by Michael Hudson posted by permission
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. But nobody thought that The American Empire would self-destruct this fast.
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 have driven these two countries together, and are 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 investment takeover of other countries simply by creating dollar IOUs. 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 Near 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 with the targeted grabbing of bank accounts of wealthy foreigners (hoping to win their hearts and minds, enticed by the hope for the return of their sequestered accounts), has ended the idea that dollar holdings – or now also assets in sterling and euro NATO satellites of the dollar – 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 Russia, China and other nations not locked into the U.S. orbit to see the writing on the wall and 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, 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, 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 neoliberal ideology to take steps to protect its own agriculture and industry. The United States provided the help that was needed by imposing domestic self-reliance on Russia. When the Baltic states obeyed American sanctions and lost the Russian market for their 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 of its dollar and euro reserves may finally lead Russia to end its adherence to neoliberal monetary philosophy, as Sergei Glaziev has long been advocating, in favor of Modern Monetary Theory (MMT).
The same dynamic of 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 sanctions making the dollar, sterling and euro holdings of Russian billionaires hostage has been to make the City of London too risky a venue in which to hold their assets – and for the wealthy of any other nation potentially subject to U.S. sanctions. By imposing sanctions on the 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 U.S. 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 from 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 their 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 the confrontations resulting from “prodding the Bear” with the U.S./NATO aggression against 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 subordinating their democratic electoral politics 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 Minister Lavrov explaining just what their response would be if NATO insisted on 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 Russian concerns was deemed to make one a Putinversteher.
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 by the Biden Administration’s resurgence of visceral Russia-hatred via Secretary of State Blinken and Victoria Nuland-Kagan. Trump’s mode of expression and mannerisms may have been uncouth, but America’s neocon gang have 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.
What foreign countries have not done for themselves to replace the IMF, World Bank and other strongarms of U.S. diplomacy, American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away as they calculate their own 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 their countries 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 U.S. pressure points to use in reshaping world diplomacy and helping 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?
The Biden Inflation
But the final breakaway from NATO’s adventurism must come from within the United States itself. As this year’s midterm elections approach, politicians will find a fertile ground in showing U.S. voters that the price inflation led by gasoline and energy is a policy byproduct of the Biden Administration’s blocking of Russian oil and gas exports. (Bad news for owners of big SUV gas guzzlers!) Gas is needed not only for heating and energy production, but to make fertilizer, of which there already is a world shortage. This situation is exacerbated by blocking Russian and Ukrainian grain exports to the United States and Europe, causing food prices already to soar.
There already is a striking disconnect between the financial sector’s view of reality and that promoted in the mainstream NATO media. Europe’s stock markets plunged at their opening on Monday, March 7, while Brent oil soared to $130 a barrel. The BBC’s morning “Today” news broadcast featured Conservative MP Alan Duncan, an oil trader, warning that the near doubling of prices in natural gas futures threatened to bankrupt companies committed to supplying gas to Europe at the old rates. But returning to the military “Two Minutes of Hate” news, the BBC kept applauding the brave Ukrainian fighters and NATO politicians urging more military support. In New York, the Dow Jones Industrial Average plunged 650 points, and gold soared to over $2,000 an ounce – reflecting the financial sector’s view of how the U.S. game is likely to play out. Nickel prices rose by even more – 40 percent.
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 ensuring Europe 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 is turning out to have the effect of making the United States look as threatening as Russia is claimed to be by the NATO West.
- Libya’s gold also disappeared after NATO’s overthrow of Muammar Gaddafi in 2011. ↑
- See most recently Radhika Desai and Michael Hudson (2021), “Beyond Dollar Creditocracy: A Geopolitical Economy,” Valdai Club Paper No. 116. Moscow: Valdai Club, 7 July, repr. in Real World Economic Review (97), https://rwer.wordpress.com/2021/09/23.