Chokepoints and the resilience of American power

Quinn Slobodian has a good review in the New York Review of Books of Edward Fishman’s Chokepoints: American Power in the Age of Economic Warfare. Fishman’s book, as discussed by Slobodian, suggests that the old geography of imperial power, associated with control over maritime chokepoints, has been displaced, or at least supplemented, by a new kind of geopolitical chokepoint embedded in the infrastructure of globalization itself.

The old strategic passages, Suez, Hormuz, Malacca, have not ceased to matter, of course. But the new chokepoints are less visible. They are located in dollar payment systems, correspondent banking networks, shipping lists, insurance, transaction data, export controls, semiconductor supply chains, and the legal mechanisms that allow American sanctions to reach firms and governments well beyond U.S. territory. The empire is not only in the fleet, but also in the spreadsheet, the compliance office, the server, and the bank account.

Slobodian’s central point, a moral or ethical one, is that Fishman is too complacent about the American use of these instruments. Sanctions and export controls are presented too easily as clever instruments of policy, when in fact they are instruments of economic warfare. They often miss ruling elites and impose enormous costs on ordinary people. They restrict access to medicines, raise the cost of living, reduce growth, and produce humanitarian consequences that rarely enter the calculations of the sanctioning power. No surprise there. Fishman is an insider of the US bureaucracy.

More importantly, he notes that there is also a paradox. Sanctions and economic warfare reveal American power and erode it at the same time. In the short run, they demonstrate the extraordinary coercive capacity of the United States. Washington can freeze assets, cut access to dollar payments, block technology transfers, threaten third-party firms, and punish countries that do business with the wrong partners. In the longer run, however, the repeated use of these instruments encourages both adversaries and allies to search for alternatives. Russia, China, Iran, and even European firms and governments learn that dependence on US-controlled networks is a vulnerability (The Chinese already knew that; see Jake Sullivan’s piece in the last issue of Foreign Affairs).

That is certainly right. But it is also incomplete. Slobodian’s critique captures the self-undermining logic of financial and technological chokepoints, but it underplays the military dimension that makes those chokepoints effective in the first place. The dollar system, the control over payment systems, the ability to impose secondary sanctions, and the capacity to define who can and cannot participate in global markets are not simply instruments of market power or legal jurisdiction. They are embedded in a broader imperial architecture.

That architecture includes US military reach, naval dominance, intelligence capabilities, alliance systems, bases surrounding potential rivals, and the capacity to enforce rules globally. The chokepoint is not only financial or technological. It is also geopolitical and military. The old geography of power has not disappeared. It has been internalized into the institutional and technological infrastructure of globalization. This is important because otherwise one ends up with an overly pessimistic view of American hegemony.

It is true that the strength of the system creates vulnerabilities. The more the United States weaponizes interdependence, the more other countries have incentives to escape from it. China’s efforts to build technological autonomy, Russia’s attempts to find payment alternatives, and the search for non-dollar channels of trade all reflect this dynamic. However, as Tim Barker notes in a recent piece in Phenomenal World, American declinism has often been less a description of terminal weakness than a political language for imperial renewal.

Further, hegemony also reproduces American power. The dollar is not simply a convenient currency that survives because markets trust it. Nor is its dominance ultimately explained by gold, credibility, or some spontaneous market convention. The willingness of agents across the world to accept dollars, to denominate contracts in dollars, to hold reserves in dollars, and to organize their calculations around the dollar rests on power. More precisely, it rests on the capacity of the United States to enforce the rules of the global system.

Monetary hegemony (the role of key currency) depends on military technology, which in turn depends on access to key commodities (mostly energy) and technological dominance (mostly in sectors related to the military), but then access to commodities and military power depend on the ability to spend without significant limits, which is based on monetary hegemony, in a circular and self-reinforcing way.

In a simplified way, since the transition to capitalism, there have been essentially three monetary standards. A silver standard, dominated by the Spanish silver peso (which anchored global trade), and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.).

The rise of the pound was associated to the demonetization of silver, and the end of Bretton Woods to the demonetization of gold. The end of Breton Woods, in this sense, did not represent the beginning of the end of dollar hegemony. Quite the opposite. The collapse of the dollar-gold link created the first genuinely global fiat standard and enlarged the policy space of the United States. Freed from the gold constraint, the United States could use its currency, its public debt, and its central bank in ways unavailable to other countries. The dollar standard allowed the United States to spend, borrow, and sustain its military and technological capacities on a scale that others could not replicate.

This is the fiscal-military side of dollar hegemony. The hegemonic currency allows the state to spend without the same external constraint faced by peripheral countries. That spending supports the military-industrial complex, government procurement, research & development, and the hidden developmental state. In turn, military power sustains the international order in which the dollar remains central. Monetary power and military power are not separate. They are mutually reinforcing.

This is why the rise of China must be analyzed carefully. China has changed the geography of global production. It is no longer simply a low-wage assembler of cheap consumer goods. It is now a central actor in high-tech manufacturing, electric vehicles, batteries, solar panels, telecommunications, and other strategic sectors. The old complacent view that the United States would innovate and design while China assembled is gone. That was one of the illusions of the pro-globalization cheerleaders.

There is an argument, the energy-hegemony argument,, we may call it, made recently by Danny Bessner in David Sirota’s podcast, and in a more systematic way by Helen Thompson in her book Disorder,* that suggest that China is to become dominant because of its control of clean energy sources. Bessner said that “the country that is the leader in new energy technologies is the country that is going to dominate global economics,” and he frames the present as a possible hinge point in which countries begin shifting toward a different energy base. Britain with coal, the United States with oil, and perhaps China with batteries, solar panels, electric vehicles, and the supply chains required for electrification.

There is something to this. Energy transitions are never merely technical, and they reorganize production, finance, and geopolitics. But one should be cautious about moving too quickly from China’s lead in renewables to the end of American hegemony. Energy leadership matters, but monetary and military power have their own inertia. The dollar system, the Treasury market, US military reach, and the legal-financial architecture of sanctions do not disappear because China sells more electric vehicles.

In other words, China’s productive rise has not displaced the financial and military architecture centered on the United States. The geography of production has changed much more than the geography of money. China remains deeply constrained by the dollar system, while the United States does not need to hold renminbi reserves. The United States has military bases around China’s neighborhood and China does not have anything comparable around the United States. China has become a great manufacturing power, but it has not become the issuer of the world’s hegemonic currency.

This asymmetry is central for understanding the current world order as I suggested in my Jacobin piece. In that sense, the discussion of chokepoints should not lead to the conclusion that American hegemony is disappearing. It should lead to a better understanding of how that hegemony operates. The United States no longer relies only on the direct control of territorial routes, although naval power remains essential. It also controls the institutional and technological circuits through which trade, finance, and production are organized. The sea is supplemented by the payment system, the microchip, the export license, and the sanctions list. In a sense, the notion that finance was central to hegemony not just trade, was true (with technological differences) about the pound centered world of the 19th century.**

The overuse of these instruments may indeed generate resistance. But resistance is not the same thing as successful displacement. Alternatives to the dollar system are costly, partial, and difficult to build. Technological autonomy takes time. Financial autonomy requires deep markets, political power, and geopolitical protection. The capacity to escape American chokepoints is unevenly distributed, and most countries remain trapped in the networks they would like to avoid.

The danger, then, is not that American hegemony is about to vanish. The danger is that it becomes more openly coercive as its legitimacy declines. The veneer of politeness associated to the liberal rhetoric of a rules-based order gives way to the crass use of direct interventions, sanctions, export controls, industrial policy for the center, and austerity for the periphery. The old ideology of globalization promised interdependence and efficiency, gives way to more openly nationalist discourses. The reality of coercive interdependence is the same.

* On the energy-hegemony nexus Thompson says: “Geopolitically, an energy change will necessarily result in upheaval. If Britain were the power that climbed to dominance during the age of coal and the United States the power that ascended during the age of oil and coal, the spectre haunting Washington is that without a decisive American strategic turn to renewables and electrification, the new energy age that depends on metals and minerals will belong to China.” Her statement is more nuanced than Bessner, and less categorical about the rise of China, but certainly linked to the energy transition.

** See my article on the use of central banks as weapons of hegemony, and why Ha-Joon Chang's kicking away the ladder was also monetary and financial in nature.

The United States’ Unchallenged Hegemony in the World-System

 

By David Fields

A prevalent assumption concerning the United States’ global position posits precipitous hegemonic decline. Conventional wisdom, predominant since the 1970s, suggests that the U.S. has been on the verge of losing its preeminent status, as evidenced by the collapse of the Bretton Woods system and the subsequent emergence of the Eurozone, BRICS, and the spectacular rise of China. Proponents of this view tend to interpret U.S. current account deficits as an unsustainable imbalance, predicting a hard landing scenario resulting from resoundingly widespread divestment from dollar-denominated assets. Similarly, academic and political anxieties regarding a more disorderly international system, often linked to a perceived weakening of U.S. influence, are further amplified by recent fascist political rhetoric of “America First”.

To construct an effective critique of U.S. imperialism, it is pertinent to ascertain that the United States is not experiencing a significant hegemonic decline; its structural power within the capitalist world-system persists without substantial challenge.

Read rest here. 

The economic and social consequences of the war on Europe and Italy

By Sergio Cesaratto

With a certain pride I remember having already mentioned for some years, within the framework of my economic courses, political realism in international relations and International Political Economy. I did so in academic contexts in which an uncritical Europeanism based on liberal thinking prevailed (and prevails) according to which the world is divided into good and bad. The book, which I suggested for reading to my students (Sorensen 2005), published in Italian by Bocconi University Press (Egea), had some pages dedicated to the enlargement of NATO to the East, dutifully presenting the opposite thesis. In particular, an important letter addressed in 1997 to President Clinton by 50 eminent personalities opposed to such an enlargement was cited (McGuire 1998). Since those years the signs of growing Western aggression and mounting Russian anger have been evident. I had approached Political Realism at the suggestion of a book in which a profound Italian jurist and philosopher of law, the late Danilo Zolo (see e.g. Zolo 2009) expressed his scepticism about humanitarian wars. My interest as an economist was naturally directed towards the debate in the field of International Political Economy between, on the one hand, liberal and Marxists supporters of cosmopolitanism (albeit for different reasons) and, on the other, supporters of economic nationalism à la Robert Gilpin. A scholar, the latter, of liberal faith, but who did not confuse ideals with crude economic reality. As I find myself teaching International Economics again next year, I will not fail to make students think about these issues.

Read rest here.

Blog Moving to Substack (and first post)

"Where is Everybody?"

The blog will continue here for announcements, messages and links to more substantive pieces. But those will be posted from now on at Substack. I might also post videos in another platform. But more on that later. Link for first post (on whether the US is a failed State, something that got some traction during the pandemic, particularly in the aftermath of the January 6 riot) here.

The US and Russia: beware of Neocons and liberals preaching democracy promotion

 By Thomas Palley (guest blogger)

Every week my e-mail box receives a steady stream of articles aimed at cultivating public animus to Russia. The articles are always wrapped in a narrative in which Russia is a threat to democracy in Ukraine, Eastern Europe, and elsewhere. The effect is to create public support for hardline action (economic and/or military) against Russia.

The insidious underside of this campaign is it paves the way for a scenario in which Ukraine provokes Russia, thereby drawing a Russian response that is then used as a pretext for US engagement. In such circumstances, the public would have been primed for action and would almost certainly fail to disentangle the truth.

What is terrifying is the scope of the stream, which spans the spectrum from far-right to center-left.

Read rest here.

The Biden administration should ignore the debt ceiling

The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.

But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt in an asset the administration does not control like gold, as it was the case in Ancien Régime France, or the US itself before the end of Bretton Woods. More importantly, political representation, and democratic control over the public purse provided the conditions to sustain expanding budgets and public debt in the American case. The debt reflects, for good or for bad, the democratic decisions of the people. The only reason public debt has become an issue is the existence, for arcane political reasons, of a debt ceiling.

Even though there is a debate about whether the economy needs an additional fiscal boost or not, nobody thinks seriously that the disruption caused by a default and interruption of government functions, with a shutdown, would be a good idea, particularly not during a pandemic. The economy is certainly not a full employment, and about five million workers that had jobs before the pandemic are unemployed. Inflation, although a concern, does not result from an economy close to full employment, but from the disruptions associated with the supply chain during the pandemic. Interest rates on public debt remain low, and there is no reason for austerity measures in the midst of a still uncertain recovery. In fact, most economists, and a good part of the public opinion, think that the visible decline in American economy results from lack of investment, not just on basic infrastructure, but also on the wellbeing of population. 

If there is a perception of a national crisis, it is not about a fiscal one, but one about declining hegemonic power, and about the rise of China (with the Sinophobic undertones noted by Tom Palley). The solution requires investment in the future, in the kinds of things that are both popular and part of the broader Biden agenda, boosting the safety net programs, and investing in green technologies, promoting cleaner economic growth. That these investments are necessary is not particularly controversial, given the size of the social crisis at home, and the global environmental crisis, let alone in the context of a pandemic crisis that seems will become endemic.*

The debt ceiling debate is purely a political instrument used by Republicans to preclude Democrats from implementing their budgetary priorities. This is not an economic crisis, it is a political crisis and requires a political solution. The most cited solution for the current crisis would be to mint a one trillion-dollar platinum coin, that would allow the Treasury to continue spending (e.g. Paul Krugman here). As Zachary Carter said in the Washington Post, only an absurd solution could save the US from an absurd problem. However, trust in the existent political institutions might be the best solution for the impasse. The Biden administration should simply declare that the debt ceiling is unconstitutional, move forward, and continue to make payments even if the debt ceiling is breached. Congress cannot enforce the debt ceiling, and the Treasury can continue to pay until the courts decide on the merits of the case. The issue should be decided by the courts.

There are two possible objections to this strategy. The first one is that an impasse may imply that the US would be technically in default, and that chaos would ensue. However, if the Treasury continues to pay, the worst consequences could be averted. As noted, everybody knows this is a political problem and there is no real question that the US cannot pay. The other concern is that the Supreme Court could presumably determine that the debt ceiling is constitutional after all. That is, to be clear, a possibility. However, it should also be clear that the Roberts court is strongly probusiness and that financial and corporate interests in general are against a default that would hurt the economy. But in the case the court decides to commit economic suicide for no good technical reason, this might still be the right move. Perhaps then there would be enough support to eliminate the debt ceiling through the legislative process, eliminating the filibuster.

* There is, of course, some debate within the Democratic Party, with Senators Manchin and Sinema probably precluding a larger fiscal package.

Capitalism Alone Against Itself: Liberal Democratic versus Political Capitalism

I finished Branko Milanovic's thought provoking Capitalism Alone this summer. But I haven't had much time to write on the blog, as you might have noticed. This is certainly not a review, and I would definitely suggest that you go and buy the book as soon as you can and read it. It is a serious discussion of the future of capitalism, that word that, as Heilbroner often reminded us, was at the center of the discipline, but seldom discussed openly by economists. He cited, if memory doesn't fail me that it didn't appear in Mankiw's Principles textbook, at least back then in the 1990s, when it was published. I always note that Allan Meltzer wrote a little book titled Why Capitalism? were he makes no explicit effort in defining it, even though a definition can be gleaned from it.*

The definition most economists use leans more on Max Weber than Karl Marx, or the materialist tradition of the surplus approach upon which he built on. Branko is a pluralistic economist, well read and influenced by several authors, not all of them conventional. The discussion of the definition of capitalism is complex, and he separates, in its modern version two archetypes of capitalism, that are in a mortal battle for global hegemonic power, namely: Liberal Meritocratic Capitalism, represented by the West, and particularly by the United States (perhaps more credibly now after the election), and Political Capitalism, represented by the rise of the rest, with China at the head.

When assessing whether China is capitalistic Branko does use the conventional Weberian definition (p. 87), but that seems to be a pragmatic approach to provide the basis for his argument that China (and Vietnam, Malaysia and Singapore too, p. 91) does conform to the Weberian notion of political capitalism, a term used by Weber to discuss ancient forms of capitalism. But there is a concern with how elites maintain control by non coercive forces in Liberal Capitalism, and about the need to create an indigenous capitalist class in Political Capitalism. Both point out to alternative issue of class conflict, of course, and how surplus is extracted from workers, and points to an alternative view of capitalism. There is, in somewhat Marxist tradition a preoccupation with the role of the bourgeoisie, and an nod to Wallerstein that suggested that there are no capitalists without state support, something I would like to have seen more in the book (p. 116).

In fact, the secondary role of the state, to some extent, the absence of a more thorough discussion of the developmental state in the case of the Chinese experience, is one of the problems with the book. Another would be an emphasis with issues of corruption, which seem to me to be of secondary importance, even if the problem might have increased with financial deregulation, and the rise of tax havens. The emphasis of the book is on the changes associated to the increasing mobility of labor and capital and the problems it poses for both systems. Branko thinks that the welfare state is vulnerable with free labor mobility (p.156), undermining the democratic process in liberal capitalism, and that capital mobility, which he sees more through the lens of Global Value Chains, rather than portfolio flows, and that would lead to higher growth in poorer countries, reducing the need for labor mobility. The book also debunks a few myths, like the notion that robots are coming for your job, or the idea that a Universal Basic Income (UBI) would be a panacea for the economic problems caused by globalization and technological change.

* Invariably it is based on notions of the profit motive (some form of rationalization) as required by markets, and private property, or Weber (plus North, if you prefer). For an alternative discussion see this old post on a view based on the surplus approach, including a critique of the Weberian naturalization of capitalism as something that existed in the past and that explains the golden ages of antiquity.

Argentina and the IMF

Alberto Fernández, who will assume as the next president in less than two weeks, has said he will not accept the next tranche of US$ 11billion that were part of the US$ 57 billion deal signed by the outgoing Macri administration. Many progressives see this as a good sign, in particular given the history of the IMF with Argentina. I've emphasized, against a lot of heterodox discussion on the subject, that the IMF remains essentially unchanged when it comes to policy prescriptions. So I do get the point.

Note, however, that the best argument for not using it, is NOT the fact that this would increase the leverage with the IMF. It would hardly do that. It's kind of a slap on their face. The leverage comes from the fact that the IMF did commit a huge amount of money, and presumably they knew this was not something that could be repaid under the circumstances that it was contracted. The reasons to accept it or not should be pragmatically associated to whether the country will need them to make the payments next year (and Argentina should negotiate to reduce and eliminate most of the payments, certainly with the IMF in the next few years). I assume that calculation has been made, and, hence, the decision. If Fernández, and his advisors, are hoping for a boost in exports, that might be a mistake.

Also, since someone in Colombia last week asked me whether Argentina should default (the person thought it was a no brainer), my simple reply is that this would be a terrible idea. Yes, the debt in foreign currency, that increased significantly in the Macri administration went to finance capital flight, and in many ways is questionable. And, for sure it was unnecessary, and should had been avoided. But to default implies to be cut from any sources of dollars, and that implies that one must ration imports, which implies by definition that a massive recession would take place. So the default should be avoided.

Note that the follow up question (same person), so why you need imports (of intermediary and capital goods). It's obviously a question of degree, but beyond advanced economies, all economies do need dollars, since it is the vehicle currency, and the one in which the key energy commodities are traded in. There's a reason for those 900 or so US military bases around the globe.

So, yep, not necessary to get the money, if the country doesn't need it for short term obligations. But if we do need it, then there's no shame in getting the next tranche, and negotiate strongly with the Fund.

Financialization and the low burden of public debt

Financialization is a fuzzy concept. There are many definitions, and none is clear cut, at least to characterize the changes of the last 40 years or so, which is the period most authors associate with financialization. I'm not suggesting it's not a useful concept though.* In some sense, financialization refers to the last phase in the capitalist system (even if there are ways in which one might argue that capitalism was always financialized).

At any rate, going to the point I wanted to make, the financial burden of public debt went down in the 2000s, but that is not necessarily a good sign. I was trying to check the financial burden of public debt (i.e. the total spending on interests, out of total current spending) in the United States. The figure above shows that the financialization (ha, another possible definition) of the budget started with the Volcker shock, and ended more or less with the collapse of the dot-com bubble in the early 2000s.

The hike in interest rates in the late 1970s increased the financial burden of public debt, and with the lower output growth -- associated not just to higher interest rates and its effects on consumption, but also higher unemployment and lower wages which additionally impacted private demand -- debt dynamics was on the unstable side of the Domar rule (r > g) and public debt increased significantly in a peaceful period that was for the most part prosperous.

Public debt normally increased in periods of crises or of external threats (wars). In other words, public debt was an instrument for the preservation of society for the most part. There was also an agreement that public debt was a necessary instrument for the accumulation of capital, and it provided a secure asset for the functioning of the financial system. Btw, that was a point that was contentious, and not everybody accepted the Hamiltonian notion that public debt could be, to some degree, a blessing. Think of Andrew Jackson's payment of debt, and the various modern Cassandras afraid about the debt burden on future generations.

The rise of public debt since the 1980s (with the minor decrease in the late 90s) has served a very different purpose. While part of it can be seen as the reaffirmation of American Hegemony, with the increased military spending of the Reagan years (still low if compared to the heights of war, hot or cold), much of it was the result of lower taxes for the wealthy. The accumulation of debt was, like the hike in interest, necessary to discipline the labor class and control inflation.

In part, the result of that perverse use of public debt accumulation is that private agents have ramped up private debt in order to compensate for income stagnation. Think about college kids accumulating more debt to compensate the reduced public support for public universities. That of course goes hand in hand with the fact that most booms now are associated with some bubble (stock market, dot-com, housing, etc), or in the absence of a bubble we end up with a moderate lack luster recovery (the last decade), and what is confusedly described as 'secular stagnation.' The flip side is that the low burden of debt on this side of the 2000s, is not benign like the one from the 1950s to the 1970s, which was closer to what Keynes' notion of the euthanasia of the rentier.

It reflects the needs of the economy to maintain private debt under control in a relatively unstable economy. Something that is still necessary to the extent that labor is still very much being disciplined by macro and micro policies that keep wages under control.

* For a relatively recent discussion of the meaning of financialization and its relevance see Epstein (2015) here, and for an older discussion see Palley (2007) here.

US technological hegemony

Where the Digital Things Are

I have suggested for a while here (this entry from May 2011) that deindustrialization in the US has not meant a decline in technological hegemony. Consider big tech digital firms in that respect. From the new Trade and Development Report:

The widening gaps across firms have been particularly marked in the digital world. Of the top 25 big tech firms (in terms of market capitalization) 14 are based in the United States, 3 in the European Union, 3 in China, 4 in other Asian countries and 1 in Africa. The top three big tech firms in the United States have an average market capitalization of more than $400 billion, compared with an average of $200 billion in the top big tech firms in China, $123 billion in Asia, $69 billion in Europe and $66 billion in Africa. What has been significant is the pace at which the benefits of market dominance have accrued in this sector: Amazon’s profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent in 2015, while that for Alibaba increased from 10 per cent in 2011 to 32 per cent in 2015.

For a country in decline, the US corporations are doing surprisingly well. Again, the problem of deindustrialization is one of the consequences for working class people, and inequality. American corporations, capitalism if you prefer, is doing fine. Workers not so much (and hence Trump).

The Latin American Crisis

Downhill

I have not written on the problems in the region for a while now (last stuff that is more comprehensive here in the talk at Keene, for example), in part, because the whole theme is a bit depressing (more recently the Honduras crisis, and the return of the right in Chile). As I have noted before, there is no doubt that the collapse of commodity prices has played a significant role in the downturn in the region, but it is also true that a lot of the problems are political in nature, and the resurgence of neoliberalism (with the support of the US, btw) has played a significant role too. In my view, the latter is far more relevant.

Two recent issues that I wanted to note, and that prompted my return to the issue of the crisis in the region. One is the downgrading of the Brazilian public debt by Standard & Poor's (I've written on credit rating agencies before here, and on the  previous downgrading of Brazil too). As I noted before, the Brazilian economy didn't face any significant fiscal or external problem. Figure below, from IMF WEO data, shows that the primary balances were actually positive until Dilma decided to cave and do a fiscal adjustment in 2015 (which did not save her from the coup, btw). And the external (current account) deficit was small, and manageable given the humongous external reserves and the great amount of global liquidity.

At any rate, why the new downgrading, you ask. The reason is to force the Brazilian government to push once again for pension reform. The whole point is that the crisis was caused to create the conditions for the dismantling of the old remnants of the very incomplete welfare state, if one can speak of one in Brazil, that survived the neoliberal onslaught of the 1990s under Fernando Henrique Cardoso. One should not minimize the importance of the soft power of US institutions, including the credit rating agencies, and how they can be used to promote certain political agendas.

The other issue is related to Venezuela (see my two previous posts here and here). I noted before that Venezuela's democracy (very problematic one, as I noted, before you complain; read the posts in the links please) is under attack, and that right wingers should not be seen as pushing for democracy against an authoritarian regime. That rhetoric, that still permeates most of the coverage in the US, is simply incorrect. I was somewhat shocked to read the recent op-ed by Ricardo Hausmann asking for military intervention by foreign powers (meaning the US). By the way, this comes from someone with the authority of being a Harvard professor (not that Harvard is supporting the coup, as far as I know). The role of the soft power of US institutions again.

If there were any doubts about their (right wingers that supported the 2002 coup) commitment to democracy I think this clears it up. I'll leave a discussion about the accuracy of the claim that elections have been rigged and the extent of the 'famine' for another post (something old on the latter here). I just wanted to note that here there is that step that is always there in the authoritarian argument about the justification for violence and the removal of the democratic institutions. Unacceptable.

Latin America's turn to the right and American policy

Tom Jobim said that Brazil was not for beginners, and he was right. The Brazilian economy is in free fall. As I noted before the causes are strictly internal, and not related to any fiscal problem. Inflation was low, even if closer to the top margin of the inflation target. Devaluation of the currency has led to higher inflation, on the low two digit level, just slightly above 10%. At the same time, fiscal contraction has led to a collapse of about 3.5% of GDP last year. There is little need for discussing that again. Nothing much has changed.

What I said about corruption in that not so old post from last December still stands. In short:

(1.) there is no evidence that corruption increased;*
(2.) corruption is not limited to the government or the parties in its coalition;
(3.) the central issues related to corruption are the structural ones, the ones that make it a necessary feature to manage the country (and those have been there for a long time).

Things have, however, got out of control in the last month, and the judiciary (which is as corrupt as other institutions in Brazilian society, no more, no less) has been clearly used for political purposes. The investigation of accusations related to members of the government coalition and not of those in the opposition, and the illegal questioning and then the bizarre request by prosecutors to jail ex-president Luiz Inácio Lula da Silva (with citations of Nietzsche, and Marx and Hegel, rather than Engels) have politicized the corruption investigations.

In addition, this has gone hand in hand with the establishment of impeachment procedures against the current president, Dilma Rousseff. The basis for the process is the delay in the payments to public banks (the so-called 'pedaladas'), which in the view of some imply the government is borrowing from public banks, which is against the Law of Fiscal Responsibility. Note that this was a common practice, even in previous governments, was never questioned, and can hardly be considered a crime that requires the impeachment of the president. So far nothing has connected the president to the corruption investigations, in contrast to her opponent in the last election, Aécio Neves, whose name has appeared in the same investigation for which Lula has been questioned and almost jailed. Many think that this is a thinly veiled coup d'état. It is hard to disagree.

I should add that these events in Brazil, a pivotal country in the region, takes place at the same time that in Argentina a right of center party, with members with ties to the last dictatorship, that has promised to stop investigations into human rights abuses, won narrowly an election. That, in Venezuela, political maneuverings to shorten the mandate of Maduro are in place, while in Bolivia, Evo has lost the chance for re-election.

In the middle of the retreat of the left in Latin America, Obama will basically go down to Argentina and Cuba to cheer about the rightwing turn in the region (note that the Post is wrong, this is not a swing to the center; these are radical right-wingers; on the policies pursued by the Argentine government go here; note that the main beneficiary of the agreement with the Vultures is Paul Singer, a backer of Marco Rubio). And the president that once said he wanted to revise NAFTA, will push for free trade with Argentina. If one adds the defense of Kissinger in one of the debates by Hillary Clinton (note that Bernie not only defended Cuba, but also cited the coup against Allende as an American mistake, part of the infamous Monroe Doctrine that he criticized), and her own ambiguous history with free trade, one cannot but be concerned about the American influence in Latin American affairs, even if Democrats remain in power. The continent, like Brazil, is not for beginners.

* Note that most measures of corruption are related to subjective surveys, not objective measures. Also, the fact that more people, including some wealthy contractors and many politicians have been jailed, may indicate a healthy reduction of impunity rather than more corruption.

The strongest, most durable economy in the world, but very unequal

Obama went to Detroit this week, and defended his economic record, including the bailout of the auto-industry. He went further on the offensive, as in the State of the Union, and suggested that Republican candidates that complain about the economy don't have a clue. In his words:

"The United States of America, right now, has the strongest, most durable economy in the world... So when you hear people -- I won't say who -- but when you hear people claiming that America is in decline, they don't know what they're talking about. They're peddling fiction during a political season." [full speech here]

On the other hand, Bernie Sanders (Obama was certainly referring to the GOP candidates, not Bernie) has made the center of his campaign the poor state of the economy, the fact that only the wealthy have benefited to a significant degree from the recovery, and that we need revolutionary changes, including a higher minimum wage, health care for all, and free access to public education, besides re-regulation of the financial sector (breaking the too-big-to-fail banks as part of that). For example, see his take on democratic socialism here.

So who is right? In a sense, both are partially correct.

In a very broad sense, Obama is correct. Meaning that the US is not only in the middle of a recovery, but also that fears of the decline of American hegemony, economic and military, are incredibly exaggerated. The US spends way more than any other country in military terms (and the differences are probably underestimated) and there is no serious security threat to US global dominance. The more than 800 military basis abroad are clear indication of that. The expansion of NATO to areas that were for a long while considered out of reach in Eastern Europe is one example. And even if there is, and there will be more blow back, because of the disastrous decisions in the Middle East, there is little doubt that no other country has the power to resist US threat of military intervention.

But more importantly, American corporations are still dominant, with a significant amount of the technological innovations that will dominate the global economy in the future still coming from the US. And one should note a good chunk of that comes from the Department of Defense (DoD), in particular Defense Advanced Research Projects Agency (DARPA), and other government agencies that are crucial for technological innovation. Think, for example, about Google's driverless car, which would be impossible without DARPA's Grand Challenge. Note that private corporations depend, directly and indirectly, from the hidden developmental state, that promotes, subsidizes and funds many of their efforts.

So in a very real sense the American economy is still the strongest and the most durable economy in the world, as Obama said. And yet, most workers in the US have not benefited from the continuous dominance of American corporations. Only the ones at the top have benefited in any significant degree. Real wages have stagnated and lagged behind productivity, as it is well-known, and in this recovery only more recently have real wages started to increase, modestly, one might add. Even the labor market, with unemployment at 5%, while much better than Europe and many other advanced economies, is still relatively weak. The increase in employment has not been sufficient to increase the employment-to-population ratio from the same low levels that it reached after the crisis in 2008. That is, most job growth went hand-in-hand with the increase in population.

So Bernie is correct too (and in some weird way right-wing populists complaining about American decline are too, even though their pro-corporate policies would make things even worse). American corporations and elites are doing fine. The rest of the country not so much.

Bernanke and Summers on global savings glut and secular stagnation

So Ben Bernanke is blogging now. He has basically defended his old idea that interest rates are low as a result of a global savings glut. Yes, it is basically the loanable funds theory of interest—with no consideration of the limitations associated with the capital debates—and the notion that the supply of funds, mostly associated to surplus countries like China, Japan, Germany and oil exporters, has pushed interest rates down.

This is essentially the same argument on negative interest rates that Krugman has made awhile ago, and not surprisingly Krugman has been favorable to Bernanke's post.*

In Bernanke's view the solution for the savings glut is: "to try to reverse the various policies that generate the savings glut—for example, working to free up international capital flows and to reduce interventions in foreign exchange markets for the purpose of gaining trade advantage." This would, presumably, move the investment schedule and lead to a recovery.

Bernanke uses the global savings glut idea to criticize Larry Summers' secular stagnation story. For him:

[...] "unless the whole world is in the grip of secular stagnation, at some point attractive investment opportunities abroad will reappear. If that’s so, then any tendency to secular stagnation in the US alone should be mitigated or eliminated by foreign investment and trade. Profitable foreign investments generate capital income (and thus spending) at home; and the associated capital outflows should weaken the dollar, promoting exports. At least in principle, foreign investment and strong export performance can compensate for weak demand at home."

I have criticized the global imbalances story before. As I noted then the actual problem is that the global imbalances are small. The empirical evidence for a external recovery on the basis of a more depreciated dollar is not convincing, but that is not the main problem with this argument. Both the secular stagnation as discussed by Summers, and the savings glut, as presented by Bernanke rest on the idea of an excess supply of savings, and a negative natural rate of interest. Summers says that the: "essence of secular stagnation is a chronic excess of saving over investment" and that "secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon."**

The main disagreement between Bernanke and Summers is on the solution. Summers is skeptical about exchange rate depreciation as a solution to the US stagnation. In his words:

"Successful policy approaches to a global tendency towards excess saving and stagnation will involve not only stimulating public and private investment but will also involve encouraging countries  with excess saving to reduce their saving or increase their investment.  Policies that seek to stimulate demand through exchange rate changes are a zero-sum game, as demand gained in one place will be lost in another."

And no the problem is not competitive depreciations, as Summers suggest. And not even a question of whether depreciation, the relative price substitution effect, would be enough to boost exports or reduce imports, which might be questionable (the last evidence I saw suggested that income elasticities tend to be larger than price elasticities, meaning that foreign trade responds more to changes in the level of activity), by the way. The problem is this notion that the solution is based on surplus countries spending more, as if the US does not have a privileged position and its external (and by the way domestic) deficits do not matter.

What Summers is saying is that depreciation does not work, but we need China and Saudi Arabia to boost the world economy. Seriously?! The US should be doing expansionary fiscal policy, and with that current account deficit would be even larger. The notion that there is a current account sustainability issue or that the dollar international reserve position might in danger is not particularly strong. But, at least on the policy issue, Summers is correct. Fiscal expansion is needed. Note, however, that there is no secular stagnation problem, associated to lack of investment opportunities. There is a political problem (remember Kalecki) that precludes more fiscal expansion.

* Krugman arguments were normally about the domestic economy, and the problem of the zero bound interest rate, or what he calls the liquidity trap.

** And there are too many problems with the excess savings story to discuss here. The investment schedule and the very existence of a natural rate of interest, negative or otherwise, is plagued by logical problems and by the complete lack of empirical evidence, since investment really reacts to changes in the level of activity (accelerator). Also, the notion that intertemporal decisions govern consumption behavior is not without its problems. That's why Keynes tried to abandon the loanable funds theory and developed effective demand, in which income adjusted for differences between investment and savings.

Cuba, the United States and Our America

It often comes as a surprise to most Americans that Latin Americans generally resent that in the United States people think of themselves as uniquely American—as if the rest of the continent somehow has another name. Latin America is, in fact, a name created by the French, supported by local elites, that invaded Mexico to collect foreign debt and to try to re-establish European colonialism. The Latin heritage, being a common one between Maximilian’s new court and the Mexican people, gave the region its appellative, but a tarnished one. That is why José Martí, the hero of Cuban independence, referred to “Our America,” to contrast it with the other, the one Americans fancy as the only one.

Read rest here.

Leo Panitch on how the US still decides the future of global capitalism

Leo Panitch offers an antidote to the growing consensus that the new development bank launched by the BRICS manifests a significant challenge to US hegemony.

From The Guardian:

International attention has been diverted away from this year’s G20 meetings in Australia by the declaration from the leaders of Brazil, Russia, India, China and South Africa, at their meeting in Fortaleza Brazil this July, that they would launch a new “Brics bank”. Created by the US Treasury in the wake of the Asian financial crisis at the end of the 1990s, the G20 was designed to get the major “emerging market” states to take responsibility alongside the G7 for the “new international financial architecture”. This was seen as providing legitimacy for the continuing central role of the US in superintending a greatly expanded but increasingly volatile global capitalism

Read rest here.

What is 'Dollar Hegemony'?

Fields, David (Forthcoming), “Dollar Hegemony,” Edward Elgar Encyclopedia on Central Banking, edited by L.P. Rochon et. al, Edward Elgar

Today, the world economy operates under the artifice of US hegemony, fortified by the US dollar as an international reserve and vehicle currency. How did the United States arrive at achieving such pre-eminence?

From 1944 to 1973, the financial architecture of the world economy centered on a US engineered Keynesian accumulation agenda as a response to the devastation wrought by the Great Depression. The capitalist institutional structure, or social structure of accumulation (see Kotz et al., 1994), rested on finance being subservient to the promotion of industrial enterprise.

With socially-engineered capital–labour compromises in developed countries, neo-colonial governing institutions in the Third World, active State regulation in decisions with respect to capacity utilization, and a co-respective form of competition among large corporations set by regulations that brought together monetary authorities, large banks as well as large industrial capitalists, the post-World-War-II system was the era of “regulated capitalism”. Altogether, the world system was underpinned by the Bretton Woods arrangement, which called for globally fixed exchange rates against the US dollar tied to the price of gold and capital controls.

The international political-economic conditions were such that domestic macroeconomic autonomy, specifically with respect to monetary policy, for aggregate demand management could be feasible. Capital controls were seen as essential to reduce the volatility of capital flows and allow for low interest rates with the objective of pursuing full employment. As Keynes (1980, p. 276) argued, “we cannot hope to control rates of interest at home if movements of capital moneys out of the country are unrestricted.”

By the 1960s, however, US officials began to actively encouraging the growth of the Euromarket, that is, the pool of unregulated US dollar reserves concentrated in the City of London (Helleiner, 1994). With traditionally marginalized segments of the population in developed countries, particularly in the United States and in Western Europe, demanding social, political, and economic rights, and with national liberation movements in the Third World overthrowing US-supported oppressive governments, calls for an expanded role of the State in meeting citizens’ needs dramatically circumscribed global capital accumulation owing to heightened nominal wage–price spirals. Consequently, the global capitalist rate of profit fell (Duménil and Levy, 2004, p. 24). The Euromarket thus became the means for international financial markets to re-establish their influence, lost as a result of the Great Depression, and allow industrial enterprise to rebuild the conditions for future profitability via offshoring.

Speculative capital flows, however, began to undermine the capacity for the United States to guarantee the convertibility of US dollars into gold at fixed parity (Triffin, 1960). Even though the US dollar was the key international currency, it was fixed to gold. As such, debt was ultimately redeemable in an asset that was not directly controlled by the US monetary authority. Default was a possibility, even if a remote one, since through manipulation of the rate of interest, and through coercion and cooperation with other central banks in the world economy, the stability of the system could be maintained. With the globalization of finance via the Euromarket, nevertheless, speculation against the gold–dollar parity proliferated, making functional finance on a worldwide basis difficult to manage.

In 1971, Nixon closed the gold window and loosened capital controls. American officials concluded that it was no longer in their interests to maintain the linchpin relation between gold and the US dollar, and ipso facto withdrew support for the Bretton Woods system by which exchange rates were fixed and flows of capital were to a large degree controlled (see Helleiner, 1994; Vernengo, 2003; Ingham, 2008). The deregulation of financial markets established a global market of mobile financial capital, and the US dollar established itself as a global fiat-money standard. The world economy moved from a fixed dollar standard to a flexible dollar standard (Serrano, 2003).

For the first time in history, it is possible for the hegemonic country, in this case the United States, to be a global debtor, as national States are within their domestic economies, and to provide a default-risk-free asset to facilitate global capital accumulation. The risk that the United States would be unable to expand demand globally, because it is forced to maintain a fixed exchange rate between its currency and an external asset, is thus non-existent. It is true, however, that foreign countries and agents may show unwillingness to hold US-dollar-denominated assets, but, as in the domestic case, the US Federal Reserve (Fed) can always monetize public debt. This would be inflationary and lead to a run on the US dollar only if there is currency substitution on a massive scale, which would require a credible alternative to the US dollar (which does not exist yet). As such, the United States can therefore incur foreign debt without any reasonable limit.

Global imbalances, in particular the large US current account deficits that reflect their so-called “exorbitant privilege”, are instrumental for the functioning of the world economy, as evidenced by the dominance of the US dollar in international trade (Fields and Vernengo, 2013). An important part of this is associated to the fact that key commodities, like oil, are priced in US dollars in international markets. This not only implies that there cannot be an insufficient amount of dollars for the United States to import key commodities, but also that a depreciation of the US dollar does not reduce US imports necessarily (Parboni, 1981).

In fact, the Fed is the world economy’s central bank, which acts as the safety valve for mass amounts of international liquidity (Arrighi, 1999). The hegemonic position of the US dollar structures the world economy in such a fashion that the United States determines the international transmission mechanism for global economic activity. Hence, the role of the US dollar in international markets, and the advantages that come with it, are the spoils of structural power. The provision of this asset allows the United States to become the source of global demand, and to insulate itself from fluctuations and contradictions of perilous cumulative disequilibria that may arise in the world economy. The US dollar enables the United States to set the global social, political, and economic conditions, within which the transmission of misery (contagion) between countries, and between global and national levels, is essentially regulated.


REFERENCES:

Arrighi, G. (1999), “The global market”, Journal of World Systems Research, 5 (2), pp. 217–51.

Duménil, G. and D. Lévy (2004), Capital Resurgent: Roots of the Neoliberal Revolution, Boston: Harvard University Press.

Fields, D. and M. Vernengo (2013), “Hegemonic currencies during the crisis: the dollar versus the euro in a Cartalist perspective”, Review of International Political Economy, 20 (4), pp. 740–59.

Helleiner, E. (1994), States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press.

Ingham, G. (2008), Capitalism, Cambridge: Polity Press.

Keynes, J.M. (1980), The Collected Writings of John Maynard Keynes, Vol. XXV: Activities 1940–1944. Shaping the Post-War World: The Clearing Union, London and Cambridge: Macmillan and Cambridge University Press.

Kotz, D., T. McDonough and M. Reich (eds) (1994), Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge: Cambridge University Press.

Parboni, R. (1981), The Dollar and Its Rivals: Recession, Inflation, and International Finance, London: Verso.

Serrano, F. (2003), “From static gold to floating dollar”, Contributions to Political Economy, 22 (1), pp. 87–102.

Triffin, R. (1960), Gold and the Dollar Crisis: The Future of Convertibility, New Haven: Yale University Press.

Vernengo, M. (2003), “Bretton Woods”, in J. King (ed.), The Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 30–34.

Raúl Prebisch on Cyclical growth and center-periphery interaction

New Working Paper at the IDEAs Network. From the asbtract:

Prebisch believed that understanding the evolution of capitalist economies over time and in different contexts required a general cycle approach, which he labeled ‘dynamic economics’, encompassing all the different areas of economic activity. His dynamic economics stemmed from a critique of both neoclassical and  Keynesian theories, which Prebisch viewed as static representations of capitalism. His dynamics was first applied to a closed economy and then to a center-periphery context. These combined the notion that profit is  the driving motive of  economic activity with a process of forced savings and the idea that the time lag between income circulation and the derived demand, and the time taken in the productive process was the main source of cyclical fluctuations. Prebisch’s dynamic theory, which he never completed, influenced his Development Manifesto (1949).

Full paper available here. From the conclusion:

The long process of development of Prebisch’s economic ideas, which did not stop with his famous Development Manifesto in 1949, from the 1920s culminated in the late 1940 with his dynamic theory. The essence of Prebisch’s dynamic analysis, in which cycle and growth went hand in hand, was the introduction of time lags in a process of continuous disequilibrium. In his model fluctuations result from the difference in the time-period for incomes to circulate within the productive process with the time period required for final production to be brought and sold on the market. In this respect, he was part of a broad tradition of authors trying to formalize macro-dynamics in the wake of the Keynesian Revolution. He maintained elements that were Keynesian in spirit with others that were decidedly neoclassical, while at the same time introducing elements of the old classical school, as it should be expected in a period of transition in the economic profession, and also in an author that was brought up intellectually in a rather eclectic environment.

More importantly, Prebisch stands alone among his contemporaries in trying to explain the cyclical growth of the global economy as the result of the interaction of center and periphery, in which the international division of labor matters. Not only Prebisch introduces the specificity of the problems of managing the peripheral economy, but also he is unique among the economists dealing with cyclical growth to discuss the importance of the change in the global center in the inter-war period from the United Kingdom to the United States.

His conception of the institutional and historical specificity of economic dynamics would eventually develop into what Structuralists at ECLAC would refer to as the Historical-Structural method of analysis, which analyzed the process of structural transformation of underdeveloped economies in historical perspective. In this sense, his understanding of capitalist dynamics, right before he wrote the Development Manifesto and became the Secretary General of ECLAC, was based on a theory that purported to be general and encompassing well beyond the problems of peripheral countries with declining terms of trade, which became the trade mark of his contributions to economic analysis.