RWER issue 55: Michael Hudson
U.S.“quantitative easing” is fracturing the Global Economy
Michael Hudson [Levy Economics Institute and Uni. of Missouri, K.C, USA]Great structural changes in world trade and finance occur quickly – by quantum leaps, not by slow marginal accretions. The 1945-2010 era of relatively open trade, capital movements and foreign exchange markets is being destroyed by a predatory financial opportunism that is breaking the world economy into two spheres: a dollar sphere in which central banks in Europe, Japan and many OPEC and Third World countries hold their reserves the form of U.S. Treasury debt of declining foreign-exchange value; and a BRIC-centered sphere, led by China, India, Brazil and Russia, reaching out to include Turkey and Iran, most of Asia, and major raw materials exporters that are running trade surpluses.
What is reversing trends that seemed irreversible for the past 65 years is the manner in which the United States has dealt with its bad-debt crisis. The Federal Reserve and Treasury are seeking to inflate the economy out of debt with an explosion of bank liquidity and credit – which means yet more debt. This is occurring largely at other countries’ expense, in a way that is flooding the global economy with electronic “keyboard” bank credit while the U.S. balance-of-payments deficit widens and U.S. official debt soars beyond any foreseeable means to pay. The dollar’s exchange rate is plunging, and U.S. money managers themselves are leading a capital flight out of the domestic economy to buy up foreign currencies and bonds, gold and other raw materials, stocks and entire companies with cheap dollar credit.
This outflow from the dollar is not the kind of capital that takes the form of tangible investment in plant and equipment, buildings, research and development. It is not a creation of assets as much as the creation of debt, and its multiplication by mirroring, credit insurance, default swaps and an array of computerized forward trades. The global financial system has decoupled from trade and investment, taking on a life of its own.
In fact, financial conquest is seeking today what military conquest did in times past: control of land and basic infrastructure, industry and mining, banking systems and even government finances to extract the economic surplus as interest and tollbooth-type economic rent charges. U.S. officials euphemize this policy as “quantitative easing.” The Federal Reserve is flooding the banking system with so much liquidity that Treasury bills now yield less than 1%, and banks can draw freely on Fed credit. Japanese banks have seen yen borrowing rates fall to 0.25%.
This policy is based on a the wrong-headed idea that if the Fed provides liquidity, banks will take the opportunity to lend out credit at a markup, “earning their way out of debt” – inflating the economy in the process.
The whole paper may be read at: http://www.paecon.net/PAEReview/issue55/Hudson55.pdf
Michael Hudson’s diatribe on “quantitative easing” strikes me as peculiar indeed, especially since QE2 is aimed at bailing out the US government, not the big banks (read Ellen Brown’s article at http://www.globalresearch.ca/index.php?context=va&aid=22014). After all, is it really good for the world, or even the US in the long run, for the US to be living off the “free lunch” provided by US dollar reserves?
As the richest country in the world, the US should be exporting to help out the people of poorer countries, not insisting that they continue to prop up bloated US consumerism. Other countries need to be demanding a global currency and that the US start paying its own way. Meanwhile devaluation of the dollar is a stop-gap measure that will help reduce US consumption, re-localize some production, and keep down the interest on US debt.
And who would ever imagine – chairman of the Federal Reserve leading the socialist revolution? At least, that’s what it feels like, when the Fed comes to the rescue of the government itself – by buying up Treasury bonds that no one else will touch, due to their low interest rate. As Ellen Brown points out in another article, the Fed could even help rescue the states by buying up municipal bonds. This is a sea change – a sign of just how desperate the situation has become.