Tom Clark and Steve Clark (unrelated) were the initial proponents of October’s two-part, Voices for New Democracy forum on Modern Monetary Theory (MMT).
The recent discussions about MMT and the Dollar Regime showed clearly that (1) we are all deeply opposed to US imperialism and wish to break its stranglehold on the global economy; (2) we all agree that finance capital uses its present domination at the IMF to retain US dollar dominance in the world’s financial affairs and to impose sanctions on those that resist this domination; (3) we all favor deep cuts in US military spending, an end to the US-imposed sanctions regime and, alternatively, development of international collaboration (climate change, etc.) and peaceful conflict resolution; and (4) we all want higher taxes on billionaires and corporations to constrain their private hoarding and political influence.
We differ on a number of interconnected monetary issues including (1) the nature and cause of inflation and what recent price increases indicate about potential for runaway inflation; (2) how interest rates come to be what they are (how they are set), their impact on the economy, and whether falling rates are a problem; and (3) whether rising deficit spending relative to GDP is a barometer of a nation’s financial fragility.
In our minds, the matters of unity are crucial for working together and uniting with other segments of the progressive movement. In contrast, the issues in struggle are less crucial and can be worked on (and worked out) in the course of today’s practical fight for progressive political power.
One meaningful two-line struggle clearly came out in these discussions. After Steve offered the view that progressives gained a significant measure of dual power in the 2020 elections and the key political task, now, is expanding our base in 2022 and 2024, this participant said (we paraphrase) that a peaceful path to socialism is near-fantasy and the overthrow of corporate power by force is the only real path to socialism in this country. No one overtly agreed with him so, presumably, he is alone on this point. Apparently, we others share unity that, currently, progressives are in pursuit of a socialist USA via non-violent struggle and the election box.
Another important two-line struggle may exist but needs more clarification. While we — Tom and Steve, representing the MMT perspective — say Biden’s agenda is fully affordable and should be enacted forthwith, it’s not entirely clear (to us) whether Dennis Torigoe (who wrote — again, we paraphrase — swords must be beat into plowshares because we can’t do both) supports its passage, given Biden’s on-going failure to restrict military spending and his anti-China adventurism. In our view, progressives should continue criticism of Biden’s imperialist agenda while fully affirming his effort to put domestic spending on a new foundation.
Certainly, the results in 2022 will turn on the voters’ perception of the Biden Administration’s efforts to pass its domestic agenda, as well as its approach to certain international issues (like immigration and climate change).
Yet, the Biden agenda is being sabotaged by conservative (corporate) Democrats who reject it for corrupt (bought-off) reasons while offering the public rationale that it is too expensive and can’t be paid for. In the context of such obstruction, MMT stresses that Uncle Sam is the monopoly supplier of US dollars and can always create as many as are necessary to fund Congressionally-mandated objectives. A decision not to fully fund Build Back Better agenda is politically, not financially, motivated.
We appreciate the views that were shared in the forums. Our discussion about the nature of contemporary public finance (aka, modern money) must continue, and the on-going struggle for social justice and ecological salvation, worldwide, will provide plenty of context for resolution of our current differences.
Last Sunday, Voices for New Democracy hosted our latest monthly political forum discussing Modern Monetary Theory (MMT) and the insights it holds for today’s Left. The full forum is available to watch in two parts below.
We also invite you to join a follow-up discussion to carry the dialogue forward. Please join us on Sunday, October 10th at 7pm ET / 4pm PT. Use this link to join the conversation.
The follow-up discussion of MMT will be open for any points or comments that you have. For stimulation, below is a list of questions that the planners gathered after last Sunday’s session. Don’t see your question on this list? Add it here.
Why does this discussion of finance and MMT matter to me?
How is positive, public investment in US funded or how could it be better funded?
What is the federal deficit and the accumulation of deficits (national debt), and what are their relevance?
What is the point of increasing taxes on the rich (and/or corporations)?
How is the general level of prices in the US set? What is inflation?
How are interest rates set and is there a seed/reap cycle?
What is the effect of US currency going abroad?
Why are taxes and government income the basis of bonds and Treasuries issued by the government?
Why are some government’s interest rates negative?
How does massive currency creation for imported goods create structural unemployment at home?
The discussion is set for 90 minutes. If you want to prepare and investigate further on your own, please see the resource list here.
A RESPONSE TO STEVE CLARK, TOM CLARK AND SIGNE WALLER FOXWORTH ON THE DOLLAR AS THE WORLD’S RESERVE CURRENCY
| Dennis Torigoe |
First of all, thank you Steve, Tom, Signe and others for responding to my recent article, The Dollar as the World’s Reserve Currency. This discussion will help activists grasp the issue’s importance as well as deepen our understanding of this issue.
Under US capitalism, policies pushed by MMT can help with partial solutions to some of the country’s problems. However, in practice, the continual debt-driven printing of money drives economic polarization and the country down the wrong path to the future. Under what we call the US dollar regime, the rich are getting much richer while structural unemployment, as shown in the labor participation rate and deindustrialization, is worsening. While the prevailing narrative of unemployment is that the Chinese are taking our jobs away, this story is increasingly being contradicted by acknowledging that we can simply print money and get their manufacturing products. Why should we then bother to do the dirty work of investing and manufacturing at home in the first place?
Under the Fed’s huge printing of money the assets of the rich, like stocks and desirable real estate, have been skyrocketing. Wages and salaries for most workers are stagnant. While it shields the middle class, who own their homes in the right places and stocks in retirement funds, from the ravages of inflation, the super-rich are getting richer and the poor are getting a lot poorer. The paradox is that economic polarization gets worse as more money is printed. Alongside that, the US has always used its ability to print money — a de facto use of what is described in MMT — to fund wars of aggression and expand its military dominance around the world.
Printing money to fund spending on infrastructure and human needs makes sense because they are a direct investment in our postindustrial future. Large budgetary spending on programs such as early childhood education, cleantech, and communications make sense because they will propel us into a highly productive, more equal and democratic postindustrial future. Federal support of research and development — whether through universities, national labs or private enterprises engaging in activities such as semiconductor chip development — is decades behind and should be vastly increased. Printing money for use in these endeavors enhances the sciences and productivity and will be paid back in time. Even when a direct payback is absent, such as for Covid vaccination and climate adaptation in developing economies (provided these are offered free of conditions and imperialist designs), these types of expenditures are essential to further a just and fair society.
We are not against the dollar as a reserve currency in principle if it was a result of superior US productivity and innovation or the use of deficit spending by the government to carry out crucial infrastructure, for human needs and in developing human capital that will propel us into a highly productive, more equal and democratic postindustrial future. What we are against is the dollar as a reserve currency used as a weapon of the US to rip off other countries and vastly overfund the US military to carry out wars of aggression and threaten other countries with economic sanctions. We are against the use of the US dollar regime as a means to push the US into gutting its real industries, creating greater structural unemployment and extreme polarization in society.
Turn Swords into Plowshares
Military spending and adventures that serve and enrich a narrow part of US society and special interest groups, to further empower the US military industrial and intelligence complex, are the opposite of the positive expenditures enabled by printing money. They take away useful, value-added productivity and turn it into death, destruction, waste and decay.
Thus, as part of a progressive program, we call for swords to be beaten into plowshares.
All of us agree that spending money on wars of aggression and huge military budgets are wrong. We also agree that spending on domestic programs to increase productive activities that increase social wealth and equality are positives.
Here is where we disagree. We cannot do both: there has to be a choice between plowshares and swords. Swords have to be turned into plowshares. That’s an essential programmatic element for any progressive agenda. As Signe has said, there is a challenge to our view of economics and ethics.
By saying that we can do both, we are following the narrative of neoliberal US imperialism, which indeed, always attempts to do both guns and butter, of war, with reform and repression. But their neoliberal narrative does not acknowledge that spending at least 750 billion dollars every year on war and the military, with its hundreds of bases in foreign countries, is the amount not spent creating the conditions for postindustrial development.
Even from a perspective of national self- defense, should such an unlikely eventuality become a necessity, a vast and rigorous R&D culture and network with the aim to better humankind will form a strong scientific and technological basis for a new and innovative national defense.
Moreover, the cost of sustaining the current vast war machine is not just reflected in the annual Federal budget. It is reflected in the oppression of people in other countries who are victims of that war machine and US imperialism and the lost opportunities to implement real positive change in the conditions of the American people and the world.
The Nature of Fiat Currency
We would like to address Tom’s point on fiat currency. All currency serves two basic purposes: first as a unit of account and as a store of value within a legal jurisdiction (normally within a country). Secondly, it is a medium of exchange. Gold and silver have often been used historically for these purposes. However due to the expansion of human production and civilization (roads, cities, productive tools, cultural products and services) both in scale and quality, there is no longer an adequate amount of these precious metals to perform these two functions.
Store of Value
However, to understand the US dollar regime, we must study a national currency used in more than one jurisdiction, that is, internationally. The rise of mercantile capitalism, colonialism and imperialism meant that a dominant currency was used in multiple jurisdictions. So a fiat currency of a particular nation, say in the case of the British Pound, particularly one that’s powerful militarily and, like the Bank of England, has a long tradition of honoring its currency and establishing its global value. It built trust in maintaining its currency’s value or for goods and services. The replacement of Great Britain by the US as the premier international power, allowed the US dollar to have a greater value as a fiat currency with global dominance.
Medium of Exchange
The other principal reason for the dominance of a currency is its value for the exchange of goods. The US dollar through its redeemability in gold and silver and even before OPEC became the ONLY currency permitted in buying oil. Since the value of the global oil trade at oil’s high points could constitute up to 60-70% of the total value of global trade, the US dollar became more valuable and desirable as a result of this linkage,( which by the way seems voluntary but is not. It’s decidedly by force or the threat of force). Almost all globally-traded commodities are priced in US dollars, including energy, precious metals, base metals, and agricultural commodities.
The US dollar is the dominant global currency. As such, it is used as a reserve currency by other countries. Today the US dollar is about 50-69% of all currencies kept by other countries for trading and other reserve purposes, though this has declined since the 1990s, before the US invasion of Iraq. To show the relative strength of the US dollar, only 2% of the world’s reserve currency is in China’s renminbi, even though it is a dominant trading nation. The Euro is in the ballpark with 20-30% while the Japanese Yen is about 10%.The US dollar is dominant not just in trade. It is also used as the basis for other pegged currencies such as the Hong Kong dollar and other currencies around the world including China which has printed its RMB from 1980 to the present, but particularly in the early years, based on the amount of US dollar they owned.
Why Has US Inflation Been So Low Since the 1990s?
The US became a world reserve currency and relatively free from inflation, even though a much larger amount is printed beyond its domestic economic needs, because a large amount of printed currency gets absorbed by other countries, free from US domestic circulation, which would be highly inflationary. MMT and some mainstream economists contend that we can print as much as we need since there is no inflation. For example, they set up a 2% inflation goal (which justifies printing 2% more US dollars as a neutral, non-inflationary act). Since this 2% US dollar inflation was never reached in recent years, they say that it shows that it’s okay to print even more.
What they didn’t say is that this is only a temporary phenomenon. Many formerly colonial and developing countries have embarked on economic development and created a lot of savings in the last two or three decades. Their savings were saved in US dollars due to the weakness of their own currencies. Absorption of this large pool of global savings enabled the US dollar to be printed without inflation.
But will this continue indefinitely? We don’t think so. There are no free lunches in the world. These developing world savings are finite and have been exhausted. There is no more coming. Furthermore, will manufacturing countries continue to accept the US dollar as good IOUs as the Federal Reserve engages in quantitative easing, again and again into infinity?
The recent commodity inflation (PPI) index has reached 10% and the consumer price (CPI) index over 5% indicating a pivotal change in inflation. Many mainstream leaders in finance such as Jamie Dimon and Larry Summers challenge the Federal Reserve’s view that inflation is only temporary. They both said that we will be surprised by the persistence of this inflation.
The Nature of the Federal Reserve’s Interest Rate Cycles
As Prof. Salas stated in his recent immigration forum, the Mexico border issue is not just a Mexico-US problem. It’s a North-South or developing world-US problem as a result of the US neoliberal imperialist system. US neoliberal imperialism is an economic-industrial-military political order which reaps world wide profit from the massive expansion of low-interest debt. As the US raises interest rates in due time, it bankrupts those that borrowed massively for economic development. This interest rate cycle, often depicted as a boom and bust cycle, or a Federal Reserve interest rate cycle are global and omnipotent. It sweeps the world first with hope and then certain despair. The finest assets such as Korea’s Samsung were once almost taken over (which would be like taking over a country without firing a shot) by the same group of hedge funds such as Elliot Management, the same group that attacked the Thai Baht, the Malaysian and HK dollars in the Asian Financial Crisis. The force of US-led global capital pushed Latin American countries and Russia into bankruptcies or debt traps like the Brady Bonds. This spreading of the fishing net and reaping by pulling it in is predictable in almost 10-12 year cycles.
The Federal Reserve’s Interest Rate Cycle is the US Dollar Regime
The key point is that the Federal Reserve’s MMT-like currency cycle is the US dollar regime. It doesn’t separate military spending from lending to poorer nations. If the set up does not guarantee “reaping,” that is, the ability to enforce measures on those who default on loans or the military capacity to enforce isolation of countries like Iran or Venezuela when they get out of line (which is the post World War II practice) they won’t lend their money until the country targeted capitulates or there is regime change. In the first place, the US dollar regime is a regime — an established system of monetary, political, military and organizational orders that doesn’t separate where the money goes. It prints because it’s set up. It is set up to reap.
When we say Keynesian spending on human capital and needs is good, we are not saying that as a part of that system. We are against the US dollar regime as a system. We are just saying there is nothing wrong to borrow through legitimate commercial channels or even by government spending but without military, SWIFT and hedge fund enforcement — the way it is done today.
The Counter-Cyclical Nature of Interest Rate Cycles of the Former Victims of the US Dollar Regime
The US Fed has lowered the interest rate to almost zero as Covid-19 hits. Now they are tapering and ready to raise the rate to reap. However, this time things may be different. Many countries learned this game and have raised their rate before the US raises its rate. They do so to be countercyclical to preempt US reaping by minimizing potential damage, by trying to get out of or lowering debt before the nets are pulled in. Countries from North to South, Turkey to Korea, China to Vietnam are all trying to raise interest rates and lighten their debt owed before it’s too late. This actually has forced Federal Reserve Chairman Powell to taper ahead of schedule! This is another reason that this round of US monetization of debt and QEs may not hurt others as much it hurts itself.
After the wakeup call from China reversing its buying of US Treasuries, this round of the interest rate cycle may be a reset for the US. The amount of US government debt of $29 trillion along with $5.6 trillion of Federal Reserve debt on its balance sheet is scaring the rest of the world and they are buying fewer US Treasuries fearing inflation. This is part of the counter-cyclical interest rate game to minimize their losses.
This makes the latest round of Fed Chairman Powell’s moves questionable. Inflation is widening from commodities to everyday consumer products, a rare global occurrence that may foreshadow the beginning of the end of the US dollar regime. Stanley Druckenmiller has stated that the US dollar regime could end in 15 years if we keep printing money like this. And, he says, that could be the end of the American way of life as we know it.
Massive Deficits a Burden?
Tom states: “As Godley showed, this accounting is a fact, not a theory, and decisively exposes the myth that the national debt is somehow a burden to our descendants, any more than the massive deficits from WWII were a burden to us.”
While it is not necessarily true that national debt is a burden, there are limits to a sovereign currency. One is that the fiat money supply (printing money) must not continually vastly outstrip the amount of goods produced, services available or savings or the currency will devalue. This devaluation most often will show itself as inflation, where prices paid in that currency rise on goods and services, which will lower people’s buying power and if it grows higher and uncontrolled will devastate the economy. This happened, for instance, in the 1970s in the US during and after the Vietnam War and in Latin America during the 1980s and early 90s and most infamously in Weimar Germany in the 1920s. In fact, Modern Monetary Theory recognizes that the limit of currency creation by a sovereign country is the ability to keep inflation at a tolerable level. Thus, sovereign currency debt creation is in fact not unlimited, but constrained by the real economic conditions in which it functions.
The other limit is that the government has to service debt created by deficit financing, for instance the servicing of bond interest. As the US government continues to deficit finance its budgets, it has to be able to pay bondholders the promised interest on the bonds. Right now, the US government allocates about 7.9% of its budget to interest payments ($325 billion) and the 2021 Federal Budget Proposal projects this by 2030 to become 10% of the budget, or $665 billion. The Congressional Budget Office projects that federal debt payments could reach 27% of GDP (GDP, not the Federal Budget !) by 2050 from around 8% in 2021. No amount of raising taxes could save the day. Moreover, any problem that arises from this debt servicing, such as the Tea Party Republicans threatening to default on US interest payments in 2011 and 2013, or like the Republicans in the Senate are doing today, will cause US treasuries interest rates to rise because of perceived risk, slows economic growth and weakens the dollar’s value, increasing import costs.
This growing federal debt service eating up more of the federal budget is also both a lost opportunity to fully fund more productive postindustrial programs and an increase to the inflationary threat. As more dollars are printed to cover this debt service, more dollars are released into the economy, causing inflationary pressure. It can also cause asset bubbles as investors chase higher returns than near 0% interest Treasuries, bubbles which burst and cripple the economy as happened in the 1970s, the dotcom stock market bust in the 1990s and the Great Recession in 2009-2014. Today, leading investors like Stanley Druckenmiller (who along with George Soros broke the Bank of England by shorting the English pound in support of the US dollar as the rising reserve currency) see that as a real risk in the next year or two. As stated before, he also predicted that the US dollar reserve regime may end in 15 years, fundamentally changing the American way of life as we know it.
On the question of the US’s massive deficits after WWII, I think we have to look at the global economic picture after the war. While the US was not invaded or devastated, the countries of Europe and Asia were. The fact is that the US won the war. The statement that the US didn’t feel the effects of its debt fails to take into account the widespread economic destruction in China, SE Asia, the Soviet Union and Europe. The outcome was that America felt it in lives lost in war but in fact profited economically. By taking the mantle of global superpower and imposing the post war international order on the non-socialist world, through means of the Marshall Plan, the reconstruction of Occupied Japan and the crushing of Communist-led rebellions in Greece, the Philippines, Vietnam and Malaya, the US enriched itself by reconstruction contracts, the control of third world commodities, the domination of global trade and commerce producing major profits for its capitalist class. With the Bretton Woods dollar regime, the US lorded over the rest of the world economically and militarily.
In fact, North America enjoyed the longest rise in the standard of living in history during the post WWII period, until we hit Vietnam, Iraq and the Middle East. The Vietnam War ended in 1975 with 55,000 American lives lost but millions of lives lost in SE Asia. The war cost a little less than $1 trillion then. But combined with the rebellion pacification money of the Great Society and Urban Renewal (the last big printing of money by the US government) it was less than 20% of what we spent in wars in the Middle East and Afghanistan. Even then the Volcker recession drove the US economy way down in the 1980s (see The Myth of American Deindustrialization) until we revived it through the digital revolution that went from the mid 1980s until it went bust in the stock market’s internet debacle in 2000.
Is US Dollar Hegemony a Product of, or Integral to US Imperialism?
Tom states that the “dollar’s status as reserve currency is a result, not a cause, of US imperialism.” That is untrue. The key fact is that US dollar hegemony is an integral part of US imperialism, and is part and parcel of US domination of other countries. Iraq was invaded and Saddam Hussein was ousted mainly because of his attempt to decouple Iraqi oil from petrodollars (oil could only be bought and sold by using US dollars). This agreement was imposed by the US and OPEC. It was not only due to his invasion of Kuwait, as the US claimed.
The forging of the petrodollar and other US dollar-denominated commodities took arm-twisting, and were a huge part of what formed the post Vietnam War US-led world order in the first place. The agreement to back Saudi Arabia with US weapons and the stationing of troops there was in exchange for the Saudis and OPEC’s willingness to couple oil transactions with the US dollar to the exclusion of all other currencies.
The Brady Bond Debt Trap
Another example is the imposing of the Brady Bond solution to the massive debt crisis in Latin America of the 1970s and 1980s that became shackles on many Latin American countries. The Latin American debt crisis was in large part due to the large loans to third world countries by US and European banks when interest rates were low, and this became a crisis caused by the increased debt service on loans because of the huge increase in oil prices in the 1970s and 1980s. Because all oil had to be paid for in dollars, those countries had to further borrow huge amounts of US dollars from US and European banks (who were getting petrodollars invested from OPEC) to pay for imported oil. Latin American countries, beginning with Mexico in 1982 started to default on US dollar loans. The results were catastrophic. According to Wikipedia, “A massive process of capital outflow, particularly to the United States, served to depreciate the exchange rates, thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back US$108 billion.[4]”
The Brady Bonds were a way to restructure the Latin American loans to make it easier for them to be repaid, but also to recover as much as possible for US and European banks and investors, rather than lose all in defaults. Even then, defaults occurred in Brady Bonds. Ecuador, for instance, defaulted on interest payments and faced immediate repayment demands. It ended up cut off from the world financial markets and suffered through years of deprivation, social and political unrest.
The US Dollar Regime is the Most Effective Part of US Imperialism
The use of sanctions against Cuba, Venezuela, Russia and Iran, were direct acts of imperialism through the control of the dollar regime. The US SWIFT sanctions became in fact far more effective than the US military, as US military ventures often stalled and became ineffective, costly and unpopular in the US. There are no protests against US economic sanctions since there are no American soldiers brought home in body-bags by such acts.
In fact, today US dollar hegemony is the most effective part of US imperialism. It allows the US to conquer and dominate countries without firing a shot. The US dollar regime is the highest development of Western imperialism, and represents the furthest development of Lenin’s thesis of imperialism and the export of capital.
Weakening of the SWIFT system Weakens the US Dollar Regime
The excessive use of economic sanctions by the US against Iran, Russia, Cuba, Venezuela and many others and even European countries that use the SWIFT currency settlement information system forced many countries into developing alternative currency systems such as the Chinese Union Pay or the European Interdex systems. Some stopped using the US dollar as a reserve currency, period — like Russia. Furthermore China has signed a 25- year agreement with Iran in trade and economic cooperation to bypass the US dollar based SWIFT system.
The development of sovereign digital currencies that don’t require SWIFT or any settlement systems at all also weaken the US dollar as the required reserve currency. MMT accepts the logic of the US dollar as a reserve currency. But this logic is failing.
Conclusion
The money printing policies of the US dollar regime is an integral part of modern US imperialism. On the domestic front, it can partially finance needed postindustrial development and necessary social needs, but as practiced in the US over the last decades, overall it has caused deindustrialization and devastating economic polarization.
Internationally, the policies call for indiscriminate printing of money and lending it out at low interest rates around the globe as the beginning of the “seeding” cycle. For the US to reap the maximum profits from the world, they must inject or “seed” the largest amount of capital to the most vulnerable or greedy developing countries, who most need economic development. This first cycle is justified by MMT. Then interest rates are gradually raised and liquidity is withdrawn around the world. This reaping process leads to destruction of the seeded and a profit festival for the global banks and hedge funds. This repeated seeding and reaping process, along with economic sanctions, the use of military force and the control through the SWIFT system is the reign of neoliberal imperialism.
In order for the US dollar regime to survive it must keep on reaping profits either through outright military victories or continuous reaping from other countries. The actual human toll of the US dollar regime’s repeated seedings and reapings around the world can be seen in deforestation, waves of refugees, overcrowding of urban centers and the gutting of American industries and urban decay. We now have the unprecedented divergence of extreme wealth and hopeless poverty driven by extreme financial crises like the Asian Financial Crisis in the 1990s and the Great Recession, sparked by the Lehman Brothers collapse in 2008.
In response, we must work to end this destructive, imperialist US dollar regime. We must turn swords into plowshares, resist US imperialist wars and economic aggression while fighting for the desperate need of the American people to build a highly productive, more equal and just postindustrial future for the nation and the world.
In advance of our upcoming forum on Modern Monetary Theory (MMT) this Sunday, October 3rd, our panelists have assembled a helpful list of background materials to ground your understanding of MMT before our discussion. While Voices for New Democracy has published a number of pieces relating to MMT (here, here, here, and here), these additional resources offer further insight and breadth.
One week after our MMT forum, we will also host a follow-up discussion on Sunday, October 10th at 7pm ET / 4pm PT. Use this link to join the conversation.
Join Voices for New Democracy on October 3 for our next forum discussing Modern Monetary Theory (MMT). Our panel will explore how governments pay for our needs; whether (and how) federal deficits and national debt matter; how the U.S. dollar affects the global economy. Ultimately, we will seek to answer whether MMT offers a path fo build a people’s economy, or if its insights represent a new form of imperialism.
Join us on Sunday, October 3, at 4pm PT / 7pm ET by clicking this link.
A bifurcated agenda (MMT at home and financial imperialism abroad) would be inconsistent and morally reprehensible for any progressive, and I don’t think anyone in or around MMT takes such a position. Rather, at worst — and like Dennis (and most of us) — MMT advocates don’t have a clearly articulated plan for remaking the international financial order. They know how it works, but they don’t know how to assert popular control at that scale (currently, their focus is on gaining effective influence in sovereign states and, someday, “going global” from such new-found power bases). Rather than criticize MMT for the same shortcoming that we all share, we need to put our MMT thinking caps on, figure out the necessary “next steps,” and advocate for consistent financial restructuring across our both domestic and global economies. This might require a think tank and a legal corps, but that could set us in the right direction.
It seems to me that when our nation’s progressive wing overcomes dual power (defeats neoliberalism) in the US (that is, for now, in the Biden Administration and the Congress), all nations and people stand to benefit because the world does, in fact, have an integrated, global, financial system (and I think Dennis would agree) in which the US dollar and the US central bank (the Fed) dominate decision-making and financial power (at the IMF/BIS/SWIFT/IIF etc.).
Given this institutional domination, if/when American progressives gain the power necessary to implement a true, worker-oriented, social investment agenda in the US, we also will gain (or will be on the verge of gaining) the power to pursue a similar agenda at global scale (via the IMF, where we progressives will have just acquired dominant power, or via some new authority that we and the world create to replace the IMF).
Further, given the scale and breadth of today’s crisis, when American progressives finally break the power of finance capital in the US (winning majority control of our government), the rest of the world’s progressives (in countries everywhere) will demand we immediately break that same financial power globally as well. Having gained control of the US votes at the IMF, we will have no choice but to comply (twist my arm!).
Few American progressives have given much thought to how this “next system” of finance must operate to meet the needs of the whole world, including its impoverished nations. Obviously, “trickle down” from the US to the world doesn’t work, but, for sure, there’s no way some kind of global planned economy will be imposed. Rather, the next system — which has to carry civilization through the era of climate change impact and mitigation ahead — will be some kind of global mixed economy in which private entities and markets operate alongside public investment entities and non-market allocations, both within the world’s many nations and in transnational forms as well (corporations, global NGOs, UN-determined public investments(?), etc.).
However this next system shapes up, the world is never going back to the gold standard. It will remain on fiat currencies because that is the actual and only way, now, that nation-states and their markets can operate (if anyone can see beyond the era of fiat currencies, please let us know what that might look like!). When US progressives quash dual power and take general control of our government (sometime over the next few election cycles), the dollar will become our currency (the public’s currency!), and we can directly and forthrightly engage China, Europe, Japan, Britain — the other four IMF-approved-for-trade currencies — the Global South, and all other sovereign nations on the matter of how best to reconstruct and democratize global finance for the challenging crisis-mitigation era ahead (including, possibly, setting a new Special Drawing Rights (SDR) currency to replace the dollar as the global reserve… MMT suggests how that might be done).
I think that forging a new system of global finance is a necessary piece of this era’s struggle, an issue to be resolved sooner rather than later. MMT is empowering because it explains not only how the system works (and, as a corollary, how finance capital exploits the system for its own ends) but, also, how our nation’s democratic majority can impose its will on the system, reprioritize its investment agenda, move on to global financial reform, and, thereby, tackle all the vital problems of our time.
To me, a crucial task, now, is raising the financial consciousness of voters so elected politicians fight for popular oversight of finance in the public interest. That’s how we overcome dual power (defeat neoliberalism) and win progressive legislative majorities over the next few election cycles. Right now, the MMT folks are leading this project, but they need allies as well as broadened popular grounding and intersectional collaboration. I hope we Leftists will walk towards them, learn from them and help them see and link more effectively, beyond the financial realm.
I’m a big Dennis Torigoe fan. As I told him at the 40th Anniversary event, having never met him before, I miss his writings from the Worker’s Viewpoint days and am very glad to see him still at it after all these years. His response about Walden Bello last winter was very useful and enlightening. And, as I commented on the Voices for New Democracy site, I do appreciate Dennis’ timely information about SWIFT, one of the ways the US exercises its hegemony, and INTREX, a potential remedy. He is still an authority in my view. I’ve thought that we should invite him to present to our Finance Group on how he thinks about financial and economic issues and what his suggestions are for how we should think about them.
So it is with all due respect that I say that I found Dennis’ explanation of Modern Monetary Theory (MMT) to be vague and unsubstantial, and his conclusion about reserve currencies misplaced.
In his article, he mentions the name Wynne Godley. What he didn’t mention, and might have, is the substance of what that economist’s work is about. As laid out in Chapter 2 of The Deficit Myth, Godley demonstrated the principle of ‘sectoral balances.’ Simply put, as author Kelton does, the government’s red ink (the deficit) is the non-government’s black ink (a surplus). Or, more precisely, there is a ‘penny-to-penny’ relationship between the amount of the government’s ‘debt,’ as we so misleadingly call it, and the amount of the surplus held by the non-government sector (what you, me, the business community, the Chinese etc., hold onto in our wallets, bank accounts, 401(k)s etc.) as assets, and didn’t pay in taxes. As Godley showed, this accounting is a fact, not a theory, and decisively exposes the myth that the national debt is somehow a burden to our descendants, any more than the massive deficits from WWII were a burden to us.
In fact, there was a recent Twitter exchange where someone asked about exactly what [Signe Waller Foxworth] wrote here and what was in Dennis’ article: Doesn’t MMT get used to maintain US hegemony over the world financial system? The answer is that framing it that way is backwards: The dollar acts as the world’s reserve currency because the US is an imperialist power and has the military and political clout to enforce its culture onto other players. In other words, the dollar’s status as reserve currency is a result, not a cause, of US imperialism. Of course they use monetary operations (the accurate description of which is the basis for MMT) to further their domination; it’s what we used to call ‘cultural hegemony,’ and part of the ‘code of capital,’ as we have called it more recently. But the work of Fahdel Kaboub, Lua Kamal Yuille, Ndongo Samba Sylla and many others demonstrate how the MMT lens and the concept of monetary sovereignty can be used by progressive/revolutionary movements to improve the lives of their constituents as well as further expose the aggressive, oppressive roles played by the US and their neoliberal allies.
To say one more thing, since you mention military spending. As we all know the US military budget is nearly 3 quarters of a trillion dollars per year. But notice that the Dems infrastructure and rescue proposals are for $6T total over 10 years, in other words about $.6T/year, comparable to the military expense. What the MMT folk say is that we have enough room to do both, at least for a while. The MMT proposition is that there is no need to ‘pay for’ the Green New Deal, Medicare for All, education, childcare, reparations etc. by cutting the military budget or anything else. Of course doing both seems wasteful and leaves in place an aggressive, damaging institution that we all hate. (I say we can work on that problem as we go.) But isn’t it worth it to get the good stuff that we really have to have and to highlight that possibility to those we work with? I think so.
The point is that believing that we must first cut things like military spending to ‘pay for’ the social programs we know are so acutely necessary, is to swallow the ‘Deficit Myth,’ to accept that the US government has to ‘find’ the money it spends just like households, businesses and local governments must. It’s just not so. So the question is larger than, ‘how do we stop so much military spending?’ It’s ‘how do we get people the things they need?’ The MMT lens says we do that by writing and passing budgets that fund the programs we want, at least initially no matter what happens with the military budget. Let’s do that and then the democratic will of the people we have established by working with everyone who will — what I think Steve means by ‘dual power’ — can decide later what best to fund for the long term, guns or butter, to use the old phrase. The issue is getting our (small-d) democratic foot further in the door of this appropriations/spending process, using what ‘dual-power’ we can muster, not slaying old dragons no matter how righteous and right we are about how monstrous they are.
Agree or disagree, I hope this is useful. Again, thanks for your response to my vids about the ongoing mainstreaming of MMT.
Thanks to Dennis Torigoe for a very informative piece in Voices for New Democracy about the privileged position the U.S. has in global finance due to the acceptance of the dollar as the world’s reserve currency. I am wondering about the relationship between Modern Monetary Theory (MMT), that has captured the enthusiasm of many of us, and the sovereign role of the dollar in global finance.
We are excited about MMT because it exposes the myth of deficit spending and describes the actual working of the economy. MMT shows the deceitfulness of rationalizing the government’s failure to provide for the basic needs of the people with excuses like we don’t have the money for this or we would have to raise taxes to pay for that. These rationalizations are false because the U.S. Government is the sole currency issuer and creates fiat money by spending it into existence, a feat none of us can accomplish, at least legally. It is no more difficult to find the money for universal health care, housing, living wages, education, immigration reform and addressing environmental destruction and climate catastrophe than it is to find the money for bombs, drones, guns, corporate bailouts and aid to foreign countries that are human rights abusers. The failure to provide a decent living standard for its population is exposed as due to a failure of political will and moral values, not a shortage of money. MMT opens the door to a more democratic process of managing the U.S. economy.
What I find challenging is what is precisely the relationship between MMT and the international financial arrangements that lead to U.S. dominance over other nations. The sovereign dollar plays a major, if not decisive, role in promoting U.S. imperialism. Could we, or would we even want to, create a paradise in the U.S. by trampling the rest of the world to death with imperialistic and financial action afforded by our privileged position in the global financial system? The relationship between MMT, with its potential benefits toward democratizing our national life, and the global financial system that fosters U.S. imperialism challenges our thinking in the fields of Economics and Ethics. Could we (is it even economically feasible) or would we want to (is it even ethically justifiable to) utilize the tools of MMT domestically to fund education, housing, living wages, immigration reform, universal health care and avoiding the worst climate catastrophes if the US sovereign position in global finance continues to allow us the latitude to address Americans’ needs by immiserating other peoples?
The US dollar is in a privileged position in the world as the global reserve currency which dominates international trade and commerce. As the world’s reserve currency, the US can continue to print as many dollars as it needs, run massive balance of trade deficits and use it to buy the world’s goods, basically swapping our paper for their raw materials and labor. The US can continue to increase its internal and trade deficits as long as it retains this world reserve currency status.
The bottom line: The dollar as the world’s reserve currency has been both an economic blessing and a curse on the workers and people of color in the US. The US dollar’s role as the hegemonic reserve currency allows the US to deficit spend massively on the military and wars of aggression, while funding certain reforms to quell domestic resistance through targeted programs paid for by massive deficit spending. At the same time the US dollar is used to plunder developing countries through high interest loans( by its de facto control of the IMF and the World Bank), to attack other countries’ sovereign currencies and engage in unequal trade with developing countries.
The dollar as the world’s reserve currency has led to the gutting of domestic industry as US corporations, riding on the massive amounts of dollars printed by the US, drive for higher profits through outsourcing manufacturing and with them factory jobs to cheaper producers in Asia and elsewhere. This has directly contributed to deindustrialization, structural unemployment and widespread suffering for a large swath of the American people.
Not only does the US control the creation of the dollar as the world’s reserve currency, it also controls the mechanism which allows another country to use the US dollar in trade or finance, the SWIFT trade clearing system. Through it, it has attacked countries like Iran and Venezuela though enforcing trade sanctions and caused untold suffering to the people of those countries,
The reserve currency status of the dollar allows the US to import cheap manufactured goods from other countries, particularly China, while paying for it in dollar-denominated paper or bonds. The US balance of trade deficit has soared, especially since the 1990s, as they give us real goods and we give them paper.
This cheap goods vs. paper payment has contributed to inflation being almost nonexistent, till now, from the 1990s to 2020.
Given the history of the imperialist wars, the plunder through unequal trade and economic and political aggression against the developing countries, the US owes reparations to much of the developing world which have to be repaid over time. In our view, the only way to repay these historic debts and to raise the standard of living within the US is through unleashing massive postindustrial gains in productivity through a top to bottom reform of the present economic system.
However, we do recognize that replacing the US dollar as a reserve currency will perhaps take decades. In the interim, a Green New Deal-like program could be pivotal in accelerating the fight against climate change and the US’s advance in a post-industrial world. However, the feasibility of such massive spending assumes the reserve currency status of the US dollar and the US’s own easy access to capital markets. Do the benefits that accrue to American workers from giant government programs come at the expense of people around the world? The answer is yes, thus the US bears a special responsibility to the rest of the world to fight climate change, inequality and injustice. As starters, the US needs to join or rejoin initiatives like the 2015 Paris Agreement, COVAX, the World Health Organization and revolutionize the character of international institutions like the IMF, World Bank, Bank for International Settlements, and the UN.
At the same time, we should seek first to promote alternatives to the US dollar’s reserve currency status and more equitable control of the world’s financial, trading and banking networks.
Commentary:
The US Dollar as the Global Reserve Currency: Is Modern Monetary Theory Only Good for Modern Imperialism?
When Representative Alexandria Ocasio-Cortez was asked how the potentially multi-trillion dollar Green New Deal was going to be paid for, she mentioned Modern Monetary Theory (MMT). Coming into wider public view since then, it has become the answer for some on the political left to the question of how to pay for any major program proposed, from Medicare for All to Guaranteed Annual Income.
So what is this theory and how does it work, who benefits and who actually pays for what it promises? We think it is usable by a superpower with hegemonic financial power through the use of the US dollar as the world reserve currency, benefiting the ruling class financially and politically. It is paid for by the developing countries and their citizens forced to use the US dollar in trade and finance. And while it may give short term benefits to US workers, it creates an unsustainable global economy and prolongs the rule of the monopoly capitalists.
The bottom line: the US dollar’s role as the hegemonic reserve currency allows the US to spend massively on the military and wars of aggression, while funding certain reforms to quell domestic resistance through targeted programs and to continue to use the US dollar to plunder third world countries and engage in unequal trade.
It is one currency, one system. They are interconnected. Given the history of the imperialist wars, the plunder through unequal trade and economic and political aggression against the developing countries, the US owes reparations to much of the developing world which have to be repaid over time. In our view, the only way to repay these historic debts and to raise the standard of living within the US is through unleashing massive postindustrial gains in productivity through a top to bottom reform of the present economic system.
However, we do recognize that replacing the US dollar as a reserve currency will perhaps take decades. In the interim, a Green New Deal-like program could be pivotal in accelerating the fight against climate change and the US’s advance in a post-industrial world. However, the feasibility of such massive spending assumes the reserve currency status of the US dollar and the US’s own easy access to capital markets. Do the benefits that accrue to American workers from giant government programs come at the expense of people around the world? As we show below, the answer is yes, and if so then the US bears a special responsibility to the rest of the world to fight climate change, inequality and injustice. As starters, the US needs to join or rejoin initiatives like the 2015 Paris Agreement, COVAX, the World Health Organization and revolutionize the character of international institutions like the IMF, World Bank, Bank for International Settlements, and the UN.
At the same time, we should seek and promote alternatives to the US dollar’s reserve currency status and more equitable control of the world’s banking networks.
Secular Stagnation Takes Hold in the US Economy
We believe that the US economy is in a period of what Lawrence Summers, the Harvard economist, calls secular stagnation. He cites a number of factors pointing in this direction.
First of all, there has been a decrease in market-based investment demand overall, driven by a shrinking working age population which drives down investment in housing, consumer demand and production equipment. Also driving down investment has been the lower cost and higher productivity afforded by the technology revolution. He also argues that increased monopoly power in the US has stifled investment, as well as the refusal of the politicians to fund major infrastructure projects. The net result has been that infrastructure spending is now one half of what it once was,
The other aspect driving secular stagnation has been the increased savings taking place in the economy. Much more of the country’s income and wealth is going to the top economic earners, driving up the prices of assets like stocks and real estate, not into productive investments. Moreover, because of the traumatic experience of the Great Recession of the 2009, people are themselves saving more as a cushion and banks have tightened lending rules, excluding many from purchasing homes and opening businesses. Of course, the coronavirus pandemic has greatly increased all these factors.
What Is Modern Monetary Theory?
Modern Monetary Theory has been around for a while. In her recent book The Deficit Myth, Stephanie Kelton, a leading proponent, cites her colleague Wynne Godley who in the late1990’s as a major inspiration for her thinking. Basically, MMT argues that the government (in the US case, the Federal Reserve) can issue as much money to enable the Federal Government to spend as much money as it wants up to the point where economic demand in the economy outstrips the available supply of goods and services, at which point inflation and higher interest rates set in. For a country with a sovereign currency, meaning it issues and controls its own currency, MMT believes that it can create money and the government can spend money as long as the goods and services exist for it to buy in its specific currency.
One of the major distinctions made by MMT is that unlike households and private businesses, a government with a sovereign currency does not need to balance its expenses with its revenues. The government, as the creator and controller of the currency, can print as much money as it wants to pay off its bills. But this means that governments without control over the currency with which they borrow or trade must use the US dollar to trade or pay off debts denominated in dollars or held by US-controlled institutions. They are like households. They need to get US dollars to pay off these bills.
How Does the US Ruling Class Use the Dollar as the Global Reserve Currency to Plunder the Rest of the World?
The countries that have the ability to follow MMT’s policies are the advanced capitalist countries of the world, with the US by far the most powerful. Like households and businesses, the rest of the world has to get (through trade or borrowing) and use the major currencies of the West, mainly the US dollar but also the euro, the yen, the pound, and to a smaller extent China’s yuan, to engage in trade and finance with the US and major trading nations of Europe, Japan and China. As we shall see, not only does the US control the creation of the dollar as the world’s reserve currency, it also controls the mechanism which allows another country to use the US dollar in trade or finance. (Unlike the US, the European countries that share the euro are a work in progress. While they share a single currency and a central bank that issues that currency, spending decisions are still made, within limits, by their individual governments.)
The US dollar is in a privileged position in the world as the global reserve currency. After World War II, the US was the world’s most powerful military and economic power. At the post war Bretton Woods Conference, the major allied powers and other signers agreed to the US dollar as the world’s reserve currency, then pegged at US$35 to an ounce of gold.
The Conference also created the International Monetary Fund, which was to stabilize currencies vis-a-vis the US dollar through loans and the World Bank which was to help develop international trade and finance. Both were de facto controlled by the United States in its position as the biggest contributor of financial support, with US dollars, a currency that it created and distributed as its sovereign currency.
The US Dollar as the World’s Currency for Buying Oil Shores Up its Dominance
In the 1950s and 1960s, as the world’s economic and military superpower, the US dominated the world economy in trade, finance and manufacturing. Importantly, it also dominated the trade in the world’s most traded commodity – oil. As the US dollar was the reserve currency in the world, almost all oil produced and exported had to be bought with US dollars. This worked until the US stagflation crisis (economic stagnation AND inflation at the same time) in the early 1970s when the US unilaterally pulled out of the gold standard of US$35 being exchangeable for one ounce of gold. With US inflation and the dollar’s devaluation — its value “floating” depending on supply and demand — the oil-exporting countries of the Middle East lost purchasing power. They rebelled with the 1979 OPEC boycott by oil producing countries, refusing to ship oil to the West, which made the price of oil quadruple, from a fixed price of US$4 a barrel to US$12 a barrel in a matter of months. With US dollars now gushing out of the US and Europe to the oil producers in OPEC, a new agreement was signed. In 1979, the US-Saudi Arabia Joint Agreement on Economic Cooperation, in which Saudi Arabia, the biggest oil exporter, agreed to take only US dollars for its oil and to funnel them back into the US. This again strengthened the US dollar’s hegemony on the world economic, trade and financial scene.
Since then, the US dollar has kept its position as the only truly world currency, though it is being potentially challenged by the euro and less so by China’s yuan. (On a secular basis, the shift away from fossil fuels, including oil, and the rise of digital currencies, especially sovereign-state-supported ones, pose challenges to the US dollar’s dominance in world trade and finance.)
The US Dollar Hegemony Helps Keep Wages Down Here and Oppress Low Wage Labor Overseas
The new millennium has brought historically low inflation to the United States, especially compared with the decades since the 1970s, as can be seen by the chart below.
At the same time, the US balance of trade deficit soared, especially since the 1990s, or as MMT author Kelton says, they give us goods and we give them paper. What happened in that period? The US started importing massive amounts of goods from the rest of the world, particularly China. While the US has historically exploited cheap overseas labor and raw materials, from the banana plantations of Central and South America to the sewing factories in the Caribbean and Asia, now the US was buying manufactured goods from a fast-growing Chinese economy. At least one study shows that this had the effect of dampening price inflation. This was especially true after the period of the Great Recession of 2008-2010, when the US economy was recovering. According to A New York Federal Reserve staff report showing the impact on trade on US prices:
Lower Chinese export prices due to WTO entry reduce the U.S. manufacturing price index by 4.9 percent, while greater Chinese export variety reduce the index by 2.6 percent. The sum of these two values indicates that the total WTO effect on the U.S. price index is 0.076, that is the U.S. manufacturing price index was 7.6 percent lower in 2006 relative to 2000 due to China joining the WTO. Note that this fall is after correcting for any overall inflation in domestic and import prices that is common across industries in the constructed U.S. price index, sincecommon trends would be absorbed by the constant term in (33).
So we interpret this 7.6 percent fall in prices as the real impact on U.S. manufacturing prices relative to inflation. Since manufacturing is only a fraction of the U.S. economy, this seemingly large effect is notably smaller than the aggregate 6.7 percent long-run U.S. welfare increase that Caliendo et al. (2015) estimate from the 2000-2007 China trade shock.
In a period of increasing impoverishment of US workers, this meant that their real wages were buffered by this lowered inflation and thus kept their standard of living from declining even more. The fact that most of the imports from China are consumer goods and consumer spending makes up 2/3 of our economy means that the standard of living of people in the US is increasingly dependent on the continuation of US dollar hegemony. We are using massive amounts of printed dollars to keep the goods coming. If there ever was a sudden stop to this, our living standards could fall precipitously. As quoted by Siddiqui, Paul Samuelson expressed his deep concern about this:
More than a decade ago, Krugman (2007: 437) noted, “The United States has a remarkably large current account deficit, both in absolute terms and as a share of GDP. At the moment the country is not having any difficulty attracting capital inflows sufficient to finance this deficit, but many observers nonetheless find that deficit worrisome. This worriers see an ominous resemblance between the current U.S. situation and that of developing countries that also went through periods during which capital flows easily financed large current deficits, then experienced ‘sudden stops’ in which capital inflows abruptly ceased, the currency plunged, and the economy experienced a major setback.”
The Walmart’s and Amazons depend on the much lower paid labor making manufactured goods from China and the developing countries as an inherent part of their business models. This was another way that the ruling class kept pressure for wage increases down and capitalist profits higher. The other way was US companies offshoring production of things like sophisticated electronics at a fraction of the cost of what it would be to produce in the US. The Apple iPhone is a prime example of this,
And how does the United States pay for this massive trade deficit? As MMT says, we get real goods, we send them paper. Basically by printing money that the world is obliged to take as payment. China now has over a trillion dollars of US Treasury notes that it has accumulated in trade with the US, about 7% of the total foreign-held US government debt.
US Global Trade Deficit 1950-2018
Thus the US ruling class continues to reap the profits of exploiting cheap labor from the developing countries in both raw materials and in manufactured goods because of its position as the creator of the world reserve currency.
The Cycle of US Interest Rates and Currency Attacks on Developing Countries
Federal Funds Rate 1950-2019
In 2007 Joseph Stiglitz wrote an article titled “The Asian Crisis 10 Years Later” in The Guardian, explaining the Asian Financial Crisis which began in 1997. In it, he laid out the timeline of the crisis:
In July 1997, the Thai Baht plummeted. Soon after, the crisis spread to Indonesia and Korea, then to Malaysia. In a little more than a year, the Asian crisis had become a global financial crisis, with the crash of Russia’s ruble and Brazil’s real.
In that year, George Soros’ hedge fund, the Quantum Fund, bet heavily against the Thai baht, which had recently dissolved its peg to the US dollar. Thailand did this after the dollar strengthened, and Thailand was caught in deteriorating terms of trade and thus an inability to pay the massive loans it had denominated in dollars. That was like blood in the water to the hedge fund sharks and other currency speculators to attack the Thai baht, betting that it would quickly devalue against the dollar. George Soros’ fund’s $1 billion bet, in fact, wasn’t the biggest of the attackers. Julian Roberts’ Tiger Fund hedge fund bet $3 billion against it. The attacks continued through the next two years.
What were the general conditions causing this financial crisis? As Stiglitz puts it, “[B]efore the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries – a six-fold increase in six years. Afterwards, capital flows to developing countries stagnated.” He went on to say, “Indeed, the two most important lessons of the crisis have not been absorbed. The first is that capital market liberalisation – opening up developing countries’ financial markets to surges in short-term ‘hot’ money – is dangerous. The only two major developing countries to be spared a crisis were India and China, both of which had resisted capital market liberalisation. Yet today, both are under pressure to liberalise.”
We think that the cycles of interest rates play a major part in the recurring financial crises. When US interest rates decline and a weaker dollar follows, US companies use the cheap money to buy up assets in these countries and US banks push dollar-denominated loans to them. Then the crisis hits and the foreign investments become “hot money” and flows out of the country. At the same time, Western banks stop lending and the economic crisis intensifies in developing countries.
Korea’s experience with the 1997 Asian financial crisis is an example of Western predatory attacks against a weakening currency leading to the attempts at an economic takeover of its most valuable assets. Korea was forced to borrow from the IMF to cover foreign loan repayments for its major industrial companies, the Chaebol. Among other demands, the IMF demanded that Korea “open up” its financial markets to foreign investment, allowing 55% foreign ownership of its companies (Korea dropped limits altogether), which would mean foreign, primarily U.S., control of Korea’s companies.
As one report in 2009 stated in Korea’s attempt to instill anti-takeover poison pill measures:
Domestic M&A laws have been loosened since the 1997-98 Asian financial crisis, and in 2006 activist investor Carl Icahn and hedge fund Steel Partners floated the idea of buying tobacco monopoly KT&G…in what would have been South Korea’s first unsolicited foreign takeover bid, but no official tender offer was filed.
In 2003, SK Group, parent of top mobile carrier SK Telecom…and refiner SK Energy…, clashed with Sovereign Asset Management, which unsuccessfully sought to remove its chairman.
Those cases raised a red flag to unfriendly takeover attempts and led listed companies, including Samsung and POSCO, to spend $55 billion defending their management as of end-January.
“Our country has made hostile M&A attacks easy by removing a ceiling on foreign stock investments, but it has not had any means to prevent hostile M&A,” the justice ministry said in a statement on Monday.
The US Dollar and the SWIFT International Settlement System: Weaponizing the Dollar
On November 5, 2018 Al Jazeera ran the following headline: US Treasury Secretary Steven Mnuchin told reporters that SWIFT could get slapped with sanctions if it provides services to Iranian banks blacklisted by Washington.
The article continued:
The Belgium-based Society for Worldwide Interbank Financial Communications (SWIFT) financial messaging service announced on Wednesday it was suspending access for some Iranian banks “in the interest of the stability and integrity of the wider global financial system.”
What was this about? Another way the US uses its hegemonic position as the world’s reserve currency is its weaponization of the currency clearing system used in global trade. Today SWIFT (the Belgium-based Society for Worldwide Interbank Financial Communications) system dominates the international trade payments system, which of course is heavily based on the US dollar,
As a whole, the US dollar is by far the currency of world trade transactions. As Kalim Siddiqui wrote in his 2018 article “The U.S. Dollar and the World Economy: A Critical Review”:
the U.S. dollar makes up nearly 63% of central banks’ reserve currency holdings,against 17% for the euro and 2% for the yen (Siddiqui 2018a, World Bank 2017).
In the foreign exchange market, 90% of forex trading involves the U.S. dollar. At present, nearly 40% of the world’s debt is issued in the U.S.dollars (World Bank 2017, Willett and Chiu 2012).
SWIFT is basically a financial messaging system that allows its member banks to conduct payment settlements between international trade buyers and sellers, According to Al Jazeera, the member-owned cooperative connects more than 11,000 banks, financial institutions and corporations in more than 200 countries and territories around the world. It continues:
Think of SWIFT as the central nervous system of international financial transactions. The messaging platform enables financial institutions to send, receive and track information about financial transactions in a secure and standardised way that facilitates the smooth flow of funds across borders.
When the Trump administration wanted to punish Iran with sanctions, it used the US’ role as the world’s issuer of reserve currency as one of the ways to enforce it. Al Jazeera states,
Countries cut off from SWIFT can be crippled financially because money transfer information can’t be forwarded to its banks. When a country’s banks are cut off from SWIFT, it can’t pay for imports and can’t receive payment for exports… In March 2012, SWIFT agreed to not forward messages to any Iranian bank or individual that had been blacklisted by the EU. As a result, Iran’s oil exports plunged from around 2.5 million bpd in 2011 to around one million bpd by 2014. The 2012 SWIFT ban was widely seen as instrumental in bringing Iran to the negotiating table which led to the 2015 Iran-nuclear deal. When Iranian banks were reconnected to SWIFT following the 2015 Iran-nuclear deal, oil exports increased again.
While SWIFT is not owned by the US, it defies the wishes of the superpower at its own peril. Al Jazeera states:
…There could be consequences if it resists US pressure to cut off Iran again. Richard Goldberg, senior adviser at the Foundation for Defense of Democracies, a think-tank, argued in this blog that in 2012, Congress authorised any president to impose sanctions on SWIFT’s board of directors (which includes executives from some of the world’s biggest banks) if it refused to disconnect Iranian banks blacklisted by Washington.
As can be seen, the US can impose its will on SWIFT and use it as a financial weapon against its intended targets.
Europe Countering US Move on SWIFT
The US campaign against Iran and pulling out of the 2015 nuclear deal, however, has not been supported by the major countries of Europe, who rely on trade and imported oil from the Middle East and want the best deal they can get in buying it, To have Iran cut off from supplying oil to them and trading with them is a major problem for them, To counter the US move against SWIFT by banning Iran from it, the Europeans have attempted to set up a separate shadow trade settlement system.
On December 1, 2019, six European countries joined a barter system for the Iran trade. As reported by TRT World, the Paris-based INSTEX, which has yet to enable transactions, functions as a clearing house allowing Iran to continue to sell oil and import other products or services in exchange, to avoid US sanctions. Paris, London and Berlin on Saturday welcomed six new European countries to the INSTEX barter mechanism, which is designed to circumvent US sanctions against trade with Iran by avoiding use of the dollar.
As founding shareholders of the Instrument in Support of Trade Exchanges (INSTEX), France, Germany and the United Kingdom warmly welcome the decision taken by the governments of Belgium, Denmark, Finland, the Netherlands, Norway and Sweden, to join INSTEX as shareholders,” the three said in a joint statement. The Paris-based INSTEX functions as a clearing house allowing Iran to continue to sell oil and import other products or services in exchange.
This, in itself, is a step toward freeing the world from the US dollar hegemony that has lasted over 85 years.
The notion of a Job Guarantee is on a lot of lips these days, led by modern monetary theory (MMT) proponent Pavlina Tcherneva, whose short book (128 pages!), The Case for a Job Guarantee, has captured widespread acclaim. In my opinion, it’s must-reading for anyone trying to define a truly transformative agenda for the period ahead. MMT proponents consistently back this demand, and it’s also a demand of the Poor People’s Campaign. And its roots go back much further.
When he ran for president in 1932, FDR saw the need of a federal job guarantee and called it a human right. Yet, he and the Democrats failed to push it through. When the postwar boom ended in the early 1960s, unemployment returned with a vengeance, creating an ever-larger echelon of precarious workers with depressed incomes alongside a stagnant stratum unable to find any job at all (and dependent on inconsistent and inadequate government support).
In retrospect, the failure to include a federal job guarantee in the New Deal social contract stands out as a crucial revolutionary failure of the 1930s popular uprising against the Great Depression’s version of US corporate capitalism.
This time around, we have to do better. With ecological catastrophe a mere decade away, American society cannot save itself — nor make the necessary contributions to saving the world (that our country has long dominated) — unless it provides the economic security of alternative, life-sustaining, transition employment to every worker who sacrifices a petroleum-based job in order to save our planet. A job guarantee is no longer merely a human right — a mere matter of justice — it has become an ecological and social necessity…and one with no time for delay.
Coming out of the economic devastation of COVID, our newly-cleansed economy must rebuild along steeply modified lines; it will be a wasted opportunity if we fail to keep polluting industries in lock-down. To this end, the Biden Department of Labor should implement a permanent, federal Job Guarantee and provide block grants to state, local, tribal and territorial governments to fund — at $15/hour plus vacation, healthcare and child care — as many full-time jobs as necessary for anyone forced or willing to leave ecologically destructive employment (or finds oneself unemployed for any reason). At the same time, Biden should establish a Green New Deal industrial policy to create an array of employment opportunities in sustained, public and private investments aimed at achieving zero carbon emissions (and other ecological necessities) by 2025.
Below are some additional links to articles and videos on the subject.
Voices for New Democracy 