The Buck Stops Here - Oh My!

[don]

by BART GRUZALSKI

There are many reasons that the US is pushing on China in the South China Sea. Two articles have been published on Counterpunch in recent weeks exploring “why?” None mention an important economic reason that has, at least in part, motivated the US to go to war and is very much at stake in the growing dispute with China: the value of the dollar.

The dominance of the dollar in world trade is critical to its value and to the US economy. Once the US abandoned the gold standard, it signed firm agreements with Saudi Arabia and all of Middle East OPEC nations that bound them to sell oil in dollars. Because of this agreement the dollar is often referred to as the “petrodollar.” The value of the dollar/petrodollar rests on its being the currency of international trade, not only for oil, but for weapons and food and everything else.

Two Dollar Wars

As I discussed in a 2013 Counterpunch article, one reason Bush II invaded Iraq was because Iraq threatened the US by selling oil in Euros. If Sadam Hussein had been allowed to continue, this would have been a major challenge to the dominance of the dollar as the world’s reserve currency. Petroeuros could begin replacing petrodollars. This would have weakened the value of the dollar and undermined the US economy. That is an underpublicized reason for the elimination of Saddam Hussein. The value of the dollar was at stake as well as the health of our economy. The second Iraq war eliminated this threat and Iraqi oil was again sold in dollars.

Ron Paul made public this rationale but it has been given scant attention. “Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat…There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war.”

Ron Paul also made public the rationale for the surprising US-led removal of Gadhafi and the destruction of his government in Libya. Again, protecting the dollar was the main reason: Gadhafi was planning on selling oil in dinars, an all-gold African currency. According to Ron Paul, the US has targeted any country that threatens the dollar by using a non-dollar currency to conduct international business.

Loss of Confidence in the Dollar

The dollar has been the dominant currency of international trade since Nixon stopped dollars being exchanged for gold. Despite the challenges from Iraq and Libya, this arrangement continued a decade into the twenty-first century.

Two things happened during and after the 2008 crash to weaken confidence in the dollar. The first is not fully appreciated even by many financially astute Americans: the damage the USA did to developing nations when the USA suffered the crash. Short on funds at home, US financial loans were no longer providing developing nations the money they needed to continue with their projects. These countries haven’t forgotten the sudden and crippling loss of funds. The ever-present possibility that this can and will happen again has become an omnipresent nagging worry. These nations realize that relying on the dollar is relying on an external condition over which they have absolutely no control but which can, did, and may again have a devastating effect on their economies. The second was Bernanke’s qualitative easing that diluted the dollar into a mere shadow of its former self (which was already a diminished dollar from the 1971 gold-based dollar). Here are the Reserve Balances with Federal Reserve banks. On September 17, 2008, the Fed banks had $47 billion. On May 27, 2015, the amount was $2,510.791 billion “Bernanke dollars,” which is but a homeopathic dilution of the pre-Bernanke dollar.

Foreign countries noticed. The most vocal were Russia and China. In 2010, China Daily reported that “China and Russia… [intend] to renounce the US dollar and resort to using their own currencies for bilateral trade.” China and Russia, with three other nations, formed BRICS (Brazil, Russia, India, China, and South Africa). Reuters reportedlast July that BRICS was forming a “$100 billion development bank and a currency reserve pool in their first concrete step toward reshaping the Western-dominated international financial system.”

The Plan for the BRICS Bank

Amy Goodman and Juan Gonzalez interviewed Nobel prize winning American economist Joseph Stiglitz about the planned BRICS bank. Stiglitz said BRICS was very important:

“First, the need globally for more investment-in the developing countries, especially-is in the order of magnitude of trillions, couple trillion dollars a year. And the existing institutions just don’t have enough resources….[the new bank] is adding to the flow of money that will go to finance infrastructure, adaptation to climate change-all the needs that are so evident in the poorest countries.”

“Secondly, it reflects a fundamental change in global economic and political power, that one of the ideas behind this is that the BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world…. The old institutions have not kept up.”

One big complaint was that people from other countries expected, in the 21st century, that people in the top positions of the IMF would “be chosen on the basis of merit, not just because you’re an American. And yet, the U.S. effectively reneged on that agreement.”

Gonzalez asked Stiglitz how China, which obviously has huge monetary reserves, and Brazil, which had its own development bank for several years, would work together as key players in this new BRICS bank.

“China has reserves in excess of $3 trillion,” answered Stiglitz. “One of the things is that it needs to use those reserves better than just putting them into U.S. Treasury bills. You know, my colleagues in China say that’s like putting meat in a refrigerator and then pulling out the plug, because the real value of the money put in U.S. Treasury bills is declining. So they say, ‘We need better uses for those funds,’ certainly better uses than using those funds to build, say, shoddy homes in the middle of the Nevada desert. You know, there are real social needs, and those funds haven’t been used for those purposes.”

Stiglitz then talked about Brazil. “Brazil has BNDES… a huge development bank, bigger than the World Bank. People don’t realize this, but Brazil has actually shown how a single country can create a very effective development bank. So, there’s a learning going on. And this notion of how you create an effective development bank, that actually promotes real development … is going to be an important part of the contribution that Brazil is going to make.”

China and Russia Trade without Using the Dollar

In October, 2014, in an exclusive interview with CNBC, Russia’s Prime Minister Dmitry Medvedev said that the world must move away from its dependence on the U.S. dollar, arguing that the global economy would benefit from a more diversified currency system. “We have nothing against the dollar, but we believe that today’s currency system should be more balanced,” he said, calling for a greater number of major reserve currencies. In particular he said that the euro, the yuan, the pound and the dollar would be a good initial grouping. He mentioned BRICS as a group which was implementing this change. “A much more just financial system” was possible, he said.

Medvedev highlighted that when countries “really depend” on the dollar, they are beholden to the fortunes of the US. “The U.S. economy is now improving but we have no proof that it will not go down again, and then everyone will suffer,” he said. “We believe that we should move away from such dependency [on any one currency] in the world’s financial system.”

Medvedev pointed out that incorporating other currencies has allowed Russia to trade with China directly. “This is a good demonstration that if somebody leaves their place, another person occupies their place[italics mine],” he added. October’s agreements follow a high-profile gas supply deal with Gazprom, worth $400 billion, to supply China with gas over 30 years.

The 2014 China-led Asian Infrastructure Investment Development Bank

In addition to being a founding member of BRINCS, the Chinese were forming a development back, the Asian Infrastructure Investment Development Bank (AIID). The US controlled the World Bank and the Asian Development Bank. Both of these institutions would face substantial competition if the Chinese development bank went forward. Combined with the BRICS bank, the new development bank would offer an international alternative to the dollar for trade.

According to the New York Times, “the United States, perhaps the most vocal of … critics… has not embraced the Chinese proposal. Instead, in quiet conversations with China’s potential partners, American officials have lobbied against the development bank with unexpected determination and engaged in a vigorous campaign to persuade important allies to shun the project, according to senior United States officials and representatives of other governments involved [italics mine].” The New York Times also reported the irrelevance of US critical arguments: “Washington’s arguments run up against undisputed needs on the ground in Asia – needs that existing institutions have been unable to meet, some development experts said. The Asian Development Bank estimated in 2009 that the region would need as much as $8 trillion in investments in physical infrastructure by 2020 – an amount that exceeds what it or the World Bank can muster, experts at the two banks said.”

Recent Developments

In April of this year the deadline fell for nations to join China’s new Asian development bank. The Chinese were astonished at the last-minute applications by countries not considered especially friendly to Beijing. Among the surprises: Taiwan and 14 of the Group of 20. Japan is the only major Asian ally still standing with the Obama administration. Even Australia and South Korea had decided to join. In Europe, Britain was among the nations that joined, much to the irritation of the US.

Meanwhile, Putin announced the launch of the $100-billion BRICS New Development Bank. It will have another $100-billion as a currency reserve pool to shield the BRICS currencies from the world economy and market volatility. The launch is in July in Ufa, Russia. “We expect to reach agreement in Ufa on the launch of practical operations of the BRICS Bank and a pool of currency reserves,” Putin said. The bank will be a rival to the IMF and World Bank and will finance infrastructure projects in developing countries. It also will challenge the dollar as the currency of international trade.

http://www.counterpunch.org/2015/06/...e-us-vs-china/

[don]

Re: The Buck Stops Here - Oh My!

No, not this, anything but this . . . .

Two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.

Last November, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.





The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:



By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: "...the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”

Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.

The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.

Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. "This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada's [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift's head of business intelligence said.

Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:

Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.
Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.

Curtailing the dollar's influence fits well with China's ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.

The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.

"As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade," Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan.

Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:

Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.

Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.

Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.

Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis...

Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.

Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.

According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.

With that, the "PetroYuan" has officially been born and while FT notes that "other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales," the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.

To understand why and to what extent this is significant in the current environment, consider the following from WSJ:

Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;

But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.

To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.
Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

[Lasher]

Re: The Buck Stops Here - Oh My!

Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

I'll be the first to admit that I don't understand currencies very well... But why does a switch to renminbi mean anything? It's pegged to the dollar, so as near as I can see it's just added a new layer without changing the dollar dependence. And if they did drop the dollar peg, would people be so quick to hold that currency?

[astonas]

Re: The Buck Stops Here - Oh My!

I'll be the first to admit that I don't understand currencies very well... But why does a switch to renminbi mean anything? It's pegged to the dollar, so as near as I can see it's just added a new layer without changing the dollar dependence. And if they did drop the dollar peg, would people be so quick to hold that currency?

Minor factual correction: It isn't pegged to the dollar, but to a basket of currencies, of which the dollar is one. That change was made in 2005. China is free to change the ratio of that basket at any time.

[Lasher]

Re: The Buck Stops Here - Oh My!

Minor factual correction: It isn't pegged to the dollar, but to a basket of currencies, of which the dollar is one. That change was made in 2005. China is free to change the ratio of that basket at any time.

Huh, interesting. I didn't know that. I guess that does make for a petroeuro/petroyen/etc along with the dollar. But still - if the peg was dropped or adjusted, are people still as keen to hold renminbi? I don't see the petro-reminbi argument without it being unpegged.

[astonas]

Re: The Buck Stops Here - Oh My!

Huh, interesting. I didn't know that. I guess that does make for a petroeuro/petroyen/etc along with the dollar. But still - if the peg was dropped or adjusted, are people still as keen to hold renminbi? I don't see the petro-reminbi argument without it being unpegged.

I believe the general theory is that this is but one step in a gradual transition to a multipolar era, ending with both the Euro and the Yuan being equally viable alternatives to the dollar, for a variety of purposes. Other steps would have to include China further increasing both economic stability and military might. Other signals being interpreted as supporting this concept are the considerable accumulation of gold reserves in China, and its increasingly prominent military displays. Both China and Europe are also showing less political deference to the US, as they (correctly, imo) see an increasing divergence of economic interests in light of the 2008 financial crisis. Personally, I agree with your reservations on China, and see the Euro as being the longer-term competition for the dollar (after the current crisis is resolved, of course, say 10-20 years out).

All that being said, to my mind, the real shift isn't so much the rise of any specific alternative currency, as it is the loss of dollar hegemony. The US has relied rather heavily on this as a tool to get its way in the world recently (the enforcement of many international sanctions plans depend on it, for example). So to me the real story here is that this could fundamentally alter the nature of US interventionism world-wide, and possibly even signal a shift to an eventual era where the US is just another strong state, rather than a generally-acknowledged world leader in terms of power.

With reduced economic clout, weakened sanctions options, and lost moral standing, it could mean a world where the US's ONLY remaining option to assert influence is direct military intervention (there is no sign that it will not continue to lead in that arena going forward).

Thus for those who dislike the notion of an America constantly at war, the destabilization associated with diminishing power is a double-edged sword. Hegemony might sound like an unfair thing. But the establishment of a new world order seldom happens without some death-throes of the old, and that may well be even worse. And let's not forget that at this point, it is still unclear exactly which blocs and personalities will arise to dominate the new power balance.

There could be interesting times ahead.

[vt]

Re: The Buck Stops Here - Oh My!

Meanwhile voters in this country are dangerously uninformed or clueless:

http://rt.com/usa/265936-us-nuclear-strike-russia/

I'd be really concerned, but it is California

[don]

Re: The Buck Stops Here - Oh My!

Defending the dollar's reserve currency status with the military, funding the world's biggest military budget with the dollar - these have been the siamese twins defending US hegemony in the current stage of world affairs. How long can it last and how violent will be the defense? Two important questions. Below Hudson comments on dollar supremacy . . . .

Russia, China and the Battle Against Dollar Hegemony

by MICHAEL HUDSON and THE SAKER

The Saker: We hear that the Ukraine will have to declare a default, but that it will probably be a “technical” default as opposed to an official one. Some say that the decision of the Rada to allow Iatseniuk to chose whom to pay is already such a “technical default”. Is there such thing as a “technical default” and, if yes, how would it be different in terms of consequences for the Ukraine for a “regular” default?

Michael Hudson: A default is a default. The attempted euphemism of “technical” default came up with regard to the Greek debt in 2012 at the G8 meetings. Geithner and Obama lobbied the IMF and ECB shamelessly to bail out Greece, simply so that it could pay bondholders, because U.S. banks had issued credit default insurance (CDS) against Greek bonds and were on the hook for a big loss if a default occurred. The ECB suggested euphemizing default as a “voluntary renegotiation,” asking banks and other bondholders to agree to write down the debt.

But according to the international bondholders’ organization – the International Swaps and Derivatives Association (ISDA) – credit defaults can be triggered if a debt restructuring is agreed between “a governmental authority and a sufficient number of holders of such obligation to bind all holders,” making it mandatory. According to the ISDA’s definitions: “The listed events are: reduction in the rate of interest or amount of principal payable (which would include a ‘haircut’); deferral of payment of interest or principal (which would include an extension of maturity of an outstanding obligation); subordination of the obligation; and change in the currency of payment to a currency that is not legal tender in a G7 country or a AAA-rated OECD country.”[1]

That sounds pretty clear. Getting the ISDA to classify the bond swap as a “credit event” enables holdouts to collect default insurance from their counterparties. There is little such insurance here, but bondholders can then move to seize government property abroad. This is what Paul Singer’s vulture fund has done with Argentina, writing new international law that will apply to Ukraine.

Under London debt laws (where Russia’s debt is registered), Parliament would have to designate Ukraine as a HIPC country (such as the African countries Singer has gone after) to block creditor behavior. I don’t see Parliament doing this for Ukraine, as its poverty is self-imposed by warfare.

If the IMF were to claim that Russia’s $3 billion loan is not official, this would rewrite international law and mean that loans from Sovereign Wealth funds of any nation (OPEC, Norway, China, etc.) have no international protection. Such a double standard would fracture the world’s debt markets along New Cold War lines – with financial warfare replacing military warfare. I doubt that the world is ready for this “nuclear” financial option.

The Saker: The Rada has also passed a law allowing the government to seize Russian assets in the Ukraine. I am not sure if these are Russian state or Russian private/corporate assets. What would be the economic and legal consequences from such seizures of assets if the government goes ahead with this plan? Could Russia take retaliatory measures against the Ukraine or appeal to an international court?

Michael Hudson: That would be so radical a step that it is beyond civil law. If Ukraine did this while still receiving IMF, U.S. and Canadian lending, its creditors could be held as responsible. Morally that is. The question is, what courts? It’s true that Israel draws this ethnic exception with Arabs – but does Ukraine want to use that as its legal justification?

When Cuba or other Latin American countries sought to buy out U.S. investments at the declared book value. The result was always attempted military coups. It would be an act of war. Russia could demand reparations, of course – but from whom? Could it seize Western assets of countries backing the Kiev junta? Could it respond by nationalizing German and French holdings, and watch the ensuing outcry with amusement?

The Saker: The Ukrainian government has gone out of its way to cut as many economic ties with Russia as possible. The Donbass has been bombed out and completely alienated, all defense contracts with Russia have also been canceled, Russian companies are excluded from bidding on contracts in the Ukraine, Russia has been declared an “aggressor country”, etc. This means that for the time being the Ukraine wants to be 100% dependent on the West. Do you believe that the West (USA+EU+IMF+WB+etc.) has the will and the means to continue to lend money to the Ukraine or to support the current regime in power? Can the US government simply print dollars and send them to Poroshenko or are there material limits on how much the West can do to support the current regime? What will happen to the Ukraine if the West cannot support it, how bad do you expect the economic crisis to be?

Michael Hudson: The “West” is not in the charity business. Its firms do not want to lose money, and the EU Constitution bans the European Central Bank and European taxpayers from financing foreign governments. They buy government bonds only from banks – and few banks hold Ukrainian bonds!

Future Ukrainian governments could repudiate economic transactions under the junta in the same way that the Allies cancelled Germany’s internal debts in 1947/48 in the currency reform – on the logic that most debts were owed to former Nazis. The present Ukrainian kleptocracy is not a very safe umbrella to sponsor privatization selloffs and other economic transactions with the West, despite George Soros’s hopes to acquire its land and infrastructure. Even Ukraine’s debt to the IMF and other international agencies may be rejected as “odious debts” that financed a government at war against its own population.

The Saker: It is generally accepted that the recession of the Russian economy has rather little to do with the sanctions imposed against her, and that it is mostly the result of the fall in oil prices. Do you believe that this was a coincidence, or the the US and the Saudis jointly conspire to drop the price of oil like what was done in the late 1980s to crash the Soviet Union? Where do you see the price of oil going in the short to mid term future and do you expect the Ruble to rise again?

Michael Hudson: I don’t think the fall in oil prices was a conspiracy to hurt the Soviet Union. Many models have shown the role of financial speculation in driving up oil prices (and those of other minerals, as speculators turned to commodities to do what they had been doing with stocks and bonds for years). The Saudis had their own objectives, in trying to crush foreign competition, including shale oil.

I don’t see the price of oil rising much, because Europe’s economy is being turned into a dead zone, and debt deflation is also shrinking U.S. economic growth.

For the ruble to rise in value, Russia would need to re-industrialize. The neoliberal revolution after 1991 was indeed intended to dismantle post-Soviet industry, to pull it up by its roots. H.I.I.D. and A.I.D. operatives bought out Russian companies playing a key potential military role and dismantled them.

To re-industrialize, Russia needs to lower its costs of living, headed by housing. It needs to do what the United States actually did to subsidize its industry and also its agriculture: heavy public subsidy by picking up “external” costs, supplying agricultural extension and research services, price supports, etc.

Perhaps Putin can convince the leading oligarchs to “pull up the ladder.” They may keep their wealth, but will agree to an economic rent tax to prevent new giveaways and unearned income from burdening the Russian economy. This will fall heavily on the companies that foreign investors have bought, ending the drain of dividends.

The Saker: The most painful sanction against Russia was the denial of credit to Russian companies. Could the Russians simply begin borrowing from, say, Chinese banks or are there objective reasons which prevent Russia from doing so? Is Russia dependent on western banks and, if yes, for how long? Could Russia disengage herself from the western markets and chose to turn to Asia, Latin America and Africa instead?

Michael Hudson: Russia obviously needs to free itself entirely from Western banks. More important, it doesn’t need their credit. (Look at how China built up its economy without foreign bank credit!) Russia needs a real central bank to finance government deficits, and a public bank to extend credit on concessionary terms. The government can create credit on its computer keyboards in the same way that commercial banks do on their keyboards. That is how the Soviet Union functioned for many decades, after all.

There is no need whatever for Western or Russian banks to finance public budget deficits. There are plenty of Modern Monetary Theorists (MMT) who can explain how Russia might do this. It is the only way to minimize the cost of doing business.

If private-sector (Western, BRICS or even domestic Russian) financial charges are built into the cost of living (housing) and doing business, it will be difficult for Russia to be competitive. It needs to do what the U.S., Germany and China have done. Every successful economy in history has been a mixed economy. Instead, Russia swung from one extreme to an even worse one – from a statist economy to an extreme Ayn Rand/Hayek/Chicago School economy in 1991, with disastrous consequences – as if there were no knowledge of Western financial history or, for that matter, Volume III of Marx’s Capital and Theories of Surplus Value. The most effective response would be proactive credit creation to subsidize reindustrialization and agricultural modernization.

The Saker: How do you assess the performance of the Russian Central Bank to the combined drop in oil prices and US+EU sanctions. Many, including myself, were very critical of the measures taken, yet Russia has fared much better than expected and some are even predicting a return to growth before the end of the year. Did Elvira Nabiullina and her colleagues take the right decisions in letting the Ruble freely float?

Michael Hudson: Russia let the ruble float because the alternative would have been for foreign speculators to gang up Soros-style and loot Russia’s central bank reserves in a financial poker game. Foreign banks would have created enough credit to engage in naked short selling to manipulate markets and make a killing. Russia is not adept at this game, partly because Russia’s monetary authorities have been brainwashed by neoliberal ideology, without realizing its anti-socialist, anti-labor, pro-bank and pro-rentier sponsorship.

The Saker: Amongst the various proposals circulated in Russia two have been particularly strongly supported: the nationalization of “independent” Central Bank and its subordination to the Russian government and the creation of a fully convertible Ruble backed by the Russian gold (some suggest backing the Ruble by “energy”, i,e, oil and gas). What do you think of these proposals?

Michael Hudson: An “independent” central bank (such as the European Central Bank) means one that is controlled by private bankers, preventing governments from financing their own spending and obliging them – and the economy at large – to rely on private interest-bearing commercial bank credit.

Russia needs a real central bank serving government objectives – to re-industrialize the economy, and to rebuild it without the heavy financial overhead that has inflated housing costs, infrastructure costs, education costs and the cost of living in the West.

Gold can indeed be a part of this system – to settle international payments imbalances, not to back domestic currency. It became clear by the 1960s that no country can participate in a gold exchange standard and wage war. The gold drain is what forced the U.S. dollar off gold in 1971 – as a direct result of U.S. military spending, which was responsible for the entire U.S. balance-of-payments deficit.

Without gold, the world’s central banks shifted to U.S. Treasury bills – government IOUs issued to finance the budget deficit that was largely military in nature. This meant that global monetary reserves monetized U.S. military spending to surround these countries and destabilize them if they tried to withdraw from the system. (That is what my book Super Imperialism is all about.)

The easiest way to stop U.S. military adventurism is to restore gold and free the world from having to use a militarized U.S. Treasury-bill standard as their monetary base.

The Saker: If you had the undivided attention and support of Vladimir Putin, Dmitry Medvedev, Anton Siluanov and Elvira Nabiullina – what advice would you give them?

Michael Hudson: They need to see how the neoliberal advice given by HIID and the World Bank after 1991 crippled their economy’s ability to compete. Privatization raises the cost of living and doing business. The U.S., Germany and other successfully industrialized economies rose to world power by heavy public infrastructure investment to hold down the price of basic needs: health care, education, pensions, transportation, communications, power, water and so forth.

Their economists during the 19th and early 20th century explained how government taxes levied on economic rent – land rent, natural resource rent and monopoly rent (including financial charges by banks) – would not raise prices, but would be paid out of economic rent. By contrast, taxing labor and even non-monopoly profits does add to the cost of living and doing business. Russia was persuaded to untax itsresource rents and monopoly rents, to leave more for bankers to obtain and, in due course, for U.S. and European investors to obtain – at the expense of the Russian tax collector.

If Russian leaders in 1990 would have read Volumes II and III of Marx’s Capital and his review of Theories of Surplus Value, they would have seen how much of what critics of industrial capitalism wanted to get rid of were carry-overs from feudalism.

The missing item in today’s economic reforms is what classical economics focused on, from the French Physiocrats through Adam Smith, John Stuart Mill to Marx and his contemporaries: freeing industrial economies from the rentier carry-overs of European feudalism. The focus of classical value and price theory was to free economies from economic rent, defined as unearned income simply resulting from privilege: absentee land rent, mineral and natural resource rent, monopoly rent, and financial interest. The aim should be to prevent rent-extracting activities – defined as purely predatory transfer payments, an economically unproductive zero-sum activity.

The classical labor theory of value aimed at isolating those forms of income (land rent, monopoly rent and interest) that were socially unnecessary, and simply were legacies of past privilege. The halfway alternative was to tax land rent and monopoly rent (Henry George, et al.). The socialist alternative was to take natural rent-producing sectors into the public domain.

Europe did this with the major public utilities – transportation, communications, the post office, and also education, public health and pensions. The United States privatized these sectors, but created regulatory commissions to keep prices in line with basic cost-value. (To be sure, regulatory capture always was a problem, especially when it came to railroad charges.)

The Saker: Russia and China have embarked on what I believe is something unique in history: two ex empires which have taken the political decision to become mutually dependent on each other, in fact creating symbiotic relationship. For example, China has basically decided to become fully dependent on Russia for energy and for military equipment. Russia, in turn, is hoping that the Chinese economy will allow Russia to diversify and grow. I would argue that they are in many ways perfectly complementary to each other. Do you agree with this assessment and how would you evaluate the potential of the economic/financial collaboration of these two super-powers? Could Russia and China together, along with the BRICS and SCO create a new, dollar-free and independent economy and market?

Michaek Hudson: Two main dynamics are paramount. First of all, in making trade, investment and monetary arrangements, it’s important to be secure that they will be long-term. America has provided this long-term security for Russia and China, by making clear that it is opposing the rising power both of Russia and China (as well as Iran or any other potential player).

That is the second dynamic: America’s “divide and conquer” strategy seeks to pick off one potential rival after another. By joining forces with each other – and by extending the Shanghai Cooperation Organization to include Iran and other countries – this obliges the United States to wage a war on at least two fronts if it moves against either Russia or China. So their long-term relationship is mutual security against the only likely aggressor.

Capital investment in pipelines requires a long pay-off period, so it can’t be made subject to foreign diplomatic interference, as Russian gas sales to Europe are prone to. Europe seems quite willing to be left out in the cold, by electing politicians that simply are bought off by U.S. money.

That’s the unspoken key to U.S. diplomacy: simply bribe politicians, journalists, publishers and others. As long as the U.S. Treasury can print money without limit, as long as the world’s central banks are willing to absorb these dollarized IOUs by buying U.S. Treasury bonds to finance American military spending to encircle them, America is free of the balance-of-payments and foreign debt constraint that limits other countries’ military spending.

To counter this, Russia, China and other countries should develop an alternative monetary and payments system to the U.S. dollar, a financial system to replace U.S. banks, and ultimately their own bank clearing through an alternative to SWIFT.

If they succeed in this, U.S. neoconservatives will have overplayed their hand – and ironically will have become a force for world peace, by uniting the rest of the world’s economies, trade, financial and even defensive military systems to protect themselves from the U.S. threat. If they succeed, this threat will recede – but the U.S. withdrawal probably will not be a pretty sight, nor will the collapse of its financial system. The rest of the world will have to protect itself from the backwash, blaming foreigners.

The Saker: For all the dire predictions about the future of the dollar, the US continues to create dollars out of thin air, countries worldwide continue to use the Dollar for trade, the US debt is still raising, the poor become poorer, the rich richer and nothing seems to change even though in its foreign policy the US goes from one failure to another. How long can his continue? Is there an objective limit after which this system cannot continue? Can you foresee any event which will force the USA to give up being an Empire and become a “regular” country like so many other ex-empires in the past?

Michael Hudson: There is no objective limit to how long Dollar Dependency, Debt Deflation and Debt Peonage can continue, unless victims fight back successfully. Rome’s creditor oligarchy gave way to the Dark Ages for nearly a millennium.

Dollar Hegemony will be phased out as an alternative vehicle to hold international reserves is developed. That is the aim of the new BRICS bank and monetary clearing system. What now is needed is a complementary tax system and strategy of public investment and subsidy.

Rather than an “event” leading U.S. neocons to give up their aims, the process is likely to mirror the Western economies’ slow crash.

The Saker: China and the US a clearly on a political and even military collision course. Yet, many say that China and the USA are too deeply dependent on each other to ever have a real conflict. Are the USA and China really in a symbiotic relationship or can China somehow disengage from the US markets without creating a collapse for the Chinese economy?

Michael Hudson: There is no real dependency, because both China and the United States aim at being economically and militarily independent, so as not to fall into subservience. The U.S. aim, of course, is to make other countries financially dependent on it, and also militarily dependent. That is why it needs to keep stoking warfare – as a kind of protection racket, to extort financial, trade and investment tribute and deeper dependency in its trading “partners.”

China and America do have a mutual trade and investment relationship. But it is not “symbiotic,” because it can be ended at any time without really threatening either party’s solvency and survival.

China is already shifting its production away from export markets to the domestic market. And in terms of monetary policy, it is sponsoring economic complementarity with the other BRICS members, Iran, South American and African countries.

The Saker: When you say “China and America do have a mutual trade and investment relationship. But it is not “symbiotic,” because it can be ended at any time without really threatening either party’s solvency and survival” could you please explain why you don’t think that if, say, the US and China had to sever their economic ties (Walmart & Co.) that would not severely hurt both economies? Is Walmart not crucial for the low-income sector of the US economy and to keep inflation low and is the income generated by these “Walmart-ties” not crucial for China?

Michael Hudson: What China has been supplying to Walmart can now be sold to its thriving internal market. China doesn’t need more dollars. Indeed, the more dollars it gets, the only thing it can safely do with them is lend them to the U.S. Treasury, funding the military’s “Asia Pivot” to encircle China. (That’s how the U.S. Treasury-bill standard has replaced the gold standard.)

Walmart, on the other hand, remains dependent on its Chinese suppliers. Its purchasing agents leave much less profit for the Chinese than they can get in their own market and in other Asian markets.

The Saker: The western capitalist model and its formula for globalization are coming under critique not only from Russia and China, but from many other countries in the world. Some say that China has developed an alternative model of state capitalism. In Latin America, “Bolivarian Socialism” is on the rise and in the Middle-East the Islamic Republic of Iran is also offering a different socio-economic model. How do you see the future of the capitalist system, with its globalization, banking and finance model, etc. Do you see a viable alternative emerging or is the “Washington Consensus” still the only game in town?

Michael Hudson: Classical economics was a doctrine of how to industrialize and become more competitive – and at the same time, more fair – by bringing prices in line with actual, socially necessary costs of production. The resulting doctrine (with Marx and Thorstein Veblen being the last great classical economists) was largely a guide to what to avoid: special privilege, unearned income, unproductive overhead.

The aim was to create a circular flow model of national income distinguishing real wealth from mere overhead. The idea was to strip away what was unnecessary – what Marx called the “excrescences” of post-feudal society that remained embedded in the industrial economies of his day. When the great classical economists spoke of a “free market,” they meant a market free from rentier classes, free from monopolies and above all free from predatory bank credit.

Of course, we know now that Marx was too optimistic. He described the destiny of industrial capitalism as being to liberate economies from the rentiers. But World War I changed the momentum of Western civilization. The rentiers fought back – the Austrian School, von Mises and Hayek, fascism and the University of Chicago’s ideologues redefined “free markets” to mean markets free for rentiers, free from government taxation of land and natural resources, free from public price regulation and oversight. The Reform Era was called “the road to serfdom” – and in its place, the post-classical neoliberals promoted today’s road to debt peonage.

Today’s Cold War may be viewed in its intellectual aspects as an attempt to prevent countries outside of the United States from realizing that (contra Thatcher) there is an alternative, and acting on it. The struggle is for the economy’s brain and understanding on the part of governments. Only a strong government has the power to achieve the reforms at which 19th century reformers failed to achieve.

The alternative is what happened as Rome collapsed into serfdom and feudalism.

The Saker: What are, in your opinion, the main consequences of the numerious US foreign policy failures for the US economy?

Michael Hudson: U.S. strategists often liken their geopolitical diplomacy to a chessboard. This may have a geographic sense of space – where is the oil, where are other mineral resources, which countries are getting strong enough to be independent – but the resulting diplomacy is nothing like a chess game at all. At least, not the way the United States plays the game.

But in chess, both sides move. The idea is to think ahead and anticipate the opponent’s strategy. Most grand masters study their opponents’ games and are familiar with their tactics and objectives when they sit down to play.

No such bilateralism characterizes U.S. policy. Back in the 1940s and ‘50s, the State Department was emptied out of China experts by Senator Joe McCarthy. The purge was conducted on the principle that most people who knew much about China, did so because they were sympathetic with it, and probably with Communism.

The inner contradiction here was that without understanding China’s policy aims and how it intended to achieve them, U.S. diplomats were operating in the dark. Naturally they floundered.

Fast-forward to today. As U.S. State Department neocon Douglas Feith noted, anyone familiar with Arab history is viewed as suspect, on the grounds that they must be sympathetic. So U.S. support for Saudi Arabian oil oligarchs goes hand in hand with Zionist anti-Arabism. When Feith interviewed an experienced Pentagon Arabist, Patrick Lang, for a job in Iraq after the invasion, Feith asked: “Is it really true that you really know the Arabs this well, and that you speak Arabic this well? Is that really true?” Lang said, yes it was. “That’s too bad” said Feith. [2] There was no room for someone with an ounce of sympathy for “those people.” Lang didn’t get the job.

So it’s hardly surprising that American unilateralism is conducted in a kind of political vacuum. (“We make our own reality.”) The result is hubris leaving to the inevitable fall. It’s like conducting foreign policy while wearing a blindfold.

The main failure of U.S. foreign policy is thus that of classical tragedy: a tragic flaw that brings about precisely the opposite effect from what is intended. Or as Marx put it, “internal contradictions” and irony.

The answer to your question depends on what you mean by “US policy.” What may be a disaster for the U.S. economy may not be a disaster for the special interests that have gained control of this policy. U.S. politicians are not so much elected by voters as bid for by their campaign contributors. The financial weight of Wall Street and, behind it, the oil industry as well as the real estate sector and the military-industrial complex has benefited the 1%? It’s been a success for them – at least in the sense of U.S. policy reflecting what the 1% want. It’s been a failure for the 99%, of course. And these days, the 1% may be so short-sighted that their aims may bring about the opposite of what they intend. This would include America’s Near Eastern failure to understand the dynamics of Islamic societies.

If by “failures” you mean the damage that has been done, I would rank the most serious one to be America’s opposition to secular governments in the Islamic lands, leading to the most extremist, literalist readings of Islam, capped by Saudi Wahabism.

The fatal turn began in 1953 with the U.S. overthrow of Iran’s Mossedegh government. The intention was simply to protect British and American oil, not to back Islamic extremism. But supporting the Shah in a Latin American-style dictatorship left only one practical venue for opposition: the Islamic mosques and other religions centers. Khomeini led the fight for freedom against the Shah’s dictatorship, torture chambers and subservience to U.S. foreign policy.

In Afghanistan, of course, the U.S. created Al Qaeda and backed Bin Laden to fight against the secular regime backed by Soviet Russia. The subsequent history of U.S. involvement in Iraq, Syria, Lebanon and elsewhere in the Near East has been one of supporting Saudi Wahabism. And it’s been a disaster from any point of view.
Anthropologists have decried the blind spot of American policy to the ethnic and religious divisions at work – not only the obvious antagonism between Shi’ite and Sunni Moslems, but between the pastoral nomadism that was the context for Wahabi extremism and anti-feminist doctrine. The Near East has been dominated by sheikdoms for the past four thousand years. But U.S. policy lumps all Islam together, missing these divisions.

Being a democracy, America can no longer afford a land war. No democratic country can. So the only military option that is practically available is to bomb and destroy. That has been U.S. policy from the Near East to the former Soviet sphere, from Latin America to Africa in supporting dictators that will follow U.S. foreign policy and that of its mining companies, oil companies and other multinationals.

U.S. foreign policy is simply “Do what we say, privatize and sell to U.S. buyers, and permit them to avoid paying taxes by transfer pricing and financialization gimmicks, or we will destroy you like we did Libya, Iraq, Syria et al.”

The result is to unify foreign countries into a resistance, obliging them to create an alternative path to U.S. financial hegemony. If America had pursued a policy of mutual benefit, other countries probably would have let America make money from them, as part of a mutual gain. But the U.S. stance is to grab everything, not share. This selfishness is what is most self-defeating ultimately.

This interview originally appeared in The Vineyard of the Saker.

Notes.
1. Katy Burne, “ISDA: Greek Debt Restructuring Triggers CDS Payouts,” Wall Street Journal, March 9, 2012. ↑
2. Steve Clemons, “Pat Lang & Lawrence Wilkerson Share Nightmare Encounters with Feith, Wolfowitz, and Tenet,” http://washingtonnote.com/pat_lang_lawren/ , citing Jeff Stein, Congressional Quarterly, ↑

[DRumsfeld2000]

Re: The Buck Stops Here - Oh My!

Good analysis. However, I disagree with your conclusion about the Euro. The Yuan will become the prime world currency in about 15 years.

[astonas]

Re: The Buck Stops Here - Oh My!

Good analysis. However, I disagree with your conclusion about the Euro. The Yuan will become the prime world currency in about 15 years.

Thanks! I'm certainly open to that as a possibility, since I don't think the "winner" has been decided yet. I should also say that I used to hold that position myself, until recently.

My thoughts on Euro vs. Yuan are partly based on my reading of the levels of exaggeration that is found in the mainstream and financial press. The Euro crisis is described in vastly more dramatic terms than reality justifies, since the narratives created around it seem to provide great entertainment value, and sell a lot of ad space.

China's narrative seems to me to be exaggerated in a different way. Remember in the eighties, when people thought that the economic dynamo of Japan was going to rule the world? The "up-and-coming nation, that's going to take away the world's lollipop" makes for a great narrative. Sells lots of advertisements. Generates lots of trades at brokerages. And is thus probably also exaggerated, simply through overrepresentation.

That's why I am inclined to believe that Europe is (slightly) more likely to be underestimated at this juncture. A federal Europe, once more fully integrated, will also be far more similar to the current hegemon than China is, making a transition more natural.

I'm thinking here of things like rule of law, a working judiciary, respect for personal and intellectual property rights, and so on. These things tend to accrue their greatest benefits over the very long term, and I think after the current Sturm and Drang has passed, they will eventually determine the winner.

I fully respect opposing views on this, however. As I have said, the outcome is not yet determined. Both China and Europe are still very capable of surprising us in all these areas. One of the many reasons to come to this site is that one can reasonably expect such surprises to be collected and represented here, well before they are more broadly comprehended.

[lektrode]

Re: The Buck Stops Here - Oh My!

Thanks! I'm certainly open to that as a possibility, since I don't think the "winner" has been decided yet. I should also say that I used to hold that position myself, until recently.

My thoughts on Euro vs. Yuan are partly based on my reading of the levels of exaggeration that is found in the mainstream and financial press. The Euro crisis is described in vastly more dramatic terms than reality justifies, since the narratives created around it seem to provide great entertainment value, and sell a lot of ad space.

China's narrative seems to me to be exaggerated in a different way. Remember in the eighties, when people thought that the economic dynamo of Japan was going to rule the world? The "up-and-coming nation, that's going to take away the world's lollipop" makes for a great narrative. Sells lots of advertisements. Generates lots of trades at brokerages..... .

not sure if i've mentioned this bit of an anecdotal contribution - but i do indeed...

in the mid80's i was living in downtown beantowne (BOS/the N. end) and my galpal at the time was an 'asst commodity broker' - read secratary - for some hotshot @ paine-webber - and this was when that narrative was really heating up.

well.. some nippon RE outfit bought the paine-webber building there in the financial district and the local scuttlebutt at the time went something along the lines of 'they paid at least double' what anybody around there thot it was worth (with the boston 'FIRE dept' being at least as sophisticated as any of em in lwr manhattan)

my thinking then(as it happened, was working on getting my series6 lic at the time) was that 'if they'll pay DOUBLE, hell, mights well sell it to em - why not - it aint like they can take it home with em - and we could use the money there in OUR economy...

fast fwd about 6years and several locations later - i found myself in honolulu - just as the news began circulating that
'the land under tokyo alone was worth more than the entire USofA' - the contigous states, i think it went, IIRC.

got to thinking about what had happened in boston and how could possibly be that such a small country - that has to import almost every scrap of raw material, most of its energy etc - how in hell could it be even remotely possible that 'the land under tokyo' be worth MORE than the 'entire US' - even without AK (or TX, never mind CA) ???

and that.. after being out there for awhile... and noting just who the 'dominant crowd' appeared to be - and how things 'functioned' (or not, as the case may be - make that certainly IS)

had to chuckle at the very thot that 'they were going to OWN the US' - like any day now, back then.

and.. well.. we know how THAT show ended...

its somewhat HILLARIOUS now - after we've seen how tokyo subscribed - hook, line & sinker - to the 'krugman theory' of economic 'engineering'

[vt]

Re: The Buck Stops Here - Oh My!

Jim Rickards says that China doesn't want to destroy Bretton Woods institutions, they want to join it:

https://www.caseyresearch.com/articl...are-dead-wrong

https://www.project-syndicate.org/co...paign=authnote

[don]

Re: The Buck Stops Here - Oh My!

SPIEF — St. Petersburg in the heart of the action

BY PEPE ESCOBAR on JUNE 20, 2015 in AT TOP WRITERS, EMPIRE OF CHAOS, PEPE ESCOBAR

The dogs of western fear and sanctions bark, while the Eurasian caravan passes.

And no caravanserai could possibly compete with the 19th edition of the St. Petersburg International Economic Forum (SPIEF). Thousands of global business leaders – including Europeans, but not Americans; after all, President Putin is “the new Hitler” – representing over 1,000 international companies/corporations, including the CEOs of BP, Royal Dutch Shell and Total, hit town in style.

Fascinating panels all around – including discussions on the BRICs; the Shanghai Cooperation Organization (SCO); the New Silk Road(s); the Eurasian Economic Union (EEU); and of course the theme of all themes, “The Making of the Asia-Pacific Century: Rebalancing East,” with former Australian Prime Minister Kevin Rudd.

Predictably, there’s been plenty of anticipation regarding the BRICs New Development Bank, with big news coming next month at the BRICs summit in Ufa. Brazilian Paulo Nogueira Batista, the new vice-president of the bank, looks forward to the first meeting of the governors.

And on another key theme — bypassing the US dollar — it was up to Anatoliy Aksakov, chairman of the Duma Committee on Economic Policy, Innovative Development and Entrepreneurship, to cut to the chase; “We need to transition to conducting mutual settlements in national currencies, and we believe that all the conditions are already in place for this.”

The action was not only rhetorical. Here’s just a fraction of the deals clinched at SPIEF. Predictably, it’s been a Pipelineistan show all around.

– The pipes for the Turkish Stream pipeline under the Black Sea will start to be laid down this month, or at latest by July, according to Russian Energy Minister Alexander Novak.

– Gazprom’s CEO Aleksey Miller and Greek Energy Minister Panagiotis Lafazanis practically clinched the extension of Turkish Stream to Greece. They are “preparing an appropriate intergovernmental memorandum,” according to Gazprom.

– Gazprom also announced it will build a new double pipeline from Russia to Germany, across the Baltic Sea, in partnership with Germany’s E.ON, Anglo-Dutch Shell and Austria’s OMV.

In another crucial Eurasian front, India signed a framework agreement to create a free trade zone with the Eurasian Economic Union. Indian Minister of Commerce Nirmala Sitharaman was euphoric: “The two regions are big, anything done together should naturally lead to bigger outcomes.”

Oh, and those were the days of Bandar Bush threatening to unleash jihadis on Russia.

Instead, a remarkable meeting took place, between Putin and Mohammad bin Salman, the Saudi deputy crown prince and defense minister (the actual conductor of the war on Yemen). This was the logical conclusion of Putin being in touch, for weeks, with the new master of the House of Saud, King Salman.

The House of Saud politely spun it as a discussion on “relations and aspects of cooperation between the two friendly countries.” Facts on the ground included Russia and Saudi Arabia’s oil ministers discussing a broad cooperation agreement; the signing of six nuclear technology agreements; and the Supreme Imponderable; Putin and the deputy crown prince discussing oil prices. Could this be the end of the Saudi-led oil price war?

If that was not enough, on the Asian front the superstar executive chairman of Alibaba Group, Jack Ma, went no holds barred to say: “It is high time for market players to invest in Russia.” Beijing, by the way, currently estimates the value of signed and almost signed agreements with Russia at a whopping $1 trillion. Russian Deputy Prime Minister Igor Shuvalov preferred to hold a “humbler” estimate.

Well, if only other sanctioned and “isolated” nations – because of their “aggression” – could be capable of such a business performance.

China Syndrome

by MIKE WHITNEY

“China is reaching deep within the world island in an attempt to thoroughly reshape the geopolitical fundamentals of global power…… Its two-step plan is designed to build a transcontinental infrastructure for the economic integration of the world island from within, while mobilizing military forces to surgically slice through Washington’s encircling containment…….If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly…. “the empire of the world would be in sight.”

— Alfred McCoy, The Geopolitics of American Global Decline, The Unz Review

“The future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the center of the action.”

— Former Secretary of State, Hillary Clinton, “America’s Pacific Century”, Foreign Policy magazine.

China’s meteoric rise has Washington worried, not because China is a threat to its neighbors or to US national security, but because China’s influence is expanding across the region. It’s creating the institutions it needs to finance its own development (AIIB and New BRICS Bank), it’s building the infrastructure needed to connect the continents with state-of-the-art high-speed rail (New Silk Road), and its attracting allies and trading partners who want to participate in its plan for growth and prosperity. This is why Washington is worried; it’s because China has transformed itself into an economic powerhouse that doesn’t conform to the neoliberal model of punitive austerity, pernicious privatization, and madcap asset inflation. China has slipped out of the empire’s orbit and charted its own course, which is why Washington wants to provoke Beijing over its negligible land reclamation activities in the South China Sea. Washington thinks it can succeed militarily where it has failed economically and politically. Case in point; check this out from Bloomberg News:

“The U.S. and Japan are conducting separate military drills with the Philippines near the disputed South China Sea,…The annual CARAT Philippines joint exercise started Monday off the east coast of Palawan island and will run until June 26, according to U.S. Navy spokesman Arlo Abrahamson. The Philippine and Japanese navies are holding drills around the same island through June 27, Japan’s Maritime Self-Defense Force said last week.

The U.S. has backed Southeast Asian nations including the Philippines as tensions escalate with China over territorial claims in the South China Sea, while Japan is providing patrol vessels to the Philippine coast guard….The drill includes a sea phase with the littoral combat ship USS Fort Worth, diving and salvage ship USNS Safeguard and a P-3 Orion surveillance aircraft and at least one Philippine frigate, according to the U.S. Navy….

Japan’s exercises with the Philippines will take place adjacent to the Spratly Islands, where China has created more than 2,000 acres of land in waters also claimed by the Philippines, Vietnam, Brunei, Taiwan and Malaysia. Japan will send a P-3C anti-submarine, maritime surveillance aircraft and 20 personnel.” (“U.S., Japan Join Philippines in Navy Drills Near South China Sea”, Bloomberg)

The “show of force” drills are designed to harass and intimidate China. They have no other purpose. The US wants to force China to succumb to its diktats, to abandon its commitment to new institutions, to open its markets to US corporations and Wall Street, and to allow the US a free-hand in writing trade rules.

That’s what Washington really wants and that’s why the moderate Chuck Hagel was dumped for the combative Ashton Carter as Secretary of Defense. US powerbrokers wanted a scrappy taskmaster who’d bloody China’s nose and show them who’s boss. Carter fit the bill to a “T”, an icy bureaucratic leg-breaker who fancies himself the “smartest guy in the room”. Peter Lee provides an interesting insight on Carter in a recent blog-post at China Matters. He says:

“…assertive Ash Carter is not playing bad cop to Obama/Kerry’s good cop; he’s the whole show, which will delight fans of military control of foreign policy everywhere.”

We’re glad that others are beginning to see that the Pentagon has taken over US foreign policy. Carter is clearly calling the shots in Asia and Europe.

Lee seems to believe that Carter will outlast Obama’s time in office if Madame Clinton is elected president. Which is not surprising, since it was Clinton who first introduced “pivot” to the strategic lexicon in a speech she gave in 2010 titled “America’s Pacific Century”. Clinton’s presentation laid out the basic themes that would later become America’s “top priority”, the rebalancing of US power to the Asia Pacific. Here’s an excerpt from the speech that appeared in Foreign Policymagazine:

“As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last 10 years, we have allocated immense resources to those two theaters. In the next 10 years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment — diplomatic, economic, strategic, and otherwise — in the Asia-Pacific region…

Harnessing Asia’s growth and dynamism is central to American economic and strategic interests and a key priority for President Obama. Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology…..American firms (need) to tap into the vast and growing consumer base of Asia…

The region already generates more than half of global output and nearly half of global trade. As we strive to meet President Obama’s goal of doubling exports by 2015, we are looking for opportunities to do even more business in Asia…and our investment opportunities in Asia’s dynamic markets.” (“America’s Pacific Century”, Secretary of State Hillary Clinton”, Foreign Policy Magazine, 2011)

Repeat: “Harnessing Asia’s growth and dynamism is central to American economic and strategic interests…. Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology…..American firms (need) to tap into the vast and growing consumer base of Asia.”

There it is in a nutshell. Having reduced the great American middle class to a lifeless, rotting corpse incapable of sustaining even meager demand or growth, US elites are packing the boats and heading for China, the shining corporate Valhalla on the hill. Clinton seems to think it should be pretty easy to penetrate these bustling Asian markets provided we back up our crackbrain aspirations with a strong dose of gunboat diplomacy–which is where Boss-man Carter comes in.

It’s worth noting that Clinton did not conjure up the pivot on her own, but was briefed on the theory by pivot mastermind Kurt M. Campbell. Campbell is Co-Founder and former CEO of the Center for a New American Security. According to the Center for a New American Security website: “From 2009 to 2013, he served as the Assistant Secretary of State for East Asian and Pacific Affairs, where he is widely credited as being a key architect of the “pivot to Asia.” In this capacity, Dr. Campbell advanced a comprehensive U.S. strategy that took him to every corner of the Asia-Pacific region where he was a tireless advocate for American interests, particularly the promotion of trade and investment.”

In a recent video interview with neocon Robert Kagan, Campbell regurgitates the same rhetoric that appears in Clinton’s speech. He opines: “Most of the history of the 21 century is going to be in the Asia Pacific region….It is in our best national interest to show that we are going to play a central role in that drama just as we have in the 20th century….(There is bipartisan)… recognition that our military presence is our ticket to the big game in the Asia Pacific.” (See entire interview here.)

There seems to be a growing consensus that the US military is the right tool for persuading China to cave in, but is it?

The last thing the Obama administration wants is a shooting war with China, mainly because China has the ability to strike back, and not just militarily either.

Let me explain: According to political scientist Pang Zhongying, “The current relationship between China and the US is one that has never existed in the history of international relations…..The level of interdependence between China and the US is unprecedented in history. Before the 1970s, no one could possibly imagine or predict that these two countries would be interdependent to the extent of today. At that time, interdependence existed only between the US and Europe, or among the G7 at the most. The level of interdependence today did not exist between the US and China.”

In other words, the two countries need each other and are bound together in a complex web of economic and financial ties, including China’s massive holding of US debt which amounts to an eyewatering $1.3 trillion. This interdependence means that the US cannot abuse China in the same way it has Russia without putting itself at risk. So, while the US still maintains the dominant position economically and militarily, it can’t simply throw caution to the wind by imposing sanctions or escalating hostilities beyond a certain point without jeopardizing its own security. China knows this, which is why it will continue to pursue its own agenda aggressively while deflecting US belligerence and hostility as best as it can.

The People’s Republic of China (PRC) is still committed to “peaceful development”. US antagonism is just one of the many hurtles that China will have to overcome to actualize its plan for integrating the Eurasian landmass into the world’s largest and most prosperous trading bloc. Check out this excerpt from Alfred McCoy’s seminal piece “The Geopolitics of American Global Decline”:

“China’s leadership began collaborating with surrounding states on a massive project to integrate the country’s national rail network into a transcontinental grid. Starting in 2008, the Germans and Russians joined with the Chinese in launching the “Eurasian Land Bridge.” Two east-west routes, the old Trans-Siberian in the north and a new southern route along the ancient Silk Road through Kazakhstan are meant to bind all of Eurasia together….

In April, President Xi Jinping announced construction of that massive road-rail-pipeline corridor direct from western China to its new port at Gwadar, Pakistan, creating the logistics for future naval deployments in the energy-rich Arabian Sea….. By building the infrastructure for military bases in the South China and Arabian seas, Beijing is forging the future capacity to surgically and strategically impair U.S. military containment. …

In a decade or two….China will be ready to surgically slice through Washington’s continental encirclement at a few strategic points without having to confront the full global might of the U.S. military, potentially rendering the vast American armada of carriers, cruisers, drones, fighters, and submarines redundant….. If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly…. “the empire of the world would be in sight.” (“The Geopolitics of American Global Decline”, Alfred McCoy, The Unz Review)

There it is, eh? The end of one empire and the beginning of another.

China’s leaders aren’t going to blow their big chance by getting sucked into a costly and pointless war with the United States. That’s ridiculous. They’re going to keep plugging away until the Silk Road becomes a reality.

[don]

Re: The Buck Stops Here - Oh My!

Confucius say, "Multi-polar World more peaceful than sole superpower run amok."

Is that true?