[A-List] Yekaterinburg -- Challenging America -- M Hudson

[james daly]

  De-Dollarization:

  Dismantling America's Financial-Military Empire

  The Yekaterinburg Turning Point


  By Prof. Michael Hudson

  Global Research,
  June 13, 2009

  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.[4] 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 two wars.'"6

  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.

  Notes
  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.


   Global Research Articles by Michael Hudson






  Michael Hudson is a former Wall Street economist specializing in the 
balance of payments and real estate at the Chase Manhattan Bank (now 
JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute 
(no relation). In 1990 he helped established the worlds first sovereign debt 
fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinichs Chief 
Economic Advisor in the recent Democratic primary presidential campaign, and 
has advised the U.S., Canadian, Mexican and Latvian governments, as well as 
the United Nations Institute for Training and Research (UNITAR). A 
Distinguished Research Professor at University of Missouri, Kansas City 
(UMKC), he is the author of many books, including Super Imperialism: The 
Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be 
reached via his website, www.michael-hudson.com and his email 
mhmichael-hudson.com .


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