No 85 Posted by fw, November 7, 2010
“The object of warfare is to take over a country’s land, raw materials and assets, and grab them. In the past, that used to be done militarily by invading them. But today you can do it financially simply by creating credit, which is what the Federal Reserve has done.” Michael Hudson
On Wednesday, November 3, 2010, the U.S. Federal Reserve pumped another $600 billion into the economy. Not only does this move keep U.S. interest rates at historically low levels, it effectively devalues the dollar against foreign currencies, thus making foreign imports more expensive to American consumers and American exports less expensive for foreign consumers.
More importantly, low interest rates encourage U.S. corporations to borrow in order to buy up foreign real estate, natural resources and stocks.
On the Friday, November 5 edition of Democracy Now, hosts Amy Goodman and Juan Gonzalez invited Michael Hudson, Distinguished Research Professor at the University of Missouri, Kansas City and a former Wall Street economist, to talk about this latest round of “quantitative easing”.
A video of the entire interview, along with a full transcript, are available here at Democracy Now, What follows are selected highlights from that conversation accompanied by my sub-headings and bridging commentary.
“The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy. . . . The Fed has said, we want to give the banks so much money that they will lend it out so you can begin to bid up prices on real estate again and pull the banks out of the real estate negative equity that it’s in. So the purpose, according to the Fed, is to raise the price of real estate. . . . But that’s not happening. The actual banks have lent less today than they did in 2007. So the money is going abroad. And it’s going abroad not really to buy foreign companies so much, but to speculate in currency.”
Rather than loaning the $600 billion to Main Street, Wall Street banks recognize a bonanza bargain opportunity when they see one. Although Hudson’s details of the dynamics of international currency speculation are necessarily sparse in an interview format, the bottom line is that surplus U.S. dollars are flooding the world. Foreign central banks recycle these dollars by purchasing U.S. Treasury bonds, which in turn finances the U.S. payments deficit and domestic budget deficit, U.S. corporate turnovers, foreign wars, and a culture of militarism and belligerence overall at the expense of democratic freedoms, beneficial social change, and human civil rights.
Returning to the interview, here’s Hudson’s general account of how speculators could conceivably make a 200 percent profit in currency deals:
“It [the $600 billion] would enable them [speculators] to earn their way out of debt by essentially looting the China central bank, the Brazilian central bank, the Turkish central bank and the other central banks, because you can now borrow money in America at one percent. So you’d put down, let’s say, a million dollars of your own money, borrow $99 million of the bank’s money—that’s $100 million. You would buy Chinese currency, RMB [renminbi], for $100 million. You then say, “Raise your currency by 20 percent,” which is what the Fed has asked them to do. That means that your million dollars now has turned into a $20 million gain, because $100 million is now worth $120 million. You’ve made a 200 percent profit. And for Wall Street, they deal in billions, not millions. And so, this would enable the banks to make up their money by buying out, essentially, foreign currency. They’re doing the same in Australia. It’s a currency gamble.” (For a full explanation of how currency speculation works, see Hudson’s Economic Meltdown: The “Dollar Glut” is What Finances America’s Global Military Buildup).
Keeping interest rates low by printing money helps Wall Street and hurts Main Street. Hudson explains:
“Well, if they [Jane and Joe Public] have money to put in pension funds or savings, they’re only able to get about one percent, if they keep it safe. Otherwise, they’re taking a risk in the stock market. But the key is not simply lowering interest rates. The [Fed’s] idea is to flood the economy with credit so the banks will lend out more debt. And if the Fed’s policy works, then housing prices are going to go back up so high that most consumers are going to have to pay 40 percent of their income for housing. They’re going to have to pay more money for credit card debt. The purpose is to help the banks make money at the expense of the economy. It’s not to help the economy at all. That’s the really important thing. When they say the economy, they mean—the Fed means its constituency: the banks. And the banks’ product is debt. And that’s what they’re trying to produce.”
“[This is inflationary]. It will inflate asset prices. It won’t inflate consumer prices. It’s actually deflationary for consumer prices, because if you’re an American consumer and you spend 40 percent of your income for housing, 15 percent for debt service to the bank, 11 percent goes out in your FICA [Federal Insurance Contributions Act tax] wage withholding, and about 10 to 15 percent in actual income taxes, that means that the average American has maybe one-third or a quarter of their salary to actually spend on goods and services. They have to spend so much on debt service and finance and insurance and real estate that there’s no money to buy goods and services. That’s why so many stores are closing throughout the cities on the big shopping streets. It’s deflationary for the economy, inflationary for the people who have wealth, inflationary for the banks.”
At this point in the interview, Amy played a clip from an interview she had recently had with the Nobel Prize-winning economist Joseph Stiglitz. He, too, was talking about the Federal Reserve and its attempt to inject liquidity into the US economy.
“So the money isn’t going into the American economy. . . . In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets. So, the irony is that money that was intended to rekindle the American economy is causing havoc all over the world. Those elsewhere in the world say, what the United States is trying to do is the twenty-first century version of ‘beggar thy neighbor’ policies that were part of the Great Depression: you strengthen yourself by hurting the others. You can’t do protectionism in the old version of raising tariffs, but what you can do is lower your exchange rate, and that’s what low interest rates are trying to do, weaken the dollar. The flood of liquidity abroad is trying to push the exchange rates abroad. And they say—they’re saying, ‘We can’t allow that.’ “
“The interview of Professor Stiglitz was quite right. . . . The Fed is doing this to cover up the huge fraud that he [Stiglitz] talks about. He’s right. These people should be in jail, and you shouldn’t bail them out. You’re keeping the debt that was run out by the junk mortgages and the fraudulent lending, you’re keeping that in place, pricing American labor out of the market, and making it impossible for America to earn its way out of debt. So, in Europe, they’re saying, “How can America ever repay these dollar debts that they’re running up?” They can’t repay, and that’s why the euro is going up against America. And that’s why they say, “We want to now talk to the BRIC countries [Brazil, Russia, India, China], to the third world, and move into a currency area with them and just isolate the dollar, so they can’t do the kind of financial warfare that they’ve been engaging in.”
Obama, the villain in this piece, talked about change in general terms but never laid out the details. He gave Americans change, all right, but not the kind they were expecting. In Hudson’s words:
“[Obama] has always represented Wall Street’s interest. . . . During the last presidential campaign, he won because he said he was for change. Mr. Obama never said what he would do. And it’s obviously the case that he saw that the public wanted change. If you want to get elected, you say that you’re for change. . . [He] reappointed the worst of the Bush people, like Tim Geithner as the Treasury secretary. He’s kept on the most right-wing of the Clinton people as his economic advisers. He is essentially in Wall Street’s pocket. . . . And that’s why so many people were so disappointed. They believed that he was going to be for change . . . but he had no intention of doing the change at all, as we now see. And he still has not come out and said that America needs anything except more debt, more bailouts for the banks. People were angry because the banks were bailed out. . . . He gave money to the rich, the exact opposite [of what he said he would do].”
When asked what he expected to happen at the upcoming G20 meeting in South Korea, Hudson replied:
“The same thing that happened two weeks ago: absolutely nothing. They will all agree that the soup was very good, that the food was nice, and that they will have further discussions. But America will not get any of what it’s asking for from them, because they’re going to say, ‘Look, we’re not going to let you create electronic keyboard credit and buy out our real estate and our industry and empty out our bank reserves like you did in the 1997 Asia crisis.’ That’s never going to happen again, and the world is going to begin splitting into two currency blocs: the BRIC bloc and the dollar bloc.”
Quoting from Hudson’s above-cited, Economic Meltdown source:
“The U.S. media are silent about the most important topic policy makers are discussing here [Europe] (and I suspect in Asia too): how to protect their countries from three inter-related dynamics: (1) the surplus dollars pouring into the rest of the world for yet further financial speculation and corporate takeovers; (2) the fact that central banks are obliged to recycle these dollar inflows to buy U.S. Treasury bonds to finance the federal U.S. budget deficit; and most important (but most suppressed in the U.S. media), (3) the military character of the U.S. payments deficit and the domestic federal budget deficit.”
Without alternate news and information sources like DemocracyNow.Org, and outspoken, informed citizens like professors Stiglitz and Hudson, we’d all be as morally and factually challenged as so many Americans appear to be.
For a far more detailed explanation of what is involved in the Fed’s injection of $600 billion into the U.S. economy, read the transcript and watch Paul Jay’s November 6, 2010 interview of Robert Pollin, Professor of Economics and founding Co-Director of the Political Economy Research Institute at the University of Massachusetts, Amherst. Jay asks some good Economics for Dummies questions to help the rest of us wrap our heads around complex economic processes. Questions like: What does it mean for the Fed to go out and buy $600 billion of U.S. bonds? What’s a bond? Who issues the bond? And if the Fed’s buying the bond, is one arm of government buying it from the other arm? What is this transaction? And then what happens to the money that goes—that bought the bond?