Economic Logic has been Replaced by National Security Overrides
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 July NATO summit in Vilnius had the feeling of a funeral, as if they had just lost a family member – Ukraine. To clear away NATO’s failure to drive Russia out of Ukraine and move NATO right up to the Russian border, its members tried to revive their spirits by mobilizing support for the next great fight – against China, which is now designated as their ultimate strategic enemy. To prepare for this showdown, NATO announced a commitment to extend their military presence all the way to the Pacific.
The plan is to carve away China’s military allies and trading partners, above all Russia, starting with the fight in Ukraine. President Biden has said that this war will be global in scope and will take many decades as it expands to ultimately isolate and break up China.
The U.S.-imposed sanctions against trade with Russia are a dress rehearsal for imposing similar sanctions against China. But only the NATO allies have joined the fight. And instead of wrecking Russia’s economy and “turning the ruble to rubble” as President Biden predicted, NATO’s sanctions have made it more self-reliant, increasing its balance of payments and international monetary reserves, and hence the ruble’s exchange rate.
To cap matters, despite the failure of trade and financial sanctions to injure Russia – and indeed, despite NATO’s failures in Afghanistan and Libya, NATO countries committed themselves to trying the same tactics against China. The world economy is to be split between US/NATO/Five Eyes on the one hand, and the rest of the world – the Global Majority – on the other. EU Commissioner Joseph Borrell calls this as a split between the US/European Garden (the Golden Billion) and the Jungle threatening to engulf it, like an invasion of its well-manicured lawns by an invasive species.
From an economic vantage point, NATO’s behavior since its military buildup to attack Ukraine’s Russian-speaking eastern states in February 2022 has been a drastic failure. The U.S. plan was to bleed Russia and leave it so economically destitute that its population would revolt, throw Vladimir Putin out of office and restore a pro-Western neoliberal leader who would pry Russia away from its alliance with China – and then proceed with America’s grand plan to mobilize Europe to impose sanctions on China.
What makes it so difficult in trying to evaluate where NATO, Europe and the United States are going is that the traditional assumption that nations and classes will act in their economic self-interest is not of help. The traditional logic of geopolitical analysis is to assume that business and financial interests steer almost every nation’s politics. The ancillary assumption is that governing officials have a fairly realistic understanding of the economic and political dynamics at work. Forecasting the future is thus usually an exercise in spelling out these dynamics.
The US/NATO West has led this global fracture, yet it will be the big loser. NATO members already have seen Ukraine deplete their inventory of guns and bullets, artillery and ammunition, tanks, helicopters weapons and other arms accumulated over five decades. But Europe’s loss has become America’s sales opportunity, creating a vast new market for America’s military-industrial complex to re-supply Europe. To gain support, the United States has sponsored a new way of thinking about international trade and investment. The focus has shifted to “national security,” meaning to secure a U.S.-centered unipolar order.
The world is dividing into two blocs: a post-industrial US/NATO vs the Global Majority
U.S. diplomats became increasingly worried as Germany and other European countries came to rely on imported Russian gas, oil, and fertilizer as the basis for its steel, glass-making and other industries. They became even more worried as China had become the “workshop of the world” while the U.S. economy de-industrialized. The fear was that growth by China and its neighboring Eurasian countries benefiting from the Belt and Road expansion threatened to make that part of the world the main growth area, and hence a magnet for European investment. The logical prospect was that politics would follow economic interest at the expense of America’s ability to maintain a unipolar world economy with the dollar at its financial center and trade subject to U.S. protectionist unilateralism.
By joining America’s crusade to destroy the Russian economy and promote regime change, Germany’s and other European countries’ refusal to trade with Russia has destroyed the basic energy foundation of their industry. Destruction of the Nord Stream pipeline has plunged the German and other European economies into depression involving widespread bankruptcies and unemployment. In place of Russian gas, the NATO countries must now pay up to six times as high a price for U.S. liquified natural gas (LNG), and must build new port facilities to physically import this gas.
The European leaders sponsored and financed by U.S. election meddling over the past seventy years have done what Boris Yeltsin did in Russia in the 1990s: They have agreed to sacrifice Europe’s industrial economies and end what had been its profitable trade and investment integration with Russia and China.
The next step is for Europe and the United States to stop trading and investing with China, despite the fact that these NATO countries have benefited from the flowering of this trade, relying on it for a wide range of consumer goods and industrial inputs. That line of prosperous trade is now to be ended. NATO’s leaders have announced that importing Russian gas and other raw materials (including helium and many metals) runs the “risk” of becoming dependent – as if Russia or China might find it in their economic or political interest to abort this trade simply to hurt Europe and to do to it what the United States has been doing to force it into submission.
But submission to what? The answer is, submission to the logic of mutual gains along lines leaving the U.S. economy behind!
By trying to prevent other countries from following this logic, U.S. and European NATO diplomacy has brought about exactly what U.S. supremacists most feared. Instead of crippling the Russian economy to create a political crisis and perhaps breakup of Russia itself in order to isolate it from China, the US/NATO sanctions have led Russia to re-orient its trade away from NATO countries to integrate its economy and diplomacy more closely with China and other BRICS members.
Ironically, the US/NATO policy is forcing Russia, China and their BRICS allies to go their own way, starting with a united Eurasia. This new core of China, Russia and Eurasia with the Global South are creating a mutually beneficial multipolar trade and investment sphere.
By contrast, European industry has been devastated. Its economies have become thoroughly and abjectly dependent on the United States – at a much higher cost to itself than was the case with its former trade partners. European exporters have lost the Russian market, and are now following U.S. demands that they abandon and indeed reject the Chinese market. Also to be rejected in due course are markets in the BRICS membership, which is expanding to include Near Eastern, African and Latin American countries.
Instead of isolating Russia and China and making them dependent on U.S. economic control, U.S. unipolar diplomacy has isolated itself and its NATO satellites from the rest of the world – the Global Majority that is growing while NATO economies are rushing ahead along their Road to Deindustrialization. The remarkable thing is that while NATO warns of the “risk” of trade with Russia and China, it does not see its loss of industrial viability and economic sovereignty to the United States as a risk.
This is not what the “economic interpretation of history” would have forecast. Governments are expected to support their economy’s leading business interests. So we are brought back to the question of whether economic factors will determine the shape of world trade, investment and diplomacy. Is it really possible to create a set of post-economic NATO economies whose members will come to look much like the rapidly depopulating and de-industrializing Baltic states and post-Soviet Ukraine?
This would be a strange kind of “national security” indeed. In economic terms it seems that the U.S. and European strategy of self-isolation from the rest of the world is so massive and far-reaching an error that its effects are the equivalent of a world war.
Today’s fighting against Russia on the Ukrainian front can be thought of as the opening campaign in World War III. In many ways it is an outgrowth of World War II and its aftermath that saw the United States establish international economic and political organizations to operate in its own national self-interest. The International Monetary Fund imposes U.S. financial control and helps dollarize the world economy.
The World Bank lends dollars to governments to build export infrastructure to subsidize US/NATO investors in control of oil, mining and natural resources, and to promote trade dependency on U.S. farm exports while promoting plantation agriculture, instead of domestic food-grain production. The United States insists on having veto power in all international organizations that it joins, including the United Nations and its agencies.
The creation of NATO is often misunderstood. Ostensibly, it depicted itself as a military alliance, originally to defend against the thought that the Soviet Union might have some reason to conquer Western Europe. But NATO’s most important role was to use “national security” as the excuse to override European domestic and foreign policy and subordinate it to U.S. control. Dependency on NATO was written into the European Union’s constitution. Its objective was to make sure that European party leaders followed U.S. direction and opposed left-wing or anti-American politics, pro-labor policies and governments strong enough to prevent control by a U.S.-client financial oligarchy.
NATO’s economic program has been one of adherence to neoliberal financialization, privatization, government deregulation and imposing austerity on labor. EU regulations prevent governments from running a budget deficit of more than 3% of GDP. That blocks Keynesian-type policies to spur recovery. Today, higher military arms costs and government subsidy of energy prices is forcing European governments to cut back social spending. Bank policy, trade policy, and domestic lawmaking are following the same U.S. neoliberal model that has deindustrialized the American economy and loaded it down with debt to the financial sector in whose hands most wealth and income is now concentrated.
Abandoning economic self-interest for “national security” dependence on the US
The post-Vilnius world treats trade and international relations not as economic, but as “national security.” Any form of trade is the “risk” of being cut off and destabilized. The aim is not to make trade and investment gains, but to become self-reliant and independent. For the West, this means isolating China, Russia, and the BRICS in order to depend fully on the United States. So for the United States, its own security means making other countries dependent on itself, so that U.S. diplomats won’t lose control of their military and political diplomacy.
Treating trade and investment with other countries than the United States as involving “risk,” ipso facto, is a projection of how U.S. diplomacy has imposed sanctions on countries that resist U.S. domination, privatization and subordination of their economies to U.S. takeover. The fear that trade with Russia and China will lead to political dependency is a fantasy. The aim of the emerging Eurasian, BRICS and Global South alliance is to benefit from foreign trade with each other for mutual gain, with governments strong enough to treat money and banking as public utilities, along with the basic monopolies needed to provide normal human rights, including health care and education, and keeping monopolies such as transportation and communication in the public domain to keep the costs of living and doing business low instead of charging monopoly prices.
Anti-China hate has come especially from Annalena Baerbock, Germany’s Foreign Minister. NATO is warned to “de-risk” trade with China. The “risks” are that (1) China can cut off key exports, just as the US cut off European access to Russian oil exports; and (2) exports could potentially be used to support China’s military power. Almost any economic export COULD be military, even food to feed a Chinese army.
Treasury Secretary Janet Yellen’s trip to China likewise explained that all trade has a military potential and thus has a national-security element. All trade has a military potential, even selling food to China could be used to feed soldiers.
The US/NATO demand is that Germany and other European countries should impose an Iron Curtain against trade with China, Russia and their allies in order to “de-risk” trade. Yet only the US has imposed trade sanctions on other countries, not China and other Global South countries. The real risk is not that China will impose trade sanctions to disrupt European economies, but that the United States will impose sanctions on countries breaking the US-sponsored trade boycott.
This “trade is risk” view treats foreign trade not in economic terms but in “National Security” terms. In practice, “national security” means joining the U.S. attempt to maintain its unipolar control of the entire world’s economy. No risk is acknowledged for re-orienting European gas and energy trade to U.S. companies. The risk is said to be trade with countries that U.S. diplomats deem “autocracies,” meaning nations with active government infrastructure investment and regulation instead of U.S.-style neoliberalism.
The world is dividing into two blocs – with quite different economic philosophies
Only the United States has imposed trade sanctions on other countries. And only the United States has rejected international free trade rules as national security threats to US economic and military control. At first glance the resulting global fracture between US/NATO on the one hand and the expanding BRICS alliance of Russia, China, Iran and the Global South might seem to be a conflict between capitalism and socialism (that is, state socialism in a mixed economy with public regulation in labor’s interests).
But that contrast between capitalism and socialism is not helpful upon closer examination. The problem lies in what the word “capitalism” has come to mean in today’s world. Back in the 19th and early 20th century, industrial capitalism was expected to evolve toward socialism. The U.S. and other industrial economies welcomed and indeed pressed for their governments to subsidize a widening range of basic services at public expense instead of obliging employers to bear the costs of hiring labor that had to pay for basic needs such as health care and education. Monopoly pricing was avoided by keeping natural monopolies such as railroads and other transportation, telephone systems and other communications, parks and other services as public utilities. Having governments instead of business and its employees pay for these services increased the global competitiveness of national industry in the resulting mixed economies.
China has followed this basic approach of industrial capitalism, with socialist politics to uplift its labor force, not merely the wealth of industrial capitalists – much less bankers and absentee landlords and monopolists. Most important, it has industrialized banking, creating credit to finance tangible investment in means of production, not the kind of predatory and unproductive credit characterized by today’s finance capitalism.
But the mixed-economy policy of industrial capitalism is not the way in which capitalism evolved in the West since World War I.
Rejecting classical political economy and its drive to free markets from the vested rent-extracting classes inherited from feudalism – a hereditary landlord class, a financial banking class and monopolists – the rentier sector has fought back to reassert its privatization of land rent, interest and monopoly gains. It sought to reverse progressive taxation, and indeed to give tax favoritism to financial wealth, landlords and monopolists.
The Finance, Insurance and Real Estate (FIRE) sector has become the dominant interest and economic planner under today’s finance capitalism. That is why economies are often called neofeudal (or euphemized as neoliberal).
Throughout history the dynamics of financialization have polarized wealth and income between creditors and debtors, leading to oligarchies. As interest-bearing debt grows exponentially, more and more income of labor and business must be paid as debt service. That financial dynamic shrinks the domestic market for goods and services, and the economy suffers from deepening debt-ridden austerity.
The result is de-industrialization as economies polarize between creditors and debtors. That has occurred most notoriously in Britain in the wake of Margaret Thatcher and the New [Anti-]Labour Party of Tony Blair and Gordon Brown’s “light touch” deregulatory approach to financial manipulation and outright fraud.
The United States has suffered an equally devastating shift of wealth and income to the Finance, Insurance and Real Estate (FIRE) sectors in the wake of Ronald Reagan’s tax cuts for the wealthy, anti-government deregulation, Bill Clinton’s “Third Way” takeover by Wall Street. The “Third Way” was neither industrial capitalism nor socialism, but finance capitalism making its gains both by stripping and indebting industry and labor of income.
The new Democratic Party ideology of deregulated finance was capped by the massive bank-fraud collapse of 2008 and Barack Obama’s protection of junk-mortgage lenders and wholesale foreclosures on their financial victims. Economic planning and policy was shifted from governments to Wall Street and other financial centers – which had taken control of in government, the central bank and regulatory agencies.
U.S. and British diplomats are seeking to promote this predatory pro-financial and inherently anti-industrial economic philosophy to the rest of the world. But this ideological evangelism is threatened by the obvious contrast between the US-British failed and de-industrialized economies compared to China’s remarkable economic growth under industrial socialism.
This contrast between China’s economic success and the NATO West’s “garden” of debt-ridden austerity is the essence of today’s campaign by the West against the “Jungle” countries seeking political independence from U.S. diplomacy so as to uplift their living standards. This ideological and inherently political global war is today’s counterpart to the religious wars that tore European countries apart for many centuries.
We are witnessing what seems to be an inexorable Decline of the West. U.S. diplomats have been able to tighten their economic, political and military control leadership over their European NATO allies. Their easy success in this aim has led them to imagine that somehow they can conquer the rest of the world despite de-industrializing and loading their economies so deeply in debt that there is no foreseeable way in which they can pay their official debt to foreign countries or indeed have much to offer.
The traditional imperialism of military conquest and financial conquest is ended
There has been a sequence of tactics for a lead-nation to carve out an empire. The oldest way is by military conquest. But you can’t occupy and take over a country without an army, and the US has no army large enough. The Vietnam War ended the draft. So it must rely on foreign armies like Al Qaeda, ISIS, and most recently Ukraine and Poland, just as it relies on foreign industrial manufactures. Its armaments are depleted and it cannot mobilize a domestic army to occupy any country. The US has only one weapon: Missiles and bombs can destroy, but cannot occupy and take over a country.
The second way to create imperial power was by economic power to make other countries dependent on U.S. exports. After World War II the rest of the world was devastated and was bullied into accepting U.S. diplomacy maneuvering to give its economy a monopoly on basic needs. Agriculture became a major weapon to create foreign dependency. The World Bank would not support foreign countries growing their own food, but pressed for plantation export crops, and fought land reform. And for oil and energy trade, U.S. companies and their NATO allies in Britain and Holland (British Petroleum and Shell) controlled the world’s oil trade.
Control of world oil trade has been a central aim of US trade diplomacy.
This strategy worked for US assertion of control over Germany and other NATO countries, by blowing up the Nord Stream pipeline and severing Western Europe from access to Russian gas, oil, fertilizer and also crops. Europe has now entered an industrial depression and economic austerity as its steel industry and other leading sectors are invited to emigrate to the United States, along with European skilled labor.
Today, electronic technology and computer chips have been a focal point of establishing global Economic Dependency on U.S. technology. The United States aims to monopolize “intellectual property” and extract economic rent from charging high prices) for high-technology computer chips, communications, and arms production.
But the United States has deindustrialized and let itself become dependent on Asian and other countries for its products, instead of making them dependent on the US. This trade dependency is what makes U.S. diplomats feel “insecure,” worrying that other countries might seek to use the same coercive trade and financial diplomacy that the United States has been wielding since 1944-45.
The United States is left with one remaining tactic to control other countries: trade sanctions, imposed by it and its NATO satellites in an attempt to disrupt economies that do not accept U.S. unipolar economic, political and military dominance. It has persuaded the Netherlands to block sophisticated chip-engraving machinery to China, and other countries to block anything that might contribute to China’s economic development. A new American industrial protectionism is being framed in terms of national security grounds.
If China’s trade policy were to mirror that of U.S. diplomacy, it would stop supplying NATO countries with mineral and metal exports needed to produce the computer chips and allied inputs that America’s economy needs to wield its global diplomacy.
The US is so heavily debt-laden, its housing prices are so high and its medical care is so extremely high (18% of GDP) cannot compete. It cannot re-industrialize without taking radical steps to write down debts, to de-privatize health care and education, to break up monopolies and restore progressive taxation. The vested Financial, Insurance and Real Estate (FIRE sector) interests are too powerful to permit these reforms. That makes the U.S. economy a failed economy, and America a Failed State.
In the wake of World War II the United States accumulated 75% of the world’s monetary gold by 1950. That enabled it to impose dollarization on the world. But today, nobody knows whether the U.S. Treasury and New York Federal Reserve have any gold that has not been pledged to private buyers and speculators? The worry is that it has sold European central-bank gold reserves. Germany has asked for its gold reserves to be flown back from New York, but the United States said that it was unavailable, and Germany was too timid to make its worries and complaints public.
America’s financial quandary is even worse when one tries to imagine how it can ever pay its foreign debt for countries seeking to draw down their dollars. The United States can only print its own currency. It is not willing to sell off its domestic assets, as it demands that other debtor countries do?
What can other countries accept in place of gold? One form of assets that may be taken as collateral are U.S. investments in Europe and other countries. But if foreign governments seek to do this, U.S. officials may retaliate by seizing their investments in the United States. A mutual grabbing would occur.
The United States is trying to monopolize electronic technology. The problem is that this requires raw-materials inputs whose production presently is dominated by China, above all rare-earth metals (which are abundant but environmentally destructive to refine), gallium, nickel (China dominates the refining), and Russian helium and other gasses used for engraving computer chips. China recently announced that on August 1 it will start restricting these key exports. It indeed has the ability to cut off supplies of vital materials and technology to the West, to protect itself from the West’s “national-security” sanctions against China. That is the self-fulfilling prophecy that U.S. warnings of a trade fight has created.
If U.S. diplomacy strongarms its NATO-garden allies to boycott China’s Huawei technology, Europe will be left with a less efficient, more expensive alternative – whose consequences help separate it from China, the BRICS and what has become the World Majority in a self-reliant alignment much broader than was created by Sukarno in 1954.