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  October 7, 2011

Senate Bill Threatens Currency War with China

Michael Hudson: Senate proposal based on junk economics and is illegal under international law
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Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. He is the author of many books, including The Bubble and Beyond, and Finance Capitalism and its Discontents, Killing the Host- How Financial Parasites and Debt Destroy the Global Economy, and most recently J is for Junk Economics: A Survivor's Guide to Economic Vocabulary in an Age of Deception.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Washington in the Senate, Democratic senators have proposed a bill that could impose tariffs on Chinese goods entering the United States, in order to pressure China to allow its currency to rise. Now joining us to talk about what people are calling a possible coming currency war with China, at least if such a thing actually did pass, is Michael Hudson. Michael teaches economics at the University of Missouri-Kansas City. Thanks for joining us again.

MICHAEL HUDSON, PROF. ECONOMICS, UMKC: Thank you very much, Paul.

JAY: So before we talk about the politics of this, 'cause a lot of people are thinking this thing can't go very far, but let's say, what's the substance of it? To what extent is the US economic woes caused because China's currency is devalued?


JAY: That's a short answer.

HUDSON: The United States would like to cripple China, as if somehow if China would only raise its currency, this would solve America's trade deficit and balance of payments deficit. The largest element of America's balance of payments deficit is military. The other element is the Federal Reserve's quantitative easing that's given money, $600 billion, to the banks that have moved it all out to speculate abroad. So the problem is that the Americans are looking for a scapegoat. And, quite frankly, it's racist against China. It has nothing to do with China's trade at all, because the balance of payments, the American companies, or the main importers--and although the ostensible trade account makes it appear as if America pays China a lot of money for the imports, China only gets a very small proportion of these, of this price. So it's based on junk economics, it's based on junk statistics, and it's based on let's blame somebody else and distract attention from the fact that the governments policies, both of the Obama administration and the Bush ministration, have been pushing the dollar down against foreign currencies. So the Senate proposal is illegal under all international law. The Chinese people I've spoken to--and I discussed this at length in Beijing--the feeling there is let them try. Even if the United States tries to impose tariffs, it takes years and years and years for a lawsuit to get through the World Trade Organization legal thing. The United States would be acting illegally, and the result would be to plunge the dollar against every other currency.

JAY: But what do you make of the argument--. Let's say this isn't the reason for the woes of an economic crisis in the United States and if they achieve this it wouldn't be that big a solution. But if that's the case, does that--but do you think China is sort of in some manipulative way artificially keeping the currency down? And does that make Chinese products unduly more competitive in the United States? And does that cost any jobs here?

HUDSON: No to all of those answers. China has not been keeping the country's--the currency down. What happens is it's being flooded with US dollars, just as other countries--Brazil has been flooded, Russia is being flooded, other countries being flooded with dollars. And as long as the backing of international reserves is held in loans to the US Treasury, when the private exporters or recipients of dollars in China get these dollars, they turn them over to the Central Bank for domestic RMB. And the government then, with these dollars, does just what governments throughout the world, from Saudi Arabia and the Arab countries to others have done: there's nothing central banks can do but invest them in Treasury bills. What they wanted to do was spend the dollar in the United States. The Senate and the US government illegally has told China, you can't buy companies here. We can buy you out, but you can't buy us out. We have a double standard. Yellow people cannot buy into America. This is a racist standard. You know, I hate to put it so bluntly, but this is how it's perceived abroad. They say, wait a minute; you mean Arab countries can buy and use their dollars to buy US companies? You won't let China buy filling stations here? You won't let us buy any company, that you say it's national security, and you say it's a national security drain just because we're Chinese? I mean, what kind--. There's no law in the world courts that permits America to say, we'll sell to anybody except the Chinese.

JAY: Right. Now, if you look at the business pages about all of this, there's a debate going on, and you kind of hear both sides of this. But the side that's talking about the need for some kind of pressure on China is saying this is sort of the opening shot, but if something doesn't happen by 2015, 2016, they're saying, you could be into real currency wars. So how do the Chinese respond to this? Because whether the argument has merit or not doesn't mean there aren't political forces in the United States that might not push this through.

HUDSON: Well, the Chinese have--have--indeed, two years ago in Russia at Yekaterinburg, the Chinese worked with the Russian--the other BRIC countries--Russia, Brazil, and India--to say, look, America is going nationalist. And I won't say fascist, but it's going ultra-protectionist, ultra-nationalistic. We have got to get an alternative to the dollar. We don't want to hold Treasury bills, partly 'cause we don't want to fund America's military bases all over the world. That's really what the dollar issue is. Do other countries want to pay for America to encircle them militarily?

JAY: Well, so far the answer to that is yes, because they're not buying any less Treasury bills or American dollars. They're all buying and continue to buy.

HUDSON: That's right. And they're looking for an alternative. They say, we want to hold our reserves in something other than dollars. We don't want to have any more loans to the US government. That's what the US Treasury defines currency manipulation, using your dollar inflows to buy Treasury bonds. And China and Russia, Brazil, say okay, let's see, America won't sell us our industry. The Chinese--I discussed the following proposal in Beijing. Let them use their dollars, if they can't buy out American companies, to buy out American ownership of the Chinese companies at book value. So the Chinese will say, okay, you won't let us buy into American industry? We're going to buy out what you own in China at the price you paid, and a normal rate of return, and you'll have the dollars back, and we're finished. Let's let the foreign exchange markets do just what the Senate wants, let's have a free market in foreign exchange and trade, but we're going to use the dollars we have. We're not going to just let you say, ha-ha, we won't pay, we've given you pieces of paper, and you can't do anything with them. We're going to actually spend them in America, which will support your currency. And that basically is what their plan is. So if America is planning on acting illegally and thinking it can push the rest of the world, the rest of the world now can draw the line and say, this is it, this is finished, the American Century's over now.

JAY: Well, we'll see if they can say that. There's been a lot of predictions of the death of the American Century over the last few years, and as I said, so far, everyone's still buying the T-bills and American dollars. It's this idea, this sort of role the United States plays as managing global capitalism, they--as much as they talk about wanting to separate from it, China, Russia, and the other countries seem too dependent on that role to really break with it.

HUDSON: I don't think they're dependent on it at all. The US press has misrepresented the situation. They're trying to defend themselves against the dollar outflow. Most of the dollars that go out, you know, are not on trade account. Most of the dollars that leave America are by banks trying to flee the country, like rats fleeing a ship. Wall Street knows that the game is over. They're trying to get out of the US market, and they're trying to put their money wherever they can do it outside of the US. That's why gold was going up. That's why Silver prices were going up. People are dumping the dollar mainly from America. And the rest of the world is trying [incompr.] prevent itself from this huge flood of dollars trying to find a safe haven now that Wall Street thinks that Obama's going to succeed in lowering wages by 30 percent and bringing on a depression. That's the Washington program. They're deliberately bringing on a depression here--to fight against labor, basically. And other countries realize that there is no reason to hold dollars anymore for a country that's committing economic suicide.

JAY: Alright. Thanks for joining us, Michael. And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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