Professor Michael Hudson – in discussion with Ian Proud, 1 May

(AKA, its the money honey! my note)

IP – I was talking about the old adage that “wars are won by economies not armies”, and I think the war in Iran has slightly refined that phrase, that “wars are won by economics not military force”. What’s your view?

MH – my view is probably in agreement with what the military is said to have discussed with Donald Trump last night and for the last few days. They’ve all told him that the invasion cannot work without an enormous sacrifice, and the United States ever since the Vietnam War, that led to the ending of the draft, no longer has a landed army. It’s depended on the client armies for the middle East, Israel and Al Qaeda in Syria.

So, it’s not going to be able to invade, not even Kharg Island which Trump had talked about, and the air force also has expressed great worry about trying to repeat an air attack on Iran which is very well protected by missiles now, and Iran in the last few days has threatened to sink American ships [this may now have happened] so Trump was told by the military at least, “don’t attack, you’d better use other means such as continue the choke point of stopping oil trade through the strait of Hormuz and impose sanctions on Iran”. And given the fact that the stock market has been going up for the last few days, international markets, even in Asia have been going up, it’s obvious that most of the large institutional money across the world thinks that somehow all of this is going to be settled, that economic means, sanctions are going to lead to some sort of resolution of the fight instead of all out war which would lead to Iran responding by bombing much of the oil capacity of the Arab OPEC counties especially in the Emirates, and also heavy bombing of American military bases, especially Israel.

So, the money that’s being bet, is being bet on it all going to be economic policy not military policy.

IP – and yet, I’m not convinced that economic sanctions and the continuance of economic sanctions against Iran including through a blockade will work. Iran’s been sanctioned since 1979. It has built up some reserves of its own from its current account surpluses. The greater pressure surely will be on American consumers, European consumers, Chinese consumers, consumers round the world who face higher prices?

MH – well, it’s not only consumers, it’s governments, it’s debtors, it’s going to bring about what looks to me like a new grand depression if Trump continues this. The problem is that economic sanctions are causing immense problems for the rest of the world. You’re already seeing shortages in oil and especially in fertilizer which is going ro reduce crop yields, helium which is already said to be reducing the MRI machinery in hospitals that need it and especially in etching computer chips, you’re ending up the flow of naphtha into plastics, you’re having all of these major industries being reduced, and the initial economic view was, well, oil and power were only 10% of GDP.

But, if you don’t have oil and gas and an interconnected economy, then you are not only going to lose oil and gas consumption, you are going to lose all of the investment and the employment and the production industries that need oil to exist. So, the threat is that countries are going to look like what Germany looked like after 2022 when it stopped importing Russian gas, that’s the problem.

You’re also having the financial problems. Well, a few months ago Donald Trump came out and said, yes it’s true, that if we really blocked the oil trade and tried to starve Iran, by starving the whole rest of the world, the rest of the world’s going to suffer, but, the United States is going to suffer less than other countries, because our country is self-sufficient in oil and gas.

But the problem is that the United States is not just a gas station with atom bombs as they say about Russia, it’s a financialised economy and if other countries are not able to balance their payments as a result of having to pay much more money for their fuel imports and fertilizer imports and all the others, they can’t pay their foreign debts, that the global south countries have been running up and falling to, and the private sector industries cannot afford to pay their credit.

There’ll be defaults all along the financial system, and the United States is the most financially exposed economy in the world, as it was in 1929 with the stock market crash, and so there’ll be problems with the United States that will be just as serious as other countries are suffering.

That’s what Donald Trump does not seem to have taken account of. And the Federal Reserve is not much help here. A lot of the financial community is saying that higher oil prices is going to be inflationary, but the effect of this price increase, that’s already occurring day after day, as long as the Strait of Hormuz is closed by the United States, this is causing deflation. Yes, oil prices are going up, but if the result is unemployment and production cutbacks in industry and agriculture, for the whole economy that’s going to be a huge deflation economy. That’s what depressions are. That’s what is really turning out to be the big threat, despite the fact of what stock markets and bond markets are saying.

IP – do you think that beyond the price of oil, the US is largely self-sufficient in oil, the price of all of its non-oil imports are going to go up because of the supply chain effect of what’s happening in Iran?

MH – that seems to be the case. What’s happening is that the US has been releasing oil from its oil reserves to keep down the price of gasoline also the price of airplane fuels, which has already reduced the volume of air traffic. Well, the problem with all this, is the oil that is being released by the government’s oil reserves finds its counterpart in a sharp increase in US LNG exports and oil exports in the last few months. So in effect, the oil the government is selling, claiming, or pretending that this is going to keep down prices, is flowing out of the country as the oil producers and gas producers, frackers, are making a killing as the foreign rise in energy prices is creating a price umbrella for US produced oil and gas.

IP – what’s the net effect on the serviceability of US debt over the medium term from the deflationary spiral that we might be starting to enter into at the moment?

MH – there’s no problem at all in servicing the US debt because, unlike a lot of other countries, the US debt is at least in its own currency and the US can simply keep printing the money to pay the debt and this is not necessarily inflationary of goods and service prices because when the money’s paid to bond holders and other creditors to the government these creditors and bond holders don’t spend their money on goods and services primarily, they spend it on making new loans and stocks and bonds, increasing the debt overhead.

So, the financial system is very insulated from the real economy of production and consumption and is autonomous from it, that is what mainstream economic theory doesn’t get. The mainstream theory is largely designed by public relations mythology by the financial sector, to depict it as playing a productive role in the real economy. But, finance is independent from production, and banks don’t really lend money for financing new industrial capital formation, if anything that is the job of the stock market through IPOs and public offerings.

The financial market makes money financially not through interacting with the real economy. And I say this despite the fact that in the last year, half of the growth in US consumption was accounted for by the wealthiest 10% of the population. But there was a discussion of this in the 17^th century by Malachy Postlethwayt and other writers that not many people read today. And Postlethwayt and other critics of foreign debt said well this foreign debt that we are paying to foreign creditors and domestic creditors is a drain on the economy, because these creditors don’t spend their money on domestic industry or agriculture they spend their money either on making new loans or luxury real estate either in London Paris and other financial centres and they buy imports.

So that most of this growth in US private sector consumption is largely luxury imports from Italy and England for cars and other countries and this is not recognised if you just make a simplistic assumption that what is paid to creditors is recycled into the real economy.

IP – In short, the bankers are just going to get richer by war again?

MH – yes and if you look at how they got richer so far this year, Chase Manhattan and other banks have got richer by trading, trading securities that are already in place manoeuvring bio deals, arranging mergers. They haven’t got rich in any way that is interacting with the industrial system itself, except to load the industrial system down with debt by private capital companies. The stock market just today (1 May) turned down because Spirit Airlines went broke because of the increasing interest rates that squeezed its ability to pay the debts that it took on to finance its expansion of budget airlines.

So, you are already seeing the result of the financial squeeze on domestic US industries that you are going to see throughout the world, much as you saw in Europe after 2022. You’re going to see this throughout the world if oil prices continue [to rise]. So, when Trump’s attempt to get back to your first question, when Trump tries to solve the fight with Iran by economic means this is a self-terminating means of winning success because it’s creating such a cost to other countries that are suffering from these sanctions and high interests rates and from the absence of oil, that they are looking around for how they manage to insulate their economies from the United States.

So, the result of this war, which Trump undertook without talking to his European allies, without talking to his middle eastern OPEC allies, the effect of this instead of isolating Iran, it looks as it its going to end up if it goes on a year or two, isolating the United States economy itself as other countries protect themselves from US actions.

IP – I 100% agree. My point about wars being won by economics and not military force, is not to say that US economic pressure on Iran will succeed, but, and has been the case in Russia and Ukraine, Russia being the most sanctioned country on the planet, Russia has inflicted more economic harm on Europe, or rather, Europe has inflicted more economic harm on itself.

MH – the word you use is succeed and that’s really the key. Conflicts are won by successful economic policy, and the result of sanctions over time is almost universal from Iran itself to Russia.

Sanctions force other countries to become self sufficient in what they can no longer import. So when NATO countries imposed sanctions against Russian trade in 2022, Russia had to begin growing its own fruits and vegetables and dairy, so what you had very quickly from 2023, 2024 a Russian dairy industry arose [in fact, this process started in 2014). Russian cheese production, Russian vegetable production, Russian grain exports greatly exceeded, so sanctions are almost always self-defeating over the long term.

They cause short term pain that other countries cope with by becoming independent of the ability of other countries to weaponise their foreign trade to impose sanctions and hurt other countries. The result is this leads to self sufficiency by other counties. So other counties now are discussing, the Financial Times has been discussing all week long, how can counties really get independent not only of Trump’s war against Iran but of oil and gas. Good news for the green parties, They will have to develop wind power, solar power and nuclear power.

How are they going to get independent of Trump’s attempt to freeze the accounts of Iranian deposits in western banks? The Treasury department sent lists of here are all the Iranian deposits in central banks, in foreign commercial banks. “You have to confiscate them.”

Well these banks are saying how do we insulate ourselves? How will the US punish us if we don’t comply with this? They say they’ll force us to not have access to the US western banking system. Well foreign central banks, foreign commercial banks say we are going to put a check on accounts, and if the US tells its depositors you are going to have to pull all your money out of these designated banks that makes loans to Iran, because they are helping Iran process its financial payments and even lending to it, well the banks can say we are going to put a freeze on any big accounts that threaten to be withdrawn in compliance to US demands. You’ll have a freezing up of the whole western financial system because of these demands. If they arm it there are going to cause a huge break in the financial chain of payments and it’s difficult to say right now how this can be solved without creating a whole alternative financial system to break free of US bank sanctions.

IP – the other irony is that Iran has been so successful in turning the economic pain back on the US and the wider economies of Europe that when any peace deal is agreed, one of the things that the Iranians are going to insist upon is sanctions removal.

MH – yes, they are a classic case, but Russia has already been a classic case. I think that the US intelligence agencies don’t like to acknowledge that the policies that the President has decided on aren’t going to work. Because they like to be team players, So you are really not getting much criticism or discussion of what you and I are discussing today.

IP -that’s the problem of group think. And it’s equally a problem in London as it is in Paris in Brussels as it is in Washington DC. It’s not just that people don’t want to call out failure, it’s that they can’t see it themselves, because they are in an organisational culture in which curiosity, critical thinking and the analysis of real evidence is actively discouraged because of the risk that that will throw up results that smash the Overton window.

MH – that seems to be the bureaucratic mentality certainly here but also in most governments probably.

IP – I was reading a really good piece that you wrote for Counterpunch about the guns or butter debate which is an important debate that doesn’t happen. We’ve recently had in the UK a former Labour government minister and Secretary general of NATO lord Robertson from the Labour party – the socialist party – I’m a centrist and don’t really support any political party – saying that the UK should be cutting welfare benefits to spend more on the military.

So, this was less butter and more guns, and this was a socialist saying this. There’s no real debate, at all, on the guns and butter issue, why do you think that is?

MH – that is what makes today’s war with Iran and this new cold war, so different to what it was in the Vietnam war. In the Vietnam war there was a huge response by students, very largely students who didn’t want to be drafted, and I think their wanting to avoid the draft, seems to have been even more important to their opposition to war itself.

But, there was a whole group of economists, I was part of a Columbia group, that were criticising and saying here are the costs of the Vietnam war. And I think in around 1971 or so, when McNamara and the Pentagon papers were all released for people to see, I was brought down to Washington for a discussion, before they were officially discussed, to make my comments on them.

And the interesting thing was that in all these Pentagon papers, there are no discussion of economics at all. No discussion of the balance of payments. And yet when I was working in the 1960s, I was the balance of payments economist for Chase Manhattan bank. Every Friday we would look at the Federal Reservice report on money and gold and watch the money supply going up and the gold draining out as General De Gaulle and the Germans also, cashing in all the dollars that American was throwing off in South East Asia, Vietnam, Laos Cambodia, which was largely in the Franc system as French colonies. All of the dollars were being sent to France to be cashed into Gold.

The whole economy there was an increase in military spending, that was essentially, as it is today, crowding out social spending, and essentially led to much of the opposition to the American war on economic grounds, because they said that, well, “what are we gaining from the war in Vietnam? Vietnam and Cambodia, why are we rescuing the French Empire when after World War II we didn’t rescue the British Empire? Why don’t we just try to buy them all out and kill them with kindness and that would probably have worked all the better?”

Well, you are not having that discussion at all today. At that time, a lot of the anti-war movement came within the Democratic party itself people like Seymour Millman, was a Democrat, he was one of our group art Columbia, and he was going around, Terence McCarthy, myself, we were all going all around the country, giving lectures, writing in magazines.

There were newspapers that were voicing all of this economic critique, of the Vietnam war. New York had two daily papers, the New York Tribune in addition to the New York Times, and the Tribune ran most of our articles. So there was a whole discussion, of what are the costs going to be of the military build up and how are we going to pay them without cutting back other government spending, what do people really want?

Well, people wanted other [than] military spending and that is what defeated President Johnson, McNamara and others in 1968. Today there is no discussion of that, you have both the Democrats and the Republicans supporting the war against Iran, supporting the war against Russia, and preparing for the likelihood of a crazy war against China, What is the point of all this? And yet there is very little domestic opposition to this because the public media, the publishing companies, the newspapers, the TV stations have all become much more concentrated in very small hands that all support the war economy. So, that’s why the discussion of the economic costs of the war is largely on YouTube and the internet.

IP – it also shows a division between domestic policy and foreign policy. One of my beliefs is that governments spend far too much time on foreign policy and forget about their domestic voters, and that may help to explain the current rise in popularity in Europe at least, of so-called populist parties. But also Trump’s rise to power as somebody who was going to break that cycle of never-ending wars, only to repeat it. He seems to be going exactly against the manifesto upon which he was voted into power which is one of the remarkable things.

MH – this is remarkable from Europe to the United States. All of the public opinion polls show that the public is overwhelmingly against the war against Iran and the middle east, against the war in Russia, but that has not stopped Starmer in Britian, or Macron or France or Merz in Germany from supporting the war, and there is no election there for the next two or three years just as in the United States, just as there is no election for another two years. So, there’s an inability for the population as a whole to elect a government to represent what its opinion polls are saying. A democracy is not voting for what policies and how the economies going to be being structured, it’s about what influencers do you want to elect to support some policy you have no control over.

IP – I completely agree. All this justification on what is called military Keynesianism, spending more on the military can revive our economy, that’s such a common debate. However, I wonder about ordinary Keynesianism, in which we spend all that money but spend it on our own countries. Military Keynesianism appears to be quite a dominant press narrative of globalist governments in Europe and I’m less clear about whether that resonates in the US as well.

MH – Keynesianism evolved into post Keynesianism, largely because of modern monetary theory, which was centred in the University of Missouri at Kansas city, where I was one of the Professors during the whole take off. The whole emphasis of modern monetary theory has become part of American policy, that thought you had to use against government debt, and supported the debtors against the creditor interests, essentially wanted progressive taxation to be spent into the economy, to help it grow, to create the money, to service the debt. But the post Keynesians point out that the key really is “what is money?” And the fact is that governments don’t have to tax in order to finance wars and to run deficits. They can simply print the money, or rather the federal reserve bank can create the money, and this is what’s happened in the US since 2008 and 2009 when the junk mortgage crisis collapsed, threatened banks with negative equity especially, as City Corp and Bank of America and other big banks.

So, the result was that the Federal Reserve revived the financial sector, not only US banks but French banks and German banks, that were wrapped up in this, they simply had this zero interest rate policy, they flooded the market with inexpensive Federal Reserve credit to the banks enabling banks to lower the interest rates that increased the prices of real estate above the break even point and revived bank liquidity and created the stock and bond market boom, the biggest bond market boom in history.

All of this was purely money creation, in a purely financial way. Well by the time that you had George W Bush’s war in Iraq, Dick Cheney and Bush said, “well, there really is no limit on what we can spend, we can just spend whatever we want.”

In a way, you had the war party develop modern monetary theory in practice but not for the social purposes that the post-Keynesians and the modern monetary theorists were pressing. Well that’s what happening today, you have the central bank essentially flooding the market with money and now recently you’ve had Treasury Secretary Bessent offering to create huge new swap agreements with other countries to just provide dollars to other economies so that they won’t be interrupted and wrecked by rising oil prices. They can afford to essentially finance the rise in oil prices and the depressions through pure money creation, but on US terms.

IP – I suppose another bi-product for the US itself, is that not only are ordinary people getting poorer, but ordinary businesses are getting crowded out, as government funding is going into military Keynesianism i.e the very well protected defence industrial sector.

MH –There’s something ironic about that term military Keynesianism. What you’ve seen in the last year in Iran is that the arms really don’t work, you think of bombs and missiles and ships are military, but it turns out they don’t work very well at all. That Iran is able to just go right through the missile defence systems to shoot down the airplanes, these arms are not really for fighting, they are not for military purpose, they are just to provide money to the military industrial complex, essentially to make luxury products like Rolls Royce automobiles or fancy clothes. They are for show, they’re not really for fighting. So, you’ve had military Keynesianism become decreasingly military in character, it just doesn’t work, that’s what is so ironic about this.

IP – it’s a massive, massive irony. And again, back to the point at the start, wars are won by economics not military force, the Iranians and actually the Russians, appear to be winning, despite in theory at least, being economically much smaller than the collective might of the west, they are nevertheless winning, and economics is winning it for them, which is the big irony in all of this.

MH – indeed.

IP – one of the things that gets spoken about a lot is the Gulf States, and their sustainability long term as the US presence in the middle east becomes under threat, as the whole petrodollar system starts to – very slowly – reduce in its global influence. Do you see any real world economic consequences for Gulf States from this shifting of power that is happening before our eyes right now through the war in Iran?

MH – a shift in power in many dimensions. Iran, there’s probably going to be some military attack on Iran, even if it’s only what Trumps intends to say this is a token attack, we’re going to send a bomb, you know “I have to tell my people I have some sort of victory”.

As soon as there’s a bomb or a plane, Iran is going to respond, by very heavily bombing, not only the US military bases, the problem is not only driving America out of west Asia, it’s about ending the whole US symbiosis with the OPEC countries. So, what we’re going to attack is not only the military bases in the Arab Emirates, we’re going to attack all the US companies that have invested there, the automatic [artificial] intelligence companies that have planned all these huge data processing centres, to use the inexpensive Emirates oil and in Saudi Arabia too, to run centres.

The only way to end the US control of OPEC countries, that is creating a political symbiosis that has led the Emirates to back the US military to back Israel, and to provide the main military basis. Right now, it’s reported there are four refuelling planes in the Emirates airport waiting to help in case Trump should follow a general air attack on Iran. You’re going to have a disconnecting of the US with the Arab OPEC countries and probably the other countries.

You mentioned the petrodollar. The petrodollar is a biproduct of the fact that a central element of US foreign policy for the last century has been the control of the oil trade in the world and it wants to control the world’s oil because this is a choke point, and it has been able to say to other countries, that if you don’t follow foreign policies that the US supports on national security grounds, we are going to cut you off from oil, this is a chokepoint.

Especially the last two administrations of the US have weaponised the oil trade, they are trying to isolate other oil producers that are not under US control. They have isolated Venezuela already years ago from Chavez onwards, and most recently by seizing its President. They’ve isolated Russia by imposing sanctions on it and they were isolating Iran since 1979, so the US is trying to isolate these other countries, basically it’s saying, if we can’t control your oil, Iran, we are going to destroy it. That’s what Trump has just said, He’s backed the seizure of Iraqi oil, saying, well we have to recover all the costs we spent going to Iraq.

Well, if the US is going to destroy non-US controlled oil, then it’s going to insist on its own terms of the oil trade. And back in 1974 this was done when the OPEC countries basically Saudia Arabia other countries, basically friendly to the US, negotiated with the US to quadruple the price of their oil after the US quadrupled the price of grain. So, the agreement between the US and these countries, I made a number of trips to the White House, met with the Treasury and the military to discuss all of this at the time, they said you can charge whatever you want with the oil, but whatever you do, you can make whatever you want, but the agreement is that you are going to invest your oil surpluses in American bonds, you can’t buy particular industries, you can’t buy control of any major industry, we are able to buy industries in Europe and other counties, but you’ll make your money in bonds and US stocks, you’ll recycle it.

You can charge whatever you want, but you have to keep your savings in dollars. So, the result is that over the last fifty years, the OPEC countries, especially the Arab OPEC countries, have made huge investments, bond holdings and loans to US banks, that now the Saudi national fund is a Trillion dollars. But even as the OPEC countries have recycled all this oil export earnings to the US, supporting the US balance of payments, these countries themselves have taken on huge amounts of debt, to finance their own domestic creation of a non-oil economy, that’s been their objective.

The result is that despite all of the money that they’ve been making on oil exports, they’ve saved it all, invested it abroad, they’ve been using this export proceeds to finance yet new real estate development, industrial development, refineries, chemical companies, that they need to move their economies beyond oil. Well, what’s happened, now that he war in Iran has interrupted all of this oil revenue, they are in a squeeze, and it’s obvious that the Arab Emirates for instance have told the US “we have a problem. We have to finance the money that many of our industries our government investments have, we have to finance it by selling some of the US securities that we’ve been building up for all these years.”

The problem is that many of these securities have been lent to many of these automatic (artificial) industries, the silicon valley magic 7 for instance, they’ve been investing in private capital, and right now, because the US economy is so heavily over debt leveraged, many funds like Blackrock have blocked the ability of investors to withdraw their funds. There is a market in these investments, but the market prices, if you sell the investments that you have made in these private capital funds, they’re now selling at heavy discounts to the original purchase.

Well, the Emirates don’t want to take a loss on this, hardly by surprise, and that’s what’s led to the swap agreements, that Secretary Bessent has agreed with them. You’re not going to have to sell the investments you’ve made in private capital firms, you’re not going to have to sell your bond holdings at a loss as our interest rates have gone up, we’ll make a swap agreement, we’ll lend you a few hundred million dollars you’ll give us your currency, and that way you can use these dollars that you’ve borrowed against issuing your own currency, for your spending and you won’t have to sell any us investments.

So, the whole purpose of these swaps is to keep the US financial market from all of a sudden suffering a crash. That’s right now the central concern of Bessent. He’s written a number of very good articles explaining well; the Federal Reserve under the Biden administration had acquired an enormous amount of federal debt from he banks, and it agreed to pay interest on the federal reserve accounts. So, the federal reserve has lent money to banks for many years at 0.1% they could invest it a 2% or more as deposits at the Federal Reserve, just recycling it, it’s all financial.

He’s said we’ve got to wind down this debt leverage. Well it’s difficult to see how it can be wound down. The danger that Bessent saw to the war in Iran, the attempt of other countries to finance their oil deficits, and OPEC’s failure of oil income, and other countries need to pay higher oil prices, to get the oil to power their factories, heat their homes, all of that is going to lead to a sell off of US securities, and when there’s a sell of prices of stock and bonds go down.

That’s what this war is threatening to cause, the longer it goes on. If the military convinces Trump that you can’t win a military war, any attempt to stifle Iranian development to the point where, as Trump says, “they cry Uncle we give up”, they’re going to say “you’ve got to be kidding, we’ve been isolated since 1979. If we haven’t crashed yet, we’re not going to crash. We can outlast you.”

That’s the dynamic that we’re seeing right now that we’re going to be seeing unfolding all this year and next year.

IP – I completely agree. It is, you’re right, a total money recycling scheme, where, in the irony of ironies, because the US is so leveraged, it needs to lend more to other counties to prevent its financial collapse. It’s quite a remarkable state of affairs.

MH – that’s the irony, that military spending is not pulling the economy out of depression, it’s causing it.

IP – indeed. Military Keynesianism as opposed to just Keynesianism.