De-Dollarization: Dismantling America’s
Financial-Military Empire
The city of
Yakaterinburg, Russia’s largest east of the Urals, may become known
not only as the death place of the tsars but of American hegemony
too – and not only where US U-2 pilot Gary Powers was shot down in
1960, but where the US-centered international financial order was
brought to ground.
Challenging America
will be the prime focus of extended meetings in Yekaterinburg,
Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for
Chinese President Hu Jintao, Russian President Dmitry Medvedev and
other top officials of the six-nation Shanghai Cooperation
Organization (SCO).
The
alliance is comprised of Russia, China,
Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan,
with observer status for Iran, India, Pakistan and
Mongolia. It will be joined on
Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and
China).
The attendees have
assured American diplomats that dismantling the US financial
and military empire is not their
aim.
They simply want to
discuss mutual aid – but in a way that has no role for the United
States, NATO or the US dollar as a vehicle for trade. US diplomats
may well ask what this really means, if not a
move to make US hegemony obsolete. That is what a multipolar world
means, after all.
For starters, in 2005
the SCO asked Washington to set a timeline to withdraw from its
military bases in Central Asia. Two years later the SCO countries
formally aligned themselves with the former CIS republics belonging
to the Collective Security Treaty Organization (CSTO), established
in 2002 as a counterweight to
NATO.
Yet the meeting has
elicited only a collective yawn from the US and even European press
despite its agenda is to replace the global dollar standard with a
new financial and military defense system.
A Council on Foreign Relations spokesman
has said he hardly can imagine that Russia and China can overcome
their geopolitical rivalry,1 suggesting that America can use the
divide-and-conquer that Britain used so deftly for many centuries
in fragmenting foreign opposition to its own
empire.
But George W. Bush
(“I’m a uniter, not a divider”) built on the Clinton
administration’s legacy in driving Russia, China and their
neighbors to find a common ground when it comes to finding an
alternative to the dollar and hence to the US ability to run
balance-of-payments deficits ad
infinitum.
What may prove to be
the last rites of American hegemony began already in April at the
G-20 conference, and became even more explicit at the St.
Petersburg International Economic Forum on June 5, when Mr.
Medvedev called for China, Russia and India to “build an
increasingly multipolar world order.”
What this means in
plain English is: We have reached our limit in
subsidizing the United States’ military encirclement of Eurasia
while also allowing the US to appropriate our exports, companies,
stocks and real estate in exchange for paper money of questionable
worth.
"The artificially maintained unipolar
system,” Mr. Medvedev spelled out, is based on “one big centre of
consumption, financed by a growing deficit, and thus growing debts,
one formerly strong reserve currency, and one dominant system of
assessing assets and risks.”2
At the root of the global
financial crisis, he concluded, is that the United States makes too
little and spends too much.
Especially upsetting
is its military spending, such as the stepped-up US military aid to
Georgia announced just last week, the NATO missile shield in
Eastern Europe and the US buildup in the oil-rich Middle East and
Central
Asia.
The sticking point with all
these countries is the US ability to print unlimited amounts of
dollars. Overspending by US consumers on imports in
excess of exports, US buy-outs of foreign companies and real
estate, and the dollars that the Pentagon spends abroad all end up
in foreign central banks.
These agencies then
face a hard choice: either to recycle these dollars back to the
United States by purchasing US Treasury bills, or to let the “free
market” force up their currency relative to the dollar – thereby
pricing their exports out of world markets and hence creating
domestic unemployment and business
insolvency.
When China and other
countries recycle their dollar inflows by buying US Treasury bills
to “invest” in the United States, this buildup is not really
voluntary.
It does not reflect faith in the U.S. economy enriching foreign central banks
for their savings, or any calculated investment preference,
but simply a lack of
alternatives. “Free markets” US-style hook countries into a system
that forces them to accept dollars without limit. Now they want
out.
This means creating a new alternative. Rather than making merely
“cosmetic changes as some countries and perhaps the international
financial organisations themselves might want,” Mr. Medvedev ended
his St. Petersburg speech, “what
we need are financial institutions of a completely new type, where
particular political issues and motives, and particular countries
will not dominate.”
When foreign military spending forced the US
balance of payments into deficit and drove the United States off
gold in 1971, central banks were left without the traditional asset
used to settle payments imbalances.
The alternative by default was to invest their
subsequent payments inflows in US Treasury bonds, as if these still
were “as good as gold.” Central banks now hold $4 trillion of these
bonds in their international reserves – land these loans have
financed most of the US Government’s domestic budget deficits for
over three decades now!
Given the fact that about half of US Government
discretionary spending is for military operations – including more
than 750 foreign military bases and increasingly expensive
operations in the oil-producing and transporting countries – the
international financial system is organized in a way that finances
the Pentagon, along with US buyouts of foreign assets expected to
yield much more than the Treasury bonds that foreign central banks
hold.
The main political issue confronting the world’s
central banks is therefore how to avoid adding yet more dollars to
their reserves and thereby financing yet further US deficit
spending – including military spending on their
borders?
For starters, the six SCO countries and
BRIC countries intend to trade in their own currencies so as to get
the benefit of mutual credit that the United States until now has
monopolized for itself.
Toward this end, China has struck bilateral
deals with Argentina and Brazil to denominate their trade in
renminbi rather than the dollar, sterling or
euros,3 and two weeks
ago China reached an agreement with Malaysia to denominate trade
between the two countries in renminbi.[4]
Former Prime
Minister Tun Dr. Mahathir Mohamad explained to me in January that
as a Muslim country, Malaysia wants to avoid doing anything that
would facilitate US military action against Islamic countries,
including Palestine.
The nation has too many dollar assets as it is, his
colleagues explained. Central bank governor Zhou
Xiaochuan of the People's Bank of China wrote an official statement
on its website that the goal is now to create a reserve currency
“that is disconnected from individual
nations.”5 This is the aim of the discussions in
Yekaterinburg.
In addition to avoiding
financing the US buyout of their own industry and the US military
encirclement of the globe, China, Russia and other countries no
doubt would like to get the same kind of free ride that America has
been getting.
As matters
stand, they see the United States as a
lawless nation, financially as well as militarily. How else to
characterize a nation that holds out a set of laws for others – on
war, debt repayment and treatment of prisoners – but ignores them
itself?
The United States is
now the world’s largest debtor yet has avoided the pain of
“structural adjustments” imposed on other debtor economies. US
interest-rate and tax reductions in the face of exploding trade and
budget deficits are seen as the height of hypocrisy in view
of the austerity programs that Washington forces on other countries
via the IMF and other Washington
vehicles.
The United States tells debtor
economies to sell off their public utilities and natural resources,
raise their interest rates and increase taxes while gutting their
social safety nets to squeeze out money to pay
creditors.
And at home,
Congress blocked
China’s CNOOK from buying Unocal on grounds of national security,
much as it blocked Dubai from buying US ports and other sovereign
wealth funds from buying into key infrastructure.
Foreigners are invited to emulate the Japanese purchase of white
elephant trophies such as Rockefeller Center, on which investors quickly lost a
billion dollars and ended up walking
away.
In this respect the
US has not really given China
and other payments-surplus nations much alternative but to find a
way to avoid further dollar
buildups.
To date, China’s
attempts to diversify its dollar holdings beyond Treasury bonds
have not proved very successful. For starters, Hank Paulson of
Goldman Sachs steered its central bank into higher-yielding Fannie
Mae and Freddie Mac securities, explaining that these were de
facto public obligations.
They collapsed in
2008, but at least the US Government took these two
mortgage-lending agencies over, formally adding their $5.2 trillion
in obligations onto the national debt. In fact, it was largely
foreign official investment that prompted the
bailout.
Imposing a loss for
foreign official agencies would have broken the Treasury-bill
standard then and there, not only by utterly destroying US
credibility but because there simply are too few Government bonds
to absorb the dollars being flooded into the world economy by the
soaring US balance-of-payments
deficits.
Seeking more of an
equity position to protect the value of their dollar holdings as
the Federal Reserve’s credit bubble drove interest rates down
China’s sovereign wealth funds sought to diversify in late
2007.
China bought stakes in
the well-connected Blackstone equity fund and Morgan Stanley on
Wall Street, Barclays in Britain South Africa’s Standard Bank (once
affiliated with Chase Manhattan back in the apartheid 1960s) and in
the soon-to-collapse Belgian financial conglomerate
Fortis.
But the US financial
sector was collapsing under the weight of its debt pyramiding, and
prices for shares plunged for banks and investment firms across the
globe.
Foreigners see the IMF, World
Bank and World Trade Organization as Washington surrogates in a
financial system backed by American military bases and aircraft
carriers encircling the
globe.
But this military
domination is a vestige of an American empire no longer able to
rule by economic strength. US military power is muscle-bound, based
more on atomic weaponry and long-distance air strikes than on
ground operations, which have become too politically unpopular to
mount on any large
scale.
On the economic front
there is no foreseeable way in which the United States can work off
the $4 trillion it owes foreign governments, their central banks
and the sovereign wealth funds set up to dispose of the global
dollar glut. America has become a deadbeat
– and indeed, a militarily aggressive one as it seeks to hold onto
the unique power it once earned by economic
means.
The problem is how to
constrain its behavior. Yu Yongding, a former Chinese central bank
advisor now with China’s Academy of Sciences, suggested that US
Treasury Secretary Tim Geithner be advised that the United States
should “save” first and foremost by cutting back its military
budget. “U.S. tax revenue is not likely to increase in the short
term because of low economic growth, inflexible expenditures and
the cost of ‘fighting two wars.’”6
At present it is
foreign savings, not those of Americans that are financing the US
budget deficit by buying most Treasury bonds. The effect is
taxation without representation for foreign voters as to how the US
Government uses their forced savings.
It therefore
is necessary for financial diplomats to
broaden the scope of their policy-making beyond the private-sector
marketplace. Exchange rates are determined by many factors besides
“consumers wielding credit cards,” the usual euphemism that the US
media cite for America’s balance-of-payments
deficit.
Since the 13th century, war has been a
dominating factor in the balance of payments of leading nations –
and of their national debts. Government bond financing consists
mainly of war debts, as normal peacetime budgets tend to be
balanced. This links the war budget directly to the balance of
payments and exchange
rates.
Foreign nations see
themselves stuck with unpayable IOUs – under conditions where, if
they move to stop the US free lunch, the dollar will plunge and
their dollar holdings will fall in value relative to their own
domestic currencies and other currencies. If China’s currency rises by 10% against the dollar,
its central bank will show the equivalent of a $200 million loss on
its $2 trillion of dollar holdings as denominated in
yuan.
This explains why, when bond ratings
agencies talk of the US Treasury securities losing their AAA
rating, they don’t mean that the government cannot simply print the
paper dollars to “make good” on these bonds. They mean that dollars
will depreciate in international value. And that is just what is
now occurring.
When Mr. Geithner put
on his serious face and told an audience at Peking University in
early June that he believed in a “strong dollar” and China’s US
investments therefore were safe and sound, he was greeted with
derisive laughter.7
Anticipation of a rise in China’s exchange rate
provides an incentive for speculators to seek to borrow in dollars
to buy renminbi and benefit from the appreciation. For China, the
problem is that this speculative inflow would become a
self-fulfilling prophecy by forcing up its
currency.
So the problem of international reserves is
inherently linked to that of capital controls. Why should China see
its profitable companies
sold for yet more freely-created US dollars, which the central bank
must use to buy low-yielding US Treasury bills or lose yet further
money on Wall
Street?
To avoid this quandary it is necessary to reverse the
philosophy of open capital markets that the world has held ever
since Bretton Woods in 1944. On the occasion of Mr. Geithner’s
visit to China, “Zhou Xiaochuan, minister of the Peoples
Bank of China, the country’s central bank, said pointedly that this
was the first time since the semiannual talks began in 2006 that
China needed to learn from American mistakes as well as its
successes” when it came to deregulating capital markets and
dismantling controls.8
An era
therefore is coming to an end. In the face of continued US
overspending, de-dollarization threatens to force countries to
return to the kind of dual exchange rates common between World Wars
I and II: one exchange rate for commodity trade, another for
capital movements and investments, at least from dollar-area
economies.
Even without capital
controls, the nations meeting at Yekaterinburg are taking steps to
avoid being the unwilling recipients of yet more
dollars.
Seeing that US global
hegemony cannot continue without spending power that they
themselves supply, governments are attempting to hasten what
Chalmers Johnson has called “the sorrows of empire” in his book by
that name – the bankruptcy of the US
financial-military world
order.
If China, Russia and
their non-aligned allies have their way, the United States will no
longer live off the savings of others (in the form of its own
recycled dollars) nor have the money for unlimited military
expenditures and
adventures.
US officials wanted to
attend the Yekaterinburg meeting as observers. They were told No.
It is a word that Americans
will hear much more in the
future.
Notes
1
Andrew Scheineson, “The Shanghai
Cooperation Organization,” Council on Foreign
Relations,
Updated:
March 24, 2009: “While some experts say the organization has
emerged as a powerful anti-U.S. bulwark in Central Asia, others
believe frictions between its two largest members, Russia and
China, effectively preclude a strong, unified
SCO.”
2 Kremlin.ru, June 5, 2009, in Johnson’s Russia
List, June 8, 2009, #8.
3 Jamil
Anderlini and Javier Blas, “China reveals big rise in gold
reserves,” Financial Times, April 24, 2009. See also
“Chinese political advisors propose making yuan an int’l currency.”
Beijing, March 7, 2009 (Xinhua). “The key to financial reform is to
make the yuan an international currency, said [Peter Kwong Ching] Woo [chairman of the Hong
Kong-based Wharf (Holdings) Limited] in a speech to the
Second Session of the 11th National Committee of the
Chinese People’s Political Consultative Conference (CPPCC), the
country’s top political advisory body. That means using the Chinese
currency to settle international trade payments
…”
4 Shai Oster, “Malaysia, China Consider Ending Trade
in Dollars,” Wall Street Journal, June 4,
2009.
5 Jonathan Wheatley, “Brazil and China in plan to
axe dollar,” Financial Times, May 19,
2009.
6 “Another Dollar Crisis inevitable unless U.S.
starts Saving - China central bank adviser. Global Crisis
‘Inevitable’ Unless U.S. Starts Saving, Yu Says,” Bloomberg
News, June 1, 2009. http://www.bloomberg.com/apps/news?pid=20601080&sid=aCV0pFcAFyZw&refer=asia
7 Kathrin
Hille, “Lesson in friendship draws blushes,” Financial
Times, June 2, 2009.
8 Steven
R. Weisman, “U.S. Tells China Subprime Woes Are No Reason to Keep
Markets Closed,” The New York Times, June 18,
2008.
http://www.globalresearch.ca/index.php?
Regardless good or bad, between Russian and the USA... I still
prefer the USA...