Global Research, March 29, 2009
Title: “Economic Meltdown: The “Dollar Glut” is What Finances America’s Global Military Build-up”
Author: Michael Hudson
Student Researcher: Frances Capell
Faculty Evaluator: Mickey Huff
Sonoma State University
The worldwide surplus of dollars is forcing foreign central banks to bear the costs of America’s expanding military empire. Keeping international reserves in “dollars” means that when US financial speculation and deficits payment pumps “paper” into foreign economies, these banks have little option but to recycle it into US Treasury bills and bonds—which the Treasury then spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers: China, Japan and Arab OPEC oil producers. These governments are forced to recycle dollar inflows in a way that funds US military policies in which they have no say in formulating, and which threaten them more and more belligerently.
To date, countries have been powerless to defend themselves against the fact that this compulsory financing of US military spending is built into the global financial system. Neoliberal economists applaud this as “equilibrium” as if it is part of economic nature and “free markets” rather than bare-knuckle diplomacy wielded with increasing aggressiveness by US officials. The mass media chime in, promoting the assumption that recycling the dollar to finance US military spending is the international community’s way of “showing faith in US economic strength” by sending “their” dollars here to “invest.” The implication is that a choice is involved. However, the foreigners in question are not consumers buying US exports, nor private-sector “investors” buying US stocks and bonds. The largest, most important foreign entities putting “their money” here are central banks, and it is not their money at all. They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.
The US economy can create dollars freely, now that they no longer are convertible into gold, or even into purchases of US companies. Consequently, the US remains the world’s most protected economy. It alone is permitted to protect its agriculture by import quotas, having grandfathered these into world trade rules half a century ago. Congress refuses to let “sovereign wealth” funds invest in important US sectors.
US Treasury prefers foreign central banks to keep on funding its domestic budget deficit, which means financing the cost of America’s war in the Near East and encirclement of foreign countries with rings of military bases. The more capital outflows US investors spend to buy up foreign economies—¬the most profitable sectors, where the new US owners can extract the highest monopoly rents—the more funds end up in foreign central banks to support America’s global military build-up.
No textbook on political theory or international relations has suggested axioms to explain how nations act in a way so adverse to their own political, military and economic interests. Yet this is just what has been happening for the past generation.
The ultimate question is what countries can do to counter this financial attack. How can nations act as real nations, in their own interest, rather than in America’s interest? Any country trying to do what the United States has done for the past 150 years is accused of being socialist or protectionist—this from the most anti-socialist economy in the world.
The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power. The International Monetary Fund’s Articles of Agreement prevent countries from restoring the “dual exchange rate” systems that many retained down through the 1950s and even into the 60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for capital movements. Under US pressure, the IMF enforced the pretence that there is an “equilibrium” rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank,¬ or were overthrown.
The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO). For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the US economy is glutting the global economy with surplus “paper,” and US resistance to stopping its free ride. From the US perspective, this is nothing less than an attempt to curtail its international military program of global domination.
Update by Michael Hudson
The largest “free lunch” in the world is the ability of the US Treasury to issue what is now $4 trillion in paper in exchange for foreign exports, the sale of foreign companies and real estate to US buyers, and US military purchases abroad. These three dynamics make up the US balance-of-payments deficit—which is “free” to the extent that foreign central banks recycle the surplus dollars into Treasury bonds and other US securities (including Fannie Mae junk mortgages between 2004 and 2007).
China has sought to limit its acquisition of dollars, and other countries are discussing how to limit further dollar inflows.
Corporate media continue to talk of a “global savings glut,” as if foreign governments invest in Treasury bills because they are “a good buy” and foreigners “have faith in the US economy.” But Treasury bills are only yielding 1 percent now, and the dollar is weakening, so it is not a good buy at all. Foreigners are trapped in the mechanics of the international financial system controlled by the US via the IMF and World Bank. At the recent G-20 meeting in April, countries reached an impasse. But the press did not explain the conflict of interest behind this impasse.
I have written about the dynamics of the dollar’s free ride in Super Imperialism: The Economic Strategy of American Empire (1972, new ed. Pluto Press 2002). The remarkable thing is that the information is “in plain sight,” in the sense that Edgar Allen Poe meant when he discussed how to hide the purloined letter. Reporters just don’t read the Federal Reserve Bulletin and the Treasury Bulletin for the month-to-month statistics that tell where the bodies are buried. Instead, they repeat handouts from the Treasury or Federal Reserve, ignoring the statistics on US Government liabilities to foreign central banks and other foreign holders.