by Michael Hudson
Part 2 - America’s sanctions on its allies hurt their economies, not those of Russia and China
What seems ironic is that such sanctions against Russia and China have ended up helping rather than hurting them. But the primary aim was not to hurt nor to help the Russian and Chinese economies. After all, it is axiomatic that sanctions force the targeted countries to become more self-reliant. Deprived of Lithuanian cheese, Russian producers have produced their own, and no longer need to import it from the Baltic states. America’s underlying economic rivalry is aimed at keeping European and its allied Asian countries in its own increasingly protected economic orbit. Germany, Lithuania and other allies are told to impose sanctions directed against their own economic welfare by not trading with countries outside the U.S. dollar-area orbit.
Quite apart from the threat of actual war resulting from U.S. bellicosity, the cost to America’s allies of surrendering to U.S. trade and investment demands is becoming so high as to be politically unaffordable. For nearly a century there has been little alternative but to agree to trade and investment rules favoring the U.S. economy as the price of receiving U.S. financial and trade support and even military security. But an alternative is now threatening to emerge – one offering benefits from China’s Belt and Road initiative, and from Russia’s desire for foreign investment to help modernize its industrial organization, as seemed to be promised thirty years ago in 1991.
Ever since the closing years of World War II, U.S. diplomacy has aimed at locking Britain, France, and especially defeated Germany and Japan, into becoming U.S. economic and military dependencies. As I documented in Super Imperialism, American diplomats broke up the British Empire and absorbed its Sterling Area by the onerous terms imposed first by Lend-Lease and then the Anglo-American Loan Agreement of 1946. The latter’s terms obliged Britain to give up its Imperial Preference policy and unblock the sterling balances that India and other colonies had accumulated for their raw-materials exports during the war, thus opening the British Commonwealth to U.S. exports.
Britain committed itself not to recover its prewar markets by devaluing sterling. U.S. diplomats then created the IMF and World Bank on terms that promoted U.S. export markets and deterred competition from Britain and other former rivals. Debates in the House of Lords and the House of Commons showed that British politicians recognized that they were being consigned to a subservient economic position, but felt that they had no alternative. And once they gave up, U.S. diplomats had a free hand in confronting the rest of Europe.
Britain committed itself not to recover its prewar markets by devaluing sterling. U.S. diplomats then created the IMF and World Bank on terms that promoted U.S. export markets and deterred competition from Britain and other former rivals. Debates in the House of Lords and the House of Commons showed that British politicians recognized that they were being consigned to a subservient economic position, but felt that they had no alternative. And once they gave up, U.S. diplomats had a free hand in confronting the rest of Europe.
Financial power has enabled America to continue dominating Western diplomacy despite being forced off gold in 1971 as a result of the balance-of-payments costs of its overseas military spending. For the past half-century, foreign countries have kept their international monetary reserves in U.S. dollars – mainly in U.S. Treasury securities, U.S. bank accounts and other financial investments in the U.S. economy. The Treasury-bill standard obliges foreign central banks to finance America’s military-based balance-of-payments deficit – and in the process, the domestic government budget deficit.
The United States does not need this recycling to create money. The government can simply print money, as MMT has demonstrated. But the United States does need this foreign central bank dollar recycling to balance its international payments and support the dollar’s exchange rate. If the dollar were to decline, foreign countries would find it much easier to pay international dollar-debts in their own currencies. U.S. import prices would rise, and it would be more costly for U.S. investors to buy foreign assets. And foreigners would lose money on U.S. stocks and bonds as denominated in their own currencies, and would drop them. Central banks in particular would take a loss on the Treasury’s dollar bonds that they hold in their monetary reserves – and would find their interest to lie in moving out of the dollar. So the U.S. balance of payments and exchange rate are both threatened by U.S. belligerency and military spending throughout the world – yet its diplomats are trying to stabilize matters by ramping up the military threat to crisis levels.
U.S. drives to keep its European and East Asian protectorates locked into its own sphere of influence is threatened by the emergence of China and Russia independently of the United States while the U.S. economy is de-industrializing as a result of its own deliberate policy choices. The industrial dynamic that made the United States so dominant from the late 19th century up to the 1970s has given way to an evangelistic neoliberal financialization. That is why U.S. diplomats need to arm-twist their allies to block their economic relations with post-Soviet Russia and socialist China, whose growth is outstripping that of the United States and whose trade arrangements offer more opportunities for mutual gain.
At issue is how long the United States can block its allies from taking advantage of China’s economic growth. Will Germany, France and other NATO countries seek prosperity for themselves instead of letting the U.S. dollar standard and trade preferences siphon off their economic surplus?
At issue is how long the United States can block its allies from taking advantage of China’s economic growth. Will Germany, France and other NATO countries seek prosperity for themselves instead of letting the U.S. dollar standard and trade preferences siphon off their economic surplus?
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