When you hold dollars, you lend money to the U.S. government to encircle you militarily, have the money to engage in military confrontation with you, and have the money to threaten you not to do things the U.S. doesn’t like
Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City. He is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics
Cross-posted from Michael’s Blog
The purpose of partisan struggle is to cut the welfare of the people
Observer.com : Chinese readers are currently very concerned about the US debt ceiling crisis. We all know that the U.S. debt limit is not a new topic. Since 1960, the U.S. government has reached the debt ceiling 78 times. How bad will it be this time compared to previous US debt crisis crises?
Michael Hudson : Probably not that bad. Republicans and many Democrats (including Biden) want to cut social welfare spending, such as cutting health insurance and benefits for single mothers, and they want to increase defense spending. On top of that, they want tax cuts for the financial sector, real estate and insurance, they just want to spend money for the financial sector and the rich one percent.
Under Trump, the U.S. government has slashed taxes without cutting spending, and in fact increased military spending, so now the government has to borrow money to get by.
All the arguments on tv are saying, look at these government deficits, we can no longer support the US government spending money like this, they just want to create a sense of fear so that they can cut social welfare spending on ordinary people and keep spending on the military . That’s what Republicans say. They kept discussing the China threat theory, saying that we should protect Taiwan from mainland China and help Taiwan fight against China. This is the focus of the bipartisan debate on the debt ceiling negotiations.
The U.S. government pays its debts, and the Treasury always has the capacity to pay them. The U.S. government simply doesn’t care about Congress’s proposal to cut the debt because Congress already supports all of their spending programs. So, if Biden says, we have to agree with the Republicans on cutting social welfare spending, because Biden and the Democratic leadership have essentially become Republicans.
Observer.com : Since the first $45 billion ceiling was set in 1939, U.S. debt has grown substantially. The problem is that the debt ceiling arrangement was supposed to limit excessive government spending and ensure financial soundness; however, US debt has exceeded the limit 78 times in the past 60 years. Why the Debt Ceiling Arrangement Doesn’t Work
Michael Hudson : As I said, it’s all publicity. The government doesn’t see this as a problem at all. Every country can always create enough money to keep running when it wants to go to war. When World War I started, people said the war would be over in 6 months because the government would run out of money by then. But governments can always print money.
There are so many ways the government can do that today, it can mint a silver gray coin of this size and say it’s worth a trillion dollars and we put it in the treasury. Suddenly, the government has enough money to spend, it doesn’t have to tax it, it doesn’t have to borrow money at all, and they create money just like the governments printed money in WW1 and WW2.
If there is a problem with the debt ceiling debate, it’s just a sham because the government wants an excuse to cut social welfare spending and avoid spending money on the 99% of ordinary Americans, and they want to keep spending it on the 1%.
Observer.com: Even so, I still want to explore the fiscal balance of the United States. From the data point of view, the expenditure of the US government far exceeds the income of the government. For example, since 1969, the government has only had a financial surplus for 5 years. Since 2001, the United States has been living beyond its means. The U.S. economy has been growing for the past few decades, so what happened in the U.S. to make the debt snowball bigger and bigger?
Michael Hudson: The financial sector is separate from the economic sector. Government debt and fiscal balance sheets are not financed by revenue, so no matter how big the GDP is, it has nothing to do with the ability to pay taxes.
The government has never been willing to say directly: we don’t want to spend money on social welfare programs, we don’t want to spend money on treatment for covid-19 or other diseases, we don’t want to pay unemployment insurance, we don’t want to spend money for the poor, we don’t want to pay social welfare expenses , we just want to keep military spending and subsidize the spending of the banking sector. We are willing to spend huge sums of money in the financial sector. Since 2009, the US government has lent $7 trillion to the banking system to buy stocks, bonds and real estate.
The US government is unwilling to spend money on economic development. Now it’s a political choice.
It can be said that the class war in the United States has reached an unprecedentedly intense stage. American politics has never been so right-wing. We’re under a very right-wing government that’s telling people that the government doesn’t have the money to benefit the people.
But Trump said when he was in office, we can create all the money we want, we don’t need taxes (referring to Trump’s tax cuts for businesses). U.S. Vice President Dick Cheney said when George W. Bush started the Iraq War that the deficit doesn’t matter, the debt builds up and we can print money whenever we want.
Debt talk is a front when they want to reduce the welfare of the people, and they try to fool the people into believing that the government is too indebted to print money anymore.
But you’re in China and you know the government can issue money to create money, and that’s how your economy grows, and that’s how the U.S. economy usually grows, unless there’s a political choice to not need economic growth.
The leaders of the Federal Reserve said that we need a depression and that the United States needs some unemployment. Because rising wages eat into profits, we need to bring wages down so businesses can make more money to hire people.
If we can create depression and unemployment, wages will go down, that’s our political policy. This is the exact opposite of China’s policy, you want wage living standards to go up while the US wants them to go down. That’s the difference.
U.S. debt inflation is based on the U.S. dollar hegemony system
Observer.com: You speak very well. Next we discuss the two possible scenarios of the US debt ceiling crisis, and the problems of the US-dominated global financial system. There are at least two scenarios when the US hits the debt ceiling: In the first scenario, Congress will raise the debt ceiling before the government runs out of cash. It would not be surprising if the U.S. can reach an agreement to raise the cap by June 5, as the U.S. has been doing for decades.
Looking at history, US debt has expanded sixfold over the past two decades. The examples of countries such as Argentina, Zambia, Sri Lanka and Greece show that a debt crisis can have disastrous effects on their economies, but the United States seems to have no fear of debt and always has big, big money to squander on the military In terms of social welfare, as well as the welfare of the people, such as the large amount of cash subsidies issued by the United States during the epidemic, some Chinese were very envious of this at the time. What do you think, why is this happening?
Michael Hudson : U.S. debt is very different from Zambia or Latin American or African countries. The difference is that the US has its own currency debt and it can print its own currency at any time to pay any amount of debt.
The debts of Zambia, Latin America, and Africa are dollar debts, and they can only print their own currencies, not dollars. In my opinion, every country’s debt should be in its own currency, because then there is no real foreign debt problem.
So why does this happen? How will Zambia and other countries get the money to pay their dollar-dominated debt? Either they export all the copper and other raw materials they can to the US, or they can sell off their commons, natural resources, and monopolies. These countries can privatize their economies, sell them to foreigners, and get dollars to pay foreign creditors. Or they could go to the IMF and the US government. They might say, “Can you lend us some dollars so we can pay off our dollar-denominated debt.”
The IMF said, sure, we will lend you money, but this country has to come to power with a right-wing military dictatorship to get that money, and you have to have a government like our Ukrainian friends. We lend you so much money, you have to be willing to devalue your currency, lower the price of your products, and make your labor costs significantly lower. And you can’t have unions, you have to cut social welfare spending, spend less on education and social welfare.
If you do what America asks to create a right-wing government, if you sell your copper mines to American companies, if you sell your country’s forest resources to American companies for dollars, then you have enough money to pay your debts . Otherwise, we will come directly to deprive you of your property.
This is the difference between Global South debt and US debt. The debts of most countries in the world are in US dollars, not in their own currencies. Americans don’t need to worry about dollar debts, because Americans don’t need to go to the IMF. Americans run the IMF, which can directly print money to pay off debts.
That’s the difference.
What China Should Worry About is U.S. Financial Sanctions
Observer.com: Another hypothesis is that the U.S. Congress still cannot reach an agreement to raise the debt ceiling before the U.S. Treasury Department runs out of water, the U.S. debt defaults, and the government may shut down again. While the odds are low, what do you think would be the impact on the U.S. economy and the global economy if it happened? Should the world be worried? Who is the winner and who is the loser in case of default?
Michael Hudson : Nothing is going to happen. Regardless of what the U.S. government pays foreign debt and bondholders, U.S. government bondholders are the wealthiest class, and each of them will get their due in the end. The US government will never refuse to pay back the richest 10%, they will only default on the bottom 90%.
The U.S. government may cut social spending, but it will certainly pay down debt holders. And when they pay off their debts, the debt balance is immediately reduced, and the government can then borrow again. This doesn’t add to the deficit at all, which is what’s called a debt rollover. It can say that once the infighting in our Congress is over, America will pay the interest it owes. After all, between 2009 and 2020, the government paid just 0.2% in interest, and the U.S. economy has run for 15 years with almost no interest payments. Therefore, the principal rollover will not be a problem. All they have to say is that the debt has been paid, that there is no default, that there is no debt, that there is no loss at all.
Observer.com : However, the Chinese are a little worried. China is the second largest foreign holder of U.S. debt, and we still hold more than 850 billion U.S. debt.
As of January this year, China held a total of US$859.4 billion in US debt, making it the second largest foreign holder. Data from the U.S. Department of the Treasury
Michael Hudson: The only thing China should be worried about is if the US treats China like it treats Russia, simply put, the US wants to take your money (referring to financial sanctions such as freezing foreign exchange reserves), what to do? Because we see China as a competitor, we are going to take all your wealth, and we are going to try to hurt you, like we did with Russia, because we plan to go to war with China in 5 years. This is something China should worry about.
Observer Network: Yes. The next question is about China. The US media have published many articles on the US debt ceiling issue. When they express their concerns about the US debt ceiling crisis, they always mention China. For example, I list the titles of several articles:
CNN said, “How the U.S. Debt Negotiation Showdown Played China’s Way to Harm U.S. Global Power?” The Diplomat, “How China Became a Bipartisan Debt Ceiling Negotiation”; Modern Diplomacy, “U.S. Debt Ceiling The investigation of the crisis is a great gift to China.”
So, can you explain how, in your view, the two possible outcomes of the US debt ceiling crisis would affect China?
Michael Hudson : There is zero chance of a U.S. debt default. The threat of default is not even worth considering. It is just an excuse to cut social spending. Don’t be intimidated by their arguments on TV, it’s all a pre-emptive ploy, not real.
No one will default on the debts of the United States, because the United States insists that everyone pay back their debts. Think about it, if the U.S. doesn’t repay China’s debts, then Zambians, Africans, and Latin Americans will say, then we won’t repay U.S. debts, okay, let’s write off all these debts. This is not what the United States wants, but China may support this (laughs), but this is not what the United States wants.
Observer.com: Haha, there are indeed Chinese people who think so. Even if you think China has nothing to worry about, many Chinese are still a little worried, and they propose to prepare for the worst.
Michael Hudson: America will pay you back.
Imagine that if the US doesn’t pay your debts, the Chinese can confiscate the American property, which is not only owned by China, but also owned by the whole world. When Argentina was unable to repay its debts that year (2001), bondholders seized Argentine ships and confiscated Argentine property. If the U.S. does not repay the debts of the Chinese, China can do the same. However, this is unlikely to happen.
Who has benefited the most from China’s boom?
Observer.com: Let’s talk about China’s debt problem again. Unlike the United States, China has been very cautious, some might say conservative, about expanding its debt. Although China may need more aggressive fiscal and monetary policies to boost the economy, especially now; and the central government’s debt is quite low (some local governments are facing debt risks). China once debated whether China should also engage in fiscal monetization, especially during the 2020 epidemic. But considering the risks, the government ultimately rejected the proposal. What do you think of China’s trade-off between risk prevention and economic stimulus?
Michael Hudson: There are two ways for governments to create money, printing paper money or creating digital money. The use of digital currency, the Chinese government is already doing.
In the West, the state allows private banks to create credit, and the wealthy create credit and lend it to the government. But China does not want to have an independent financial class, so the central government can start printing money; however, local governments in local cities and towns cannot.
So the question is, how do local governments finance spending? This is exactly the problem you mentioned that local governments are really facing. Since local governments at the provincial, municipal, and district levels cannot print money and issue bonds, they either go to the bank to borrow money or collect taxes, but the taxes are not enough, so local governments have adopted a financing model of selling land to real estate developers. This is one aspect of the housing and real estate issues facing China today.
I think there is a simpler solution, the central government is eligible to issue currency that it can loan to local governments for government-sanctioned social spending. In this way, there is no need to rely on land sales for financing.
In fact, local governments can use propaganda to say that we should do what the 19th-century Western classical economists wanted to do, so as to drive down land prices and house prices. Economists such as Adam Smith, John Stuart Mill, and Karl Marx argued that the government could tax the gains from land rents. You don’t want to tax laborers, industrial companies, but you can tax gains on land instead of the price increase of buildings on land.
In this way, people cannot go to the bank to borrow money to speculate on housing prices, because housing prices only reflect the cost of housing construction, and housing construction will not increase land rents.
The only thing that doesn’t want China doing this right now is the banking system. The bank told the government that instead of taxing the land, it would be better to sell it. Banks will lend to developers, and local governments will purchase land from local governments, so that local governments will be able to carry out construction.
However, more and more debts in China are accumulated in banks. In addition to developers, when residents invest more and more funds in purchasing houses, they must also borrow from banks and pay interest.
At this time we found that the banks will be stronger than the government, which is what the banks want. This is basically the core of the current conflict in China. Who profited from China’s prosperity and got richer and richer? Is it the Chinese people and the government, or the bankers and real estate developers? This is the biggest political issue in China this year.
De-dollarization is the key to de-militarization
Observer.com: Makes sense! The last question is back to the United States. Although you think the U.S. debt ceiling crisis will have no impact on China, U.S. debt and the U.S. dollar, as symbols of U.S. financial hegemony, have been weaponized. In the long run, how do you think the United States will be relieved? The risk of endless debt accumulation to Chinese and other foreign creditors? Is “de-dollarization” a good way to reduce the negative impact of US financial hegemony?
Michael Hudson: It is very important for China and other countries to de-dollarize their economies. When your central bank uses U.S. dollars as foreign exchange reserves, it means that you have lent U.S. dollars to the U.S. government. And what does the U.S. government do with those dollars? Much of it is spent on armaments ot use against China, Russia and Asia and around the world.
Note: Since April 1, 2016, in addition to publishing official reserve assets in U.S. dollars, relevant data will be published in Special Drawing Rights (SDR) of the International Monetary Fund. The conversion exchange rate comes from the website of the International Monetary Fund. USD/SDR=0.741582 in January, USD/SDR=0.752567 in February 2023, USD/SDR=0.743367 in March 2023, USD/SDR=0.742386 in April 2023.
When you hold dollars, you lend money to the U.S. government to encircle you militarily, have the money to engage in military confrontation with you, and have the money to threaten you not to do things the U.S. doesn’t like.
From the perspective of the overall US balance of payments deficit, during the Korean War in 1951 and the Vietnam War in the 1970s, the increase in US debt was caused by huge military expenditures.
Therefore, when Asia holds dollars, it means that Asia is paying for US military spending. You tax your own people and then give the wealth to the American military so they can build military bases to surround you and fight you. If your government does not do what the United States wants, the United States will turn Taiwan into Ukraine and fight to the last Taiwanese, just like NATO’s war on Russia and fight to the last Ukrainian.
NATO says we are fighting Asia and Europe at the same time. We are not a defensive organization, we are an offensive organization, we want to go to war with China, and we encourage our customers in Japan and other countries to join us in fighting China. Because we want to control China, if the Chinese government refuses to sell us Chinese companies, if China refuses to sell raw materials to American buyers, then we will have to change the Chinese government, and we need a lot of military spending to achieve this.
The US government has said that they want to divide China into four or five different countries. And they say that after the split, some Chinese will definitely lend us dollars and can support us against China. The world has split into a dollar bloc that relies on US military spending against every other country in the world. Most countries in the world should strive to promote currency swaps and local currency settlements, reduce their dependence on the US dollar, and not reserve US dollars to lend to the US government.
Once there is no money, it is impossible for the US government to spend so much foreign military spending all over Asia. Therefore, de-dollarization is the key to de-militarization.
Observer.com: Very good. Let me add another question. In 2022, 12% of the US government expenditure will be used for military defense. At present, the two parties in the United States are haggling over how to increase income and reduce expenditure. In your opinion, if the U.S. government increases revenue and reduces expenditure, what kind of plan is the most ideal?
Michael Hudson : I think you’re confusing two concepts here. Military spending may account for 12% of the year’s budget, but 100% of America’s foreign debt is attributable to increased military spending.
As I said, political elections in the United States are funded by corporations, especially from Wall Street, the military industrial complex, arms manufacturers, Raytheon, etc., are major funders of political campaigns.
In the United States, the head of any congressional committee is the congressman who receives the most campaign contributions.
We’ll make sure we fund our MPs so that we elect MPs who represent our interests. The donors to the campaign, not the voters, are these donors. This is how American politics works.
Everything is up for grabs. Donors are the ones most debated on television, no matter how much they donate. Therefore, in order to get more benefits, Congress will reciprocate, giving more votes to Raytheon and the military complex; in turn, the military complex provides more donations to the congressional campaign.
It’s a back and forth cycle, and in most countries it’s illegal, but that’s the financialization of the American political system. Wall Street, the oil industry, the pharmaceutical industry, and the mining industry are major contributors to US election campaigns. This is why the U.S. government ignores the interests of voters and serves Wall Street, the pharmaceutical industry, and the military industry.