The dollar system's contradictions after de-linking from gold, with Radhika Desai & Michael Hudson
Mar 11, 2023
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Economists Radhika Desai and Michael Hudson discuss the consequences of the dollar system after de-linking from gold, including dollar hegemony, quantitative easing, and the euro. They also explore the impacts of Volcker, Reaganomics, and financialization on the US economy, as well as the effects of deindustrialization and leveraged buyouts. Additionally, they discuss the shift to finance capitalism, the 2008 crisis, and the role of the dollar system in it.
The shift from industrial production to financialization in the US has led to increasing wealth inequality.
The financialization trend in the US was mirrored in Japan, contributing to systemic risks and economic challenges.
The Federal Reserve is faced with the difficult decision of balancing monetary stability and financial stability, which can impact the value of the dollar.
Deep dives
The Volcker Shock and Financialization
The Volcker shock in the late 1970s induced a recession and accelerated the decline of US industry. High interest rates during this period strangled US industry and led to the financialization of many productive American corporations. Financialization became a more profitable strategy than industrial production, leading to the dismantling of the manufacturing sector. This shift in focus from production to finance transformed the character of US capitalism, contributing to increasing wealth inequality. The wealth generated by financialization benefitted a small percentage of the population, while the majority faced rising debt and stagnant incomes.
Third World Debt Crisis and Financialization
The Volcker shock and the resulting high interest rates triggered the third world debt crisis, as borrowing became increasingly difficult for developing countries. To repay their debts, these countries were forced to sell off industries, public utilities, and other assets to generate revenue. The IMF and World Bank imposed austerity measures, exacerbating underdevelopment. Similar financialization trends were occurring in the US, with corporations prioritizing stock buybacks and dividends over productive investments. This financialization contributed to increasing inequality, concentrating wealth in the hands of the few while leaving the majority trapped in debt.
Role of Japan in Dollar System and Financialization
During the 1980s, Japan played a significant role in supporting the US dollar system by buying US treasuries. This allowed the US to continue its deficit spending, but it also granted Japan preferential access to the US market. Japanese financial interests benefited from buying high-interest US treasuries, while Japanese car manufacturers flooded the American market with fuel-efficient vehicles, contributing to the decline of the US automotive industry. The peak in the value of the yen and resulting inflow of money into Japan led to a real estate bubble in the country. However, Japan's financialization mirrored similar trends in the US, where the focus shifted from industrial production to finance, contributing to systemic risks and economic challenges.
Legacy and Implications of Financialization
The financialization of the US economy has created a parlor state, strangled productive activity, and increased wealth inequality. It has transformed the US economy from an industrial capitalist system to a finance-based one. The policy paradigm of financialization, embraced by both Democrats and Republicans, has accentuated the parlor state of the US economy. The accumulation of financial wealth, along with the associated widening disparities, has distorted the economy, polarizing it further. Financialization has led to exponential growth in debt, with each economic recovery dependent on increasing levels of debt. This has undermined the productive capacity of the economy and perpetuated systemic risks.
The Federal Reserve's Dilemma: Monetary Stability vs. Financial Stability
The Federal Reserve is currently faced with a difficult decision between pursuing monetary stability and financial stability. Low interest rates have created incentives for taking unreasonable risks, leading to asset bubbles. However, combating inflation may require increasing interest rates, which could burst these bubbles. This puts the Federal Reserve in a bind as both scenarios can negatively impact the value of the dollar.
The Contradictions of the Dollar System and the International Investment Position of the United States
Throughout history, the United States has managed the dollar system to sustain its dominance. Denying accusations of living beyond its means, the US claimed its international investment positions showed increasing wealth. However, by 2001, the US international investment position turned negative, shifting from a surplus to a deficit. The US administration struggled to justify the country's status as a destination for global capital, as the casino-like financialization of the economy relied on unsustainable asset bubbles. The current dilemma for the US lies in maintaining the value of the dollar amidst growing contradictions and efforts to manage the system's decline.
Economists Radhika Desai and Michael Hudson discuss the evolution of the US dollar system after it was taken off the gold standard in 1971.
VIDEO: https://youtube.com/watch?v=dRlOfxWR-qE
Check out other episodes of their show Geopolitical Economy Hour here: https://youtube.com/playlist?list=PLDAi0NdlN8hMl9DkPLikDDGccibhYHnDP
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