Michael Hudson on Paulson's task and motives and on the scope of the problem CounterPunch Nov. 17, 2008 Speaking on Thursday, November 13, before the Manhattan Institute, a lobbying organization for finance and real estate, President Bush repeated the myth that foreign countries recycle so many dollars to America because of our "strong economy" and free markets. The reality is quite different. There is no such thing as a "free market." For a few days after announcement of the $700 billion giveaway, some knee-jerk opponents of government spending accused this of being "socialism," but they quickly discovered that not all government spending is socialist. Regardless of what economic system is followed, all markets are planned, and have been ever since calendars were developed back in the Ice Age. Most market structures throughout history have been organized in a way that provides the vested interests with a free lunch. This remains the essence of post-feudal capitalism - or as some have expressed it, corporativism. What happens in practice is that foreign central banks recycle the dollars that their exporters and asset sellers receive because (as noted above) their currencies would rise if they failed to do this. That would price their exports out of world markets, leading to unemployment. Foreign countries thus are in a dollar trap. They send their savings to finance the domestic U.S. Government budget deficit instead of helping their own domestic economics, because they have not been able to create an alternative to the dollar. Next to Treasury debt, real estate mortgages are the only category large enough to absorb the excess dollars being thrown off by the U.S. payments deficit - thrown off, that is, by U.S. military spending abroad, consumer spending to swell the trade deficit, and investment outflows as investors here and abroad diversified their holdings outside of the United States. The upshot is that world monetary reserves have come to consist of central bank loans to finance the U.S. bubble economy. But the knee-jerk deregulatory philosophy of the Clinton and Bush eras has killed the U.S. investment market. -Skip- Nobody has found a "market-oriented" solution to this problem. That is what doomed the G-20 meetings this weekend to failure, just as there could be no agreement at the G7 meetings a few weeks ago. In the face of U.S. Treasury dreams of re-inflating the mortgage market, Europe is trying to draw the line at financing a losing proposition. But now that gold no longer is the means of settling balance-of-payments deficits, foreign central banks lack an alternative to the U.S. dollar to hold their monetary reserves. This leaves them with (1) U.S. Treasury securities, and (2) U.S. mortgage securities. Recent years have seen a further diversification via "sovereign wealth funds" into (3) direct ownership of mineral resources, industrial companies, privatized national infrastructure and other equity investment rather than debt. But rather than welcoming this, the U.S. Government seeks to limit foreign central banks to buying junk mortgages, junk bonds and other financial garbage. To call this "market equilibrium" is to indulge in the feel-good argot that fogs today's international financial dialogue. To put matters bluntly, the issue at the G-20 meetings is mistrust of the unregulated U.S. banking system and, behind it, government "regulators" who refuse to regulate. China and other foreign dollar recipients have been treating the dollar like a hot potato, trying to spend it on buying foreign minerals, fuels and other assets from any country that will accept payment in dollars. Most of the takers are third world countries still committed to paying the heavy dollarized debts owed to the World Bank and other global creditors. The price of their remaining in the Bretton Woods system is to sacrifice their public domain in a kind of pre-bankruptcy sale rather than repudiating their debts under the "odious debt" and "fraudulent conveyance" escape valves. What is needed is not to "reform" the World Bank and IMF, but to replace them. But that is another story, one that other countries dared not even bring up at the November 15-16 meetings.
Speaking on Thursday, November 13, before the Manhattan Institute, a lobbying organization for finance and real estate, President Bush repeated the myth that foreign countries recycle so many dollars to America because of our "strong economy" and free markets.
The reality is quite different. There is no such thing as a "free market." For a few days after announcement of the $700 billion giveaway, some knee-jerk opponents of government spending accused this of being "socialism," but they quickly discovered that not all government spending is socialist. Regardless of what economic system is followed, all markets are planned, and have been ever since calendars were developed back in the Ice Age. Most market structures throughout history have been organized in a way that provides the vested interests with a free lunch. This remains the essence of post-feudal capitalism - or as some have expressed it, corporativism.
What happens in practice is that foreign central banks recycle the dollars that their exporters and asset sellers receive because (as noted above) their currencies would rise if they failed to do this. That would price their exports out of world markets, leading to unemployment. Foreign countries thus are in a dollar trap. They send their savings to finance the domestic U.S. Government budget deficit instead of helping their own domestic economics, because they have not been able to create an alternative to the dollar. Next to Treasury debt, real estate mortgages are the only category large enough to absorb the excess dollars being thrown off by the U.S. payments deficit - thrown off, that is, by U.S. military spending abroad, consumer spending to swell the trade deficit, and investment outflows as investors here and abroad diversified their holdings outside of the United States. The upshot is that world monetary reserves have come to consist of central bank loans to finance the U.S. bubble economy. But the knee-jerk deregulatory philosophy of the Clinton and Bush eras has killed the U.S. investment market.
-Skip-
Nobody has found a "market-oriented" solution to this problem. That is what doomed the G-20 meetings this weekend to failure, just as there could be no agreement at the G7 meetings a few weeks ago. In the face of U.S. Treasury dreams of re-inflating the mortgage market, Europe is trying to draw the line at financing a losing proposition. But now that gold no longer is the means of settling balance-of-payments deficits, foreign central banks lack an alternative to the U.S. dollar to hold their monetary reserves. This leaves them with (1) U.S. Treasury securities, and (2) U.S. mortgage securities. Recent years have seen a further diversification via "sovereign wealth funds" into (3) direct ownership of mineral resources, industrial companies, privatized national infrastructure and other equity investment rather than debt. But rather than welcoming this, the U.S. Government seeks to limit foreign central banks to buying junk mortgages, junk bonds and other financial garbage. To call this "market equilibrium" is to indulge in the feel-good argot that fogs today's international financial dialogue.
To put matters bluntly, the issue at the G-20 meetings is mistrust of the unregulated U.S. banking system and, behind it, government "regulators" who refuse to regulate. China and other foreign dollar recipients have been treating the dollar like a hot potato, trying to spend it on buying foreign minerals, fuels and other assets from any country that will accept payment in dollars. Most of the takers are third world countries still committed to paying the heavy dollarized debts owed to the World Bank and other global creditors. The price of their remaining in the Bretton Woods system is to sacrifice their public domain in a kind of pre-bankruptcy sale rather than repudiating their debts under the "odious debt" and "fraudulent conveyance" escape valves. What is needed is not to "reform" the World Bank and IMF, but to replace them. But that is another story, one that other countries dared not even bring up at the November 15-16 meetings.
