced austerity.  Their government cut back on the social safety net and public services.  British life expectancy, like American life expectancy, has actually fallen.

The British, like us Americans, had 10 years to fix their financial system.  Like us, they wasted the opportunity.  Now it may be too late to avert the next crash—even if the UK and US governments wanted to act.

LINK

After the Fall: Ten Years After the Crash by John Lanchester for the London Review of Books.  Well worth reading in detail.  Hat tip to Steve B.

Another financial crash is on the way

Another financial crash is coming and it will be as bad or worse than the 2008 recession.

The reason is that all the conditions that existed before the 2008 crash exist now:

• Growing concentration of wealth, which depresses the mass consumer market.
• Growing debt, which can’t be repaid.
• Reckless financial speculation, encouraged by lack of regulation and the expectation of another bailout.
• A negative balance of trade, and a continuing overall weakness of the U.S. economy.
• Lack of sufficient firewalls and safety nets to prevent cascading bankruptcies and financial failures.

Rich people on average spend less of their incomes than middle-class or poor people.   Once you get above a certain level, spending more money on yourself doesn’t make you happier.  You instead reinvest it so as to become even richer.

Middle-class people spend most of what they earn in order to maintain a middle-class material standard of living.  They are the ones who sustain the mass consumer market, which is the engine of American prosperity.

Poor people need to spend all they have just to survive.

When incomes don’t rise, middle-class people maintain their material standard of living through borrowing.  But this has limits.

The hollow populism of Steve Bannon

Steve Bannon, the chief adviser to President Donald Trump, is probably the most influential person in the Trump administration besides Trump himself.

But I find it hard to get a handle on Bannon’s thinking, since he shuns the limelight, and hasn’t written any books or magazine articles I could get hold of,

His 2010 documentary film, Generation Zero, is probably as good a guide to his thinking as anything else.

It is well done and, despite being 90 minutes long, held my interest—at least until the last 10 minutes of so, which consists of restatements of the main points.

Generation Zero is an analysis of the roots and consequences of the 2008 financial crisis, which Bannon rightly blames on crony capitalism, the unholy alliance of Wall Street and Washington that began in the 1990s.

But if you look at the film’s action items, what he really does—knowingly or unknowingly—is to protect Wall Street by diverting the public’s attention from what’s really needed, which is criminal prosecution of financial fraud and the break-up of “too big to fail” institutions.

Bannon presents himself as an enemy of corrupt politicians and financiers.  But there is nothing he advocates in the film or otherwise that threatens the power of either.

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Generation Zero draws on a book, The Fourth Turning by William Strauss and Neil Howe, who claim there is a cycle in American politics based on the succession of generations.  Each cycle consists of four turnings—(1) a heroic response to a crisis, (2) a new cultural or religious awakening, (3) an unraveling and (4) a crisis.

Housing, financialization and the crash

Via Corrente

This video by Richard D. Wolff is a clear and accurate account of the financial crash and the current struggles of American working people.  It dates from 2011, but it is still relevant.  I recommend fast-forwarding through the first three and a half minutes minutes, which are about economic classes, and getting to the meat of the video, which is about the foreclosure and credit crisis.

I can remember when most goods and services were paid for through cash and check, without having to go through credit card companies, other lends and insurance companies.  I don’t deny the benefit of credit or of insurance, or advocate going without either, but it is striking how much we Americans are at the mercy of lenders and insurers.

The 1% prepare for the next financial crash

The past 30 years have seen a series of financial crises, each worse than the previous one, followed by a government bailout.  David Malone, a documentary filmmaker turned financial journalist, said the world’s financial elite see another crisis coming, which will be the worst of all.

Rather than try to prevent the next crisis, he wrote, the financial elite are preparing to secure themselves from harm.  This means neutering the ability of national governments to regulate banking or restructure debt.   This includes international trade sgreements that would make freedom from regulation a binding obligation under international law.

With government rendered powerless, international bankers and financiers, as their creditors, would have the power to dictate.

There’s more.  Read his two articles to get the full story.  This is speculation based on circumstantial evidence, but it seems plausible to me.

LINKS

The Next Crisis – Part one by David Malone as Golem XIV (via Naked Capitalism)

The Next Crisis – Part two – a manifesto for the supremacy of the 1 percent by David Malone as Golem XIV (via Naked Capitalism)