Re: [A-List] Michael Hudson's Super-imperialism

[Hudsonmi@xxxxxxx]

Dear James,
    You ask whether the US debt can be sustained without a collapse in the world economy. If there is a collapse, it must take the form of a political break, and this still is not on the horizon, remarkable as it may appear. (I'm hoping to help fan the flames of discontent over this issue.)
    The reason that the process has not created a collapse so far is that the United States made it clear ever since the 1970s in discussions over IMF Special Drawing Rights ("paper gold") that it has no intention of paying its foreign debt. Foreign central banks are invited to keep their claims on the US Treasury as money to settle balances among themselves, but the US won't treat this as a debt. Hence, the nominal US official debt is largely fictitious. 
    Fictions can go on forever, as long as nobody will call the US bluff and actually try to use their central bank Treasury bills to buy a US company, US real estate or other real asset.
    Governments rejecting US dollars don't seem to stay in office long, or experience assassinations or regime change. In this respect the US won't face a debt problem, but the rest of the world will have to confront the US free lunch.

    Most other debt, of course, can't be paid, simply because of the mathematics of compound interest. Most third world debt represents the annual interest accruals of loans long past taken out and squandered to subsidize capital flight by supporting the currency. In effect, governments borrow the interest each year. I've plotted curves for most countries, including the United States, for the debt they had in 1945, and plotted the curve of increase at 5 and 6%. This covers most countries and they fall within this range. 
    At the end of this geometric growth is all the gold in the world, so of course the debt is not sustainable. As Adam Smith said in the Wealth of Nations, no nation has ever paid off its debt.

    A second reason why the debts can't be paid concerns the rate of interest. And this is a problem that affects the US domestic financial market as well as global markets. 
    More and more debt has been added on by lowering the rate of interest, so that a given flow of debt service has been able to carry a larger and larger inverted pyramid of debt.
    This is what has inflated the bubble economy. However, there is an inner contradiction here, and that concerns pension funds. As the rate of interest falls, it is necessary to invest more and more in bonds in order to provide a given defined benefit. As rates fall to zero, the pension fund - presaving to pay pension - must approach infinity to generate the required returns.
    This is prompting corporations all over the world to switch from defined benefits to defined pay-in plans. Employees have no idea of what they'll get when they retire.
    The classic switch is the "South Sea Bubble strategy." Holders of government obligations - including Social Security contributors - will be asked to switch their legal claims for stipulated interest or rentier payments to undefined equity. In the 1710s England could hold out the promise of the great growth industry of its day, the slave trade. Today I suppose it's the dot.com and information technology bubble (no, that's gone bust already), maybe outer space. Once bondholders and Social Security claimants and pensioners switch into stocks, the vast shift of money into the stock market will inflate its prices. Then, these prices can be permitted to collapse, wiping out their claims. It will all be blamed on "the madness of crowds," as if the government had not orchestrated public opinion to fan the flames of get-rich-quick bubble financing.
    
    This comment explains why I included the first three chapters of my Super-Imperialism on America's creditor stance before 1950. It provides a counterpoint to the post-1950 period, where the US has used its debtor power as aggressively as it used its creditor power in earlier times. Today, in fact, it uses a creditor strategy vis-à-vis third world countries and other debtor countries, while using a debtor strategy vis-à-vis Europe and Asia.
    My point is that from this financially macroeconomic standpoint, an international creditor position has a logic all its own. This logic is independent from the role of governments in representing the interests of their private corporations. Of course they do this too. But the corporation-and-profit motivation for imperialism is largely microeconomic in character as compared to the international creditor/debtor motivation on the macroeconomic financial level. I am trying to distinguish between the different motivations and techniques or tactics of imperialism in order to get a more rounded picture. This should be viewed as adding a layer to the analysis, not as replacing the familiar old-style imperialism.

    Michael Hudson