The Consequences of Moving from Industrial to Financial Capitalism
January 7, 2021
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Michael Hudson and Pepe Escobar last month took a hard look at rent and
rent-seeking at the Henry George School of Social Science.
High-ended retailer Saks Fifth Avenue added private security, fencing and
barbed wire ahead of a Black Lives Matter protest in New York, June 7. 2020.
(Anthony Quintano, CC BY 2.0, Wikimedia Commons)
Pepe Escobar in conversation with Michael Hudson
At The Henry George School of Social Science
Michael Hudson: Well, Im honored to be here on the same show with Pepe and
discuss our mutual concern. And I think you have to frame the whole issue
that China is thriving, and the West has reached the end of the whole
75-year expansion it had since 1945.
So, there was an illusion that America is de-industrializing because of
competition from China. And the reality is there is no way that America can
re-industrialize and regain its export markets with the way that its
organized today, financialized and privatized and if China didnt exist.
Youd still have the Rust Belt rusting out. Youd still have American
industry not being able to compete abroad simply because the cost structure
is so high in the United States.
Michael Hudson. (Wikimedia Commons)
The wealth is no longer made here by industrializing. Its made financially,
mainly by making capital gains. Rising prices for real estate or for stocks
and for bonds. In the last nine months, since the coronavirus came here,
the top 1 percent of the U.S. economy grew by $1 trillion. Its been a
windfall for the 1 percent. The stock market is way up, the bond market is
up, the real estate market is up while the rest of the economy is going
down. Despite the tariffs that Trump put on, Chinese imports, trade with
China is going up because were just not producing materials.
America doesnt make its own shoes. It doesnt make some nuts and bolts or
fasteners, it doesnt make industrial things anymore because if money is to
be made off an industrial company its to buy and sell the company, not to
make loans to increase the companys production. New York City, where I
live, used to be an industrial city and, the industrial buildings, the
mercantile buildings have all been gentrified into high-priced real estate
and the result is that Americans have to pay so much money on education,
rent, medical care that if they got all of their physical needs, their food,
their clothing, all the goods and services for nothing, they still couldnt
compete with foreign labor because of all of the costs that they have to pay
that are essentially called rent-seeking.
Housing in the United States now absorbs about 40 percent of the average
workers paycheck. Theres 15 percent taken off the top of paychecks for
pensions, Social Security and for Medicare. Further medical insurance adds
more to the paycheck, income taxes and sales taxes add about another 10
percent. Then you have student loans and bank debt. So basically, the
American worker can only spend about one third of his or her income on
buying the goods and services they produce. All the rest goes into the FIRE
sector the finance, insurance and real estate sector and other
monopolies.
And essentially, we became whats called a rent-seeking economy, not a
productive economy. So, when people in Washington talk about American
capitalism versus Chinese socialism this is confusing the issue. What kind
of capitalism are we talking about?
America used to have industrial capitalism in the 19th century. Thats how
it got richer originally but now its moved away from industrial capitalism
towards finance capitalism. And what that means is that essentially the
mixed economy that made America rich where the government would invest in
education and infrastructure and transportation and provide these at low
costs so that the employers didnt have to pay labor to afford high costs
all of this has been transformed over the last hundred years.
And weve moved away from the whole ethic of what was industrial capitalism.
Before, the idea of capitalism in the 19th century from Adam Smith to
Ricardo, to John Stuart Mill to Marx was very clear and Marx stated it quite
clearly; capitalism was revolutionary. It was to get rid of the landlord
class. It was to get rid of the rentier class. It was to get rid of the
banking class essentially, and just bear all the costs that were unnecessary
for production, because how did England and America and Germany gain their
markets?
Weve moved away from the whole ethic of what was industrial capitalism.
They gained their markets basically by the government picking up a lot of
the costs of the economy. The government in America provided low-cost
education, not student debt. It provided transportation at subsidized
prices. It provided basic infrastructure at low cost. And so, government
infrastructure was considered a fourth factor of production.
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And if you read what the business schools in the late 19th century taught
like Simon Patten at the Wharton School, its very much like socialism. In
fact, its very much like what China is doing. And in fact, China is
following in the last 30 or 40 years pretty much the same way of getting
rich that America followed.
It had its government fund basic infrastructure. It provides low-cost
education. It invests in high-speed railroads and airports, in the building
of cities. So, the government bears most of the costs and, that means that
employers dont have to pay workers enough to pay a student loan debt. They
dont have to pay workers enough to pay enormous rent such as you have in
the United States. They dont have to pay workers to save for a pension
fund, to pay the pension later on. And most of all the Chinese economy
doesnt really have to pay a banking class because banking is the most
important public utility of all. Banking is what China has kept in the
hands of government and Chinese banks dont lend for the same reasons that
American banks lend.
Shanghais Pudong district from The Bund. (CC0, Wikimedia Commons)
(When I said that China can pay lower wages than the U.S., what I meant was
that China provides as public services many things that American workers
have to pay out of their own pockets such as health care, free education,
subsidized education, and above all, much lower debt service.
When workers have to go into debt in order to live, they need much higher
wages to keep solvent. When they have to pay for their own health insurance,
they have to earn more. The same is true of education and student debt. So
much of what Americans seem to be earning more than workers in other
countries goes right through their hands to the FIRE sector. So, what
seems to be low wages in China go a lot further than higher wages in the
United States.)
Eighty percent of American bank loans are mortgage loans to real estate and
the effect of loosening loan standards and increasing the market for real
estate is to push up the cost of living, push up the cost of housing. So,
Americans have to pay more and more money for their housing whether theyre
renters or theyre buyers, in which case the rent is for paying mortgage
interest.
So, all of this cost structure has been built into the economy. Chinas been
able pretty much, to avoid all of this, because its objective in banking is
not to make a profit and interest, not to make capital gains and
speculation. It creates money to fund actual means of production to build
factories, to build research and development, to build transportation
facilities, to build infrastructure. Banks in America dont lend for that
kind of thing.
So, you have a diametric opposite philosophy of how to develop between the
United States and China.
They only lend against collateral thats already in place because they wont
make a loan if its not backed by collateral. Well, China creates money
through its public banks to create capital, to create the means of
production. So, you have a diametric opposite philosophy of how to develop
between the United States and China.
The United States has decided not to gain wealth by actually investing in
means of production and producing goods and services, but in financial ways.
China is gaining wealth the old-fashioned way, by producing it. And whether
you call this, industrial capitalism or a state capitalism or a state
socialism or Marxism, it basically follows the same logic of real economics,
the real economy, not the financial overhead. So, you have China operating
as a real economy, increasing its production, becoming the workshop of the
world as England used to be called and America trying to draw in foreign
resources, live off of foreign resources, live by trying to make money by
investing in the Chinese stock market or now, moving investment banks into
China and making loans to China not actual industrial capitalism ways.
China is gaining wealth the old-fashioned way, by producing it.
So, you could say that America has gone beyond industrial capitalism, and
they call it the post-industrial society, but you could call it the
neo-feudal society. You could call it the neo-rentier society, or you could
call it debt peonage but its not industrial capitalism.
And in that sense, theres no rivalry between China and America. These are
different systems going their own way and I better let Pepe pick it up from
there.
Pepe Escobar: Okay. Thank you, Michael, this is brilliant. And you did it in
less than 15 minutes. You told the whole story in 15 minutes. Well, my
journalistic instinct is immediately to start questions to Michael. So, this
is exactly what Im gonna do now. I think it is much better to basically
illustrate some points of what Michael just said, comparing the American
system, which is finance capitalism essentially, with industrial capitalism
that is in effect in China. Let me try to start with a very concrete and
straight to the point question, Michael.
Okay. lets says that more or less, if we want to summarize it, basically
they try to tax the nonproductive rentier class. So, this would be the
Chinese way to distribute wealth, right? Sifting through the Chinese
economic literature, there is a very interesting concept, which is
relatively new (correct me if I am wrong, Michael) in China, which they call
stable investment. So stable investment, according to the Chinese would be
to issue special bonds as extra capital in fact, to be invested in
infrastructure building all across China, and they choose these projects in
what they call weak areas and weak links. So probably in some of the inner
provinces, or probably in some parts of Tibet or Xinjiang for instance. So,
this is a way to invest in the real economy and in real government
investment projects.
Right? So, my question in fact, is does this system create extra local debt,
coming directly from this financing from Beijing? Is this a good recipe for
sustainable development, the Chinese way and the recipe that they could
expand to other parts of the Global South?
Michael: Well, this is a big problem that theyre discussing right now. The
localities, especially rural China, (and China is still largely rural) only
cover about half of their working budget from taxation. So, they have a
problem. How are they going to get the balance of the money? Well, there is
no official revenue sharing between the federal government and its state
banks and the localities.
So, the localities cant simply go to central government and say, give us
more money. The government lets the localities be very independent. And it
is sort of the let a hundred flowers bloom concept. And so, theyve let
each locality just go the long way, but the localities have run a big
deficit.
What do they do? Well in the United States they would issue bonds on which
New York is about to default. But in China, the easiest way for the
localities to make money, is unfortunately they will do something like
Chicago did. They will sell their tax rights for the next 75 years for
current money now.
So, a real estate developer will come in and say; look we will give you the
next 75 years of tax on this land, because we want to build projects on this
(a set of buildings). So, what this means is that now the cities have given
away all their source of rent.
Chicagos Water Tower and Water Tower Place. (CC BY-SA 3.0, Wikimedia
Commons)
Let me show you the problem by what Indiana and Chicago did. Chicago also
was very much like Chinas countryside cities. So, it sold parking meters
and its sidewalks to a whole series of Wall Street investors, including the
Abu Dhabi Investment Fund for seventy-five years. And that meant that for 75
years, this Wall Street consortium got to control the parking meters.
So, they put up the parking meters all over Chicago, raised the price of
parking, raised the cost of driving to Chicago. And if Chicago would have a
parade and interrupt parking, then Chicago has to pay the Abu Dhabi fund and
Wall Street company what it would have made anyway. And this became such an
awful disaster that finally Wall Street had to reverse the deal and undo it
because it was giving privatization a bad name here. The same thing
happened in Indiana.
High School marching band in Chicagos 2008 Bud Billiken Parade. (Curtis
Morrow, CC BY 2.0, Wikimedia Commons)
Indiana was running a deficit and it decided to sell its roads to a Wall
Street investment firm to make a toll road. The toll on the Indiana turnpike
was so high that drivers began to take over the side roads. Thats the
problem if you sell future tax revenues in advance.
Now what China and the localities there are discussing is that weve already
given the real estate tax at very low estimates to the commercial
developers, so what do we do? Well, Ive given them my advice. Im a
professor of economics at the Peking University, School of Marxist studies
and Ive had discussions with the Central Committee. I also have an official
position at Wuhan University. There, were discussing how China can put an
added tax for all of the valuable land, thats gone up. How can it be done
to let the cities collect this tax? Our claim is that the cities, in selling
these tax rights for 75 years, have sold what in Britain would be called
ground rent (i.e. whats paid to the landed aristocracy).
Over and above that theres the market rent. So, China should pass a
market-rent tax over and above the ground rent tax to reflect the current
value. And there theyre thinking of, well, do we say that this is a capital
gain on the land? Well, its not really a capital gain until you sell the
land, but its value. Its the valuation of the capital. And theyre looking
at whether they should just say this is the market rent tax over and above
the flat tax that has been paid in advance, or its a land tax on the
capital gain for land.
Now, all of this requires that there be a land map of the whole country. And
they are just beginning to create such a land map as a basis for how you
calculate how much the rent there is.
What I found in China is something very strange. A few years ago, in
Beijing, they had the first, International Marxist conference where I was
the main speaker and I was talking about Marxs discussion of the history of
rent theory in Volume II and Volume III of Capital where Marx discusses all
of the classical economics that led up to his view; Adam Smith, Ricardo,
Malthus, John Stuart Mill, and Marxs theory of surplus value was really the
first history of economic thought that was written, although it wasnt
published until after he died. Well, you could see that there was a little
bit of discomfort with some of the Marxists at the conference. And so, they
invited for the next time my colleague David Harvey to come and talk about
Marxism in the West.
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Well, David gave both the leading and the closing speech of the conference
and said, youve got to go beyond volume I of Capital. Volume I was what
Marx wrote as his addition to classical economics, saying that there was
exploitation in industrial employment of labor as well as rent seeking and
then he said, now that Ive done my introduction here, let me talk about how
capitalism works in Volumes II and III. Volumes II and III are all about
rent and finance and David Harvey has published a book on Volume III of
Capital and his message to Peking University and the second Marxist
conference was youve got to read Volume II, and III.
Well, you can see that, theres a discussion now over what is Marxism and a
friend and colleague at PKU said Marxism is a Chinese word; Its the Chinese
word for politics. That made everything clear to me. Now I get it! Ive
been asked by the Academy of Social Sciences in China to create a syllabus
of the history of rent theory and value theory. And essentially in order to
have an idea of how you calculate rent, how do you make a national income
analysis where you show rent, you have to have a theory of value and price
and rent is the excess of price over the actual cost value. Well, for that
you need a concept of cost of production and thats what classical economics
is all about. Post-classical economics denied all of this. The whole idea of
classical economics is that not all income is earned.
Landlords dont earn their income for making rent in their sleep as John
Stuart Mill said. Banks dont earn their income by just sitting there and
letting debts accrue and interest compounding and doubling. The classical
economists separated actual unearned income from the production and
consumption economy.
Well, around the late 19th century in America, you had economists fighting
against not only Marx, but also even against Henry George, who at that time,
was urging a land tax in New York. And so, at Columbia University, John
Bates Clark developed a whole theory that everybody earns whatever they can
get. That there was no such thing as unearned income and that has become the
basis for American national income statistics and thought ever since. So, if
you look at todays GDP figures for the United States, they have a figure
for 8 percent of the GDP for the homeowners rent. But homeowners wouldnt
pay themselves if they had to rent the apartment to themselves, then youll
have interest at about 12 percent of GDP.
And I thought, well how can interest be so steady? What happens to all of
the late fees; that 29 percent that credit card companies charge? I called
up the national income people in Washington, when I was there. And they said
well, late fees and penalties are considered financial services.
And so, this is what you call a service economy. Well, theres no service in
charging a late fee, but they add all of the late fees. When people cant
pay their debts and they owe more and more, all of that is considered an
addition to GDP. When housing becomes more expensive and prices American
labor out of the market, thats called an increase in GDP.
This is not how a country that wants to develop is going to create a
national income account. So, theres a long discussion in China about, just
to answer your question, how do you create an account to distinguish between
whats the necessary cost to production and whats an unnecessary production
cost and how do we avoid doing what the United States did. So again, no
rivalry. The United States is an object lesson for China on what to avoid,
not only in industrializing the economy, but in creating a picture of the
economy as if everybody earns everything and theres no exploitation, no
earned income, nobody makes money in their sleep and theres no 1 percent.
Well, thats whats really at issue and why the whole world is splitting
apart as you and I are discussing in what were writing.
When people cant pay their debts and they owe more and more, all of that
is considered an addition to GDP.
Pepe: Thank you, Michael. Thank you very much. So just to sum it all up, can
we say that Beijings strategy is to save especially provincial areas from
leasing their land, their infrastructure for 60 years or 75 years? As you
just mentioned, can we say that the fulcrum of their national strategy is
what you define as the market rent tax? Is this the No. 1 mechanism that
they are developing?
Michael: Ideally, they want to keep rents as low as possible because rent is
a cost of living and a cost of doing business. They dont have banks that
are lending to inflate the real estate market.
However, in almost every Western country the U.S., Germany England the
value of stocks and bonds and the value of real estate is just about exactly
the same. But for China, the value of real estate is way, way larger than
the value of stocks.
And the reason is not because the Chinese Central bank, the Bank of China
lends for real estate; its because they lend to intermediaries and the
intermediaries have financed a lot of housing purchases in China. And, this
is really the problem for if they levy a land tax, then youre going to make
a lot of these financial intermediaries go bust.
Thats what Im advocating, and I dont think thats a bad thing. These
financial intermediaries shouldnt exist, and this same issue came up in
2009 in the United States. You had the leading American bank being the most
crooked and internally corrupt bank in the country, Citibank making junk
mortgage, and it was broke.
Sheila Bair in 2016. (Matt Spangler for Washington College, CC BY-SA 4.0,
Wikimedia Commons)
Its entire net worth was wiped out as a result of its fraudulent junk
mortgages. Well, Sheila Bair, the head of the Federal Deposit Insurance
Corporation (FDIC) wanted to close it down and take it over. Essentially
that would have made it into a public bank and that would be a wonderful
thing. She said, look Citibank shouldnt be doing what its doing. And she
wrote all this up in an autobiography. And, she was overruled by President
Obama and Tim Geithner saying, but wait a minute, those are our campaign
contributors. So, they were loyal to the campaign contributors, but not the
voters; and they didnt close Citibank down.
And the result is that the Federal Reserve ended up creating about $7
trillion of quantitative easing to bail out the banks. The homeowners
werent bailed out. Ten million American families lost their homes as a
result of junk mortgages in excess of what the property was actually worth.
All of this was left on the books, foreclosed and sold to a private capital
companies like Blackstone. And the result is that home ownership in America
declined from 68 percent of the population down to about 61 percent. Well,
right where the Obama administration left off, youre about to have the
Biden administration begin in January with an estimated 5 million Americans
losing their homes. Theyre going to be evicted because theyve been
unemployed during the pandemic. Theyve been working in restaurants or gyms
or other industries that have been shut down because of the pandemic.
Theyre going to be evicted and many homeowners and, low-income homeowners
have been unable to pay their mortgages.
Theres going to be a wave of foreclosures. The question is, whos going to
bear the cost? Should it be 15 million American families who lose their
homes just so the banks wont lose money? Or should we let the banks that
have made all of the growth since 2008? Ninety five percent of American GDP
of the population has seen its wealth go down. All the wealth has been
accumulating for the 5 percent in statistics. Now the question is should
this 5 percent thats got all the wealth lose or should the 95 percent lose?
Worker installs security panels over windows after police evict woman from
her foreclosed home in South Minneapolis, 2009. (Tony Webster, CC BY 2.0,
Wikimedia Commons)
The Biden administration says the 95 percent should lose basically. And
youre going to see a wave of closures so that the question in China should
be that, these intermediate banks (theyre not really banks they are sort of
like payday loan lenders), should they come in and, bear the loss or should
Chinese localities and the people bear the loss? Somebody has to lose when
youre charging, youre collecting the lands rent that was paid to the
creditors, and either the creditors have to lose or, the tax collector loses
and thats the conflict that exists in every society of the world today.
And, in the West, the idea is the tax collectors should lose and whatever
the tax collector relinquishes should be free for the banks to collect. In
China obviously, they dont want that to happen and they dont want to see a
financial class developing along US lines.
Pepe: Michael, theres a quick question in all this, which is the official
position by Beijing in terms of helping the localities. Their official
position is that there wont be any bailouts of local debt. How do they plan
to do that?
Michael: What theyre discussing, how are you not going to do it? They think
they sort of let localities go their own way. And they think, well you know
which ones are going to succeed, and which ones arent, they didnt want to
have a one-size-fits all central planning. They wanted to have flexibility.
Well, now they have flexibility. And when you have many different let a
hundred flowers bloom, not all the flowers are going to bloom at the same
rate.
And the question is, if they dont bail out the cities, how are the cities
going to operate? Certainly, China has never let markets steer the economy,
the government steers the markets. Thats what socialism is as opposed to
finance capitalism. So, the question is, you can let localities go broke and
yet youre not going to destroy any of the physical assets of the
localities, and all of this is going to be in place. The question is how are
you going to arrange the flow of income to all of these roads and buildings
and land thats in place? How do you create a system? Essentially, theyre
saying well, if were industrial engineers, how do we just plan things?
Forget credit, forget property claims, forget the rentier claims. How are we
just going to design an economy that operates most efficiently? And thats
what theyre working on now to resolve this situation because its gotten
fairly critical.
Pepe: Yes, especially in the countryside. Well, I think, a very good
metaphor in terms of comparing both systems are investment in
infrastructure. You travel to China a lot so, youve seen. Youll travel
through high-speed rail. Youll see those fantastic airports, in Pudong or
the new airport in Beijing. And then youll take the Acela to go from
Washington to New York City, which is something that I used to do years ago.
And the comparison is striking. Isnt it?
Or if you go to France, for instance, when France started development of the
TGV, which in terms of a national infrastructure network, is one of the best
networks on the planet. And the French started doing this 30 years ago, even
more. Is there
, its not in terms of way out, but if we analyze the
minutia, its obvious that following the American finance utilization
system, we could never have something remotely similar happening in United
States in terms of building infrastructure.
So, do you see any realistic bypass mechanism in terms of improving American
infrastructure, especially in the big cities?
TGV 2N2 Lyria train at Paris Gare de Lyon station. (CC BY-SA 4.0, Wikimedia
Commons)
Michael: No, and there are two reasons for that. No. 1, lets take a look at
the long-term railroads. The railroads go through the center of town or even
in the countryside, all along the railroads, the railroads brought business
and all the businesses had been located as close to the railroad tracks as
they could. Factories with sightings off the railroad, hotels and especially
right through the middle of town where you have the railway gates going up
and down. In order to make a high-speed rail as in China, you need a
dedicated roadway without trucks and cars, imagine a car going through a
railway gate at 350 miles an hour.
So, when I would go from Beijing to Tianjin, heres the high-speed rail,
theres one highway on one side, one highway on the other side. Therell be
underpasses. But there it goes straight now. How can you suppose you would
have a straight Acela line from Washington up to Boston when all along the
line, theres all this real estate right along the line that has been built
up? Theres no way you can get a dedicated roadway without having to tear
down all of this real estate thats on either side and the cost of making
the current owners whole would be prohibitive. And anywhere you would go,
thats not in the center of the city, you would also have to have the
problem that theres already private property there.
And theres no legal, constitutional way for such a physical investment to
be made. China was able to make this investment because it was still largely
rural. It wasnt as built up along the railways. It didnt have any
particular area that was built up right where the railroad already was.
President Donald Trump visiting China in 2017. (PAS China via Wikimedia
Commons)
So certainly, any high-speed rail could not go where the current railways
would be, and theyd have to go on somebodys land. And, theres also, what
do you do if you want to get to New York and Long Island from New Jersey?
Sixty years ago, when I went into Wall Street, the cost of getting and
transporting goods from California to Newark, New Jersey, was as large as
from Newark right across the Hudson River to New York, not only because of
the mafia and control of the local labor unions, but because of the tunnels.
Right now, the tunnels from New Jersey to New York are broke, they are
leaking, the subways in New York City, which continually break down because
there was a hurricane a few years ago and the switches were made in the
1940s. The switches are 80 years old. They had water damage and the trains
have to go at a crawl. But the city and state, because it is not collecting
the real estate tax and other taxes and because ridership fell on the
subways to about 20 percent, the citys broke. Theyre talking about 70
percent of city services being cut back. Theyre talking about cutting back
the subways to 40 percent capacity, meaning everybody will have to get in
when theres still a virus and not many people are wearing masks, and there
was no means of enforcing masks here.
Blue Xs mark social distancing on the platform of a New York City subway
station, May 2020. (Marc A. Hermann, MTA, Wikimedia Commons)
So, theres no way that you can rebuild the infrastructure because, for one
thing the banking system here has subsidized for a hundred years junk
economics saying you have to balance the budget. If the government creates
credit its inflationary as if when banks create credit, its not
inflationary. Well, the monetary effect is the same, no matter who creates
the money. And so, Biden has already said that President Trump ran a big
deficit, were going to run a bunch of surpluses or a budget balance. And he
was advocating that all along. Essentially Biden is saying we have to
increase unemployment by 20 percent, lower wages by 20 percent, shrink the
economy by about 10 percent in order to, in order for the banks not to lose
money.
Youre going to price the American economy even further out of business
because they say that public investment is socialism.
And, were going to privatize but we are going to do it by selling the
hospitals, the schools, the parks, the transportation to finance, to Wall
Street finance capital groups. And so, you can imagine whats going to
happen if the Wall Street groups buy the infrastructure. Theyll do what
happened to Chicago when it sold all the parking meters, theyll say, OK,
instead of 25 cents an hour, its now charged $3 an hour. Instead of a $2
for the subway, lets make it $8.
Youre going to price the American economy even further out of business
because they say that public investment is socialism. Well, its not
socialism. Its industrial capitalism. Its industrialization, thats basic
economics. The idea of what, and how an economy works is so twisted
academically that its the antithesis of what Adam Smith, John Stewart Mill
and Marx all talked about. For them a free- market economy was an economy
free of rentiers. Free of rent, it didnt have any rent seeking. But now for
the Americans, a free-market economy is free for the rentiers, free for the
landlord, free for the banks to make a killing. And that is basically the
class war back in business with a vengeance. That blocks and is preventing
any kind infrastructure recovery. I dont see how it can possibly take
place.
Pepe: Well, based on what you just described, there is a process of turning
the United States into a giant Brazil. In fact, this is what the Brazilian
Finance Minister Paulo Guedes, a Pinochetista, as you know Michael, has been
doing with the Brazilian economy for the past two years, privatizing
everything and selling everything to big Brazilian interests and with lots
of Wall Street interests involved as well. So, this is a recipe that goes
all across the Global South as well. And its fully copied all across the
Global South with no way out now.
Michael: Yes, and this is promoted by the World Bank and the International
Monetary Fund. And when I was brought down to Brazil to meet with the
council of economic advisers under Lula, [Luiz Inácio Lula da Silva, former
president of Brazil], they said, well the whole problem is that Lulas been
obliged to let the banks do the planning.
So, basically free markets and libertarianism is adopting central planning,
but with central planning by the banks. America is a much more centrally
planned economy than China. China is letting a hundred flowers bloom;
America has concentrated the planning and the resource allocation in Wall
Street. And thats the central planning that is much more corrosive than any
government planning, could be. Now the irony is that Chinas sending its
students to America to study economics. And, most of the Chinese I had
talked to say, well we went to America to take economics courses because
that gives us a prestige here in China.
Im working now, with Chinese groups trying to develop a reality economics
to be taught in China as different from American economics.
America has concentrated the planning and the resource allocation in Wall
Street. And thats the central planning that is much more corrosive than any
government planning, could be.
Pepe: Exactly, because of what they study at Beijing University, Renmin or
Tsinghua
is not exactly what they would study in big American universities. Probably
what they study in the U.S. is what not to do in China. When they go back to
China, what they wont be doing. Its an object lesson for what to avoid.
Michael, Id like to go back to what the BRICS [Brazil, Russia, India, China
and South Africa] had been discussing in the 2000s when Lula was still
president of Brazil and many of his ideas deeply impressed, especially Hu
Jintao at the time, which is bypassing the U.S. dollar. Well, at the moment
obviously were still at 87 percent of international transactions still in
U.S. dollars. So, we are very far away from it, but if you have a truly
sovereign economy, which is the case of China, which we can say is the case
of Russia to a certain extent and obviously in a completely different
framework, Iran. Iran is a completely sovereign, independent economy from
the West. The only way to try to develop different mechanisms to not fall
into the rentier mind space would be to bypass the U.S. dollar.
Occupy Wall Street picket of HSBC, midtown Manhattan; Feb. 14, 2013.
(Michael Fleshman Via Flickr)
Occupy Wall Street picket of HSBC, midtown Manhattan; Feb. 14, 2013.
(Michael Fleshman
Via Flickr)
Michael: Yes, for many reasons. For one thing the United States can simply
print the dollars and lend to other countries and then say, now you have to
pay us interest. Well, Russia doesnt need American dollars. It can print
its own rubles to provide labor. Theres no need for a foreign currency at
all for domestic spending, the only reason you would have to borrow a
foreign currency is to balance your exchange rate, or to finance a trade
deficit. But China doesnt have a trade deficit. And in fact, if China were
to work to accept more dollars, Americans would love to buy into the Chinese
market and make a profit there, but that would push up Chinas exchange rate
and that would make it more difficult for her to make its exports because
the exchange rate would come up not because its exporting more but because
its letting American dollars come in and push it up.
Well, fortunately, President Trump as if he works for the Chinese National
Committee, said, look, we dont want to really hurt China by pushing up its
currency and we want to keep it competitive. So, Im going to prevent
American companies from lending money to China, Im going to isolate it and
so hes helping them protect their economy. And in Russia he said, look
Russia really needs to feed itself. And, theres a real danger that when the
Democrats come in, there are a lot of anti-Russians in the Biden
administration. They may go to war. They may do to Russia what they tried to
do to China in the 50s. Stop exporting food and grain. And only Canada was
able to break the embargo. So, were going to impose sanctions on Russia. So
immediately, what happened is Russia very quickly became the largest grain
exporter in the world. And instead of importing cheese from the Baltics, it
created its own cheese industry. So, Trump said look, I know that Russians
followed the American idea of not having protective tariffs, they need
protective tariffs. Theyre not doing it. Were going to help them out by
just not importing from them and really helping them.
Pepe: Yeah. Michael, what do you think Black Rock wants from the Chinese?
You know that they are making a few inroads at the highest levels? Of
course, Im sure youre aware of that. And also, JP Morgan, Citybank, etc.
What do they really want?
Michael: Theyd like to be able to create dollars to begin to buy and make
loans to real estate; let companies grow, let the real estate market grow
and make capital gains.
The way people get wealthy today isnt by making an income, its been by
making a capital gain. Total returns are current income plus the capital
gains. As for capital gains each year; the land value gains alone are larger
than the whole GDP growth from year to year. So thats where the money is,
thats where the wealth is. So, they are after speculative capital gains,
they would like to push money into the Chinese stock market and real estate
market. See the prices go up and then inflate the prices by buying in and
then sell out at the high price. Pull the money out, get a capital gain and
let the economy crash, I mean thats the business plan.
Pepe: Exactly. But Beijing will never allow that.
Michael: Well, heres the problem right now, they know that Biden is pushing
militarily aggressive people in his cabinet. Theres one kind of overhead
that China is really trying to avoid and thats the military overhead
because if you spend money on the military, you cant spend it on the real
economy. Theyre very worried about the military and they say, how do we
deter the Biden administration from actually trying a military adventure in
the South China Sea or elsewhere? They said well, fortunately America is
multi-layered. They dont think of America as a group. They realize theres
a layer and they say, whos going to represent our interests?
Theres one kind of overhead that China is really trying to avoid and
thats the military overhead because if you spend money on the military, you
cant spend it on the real economy.
Well, Blackstone and Wall Street are going to represent their interests.
Then I think one of the, Chinese officials last week gave a big speech on
this very thing, saying look, our best hope in stopping Americas military
adventurism in China is to have Wall Street acting as our support because
after all, Wall Street is the main campaign contributor and the president
works for the campaign contributors.
The politician works for the campaign contributors. Theyre in it for the
money! So fortunately, we have Wall Street on our side, weve got control of
the political system and theyre not there to go to war so that helps
explain why a month ago they let wholly-owned U.S. banks and bankers in. On
the one hand, they dont like the idea of somebody outside the government
creating credit for reasons that the economy doesnt need. If they needed
it, the Bank of China would do it. They have no need for foreign currency to
come in to make loans in domestic currency, out of China.
The only reason that they could do it is No. 1, it helps meet the World
Trade Organizations principles and, No. 2, especially during this formative
few months of the Biden administration, it helps to have Wall Street saying;
we can make a fortune in China, go easy on them and that essentially
counters the military hawks in Washington.
Pepe: So, do you foresee a scenario when Black Rock starts wreaking havoc in
the Shanghai stock exchange for instance?
Wall Street, Nov. 21, 2009. (Dave Center, Flickr)
Michael: It would love to do that. It would love to move things up and down.
The moneys made by companies with the stock market going up and down; the
zigzag. So of course, it wants to do a predatory zigzag. The question is
whether China will impose a tax to stop this, all sorts of financial
transactions. Thats whats under discussion now. They know exactly what
Black Rock wants to do because they have some very savvy billionaire Chinese
advisers that are quite good. I can tell you stories, but I better not.
Pepe: Okay. If its not okay to tell it all, tell us part of the story then.
Michael: The American banks have been cultivating leading Chinese people by
providing them enough money to make money here, that they think that, okay
they will now try to make money in the same way in China and we can join in.
Its a conflict of systems again, between the finance capital system and
industrial socialism. You dont get any of this discussion in the U.S.
press, which is why I read what you write because in the U.S. press, the
neocons talk about the fake idea of Greek history and fake idea of the
Thucydides problem of a country jealous of another countrys development.
Theres no jealousy between America and China. Theyre different, they have
their own way. We are going to destroy them. And if you look at the analogy
that the Americans draw and this is how the Pentagon thinks with the war
between Athens and Sparta. Its hard to tell, which is which. Here you have
Athens, a democracy backing other democracies and having the military
support of the democracies and the military in these democracies all had to
pay Athens protection money for the military support and thats the money
that Athens got to ostensibly support its navy and protection that built up
all of the Athenian public buildings and everything else. So, thats a
democracy exploiting its allies, to enrich itself via the military. Then you
have Sparta, which was funding all of the oligarchies, and it was helping
the oligarchies overthrow democracies. Well, that was America too. So,
America is both sides of the Thucydides war if the democracy is exploiting
the fellow democracies and is the supporter of oligarchies in Brazil, Latin
America, Africa and everyone else.
So, you could say the Thucydides problem was between two sides, two aspects
of America and has nothing to do with China at all except, for the fact that
the whole war was a war between economic systems. Theyre acting as if
somehow if only China did not export to us, we could be re-industrialized
and somehow export to Europe and the Third World.
And as you and I have described, its over. We painted ourselves into such a
debt corner that without writing down the debts, were in the same position
that the Eurozone is in. Theres so much money that goes to the creditors to
the top 1 percent or 5 percent that there is no money for capital
investment, there is no money for growth. And, since 1980 as you know, real
wages in America have been stable. All the growth has been in property
owners and predators and the FIRE sector, the rest of the economy is in
stagnation. And now the coronavirus has simply acted as a catalyst to make
it very clear that the game is over; its time to move away from the
homeowner economy to rentier economy, time for Blackstone to be the
landlord. America wants to recreate the British landlord class and
essentially what were seeing now is like the Norman invasion of England
taking over the land and the infrastructure. Thats what Blackstone would
love to do in China.
Theres so much money that goes to the creditors to the top 1 percent or 5
percent that there is no money for capital investment, there is no money for
growth.
Pepe: Wow. Im afraid that they may have a lot of leeway by some members of
the Beijing leadership now, because as you know very well, its not a
consensus in the political arena.
Michael: Were talking about Volume II and III of Capital.
Pepe: Exactly. But you know, you were talking about debt. Coming back to
that, in fact I just checked this morning, apparently global debt as it
stands today is $277 trillion, which is something like 365 percent of global
GDP. What does that mean in practice?
Michael: Yeah, well fortunately this is discussed in the 19th century and
there was a word for that fictitious capital its a debt that cant be
paid, but youll keep it on the books anyway. And every country has this.
You could say the question now, and The Financial Times just had an article
a few days ago that Chinas claims on Third World countries on the Belt and
Road Initiative is fictitious capital, because how can it collect?
Well, Chinas already thought of that. It doesnt want money. It wants the
raw materials. It wants to be paid in real things. But a debt that cant be
paid, can only be paid either by foreclosing on the debtors or by writing
down the debts and obviously a debt that cant be paid wont be paid.
Fictitious capital its a debt that cant be paid, but youll keep it on
the books anyway. And every country has this.
And so, you have not only Marx using the word fictitious capital. At the
other end of the spectrum, you had Henry George talking about fictive
capital. In other words, these are property claims that have no real capital
behind them. Theres no capital that makes profit. Thats just a property
claim for payment or a rentier claim for payment.
So, the question is, can you make money somehow without having any
production at all, without having wages, without having profits, without any
capital? Can you just have asset grabbing and buying-and-selling assets? And
as long as you have the Federal Reserve in America, come in, Trumps $10
trillion Covid program gave $2 trillion to the population at large with
these $1,200 checks, that my wife and I got, and $8 trillion all just to buy
stocks and bonds. None of this was to build infrastructure. None of this $8
trillion was to build a single factory. None of this 8 trillion was to
employee a single worker. It was all just to support the prices of stocks
and bonds, and to keep the illusion that the economy had not stopped
growing. Well, its growing for the 5 percent. So, its all become
fictitious. And if you look at the GDP as I said, its fictitious.
Pepe: And the most extraordinary thing is none of that is discussed in
American media. Theres not a single word about what you would have been
describing.
Michael: Its not even discussed in academia. Our graduates at the
university of Missouri at Kansas City, were all trained in Modern Monetary
Theory. And as hired professors they have to be able to publish in the
refereed journals and the refereed journals are all essentially controlled
by the Chicago School. So, you have a censorship of the kind of ideas that
were talking about. You cant get it into the economic journals, so you
cant get it into the economics curriculum. So, where on earth are you going
to get it? If you didnt have the internet you wouldnt be discussing at
all. Most of my books sell mainly in China, more than in all the other
countries put together so I can discuss these things there. I stopped
publishing in orthodox journals so many years ago because its talking to
the deaf.
None of this $8 trillion was to build a single factory, employee, a single
worker.
Pepe: Absolutely. Yeah. Can I ask you a question about Russia, Michael?
There is a raging, debate in Russia for many years now between lets say the
Eurasianists and the Atlanticists. It involves of course, economic policy
under Putin, industrial capitalism Russian style. The Eurasianists basically
say that the central problem with Russia is how the Russian central bank is
basically affiliated with all the mechanisms that you know so well, that it
is an Atlanticist Trojan Horse inside the Russian economy. How do you see
it?
Michael: Russia was brainwashed by the West when the Soviet Union broke up
in 1991. First of all, the IMF announced in advance that there was a big
meeting in Houston with the IMF and the World Bank. And the IMF published
all of its report saying, first you dont want inflation in Russia so lets
wipe out all of the Russian savings with hyperinflation, which they did.
They then said, well now to cure the hyperinflation the Russian central bank
needs a stable currency and you need a backup for the currency. You will
need to back it with U.S. dollars.
Russia was brainwashed by the West when the Soviet Union broke up in 1991.
So, from the early 1990s, as you know, labor was going unpaid. The Russian
central bank could have created the rubles to pay the domestic labor and to
keep the factories in place. But, the IMF advisers from Harvard said, no
youll have to borrow U.S. dollars. I met with people from the Hermitage
Fund and the Renaissance Fund and others. We had meetings and I met with the
investors. Russia was paying 100 percent interest for years to leading
American financial institutions for money that it didnt need and could have
created itself. Russia was so dispirited with Stalinism that, essentially,
it thought the opposite of Stalinism must be what they have in America.
They thought that America was going to tell it how America got rich, but
America didnt want to tell Russia how it got rich, but instead wanted to
make money off Russia. They didnt get it. They trusted the Americans. They
really didnt understand that, industrial capitalism that Marx described had
metamorphosized into finance capitalism and was completely different.
And thats because Russia didnt charge rent, it didnt charge interest. I
gave three speeches before the Duma, urging it to impose a land tax. Some of
the people I noticed, Ed Dodson was there with us and we were all trying to
convince Russia, dont let this land be privatized. If you let it be
privatized, then youre going to have such high rents and housing costs in
Russia that youre not going to be able to essentially compete for an
industrial growth. Well, the politician who brought us there, Viatcheslav
Zolensky was sort of maneuvered out of the election by the American
advisers.
Russian Duma Building, Moscow, 2017. (Wikimedia Commons)
The Americans put billions of dollars in to essentially finance American
propagandists to destroy Russia, mainly from the Harvard Institute of
International Development. And essentially, they were a bunch of gangsters
and the prosecutors in Boston were about to prosecute them.
The attorney general of Boston was going to bring a big case for Harvard
against the looting of Russia and the corruption of Russia. And I was asked
to organize and to bring a number of Russian politicians and industrialists
over to say how this destroyed everything. Well, Harvard settled out of
court and essentially that made the perpetrators the leading university
people up there. (Im associated with Harvard Anthropology Department, not
the Economics Department.)
So, we never had a chance to bring my witnesses, and have our report on what
happened, but I published for the Russian Academy of Sciences a long study
of how all of this destruction of Russia was laid out in advance at the
Houston meetings by the IMF. America went to the leading bureaucrats and
said; look, we can make you rich why dont you register the factories in
your own name, and if youre registered in your own name, you know, then
youll own it. And then you can cash out. You can essentially sell, but
obviously you cant sell to the Russians because the IMF has just wiped out
all of their savings.
You can only cash out by selling to the West. And so, the Russian stock
market became the leading stock market in the world from 1994 with the
Norilsk Nickel and the seven bankers in the bank loans for shares deal
through 1997. And, I had worked for a firm Scutter Stevens and, the head
adviser, a former student of mine didnt want to invest in Russia because
she said, this is just a rip off, its going to crash. She was fired for not
investing. They said look, we know thats going to crash. Thats the whole
idea its going to crash. We can make a mint off it before the crash. And
then when it crashes, we can make another mint by selling short and then all
over again. Well, the problem is that the system that was put in with the
privatization thats occurred, how do you have Russias wealth used to
develop its own industry and its own economy like China was doing. Well,
China has rules for all of this, but Russia doesnt have rules, its really
all centralized, its President Putin that keeps it this way.
President Vladimir Putin meeting with German business executives, Nov. 1,
2018. (The Kremlin)
Well, this was the great fear of the West. When you had Mikhail Gorbachev
beginning to plan to do pretty much what is done today, to restrain private
capital, the IMF said hold off. Were not going to make any loans to
stabilize the Russian currency until you remove Mr. Primakov.
The U.S. said we wont deal with Russia until you remove him. So, he was
pushed out and he was probably the smartest guy at the time there. So, they
thought [President Vladimir] Putin was going to be sort of the patsy. And he
almost single-handedly, holding the oligarchs in and saying, look, you can
keep your money as long as you do exactly what the government would do. You
can keep the gains as long as youre serving the public interest.
But none of this resulted into a legal system, a tax system, and a system
where the government actually does get most of the benefits. Russia could
have emerged in 1990 as one the most competitive economies in Eurasia by
giving all of the houses to its people instead of giving Norilsk Nickel and
the oil companies to Yukos. It could have given everybody their own house
and their own apartment, the same thing in the Baltics. And instead it
didnt give the land out to the people. And Russians were paying 3 percent
of their income for housing in 1990. And rent is the largest element in
every households budget.
Russia could have emerged in 1990 as one the most competitive economies in
Eurasia by giving all of the houses to its people.
So, Russia could have had low-price labor. It could have financed all of its
capital investment for the government by taxing, collecting the rising
rental value. Instead, Russian real estate was privatized on credit and it
was even worse in the Baltics.
In Latvia, where I was research director for the Riga Graduate School of
Law, Latvia borrowed primarily from Swedish banks. And so, in order to buy a
house, you had to borrow from Swedish banks. And they said, well, were not
going to lend in the Latvian currency because it can go down. So, you have a
choice; Swiss Francs or German Marks or U.S. Dollars. And so, all of this
rent was paid in foreign currency. There came an outflow that essentially
drained all the Baltic economies. Latvia lost 20 percent of its population.
Estonia and Lithuania followed suit.
And of course, the worst hit by neo-liberalism was Russia. As you know,
President Putin said that neo-liberalism cost Russia more of its population
than World War II. And you know that to destroy a country, you dont need an
army anymore. All you have to do is teach it American economics.
Pepe: Yes, I remember well, I arrived in Russia in the winter of 91 coming
from China. So, I transited from the Chinese miracle. In fact, a few days
after Deng Xiaopings famous Southern tour when he went to Guangzhou and
Shenzhen. And that was the kick for the 1990s boom, in fact a few years
before the handover, and then I took the Trans-Siberian and I arrived in
Moscow a few days after the end, in fact, a few weeks after the end of the
Soviet Union.
But yeah, I remember the Americans arrived almost at the exact minute,
wasnt it, Michael? I think they already were there in the spring of 1992.
If Im not mistaken.
Russian 1992 privatization voucher. (Wikimedia Commons)
Michael: The Houston meeting was in 1990. But all before that already in,
1988 and 1989, there was a huge outflow of embezzlement money via Latvia.
The assistant dean of the university who ended up creating Nordex,
essentially the money was all flying out because Ventspils in Latvia, was
where Russian oil was exported and it was all fake invoicing. So, the
Russian kleptocrats basically made their money off false export invoicing,
ostensibly selling it for one price and having the rest paid abroad and,
this was all organized through Latvia and the man who did it later moved to
Israel and finally gave a billion dollars back to Russia so that he went on
to live safely for the rest of his life in Israel.
Pepe: Well, the crash of the ruble in 1998 was what, roughly one year after
the crash of the baht and the whole Asian financial crisis, no? It was
interlinked of course, but let me see if I have a question for you, in fact,
Im just thinking out loud now. If the economies of Southeast Asia and
Northeast Asia, the case of South Korea and Russia, were more integrated at
the time as they are trying to integrate now, do you think that the Asian
financial crisis would have been preventable in 1997?
Michael: Well, look at what happened in Malaysia with Mohammad Mahathir.
Malaysia avoided it. So of course, it was preventable, and they had the
capital controls. All you would have needed was to do what Malaysia did. But
you needed an economic theory for that.
And essentially the current mode of warfare is to conquer the brains of a
country to shape how people think and how they perceive the economy. And if
you can twist their view into an unreality economics, where they think that
youre there to help them not to take money out of them, then youve got
them hooked. That was what happened in Asia. Asia thought it was getting
rich off the dollars inflows and then the IMF and all the creditors pulled
the plug, crash the industry. And now that all of a sudden you had a crash,
they bought up Korean industry and other South Asian industries at giveaway
prices.
Thats what you do. You lend the money; you pull the plug. You then let them
go under and you pick up the pieces. Thats what Blackstone did after the
Obama depression began, when Obama saved the banks, not the constituency,
the mortgage borrowers. Essentially thats Blackstones modus operandi to
pick up distressed prices at a bankruptcy sale, but you need to lend money
and then crash it in order to make that work.
Pepe: Michael, I think we have only five minutes left. So, I would expect
you to go on a relatively long answer and Im really dying for it. Its
about debt, it about the debt trap. And its about the New Silk Roads, the
Belt and Road Initiative, because I think rounding up our discussion and
coming back to the theme of debt and global debt.
The No. 1 criticism apart from the demonization of China that you hear from
American media and a few American academics as well against the Belt and
Road is that its creating a debt trap for Southeast Asian nations, Central
Asian nations and nations in Africa, etc
. Obviously, I expect you to debunk
that, but the framework is there is no other global development project as
extensive and as complex as Belt and Road, which as you know very well was
initially dreamed up by the Ministry of Commerce. Then they sold it more or
less to Xi Jinping who got the geopolitical stamp on it, announcing it,
simultaneously, (which was a stroke of genius) in Central Asia in Astana and
then in Southeast Asia in Jakarta. So, he was announcing the overland
corridors through the heartland and the Maritime Silk Road at the same time.
At the time people didnt see the reach and depth of all that. And now of
course, finally the Trump administration woke up and saw what was in play,
not only across Eurasia but reaching Africa and even selected parts of Latin
America as well. And obviously the only sort of criticism, and its not even
a fact-based criticism, that Ive seen about the Belt and Road is its
creating a debt trap because as you know Laos is indebted, Sri Lanka is
indebted, Kyrgyzstan is indebted etc. So, how do you view Belt and Road
within the large framework of the West and China, East Asia and Eurasia
relations? And how would you debunk misconceptions created, especially in
the U S that this is a debt trap.
Six proposed corridorsof Belt and Road Initiative, showing Italy inside
circle, on maritime blue route. (Lommes, CC BY-SA 4.0, Wikimedia Commons)
Six proposed corridors of Belt and Road Initiative, showing Italy inside
circle, on maritime blue route. (Lommes, CC BY-SA 4.0, Wikimedia Commons)
Michael: There are two points to answer there. The first is how the Belt
and Road began. And as you pointed out, the Belt and Road began, when China
said, what is it we need to grow and how do we grow within our neighboring
countries so we dont have to depend upon the West, and we dont have to
depend on sea trade that can be shut down? How do we get to roads instead of
seas in a way that we can integrate our economy with the neighboring
economies so that there can be mutual growth?
So, this was done pretty much on industrial engineering grounds. Heres
where you need the roads and the railroads. And then how do we finance it?
Well, The Financial Times article, last week, said didnt the Chinese know
that [with past] railroad development, theyve all gone broke? The Panama
Canal went broke, you know, the first few times there were European railway
investment in Latin America in the 19th century, that all went broke.
Well, what they dont get is Chinas aim was not to make a profit off the
railroads. The railroads were built to be part of the economy. They dont
want to make profit. It was to make the real economy grow, not to make
profits for the owners of the railroad stocks. The Western press cant
imagine that youre building a railroad without trying to make money out of
it.
Then you get to the debt issue. Countries only have a debt crisis if their
debt is in a foreign currency. The first way that the United States gained
power was to fight against its allies. The great enemy of America was
England and it made the British block their currency in the 1940s. And so,
India and other countries, that had all these currencies holdings in
sterling, were able to convert it all into dollars.
The whole move of the U.S. was to denominate world debt in dollars. So that
No. 1, U.S. banks would end up with the interest in financing the debt. And
No. 2, the United States could, by using the debt leverage, control domestic
politics.
Well, as youre seeing right now in Argentina, for instance, Argentina is
broke because it owes foreign-dollar debt. When I started the first Third
World bond fund in 1990 at Scutter Stevens, Brazil and China and Argentina
were paying 45 percent interest per year, 45 percent per year in dollars
debt. Yet we tried to sell them in America. No American would buy. We went
to Europe, no European buy this debt. And so, we worked with Merrill Lynch
and Merrill Lynch was able to make an offshore fund in the Dutch West Indies
and all of the debt was sold to the Brazilian ruling class in the central
bank and the Argentinian bankers in the ruling class, we thought oh, thats
wonderful.
We know that theyre going to pay the foreign Yankee Dollars debt because
the Yankee Dollars debt is owed to themselves. Theyre the Yankees! Theyre
the client oligarchy. And you know, from Brazil client oligarchy is, you
know, theyre cosmopolitan, thats the word. So, the problem is that on the
Belt and Road, how did these other countries pay the debt to China?
Well, the key there again is the de-dollarization, and one way to solve it
is since were trying to get finance out of the picture, were doing
something very much like, Japan did with Canada in the 1960s. It made loans
to develop Canadian copper mines taking its payment, not in Canadian
dollars, that would have pushed up the yens exchange rate, but in copper.
So, China says, you know you dont have to pay currency for this debt. We
didnt build a railroad to make a profit and you want, we can print all the
currency we want. We dont need to make a profit. We made the Belt and Road
because its part of our geopolitical attempt to create what we need to be
prosperous and have a prosperous region. So, these are self-reinforcing
mutual gain. Well, so thats what the West doesnt get mutual gain? Are
we talking anthropology? What do you mean mutual? This is capitalism! So,
the West doesnt understand what the original aim of the Belt and Road was,
and it wasnt to make a profitable railroad to enable people to buy and sell
railway stocks. And it wasnt to make toll roads to sell off to Goldman
Sachs, you know. Were dealing with two different economic systems, and its
very hard for one system to understand the other system because of the
tunnel vision that you get when you get a degree in economics.
Were dealing with two different economic systems, and its very hard for
one system to understand the other system because of the tunnel vision that
you get when you get a degree in economics.
Pepe: Belt and Road loans are long-term and at very low interest and they
are renegotiable. They are renegotiating with the Pakistanis all the time
for instance.
Michael: Chinas intention is not to repeat an Asia crisis of 1997. It
doesnt gain anything by forcing a crisis because its not trying to come in
and buying property at a discount at a distressed sale. It has no desire to
create a distressed sale. So obviously, the idea is the capacity to pay.
Now, this whole argument occurred in the 1920s, between [John Maynard]
Keynes and his opponents that wanted to collect German reparations and,
Keynes made it very clear. What is the capacity to pay? Its the ability to
export and the ability to obtain foreign currency. Well, Chinas not looking
for foreign currency. It is looking for economic returns but the return is
to the whole society, the return isnt from a railroad. The return is for
the entire economy because its looking at the economy as a system.
The way that neoliberalism works, it divides the economy in parts, and it
makes every part trying to make a gain, and if you do that, then you dont
have any infrastructure thats lowering the cost for the other parts. You
have every part fighting for itself. You dont look at in terms of a system
the way Chinas looking at it. Thats the great advantage of Marxism, youll
look at the system, not just the parts.
Pepe: Exactly and this is at the heart of the Chinese concept of a
community with a shared future for mankind, which is the approximate
translation from Mandarin. So, we compare community with a shared future for
mankind, which is, lets say the driving force between the idea of Belt and
Road, expanded across Eurasia, Africa and Latin America as well with our
good old friends, greed is good concept from the eighties, which is still
ruling America apparently.
Michael: And the corollary is that non-greed is bad.
Pepe: Exactly and non-greed is evil.
Michael: I see. I think we ran out of time. I do. I dont know if Alanna
wants to step in to wrap it up.
Michael: There may be somebody who has a question.
Pepe: Somebody has a question? Thatll be fantastic.
Alanna: There is a question from Ed Dodson. He wanted to know why there are
these ghost cities in China? And whos financing all this real estate thats
developed, but nobodys living there? Weve all been hearing about that. So,
what is happening with that?
Michael: Okay. China had most of its population living in the countryside
and it made many deals with Chinese landholders who have land rights, and
they said, if you will give up your land right to the community, we will
give you free apartment in the city that you could rent out.
So, China has been building apartments in cities and trading these basically
in exchange to support what used to be called a rural exodus. China doesnt
need as many farmers on the land as it now has, and the question is how are
you going to get them into cities? So, China began building these cities and
many of these apartments are owned by people whove got them in exchange for
trading their land rights. The deals are part of the rural reconstruction
program.
Alanna: Do you think it was a good deal? Vacant apartments everywhere.
Pepe: You dont have ghost cities in Xinjiang for instance, Xinjiang is
under-populated, its mostly desert. And its extremely sensitive to
relocate people to Xinjiang. So basically, they concentrated on expanding
Urumqi. When you arrive in Urumqi it is like almost like arriving in,
Guangzhou. Its enormous. Its a huge generic city in the middle of the
desert. And its also a high-tech Mecca, which is something that very few
people in the West know. And is the direct link between the eastern seaboard
via Belt and Road to Central Asia.
Pepe Escobar at the Khunjerab pass, China-Pak border, on New Silk Road
overdrive.
Last year I was on an amazing trip. I went to the three borders, the
Tajik-Xinjiang border, Kyrgiz-Xinjiang border and the Kazakh-Xinjiang
border, which is three borders in one. Its a fascinating area to explore
and specially to talk to the local populations, the Kyrgiz, the Kazakhs and
the Tajiks. How do they see the Belt and Road directly affecting their lives
from now on? So, you dont see something spectacular for instance, in the
Xinjiang Kazakh boarder, there is one border for the trucks, lots of them
like in Europe, crossing from all points, from Central Asia to China and
bringing Chinese merchandise to Central Asia.
Theres the train border, which is a very simple two tracks and the
pedestrian border, which is very funny because you have people arriving in
buses from all parts of Central Asia. They stop on the Kazakh border. They
take a shuttle, they clear customs for one day, they go to a series of
shopping malls on the Chinese side of the border. They buy like crazy, shop
till it drops, I dont know for 12 hours? And then they cross back the same
day because the visa is for one day. They step on their buses and they go
back.
So, for the moment its sort of a pedestrian form of Belt and Road, but in
the future, were going to have high-speed rail. Were going to have, well
the pipelines are already there as Michael knows, but its fascinating to
see on the spot. You see the closer integration; you see for instance
Uyghurs traveling back and forth. You know, Uyghurs that have families in
Kyrgizstan for instance, I met some Uyghurs in Kyrgyzstan who do the
back-and-forth all the time. And they said, theres no problem. They are
seen as businessmen so theres no interference. There are no concentration
camps involved, you know, but you have to go to these places to see how it
works on the ground and with Covid, thats the problem for us journalists
who travel, because for one year we cannot go anywhere and Xinjiang was on
my travel list this year, Afghanistan as well, Mongolia.
These are all parts of Belt and Road or future parts of Belt and Road, like
Afghanistan. The Chinese and the Russians as well; they want to bring
Afghanistan in a peace process organized by Asians themselves without the
United States, within the Shanghai Cooperation Organization, because they
want Afghanistan to be part of the intersection of Belt and Road and
Eurasian Economic Union. This is something Michael knows very well. You
dont see this kind of discussions in the American media for instance,
integration of Eurasia on the ground, how its actually happening.
Michael: Thats called cognitive dissonance.
Alanna: To try to understand it gets you cognitive dissonance.
Pepe: Oh yeah, of course. And obviously you are a Chinese agent, a Russian
agent. And so, I hear that all the time. Well, in our jobs we hear that all
the time. Especially, unfortunately from our American friends.
Alanna: Okay. I know you have other things to do. This has been fabulous. I
want to thank you so much, both of you, uh, with so easy to get attendance
for this webinar. There were 20 people in five minutes enrolled and in two
days we were at capacity. So, I know there are many more people who would
love to hear you talk another time, whenever you two are so willing. And I
think you both got much out of your first conversation in person. Everybody
listening knows these two wonderful gentlemen, they have written more than
10 books, and they have traveled all over the world. They are on the top of
geopolitical and geoeconomic analysis, and they are caring, loving people.
So, you can see that these are the people we need to be listening to and
understanding all around the world.
So, thank you so much. Ibrahima Drame from the Henry George School is now
going to say goodbye to you and will wrap this up. Thank you again.
Pepe: Michael it was a huge pleasure. Really, it was fantastic. Really nice,
were on the same website. So, lets have a second version of this.
Ibrahima: So, lets have a second version of this two months from now.
Thank you very much for participating and I really hope you liked this
event. And,
