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De-dollarization is about more than currencies: As dollar system declines, what comes next?

Economists Radhika Desai and Michael Hudson discuss de-dollarization, the global drive to drop the US dollar, and the transition away from financialized neoliberalism toward a new economic system.

de-dollarization neoliberalism Radhika Desai Michael Hudson

In this episode of their program Geopolitical Economy Hour, Radhika Desai and Michael Hudson discuss de-dollarization, the global drive to drop the US dollar, and the transition away from financialized neoliberalism toward a new economic system.

You can find more episodes of Geopolitical Economy Hour here.

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(What follows is an edited transcript.)

RADHIKA DESAI: Hi everyone, welcome to this eighth Geopolitical Economy Hour, the fortnightly show on the political and geopolitical economy of our times. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: And this will be the fourth and final show on de-dollarization. As you know, we initially decided to do a couple of shows on de-dollarization, but Michael and I have written lots about it, both jointly and individually. And we have lots to say.

So it eventually became three programs, and even then it wasn’t over. So today we are into the fourth and final program. And as you know, we’ve divided our discussion into several questions:

  1. What is money? Why does it appear to take national forms? Can there be world money?
  2. What is the relation of money and debt?
  3. Is money a commodity?
  4. What is the ‘theory’ of how the dollar served as the world’s money?
  5. Was it like the Sterling System? What was the sterling system?
  6. How did the Sterling system end?
  7. What really happened between the World Wars?
  8. The dollar system between 45 and 71, when the dollar-gold link was broken. How did it work?
  9. Was there really a ‘Bretton Woods II after 1971?
  10. The crisis today? What are its main dimensions?

So there are the 10 questions, and we’ve dealt with the first nine. And today we’ll be dealing with the final question, which is: What are the dimensions of the crisis of the dollar system today?

And of course, as the Chinese saying goes, every crisis is an opportunity. So Michael and I also want to talk very much about: What are the opportunities contained in this current crisis for a policy paradigm, which is much kinder and better for development and for the prosperity of ordinary people around the world than has been possible over the last several decades of dollar dominance?

So that’s what we are going to talk about, isn’t it, Michael?

MICHAEL HUDSON: Yes, we’re going to talk about how really, it’s not simply moving out of the dollar, it’s de-neoliberalization. It’s really a whole creation of a whole different economic system that is necessary.

RADHIKA DESAI: Some people often talk about the contrast between the so-called Washington Consensus and the so-called Beijing Consensus and much of what we say will have to do with that.

So I think of what drives de-dollarization as being at least composed of two very different parts:

What drives de-dollarization?

WITHIN U.S.: CONTRADICTIONS MOUNT

    • Capital inflows never recovered from 2007 peak
    • Federal Reserve has to support asset markets
    • Inflation is eroding the dollar
    • But Federal Reserve cannot rescue it without collapsing asset markets, which have been critical support for dollar
    • US assets, treasuries and others, less attractive
    • Weaponization of dollar financial system

OUTSIDE U.S.: ALTERNATIVES BEING CREATED

    • Bilateral arrangements for trade in national currencies and swap lines
    • Multilateral arrangements to provide finance and monetary support: CMI, SCO, NDB, CRA
    • New payments systems
    • CBDCs
    • Internationalization of other currencies
    • Increasing invocation of Keynes’ International Clearing Union (ICU) and Bancor ideas
    • Widening pluripolarity and weakening of imperialism: effects on commodity prices

So one is, one set of developments is occurring within the dollar system, the US financial system, which really forms the base upon which, then, the dollar tries to mount its contradictory, volatile and never-entirely-successful role as the world’s money.

So we look at how the contradictions are mounting there.

And then we will see that as the contradictions are mounting within the dollar system, outside there are a whole stream of possibilities and alternatives that are being created, centered, of course, around China, but also entailing the activities and policies and the new policies of other countries.

And of course, as you know, all these developments have been rapidly accelerated by the current conflict in which so many contradictions have been really maturing.

So if we look at the left hand side, the mounting contradictions of the dollar, we see that first of all, as we’ve talked about many times throughout this past several shows on de-dollarization, the dollar system after 1971 essentially rested on creating, on expanding, financial activity, dollar denominated financial activity in such a way that the rest of the world, holders of money of the rest of the world, would hold that money in dollars in order to take advantage of the opportunities for financial profit being created by the dollar system.

And what’s really interesting is that this inflow of dollars that has been central to keeping up the value of the dollar, to counteracting the downward pressure on the dollar that the US deficits and the declining US economy would create, this inflow has actually gone down considerably.

cross border capital flows graph

You will see in the graph that inflows grow faster, and as you can see, the inflow of dollars, the growth of dollars, the growth of the gross cross-border capital flows, the bulk of which are in dollars, you see them going up sort of in a series of peaks up to the really big peak of 2007.

And as you can see, that was like the mother of all asset bubbles. And after that, you see that the cross-border capital flows fall, and then they recover. But as you also see, the recovery has remained essentially at levels that are less than half of the 2007 peak. So that’s the real point.

So these inflows are declining. Michael, did you want to add anything?

MICHAEL HUDSON: Yes, the important thing is that what we’re talking about here, and what actually determines the relative exchange rates of currencies, is not trade.

In the newspapers, they talk about using the dollar for oil and for food and for other basic needs, but the actual change that is responsible for the up and down zigzagging are capital flows, mainly into the stock market and into the bond market.

And this is very largely a function of interest rates. And the exchange rates are really a function of financial markets, not trade particularly, especially foreign debt service.

Why do Global South countries need dollars to pay their dollar denominated debts? And this is what the papers leave out.

And once you begin to look at these factors, the capital flows that Radhika just mentioned and that we’re charting right now, you realize that if you’re having a system that’s not based on investment in each other’s private capital markets, but on a mixed economy with governments, we’re not talking about a market economy anymore.

Suppose we’re 10 years from now and we’re looking back at the chart that Radhika had just put up. Well, right now it looks up and down, but in 10 years, all this will be just a little squiggle and then there’ll be just a completely different world.

RADHIKA DESAI: Well, exactly. And you know, Michael, you raise a really interesting point.

But before we get to that, let me also add one other thing.

What Michael says is that, this entire dollar system is organized not around production, not around trade, which is basically what ordinary people need in order to make their living. But it is essentially organized around finance.

That is to say, in the indebting of ordinary individuals, businesses, productive businesses and governments. And it is centered around creating speculative asset markets.

Not only does this not feed anybody apart from making a few people very rich by transferring income from some people to others, but it also strangulates production.

And in addition to that, by creating such a demand for the dollar, which essentially is a demand that mainly rich people and big institutions engage in that they supply, what this system has also done is it has brought the exchange value of most currencies other than the dollar down.

That is to say, the dollar is overvalued in relation to all these other currencies, which means ordinary people in poor countries not only have to work hard in order to earn dollars, they have to work unreasonably hard because the dollar is unreasonably overvalued.

And of course, as Michael says, this is what they need to do in order to pay the debt, which is also the other net on which this resides, because governments of the Third World and increasingly also businesses of the Third World are indebted to the dollar system.

So now, Michael also mentioned one other thing, which is that for this so-called market system, we are always told that the market is operating freely and the dollar’s value is the value determined by the free market. But actually, there’s something really fishy going on.

So if you see here, basically what we are also arguing is that the Federal Reserve has had to step in in a big way and support asset markets.

Federal Reserve Fed total assets 2023

So here you see simply a graph of the dollars, the Federal Reserve’s balance sheet. And you can see that from being at about a trillion dollars before 2008, it sort of jumped to twice the amount soon thereafter. And then in the process of quantitative easing, it went up to about four trillion dollars.

And then in the last two or three years, given the pandemic crisis and the need to hold up asset markets, you can see it doubled again in size. So today, the value of the Federal Reserve’s balance sheet is over nine trillion dollars.

Why are we showing you this? This is the amount of money, which in addition to all the other shenanigans, including low interest rates, et cetera, that the Federal Reserve is using in order to prop up asset markets.

Why does the Federal Reserve need to prop up asset markets? Because foreign money is no longer coming in to the same extent that it would need to in order to keep asset markets up.

And if these asset prices were to fall, which they would without the intervention of the Federal Reserve, then of course the wealth of the richest US and world elites would be wiped out. And the Federal Reserve is indebted to nobody other than these elites.

So that’s the next thing we wanted to show you.

MICHAEL HUDSON: One thing about this, the Federal Reserve, by doing the quantitative easing, has painted itself into a corner.

And the corner is what you saw a few weeks ago with Silicon Valley Bank and now the other San Francisco banks that are going under.

If interest rates were to rise, then the banks would become insolvent because the value of stocks or bonds is discounted by the exchange rate. I know that may sound technical for some people, but when interest rates rise, it’s basically a repayment period.

And so the Federal Reserve has a problem. And it seems to have just discovered this now, that if you have a zero interest rate, then people are going to buy stocks and bonds.

And one of the reasons that the dollar has remained strong is that the American stock market has gone up so fast and compared to other markets, including Japan and Europe, that foreign investors, the billionaires all over the world, are putting their money into riding the stock market rise.

But if the Federal Reserve now decides, wages are beginning to go up and we’ve got to create unemployment and bring on a depression so that we can lower the wages and make even bigger profits, then you’re going to have the banking system here and in Europe going insolvent. And that’s what you’re seeing right now.

So the system has reached an insolvable crisis. It’s not a problem. It’s a quandary. There’s nothing the Federal Reserve can do. And the whole dollarized system is breaking right now in the United States. It’s paralyzed.

It can’t raise the interest rates without making all the banks look like Silicon Valley Bank, insolvent and on the balance sheet where the assets lower their value below the deposit liabilities.

Banks owe depositors money. The banking for these deposits are the banks’ holding of stocks and bonds. If interest rates go up and stock and bond prices and real estate prices go down, then the banks no longer can cover their reserves.

The nine trillion dollars that Radhika just mentioned is the insolvency of the bank. Within one month, the government would have to create another nine trillion dollars to give to the banks to cover the deposits. And that’s crazy.

RADHIKA DESAI: Well, absolutely. In fact, you know, it’s both. It’s this vast inflation of the US Federal Reserve’s balance sheet that, as Michael says, represents the insolvency of banks.

But I would add one other thing. It represents the illiquidity of asset markets.

That is to say, you know, an asset market is only liquid if whenever you want to sell your holding of that asset, there is a buyer for it. And that is no longer so, which is why the Federal Reserve has stepped in to act as the buyer of last resort for these asset markets.

And the quandary that Michael talks about, this is absolutely key. And we have talked about this actually for several years, including in our 2020 paper “Beyond the Dollar Creditocracy” and even going back before it.

And this has also been my argument, actually going back even more years. Essentially throughout the 21st century, and certainly since 2008, the Federal Reserve, in order to prop up a declining financial system and an increasingly volatile and vulnerable financial system, has been pursuing a zero, or very low, interest rate policy.

And this has not only supported the banking structure, which was already vulnerable, but by supporting it in this way, the Federal Reserve papered over the vulnerabilities of this banking system. And of course, it also inflated the value of financial assets.

And now the resurgence of inflation, which the Federal Reserve cannot combat or will not combat, I should say, through any other means but by raising interest rates, the Federal Reserve is caught between a rock and a hard place.

If they raise interest rates, the whole financial house of cards comes crashing down. And if they don’t raise interest rates, inflation will bring down the dollar and also have an effect and act as a drag on the economy, on the financial system, et cetera.

So in this way, essentially, the return of inflation is a crisis of the dollar system itself. And I would also add that it is a crisis of the imperial system in the simple sense that one of the key foundations of imperialism is to keep the resources that come to rich countries, particularly the United States, cheap.

And as the dollar goes down in value, as inflation goes up, these things are no longer cheap and they can no longer essentially keep the cost of living down and the cost of production down in these countries.

The next contradiction is that in fact, the inflation of course is eroding the dollar. And we’ve also talked about how the Federal Reserve cannot reverse it without collapsing asset markets. So we’ve done that.

But the next problem is that US assets, including US treasuries, are becoming less attractive.

So if we go to the next graph, what’s very clear is that the US share of global reserve currencies has declined quite substantially. So you see here right up to the end of the 1970s, it is very high, at about 85% of the dollar’s share of global reserves.

us dollar share global reserve currencies graph

Then it falls as a result of the crisis of the late 1970s, which Paul Volcker had to react to by massively raising interest rates. And this saved the situation, but the dollar’s share of global reserves kept falling.

And then in the 1990s, it went up. And that’s also a really interesting story. It went up because of a series of financial crises that afflicted other countries, largely thanks to their participation in this volatile dollar system.

And in reaction to this, in order to keep capital accounts open, remember:

In the 1990s, the Clinton administration had gone on a big drive to get all the countries of the world, but particularly what they called the big emerging markets of Eastern Asia. It had been on a drive to get them to lift capital controls, telling them that they would get necessary investment money coming in, investment funds coming in.

But in reality, all that came in was what’s called hot money, short term money that invests in asset markets and leaves at the drop of a hat.

And indeed, this is the kind of money that had caused the great East Asian financial crisis and a whole slew of other crises in different markets before then.

Around this time, what then happened is that these countries, unfortunately, rather than impose capital controls, they elected to keep their capital accounts open, but also accumulated reserves in order to have the ammunition with which they could intervene in markets if there was any downward pressure on their currency.

So for example, the Korean Central Bank would keep vast reserves so that if there was a downward pressure on the Korean won, it would use the dollars to buy Korean won and hold up the value of the won. Of course, this meant that they had to increase their dollar reserves. So the share of the dollar reserves went up.

MICHAEL HUDSON: Well, you’re right. People had to hold dollars in order to interfere with exchange, to regulate exchange markets. And this is what England did for many years.

If you import more because you’re in a boom, the currency would go down if you didn’t have reserves to sell against the dollar. So the dollar was the main measure.

The chart that Radhika just showed actually understates the problem because there’s a little trick there. The trick [is, in the chart, the] dollar is [shown as] a percentage of currency reserves, but foreign reserves are not only in currency, they’re in gold. And if this chart would have shown central bank reserves, it would have shown that gold, especially in the last two years, has shown a rising percentage of currency values.

And that that really is what countries are moving into. They don’t sell gold back and forth to stabilize their foreign exchange markets, as they used to do in the 1920s.

But they’re looking for a kind of an economic system where they don’t want to have to stabilize exchange markets by having the financial system determine exchange rates, but they want to establish stable trade relations among themselves without the financial sector interfering and causing the whole long-term distortion that we’re describing.

RADHIKA DESAI: And that’s a really good point, Michael. And I just want to make one other point about that graph.

So then we talked about how in the 1990s these reserves went up and then what we see is that basically in the new century there has been essentially a decline in the share of dollars as a reserve currency.

And Michael already pointed out one little thing that is ignored by this chart. But some people are pointing out that charts like this also ignore one other thing.

This chart generally takes the reserves at the nominal value. But if you factor in the fact that the dollar has also been losing its value over the same period, then in fact you see much more drastic falls. So not just say from a high of 85% or so to now a high of about 60% or just below 60%, but you would see them coming down to below 50% and even less if you accounted for the actual market value of the dollar.

So, in this way, one indicator is that the share of dollars in global reserves is going down.

So, now you also see stories like this in various financial newspapers. So, this is from the Financial Times. Just one example, “The market in US Treasuries is storing up trouble”, is what Gillian Tett says.

And if we look at the following quotes in that story, she makes a series of points which are really worth noting:

More striking still, these trends recently prompted Janet Yellen, US Treasury secretary, to take the rare step of admitting in public that she is “worried about a loss of adequate liquidity in the market”. On Friday her staff did something remarkable: in a regular market survey, they asked the Treasury Bond Auction Committee (the bankers who run bonds sales) if the government should start buying less-liquid Treasuries, to prevent them freezing up.

However, the Treasuries market is also plagued by particular challenges. One is size: US government outstanding issuance has almost doubled since 2015 and quadrupled since 2007. US Treasury market growth has significantly outpaced the growth in bank capital since 2008. This is a remarkable — and little noticed — shift.

Another problem (echoed elsewhere) is that quantitative tightening is raising questions about who will buy government bonds as the Fed stops buying Treasuries. As a punchy paper by economists including Raghuram Rajan and Viral Acharya recently noted, with masterly understatement, this QT is “not likely to be an entirely benign process”. Investors are skittish.

The third problem is market structure. Previously, the primary dealers (ie big banks) kept the treasuries market liquid in a crisis by acting as market makers. But after 2008, a string of regulatory reforms made it expensive to play this role — most notably by demanding reserves against Treasury holdings. As a result, primary dealers’ transactions are now just 2 per cent of the market, down from 14 per cent in 2008, TBAC data shows.

So, first of all, this is just from a couple of months ago [in October 2022].

And she says that Janet Yellen, the US Treasury Secretary, had to take the rare step of admitting in public that she’s worried about a loss of adequate liquidity in the market. And once again, just remember, loss of liquidity is simply a polite way of saying that people don’t want to buy US Treasuries. So, that’s the first thing.

And then a couple of other points Gillian Tett makes here.

First of all, the US Treasury market is also plagued by particular challenges. One is size. The US government’s outstanding issuance has almost doubled since 2015 and quadrupled since 2007, something we know very well.

And as you know, of course, the quality of that debt has already been downgraded a couple of times in the recent past. So, essentially, the idea that US Treasuries are the ultimate safe asset is taking a drubbing.

And then finally, you know, a third problem is that the very rules that after 2008 were brought into play in order to make the US banking system more resilient are also essentially ensuring that the US financial institutions are not stepping up to buy US Treasuries.

Because every time they step up to buy US Treasuries, this is taken as a form of lending, which it is, and the banks have to show adequate reserves against that lending, which means that they are not, by the rules, able to buy more US Treasuries, which really shows you that the US financial system is increasingly like the serpent that’s eating its own tail.

Its own contradictions are multiplying. So, Michael, I think you probably want to add something more.

MICHAEL HUDSON: No, no, this is technical and I want to get beyond the technical.

RADHIKA DESAI: Okay, fine. So, another graph:

Federal Government debt holders US

I think this is a final point here, which is that, in order to talk about the strength of the US dollar as the world’s money, one of the things that people constantly refer to is, “Oh, you know, Japan and China are the biggest holders of US dollars”.

There’s a little problem there. They’re not the biggest holders of US dollars. They are the biggest foreign holders of US dollars, and the share of foreign holders among total holders of US dollars has historically been about 30% or so.

But today, with the recent rise in the US debt, which you see at the top of the top line there, you see that there has been a big rise in the US indebtedness.

But foreign holders have not correspondingly increased their holdings, which means that as the US continues to get more indebted, what you’re looking at is that the foreign holders’ share, and including the Chinese and Japanese share, of dollars is actually going down as a proportion of the total.

So, Michael, did you want to add anything?

MICHAEL HUDSON: There’s an important reason for all of this. A lot of high-income money in the United States has moved out of the stock market, out of the bond market, into treasuries because they know that the government can always print the money.

There’s no question that US treasuries are the safest of all investments for Americans and for friendly Europeans.

The problem is, while the United States can always print dollars, and you’re safe if you’re an American, safer than holding stocks that are going up and down, if you’re a foreigner, the Federal Reserve cannot print foreign currencies.

If you’re a foreigner and you’re saying, — Look at the volume of US debt. There’s no way that the American economy ever in 100 years can repay the existing debt.

— The Treasury debt that America owes to Americans is “good debt” because they can print it. The debt by the treasury that Americans own to foreigners is “bad debt”. It cannot be paid.

Foreigners have done the financial analysis and realized, — Well, wait a minute, the United States can’t export more because it’s de-industrialized. It can’t really create more of a stock and bond market growth because it’s already at zero interest with $9 trillion propping it up.

— There’s no way we can ever be repaid. Let’s get out of the dollars into something that we know can be repaid.

That’s why they’re moving into gold. That’s why they’re moving into each other’s currencies. That’s why they’re trying to think there must be a different system, which is what we’re going to be talking about for the balance of this show.

RADHIKA DESAI: Yes, indeed. I would say that there’s only one final point that I’m sure we want to cover before we go on to talking about the different system.

That is that, of course, the final problem with the US dollar within the dollar system is the weaponization of the dollar system, which is essentially a whole slew of things.

Most recently, of course, we’ve seen how the US financial system was used as an instrument through which to essentially sequester, essentially steal Russia’s reserves. Before that, as you know, Afghanistan’s and Venezuela’s reserves had been stolen.

There is also another problem, which is that already some years ago, people were complaining about the weaponization of the dollar system vis-a-vis Argentina, where the old rules of bankruptcy and essentially dealing with degraded debt.

Which was that some vulture funds buy them up for pennies and they try to get a few more pennies on top of that by reclaiming the debt.

But the fact is that a New York court ruled that the vulture funds were entitled to the entirety of the debt that they had bought for pennies. And even the Financial Times had to complain that this is not how the rules of the debt markets work.

MICHAEL HUDSON: Argentina’s debt cannot be paid. Zambia’s debt cannot be paid. Sri Lanka’s debt cannot be paid. And the American debt cannot be paid.

So what’s broken is not simply the dollar as a political currency, that it can grab your money; the whole financial system in the West has reached its limit. The debts can’t be paid. And the question is, how are they going to be paid?

RADHIKA DESAI: Exactly. That’s the reality.

MICHAEL HUDSON: Janet Yellen said that China should pay them. The American position is let China, if only China will give up all its debts, then these countries can afford to pay the bondholders.

And then you have bank lobbyists such as Bono saying, well, if only the governments will give up their debt, then the little money that the Global South makes can be used to pay the dollar holders. Let governments subsidize the dollars by giving up their debt. Let China give up its debt.

And this is what politicizes the whole issue of international finance and trade and currency.

RADHIKA DESAI: Now you can have as full a picture as we can draw of the mounting contradictions of the dollar system. So the dollar system is collapsing under the weight of its own contradictions. On the other hand, alternatives are emerging.

And we’ve talked off and on about the various alternatives, bilateral arrangements between different countries to trade in their own currencies, multilateral arrangements like the Chiang Mai Initiative, the Shanghai Cooperation Agreement, the New Development Bank, the [BRICS] Contingency Reserve Agreement, the creation of new payment systems like the MIR systems and the SIP systems of Russia and China, respectively.

The increasing interest in central bank digital currencies, which will allow countries to ease monetary transactions, particularly those that are intimately involved with what the rest of the world is primarily involved with, which is the expansion of their productive system and their trading relations.

And of course, their mutual productive investment relations.

These countries are not interested in expanding unnecessarily the financial system, as in debts and asset markets or unproductive debt and asset markets. So central bank digital currencies will enable this to happen more easily.

So as these things multiply, what is increasingly going to happen is that the dollar and its value will matter to an ever-narrowing circle of primarily US-based dollar holders. So that’s where we are at.

And in this context, what we then have is the possibility that the rest of the world will fashion a completely new financial system.

Because one of the things that everybody asks is, — OK, so if the dollar is no longer going to be the world’s currency, what will be the world’s currency?

And our answer has always been that it’s not going to be another national currency modeled either on the pound sterling or on the dollar.

One of the things we’ve pointed out is that both of these systems were based on foundations that are no longer possible. And in fact, the dollar system was always, as a result, too unstable and volatile.

So what we are going to see is the replacement of this broken system with a brand new system based on quite new principles.

MICHAEL HUDSON: That’s the whole point. It’s not a de-dollarization as such. It’s a de-neoliberalization.

And obviously, the countries are going to still run imbalances with their trade and some investment, tangible capital investment, not stock market investment.

But how are they going to settle the fact that all economies work on credit? You need some basis for the credit system, but you don’t want it to be a foreign currency.

So the solution is obviously going to be: you create an artificial currency. We’ve said before, it’s like paper gold, except it’s not gold.

It’s something that will be politically defined by the member countries as something like Keynes’s bancor or a kind of credit that can only be used among central banks, among governments for their own purpose. And this is what the United States is really afraid of.

Right now, if you were to look at the charts that we’ve just been showing, the United States can say, — Well, so what? What’s the alternative?

The problem is for other countries to create an alternative. And to create an alternative, you need to have an ideology.

You need to have an idea of: What is an economic system? How does the world economy work in a way that is going to benefit us and be mutually beneficial without being centered on any particular economy benefiting at the expense of the others by just printing its currency as a free lunch?

That’s the task that other countries are facing. And yet, they’re not facing it. They’re not really describing the kind of economic system that would be an alternative to the US-based bank-financed neoliberal system.

I think, in all of the shows that we’re doing here, we’re trying to provide an outline for what this kind of a future can look like if it’s not the kind of a financialized system that we’ve had in the past.

In fact, it’s: How do we move towards a socialist system?

RADHIKA DESAI: Well, exactly. A couple of different points.

So as Michael pointed out, the way to think about what will replace the dollar system, one of the best ways to think about it is to think about the principles underlying Keynes’s proposals for bancor and the International Currency Union (ICU), which is why we discussed it at some length in a previous episode.

We will not realize an ICU or a bancor immediately, chiefly because it requires the US as one of the larger economies to play ball. And as long, you know, for the foreseeable future, we don’t see the US as agreeing to anything like that.

In fact, the United States, in its quest for making the dollar the world’s money, nixed Keynes’s original proposals in the first place back in 1944. And it’s not about to subordinate itself to this system.

And one of the key reasons why the US will not subordinate itself to this system is very important and interesting from the point of view of what Michael was just saying. It involves a completely different conception of the economy.

The US government essentially acts as the representative of big private corporations. It is their power that it seeks to advance.

Whereas if you accepted the principles of bancor and the International Currency Union, the idea is not to add to the power of big private corporations, including big financial corporations, but on the contrary, to underline the fact that economies are supposed to be run to focus on production, productivity, and the creation of a broad-based prosperity, full employment, et cetera, which is exactly the opposite of what the US wants to do.

So the United States’ pursuit of the interests of big corporations is not served by agreeing to such a system. So we will not see that.

But we will see regional equivalence of that, partial equivalence of that, and the principles involving the bancor system are very important. One of the first ones is, the whole issue of balanced economic growth and investment and trade versus imbalance.

The dollar system, because it’s based on essentially the US running current account deficits, rests systematically on the generation of imbalances. The bigger the imbalance is, the more liquidity that is provided to the world system, which then means that there is a fundamental volatility in the system.

Keynes, on the other hand, had designed the ICU and Bancor, and we’ll see that the regional arrangements will also have to eventually see the wisdom of this, in order to reduce imbalances.

Yes, the bancor was created in order to settle imbalances, but the way the ICU was designed was to ensure that imbalances did not persist.

And the more balance you have in world trade, in world investment relations, what that does is it actually reduces the need for the use of any currency, because if there is no imbalance to settle, there is no need for the money.

And it also creates an incentive. For example, imagine if the relations between Germany and the rest of the EU were run on bancor-like principles, Germany would have to invest in the productive development of Greece in order to bring Greece up to the level at which it would be able to buy as much of German products as it sold to Germany and vice versa.

So the trade between these countries would grow. It would increase the well-being of Germans and Greeks, but it would do so in a balanced fashion so as to not store up problems for later.

MICHAEL HUDSON: Well, Germany has been investing in Greece, but not in a way that has increased balance.

When Greece was in financial trouble, Germany bought out the electric utilities and some others and has been charging monopoly rents. The German objective is to impoverish Greece to the maximum degree possible in order to create profits for the German firms.

When Keynes talked about reducing imbalances, he didn’t mean reducing instability. Any economic system, even under a reformed system that the world is bringing about, is going to polarize.

Any economy, the natural tendency is to polarize, especially because of debt. We’ve talked before about how debt grows faster than the economy. That polarizes.

Keynes accepted the fact that there was going to be continuing imbalance that was, in fact, going to grow. What he wanted to do was not deny this imbalance, not create a system of balance, because that’s really not possible.

But, when it’s imbalanced, you would actually cancel the accumulation of debt by the creditor countries, and you would wipe out the debt of the debtor countries so that they weren’t reduced to having to live like Argentina had to live. They’re not imposing austerity on themselves.

The result of the imbalance will be wiped out. The imbalance itself won’t be cured, but the results of the imbalance will be wiped out, so that the world can have some restoration of order, some restoration of normalcy and solvency.

You have to maintain some way of keeping economies solvent, and under finance capitalism, under any financialized system, the tendency is for the financial sector to take over the real economy and the only solution, Keynes said, is to wipe out the debts that are built up by the financial creditors.

You wipe out the debts and at the same time the creditors’ claims on others, and that’s what the bancor systems did, and that’s why the United States rejected this claim in 1945, because they said, — Well, wait a minute, over the next five years, by 1950, we’re going to increase our holdings of gold, as indeed they did. — We’re going to increase other countries’ debt, of England and Europe, as indeed it did. — We don’t want to wipe it out. We want to use this to consolidate our power. That’s what our power is.

So Keynes’ system is designed to prevent any country from achieving the kind of power that the United States achieved as a creditor nation.

The fact is, if you had a bancor, this would mean that if China becomes a major investor in the major economy, yes, it can continue to develop, to build up credits, but at a certain point, the accumulation of Chinese financial claims on other countries, namely other countries’ debt to China, will simply be wiped out.

And Keynes had a mechanism to wipe this out after a given number of years. So governments have to avoid trying to profit at other governments’ expense.

That’s the problem that really has to be solved by governments getting together and creating the kind of alternative to neoliberal financialization that we’re talking about.

RADHIKA DESAI: Yeah. I would just put it, the point you were making about balance and imbalance, Michael, in a slightly different way.

I would say that Keynes, of course, knew that imbalances could not be entirely wiped out. But what he did was he ensured that imbalances would not persist. There would not be persisting imbalances.

You would not have the situation that we’ve had for the last so many decades of US current account deficits continuing to grow exponentially, essentially, and of course, capital flows also continuing to grow.

He proposed to correct that, essentially, by focusing on the productive economy. It was not merely a financial correction.

He basically created incentives for countries that were accumulating surpluses. Remember also that one of the key principles of Keynes’s system was that adjustment should not be imposed only on the debtor and deficit countries, but also on the surplus and creditor countries, so that [both countries are always involved].

Because one country’s trade surplus is another country’s trade deficit, or vice versa. So all the countries involved should look for win-win solutions.

And by the way, it’s not surprising that the Chinese government in particular keeps using this expression because it is indeed the opposite of what the US system offers.

The US system is a zero-sum game. Somebody wins and somebody loses, whereas it is possible to devise rules of the game that are win-win. So, no persistent imbalances.

And yes, the devising of a bancor, a multilaterally created currency to be used only by central bankers and therefore not to be used, as I always like to say, by the likes of you and me to buy a bar of chocolate, but also not to be used by wealthy individuals to accumulate wealth, to indebt others, and so on and so forth.

So that’s one principle. So it is designed in such a way as to essentially prevent precisely the type of financialization that hangs like an albatross around the neck of the world economy today.

There are a couple of other principles as well.

From the start, in these de-dollarization programs, we’ve emphasized that the idea that any national currency can easily be the world’s currency is very problematic. We’ve explored the problems with the sterling system, with the dollar system, et cetera.

So it therefore follows logically from this that, going forward, we should not expect that this should be replaced by the yuan or any other currency. In fact, you will be seeing these other arrangements.

And key, another very important principle of this for Keynes, I think it was practically sacrosanct, was the institution of capital controls or what we call capital account management.

Because without capital controls, the type of productive economy that Michael is referring to, and that we both believe should really be what all countries strive for, is not possible.

If you allow the rich people of your country to take money in and out of your country whenever they like, you are tying yourself to a form of economic management, which is the opposite of economic management for productive expansion, for egalitarian economies, and so on and so forth.

I’ll make one final point and then we’ll probably draw this program to a close. I’m sure Michael will have lots to add.

Let me start winding down by saying that, of course, in the near future, we will witness internationalization of the yuan for sure and maybe some other currencies as well.

But if you are going to keep to the sorts of principles that underlay Keynes’s ingenious proposals, then you will not see the yuan being internationalized on the model of the dollar.

I always get so intrigued that people don’t get things. Every other day you will read a story saying, — Oh, the yuan will never replace the dollar because it will never be internationalized like the dollar.

Well, you’re darn right it won’t be internationalized like the dollar, and it should not be. Because if it were internationalized like the dollar, the Chinese productive economy would suffer the fate of the American productive economy, which is essentially going down the drain.

So internationalization of the yuan will proceed, but on very different principles. So the yuan will not become the foundation, for example, of new types of financial bubbles or new types of unsustainable indebtedness that Michael is always talking about when he says that debts that can’t be paid won’t be paid.

So Michael, please go ahead.

MICHAEL HUDSON: Well, changing a financial system requires changing the whole economic system. And if the purpose we’ve been discussing is: How are you going to make the countries that today are indebted, the Global South countries, how are you going to enable them to get to the future?

Well, there’s only one way that you can have them revive, and that is to create a mixed economy. Government is going to have to play a major role in reviving these economies through government infrastructure.

The key is that basic natural monopolies, transportation, communications, health care cannot be financialized. They’re going to be done by the government. That is the reason. That is how China has been able to make the amazing gains that it’s made over the last 30 to 40 years.

So what we’re talking about is how do you make the whole world have the kind of success that China has had for 40 years and not have the kind of dependency and austerity that the US dollar system has had?

Well, you’re going to have to have government taking a lead. This is why the United States is fighting so viciously to prevent this from happening. It’s not simply preventing an alternative to the dollar as a currency. It’s preventing the financial system from being outmoded and replaced by a mixed public-private economy.

I want to quote one thing that Janet Yellen, the militarized Treasury Secretary said. She’s sort of in the line of Madeleine Albright and Hillary Clinton and Ms. Rice. The most vicious American supremacists all seem to be women these days.

Here’s what Ms. Yellen complained about last week. I’m going to quote. “China has long used government support to help its firms gain market share at the expense of foreign competitors.”

In other words, it succeeded in developing. That’s called at their expense.

“But in recent years, its industrial policy has become more ambitious and complex. China has expanded support for its state-owned enterprises and domestic private firms to dominate foreign competitors.”

In other words, a mixed economy and government support works. That’s why the United States has been subsidizing its computer chip [industry] so much.

She said, “It has done so in traditional industrial sectors as well as emerging technologies. This strategy has been coupled with aggressive efforts to acquire new technological know-how and intellectual property. That must be blocked.”

Well, imagine the American plan is to gain control of the number of sectors that Ms. Yellen indicated, the information technology, computer chip making. The United States insists that only the United States can control computer chips, so that it can sell computer chips not simply for the cost of production, but for a huge monopoly rent that economists call international property rent.

In the last few days, you’ve had the Korean president meet with President Biden, who said, — We want to make sure that you are not going to sell computer chips to China. We are trying to prevent China from having technology.

That’s how the dollar system works. The dollar system is based on concentrating all natural monopolies in the United States, the monopoly of ownership of oil and gas reserves, the monopoly of computer technology, the information technology, pharmaceutical and health technology.

The dollar system is really a concentration of monopoly rents in the United States dollars, which is supposed to create a huge increase in the stock market value of Amazon and Google. And they’ve been leading last week’s stock market boom.

The Americans say, we can create all other countries to be not only financially dependent on the dollar, but trade dependency. And that’s the key.

You can’t understand the financial system of dependency without understanding the trade dependency that America has tried to create for oil and gas, for food exports, blocking Russia, for technology exports.

This is the whole system that has to be taken on.

And the amazing thing is that, unlike 50 years ago, you had other countries describing the benefits of their system.

China has not come out with any attempt to proselytize its economic plans, its economic philosophy, that has enabled it to develop as an alternative to US philosophy. It has simply done it.

So it’s really the job of other countries. Other countries are now going to have to be very explicit. Yes, we need government investment. What should the government invest in? Natural monopolies and research and development, just as the United States has done.

And in fact, China has simply been following the policies that made America rich. And the idea of a new financial system is that all countries will have this government support in stabilizing.

So we’re really talking about not only a financial alternative to the dollar, but a mixed economy as contrasted to a finance bank-driven economy.

RADHIKA DESAI: You know, Michael, you so well described the new economic system that’s possible now, as the dollar system goes into its twilight phase, and you see the emergence of international monetary and financial structures which are more conducive to a new type of economic paradigm.

And I was reminded, I often think of the type of economy that you see today in the United States or in the UK, for example, which are all chasing after existing assets in a way that is actually undermining the real economy, which is the production of new goods and services, which is absolutely vital to the maintenance of life.

So I think of the US system today as a necrophilic system, based on the love of the dead, the already-dead labor that is already-produced assets.

Whereas I think what we want to see is an economic system which is “vitaphilic”, that is to say, based on a love of life, that is about creating full employment, ensuring that all the productive capacities of the society get their expression.

Historically we know that free market systems have tended not to produce these kinds of economies, but state interventionist systems have.

In the post-Second World War period, in practically all countries, in socialist countries throughout, until today, we have had systems involving planning, focusing on full employment, involving substantial state ownership, creating welfare states.

And based fundamentally on financial repression, which is ultimately about stopping this necrophilia and creating a type of bank industry relations, which we also talked about earlier, that Hilferding described as being based on finance capital, that is to say a financial system able to drive forward productive expansion rather than strangulating it, the type of financial system which basically China more or less has today.

And which it should preserve rather than undermine, and we are pretty sure it will, even while it may allow, for example, a certain amount of internationalization of the renminbi, et cetera.

So I think we can bring this show to a close by just perhaps reminding you of some of the works in which we’ve talked about this.

Over the last four de-dollarisation shows, we’ve talked a lot about the international monetary systems, the history, its present, and Michael and I have written a number of things.

There’s my Geopolitical Economy, then there is Michael’s Super Imperialism, and there is also Michael’s The Destiny of Civilisation: Finance Capitalism, Industrial Capitalism, or Socialism, very important in talking about what Michael was just talking about just now, the different types of economic systems that we need to see developing now.

And then finally my most recent book, Capitalism, Coronavirus and War.

And sorry, there’s one more thing, Michael and I wrote a common article, “Beyond the Dollar Creditocracy“, which also talks about all of this.

So hopefully this has been very interesting to you all. Next week we hope to talk about the political economy of the conflict over Ukraine, looking at the political and geopolitical economy of both what’s happening in Ukraine, in Russia, in Europe, in the rest of the world, in the United States, et cetera.

So we hope you’ll join us, and for now we’ll just say goodbye.

1 Comment

1 Comment

  1. Rubicon

    2023-05-25 at 20:24

    Thank you Dr. Hudson for giving us a very valuable assessment facing China/Russia/BRICS and to those who join…..We don’t know what movement is being made in those nations who must establish all the mechanisms you recommend.
    We certainly don’t hear from RT or any Russian news sites nor Chinese news agencies whether these mechanisms have even been acknowledged.

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