The fire in the world economy

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By MICHAEL HUDSON*

By the time the world realizes what is happening, the global rift will have allowed Russia, China and Eurasia to create a truly non-neoliberal New World Order.

It is now clear that the current escalation of the new Cold War was planned more than a year ago, as a serious strategy associated with the US plan to block the Nord Stream 2 pipeline. This, in turn, was part of Washington's objective, to block Western Europe's ("NATO") quest for prosperity through mutual trade and investment with China and Russia.

As announced by Joe Biden and US national security reports, China is seen as the main enemy. Despite its useful role in allowing US companies to reduce labor wages, de-industrializing the US economy in favor of Chinese industrialization, China's growth has come to be seen as the greatest terror: prosperity through socialism. Socialist industrialization has always been perceived as the great enemy of the rentier economy that has dominated most nations in the century since the end of World War I, and especially since the 1980s. The result today is a clash of economic systems: industrialization socialist against neoliberal financial capitalism.

This makes the new Cold War against China an implicit opening act for what threatens to be a long-term Third World War. The US strategy is to take away from China its most likely economic allies, especially Russia, Central Asia, South Asia and East Asia. The question was where to start dividing and isolating.

Russia was seen as the biggest opportunity to start isolating both China and the Eurozone from NATO. A string of increasingly severe sanctions – expected to be fatal – against Russia was built to prevent NATO from negotiating with Moscow. All that was needed to trigger the geopolitical earthquake was a casus belli.

This was easily arranged. The escalation of the new Cold War could have started in the Middle East, with resistance to the US capture of Iraq's oil fields, or against Iran and the countries that help it survive economically, or in East Africa. Coup plans, “color revolutions” and regime changes have been hatched in all these areas, and the US military in Africa has been bolstered particularly quickly in the past two years. But Ukraine has been in a US-backed civil war for eight years, since the Maidan coup in 2014, and has offered the opportunity to attempt a first victory in this confrontation against China, Russia and their allies.

The Russian-speaking regions of Donetsk and Luhansk were bombed with increasing intensity, and as Russia continued to be unresponsive, plans were drawn up for a major confrontation that would begin in late February, with a Blitzkrieg of western Ukraine organized by American advisers and armed by NATO.

Russia's preemptive defense of the two eastern Ukrainian provinces, and the subsequent military destruction of the Ukrainian army, navy and air force over the past two months has been used as a pretext to impose the US-designed sanctions program we see under way today. Instead of buying Russian gas, oil and food grains, Western Europe will buy them from the US. And he will add to this a sharp increase in the importation of US weapons.

 

The possible drop in the euro/dollar exchange rate

It is worth examining how this might affect Western Europe's balance of payments and therefore the exchange rate of the euro against the dollar. European trade and investment before sanctions promised increasing prosperity for Germany, France and other NATO countries in their relations with Russia and China. Russia provided abundant energy at a competitive price, and this process should take a quantum leap with Nord Stream 2. Europe should earn foreign exchange to pay for this growing import trade through a combination of exporting more industrial products to Russia and capital investment in the development of the Russian economy – for example, by German automobile companies and in the form of financial investment. This bilateral trade and investment is now at a standstill – and will remain at a standstill for many years to come, given NATO's confiscation of Russia's euro and pound sterling foreign exchange reserves, and European Russophobia fueled by US propaganda media.

Instead, NATO countries will buy liquefied natural gas (US LNG, but will have to spend billions of dollars building the necessary port capacity, which could last until perhaps 2024. (Good luck until then!) The shortage of energy will sharply increase the world price of gas and oil. NATO countries will also increase their purchases of weapons from the US military-industrial complex. Almost instantaneous purchases will also increase the price of weapons. And food prices will also increase, as a result of the desperate shortage of grain resulting from the cessation of imports from Russia and Ukraine, on the one hand, and the shortage of ammonia-based fertilizers, on the other.

These three trading dynamics will strengthen the dollar against the euro. The question is: how will Europe balance its international payments with the US? What is possible to export to the US economy, contaminated by its own protectionist interests, now that world “free trade” is rapidly dying?

The answer is: not much. So what is Europe going to do? She could do something modest. Now that the European Union has largely ceased to be a politically independent state, it is starting to look like Panama and Liberia. They are banking centers offshore “flag of convenience” that cannot be equated with true “States” because they do not issue their own currency, using the US dollar instead. Given that the eurozone was created with currency shackles that limit its ability to create money to spend in the economy beyond the 3% of GDP threshold, why not just throw in the financial towel and adopt the US dollar, like Ecuador, Somalia and the Turks and Caicos Islands? This would give foreign investors security against currency devaluation in their growing trade with Europe and their export finance.

For Europe, the drama is that the cost in dollars of its foreign debt taken on to finance its growing trade deficit with the United States (in oil, arms and food) will skyrocket. The cost in euros will be even higher as the currency declines against the dollar. Interest rates will rise, delaying investment and making Europe even more dependent on imports. The eurozone will become an economically dead zone.

The United States already dreams of an intensified dollar hegemony, at least in relation to Europe.

 

The Dollar Against Currencies in the Global South

The new Cold War unleashed by the “Ukraine War” risks becoming the opening salvo of World War III. It will likely last at least a decade, perhaps two, as the US extends the struggle between neoliberalism and socialism into a global conflict. In addition to the economic conquest of Europe by the United States, its strategists seek to lock African, South American and Asian countries in a line similar to that planned for Europe.

The sharp increase in energy and food prices will hit food and oil deficit economies hard. This will come at the same time that its dollar-denominated foreign debts are maturing and the dollar's exchange rate is rising against its own currency. Many African and Latin American countries – especially those in North Africa – are faced with the choice of starving, reducing their consumption of fuel and electricity, or borrowing more dollars to cover their dependence on trade with the United States.

There has been talk of issuing new Special Drawing Rights (SDRs), an IMF-owned currency that could finance the growing trade and payment deficits of Southern countries. But such credits always come with compromises. The IMF has its own policy of sabotaging countries that do not comply with US policy. Washington's first demand will be that these countries boycott Russia, China and their emerging trade and currency alliance. “Why would we give you SDRs or new dollar loans if you're just going to spend them on Russia, China and other countries we declare enemies?” US officials will ask.

At least, that's the plan. I would not be surprised to see some African country become the “next Ukraine”, with troops acting by proxy for the US (there are still many Wahhabi supporters and mercenaries) fighting the armies and populations of countries seeking to feed themselves with Russian grain, or propping up their economies with oil or gas from Russian wells — not to mention participating in the New Silk Roads Initiative — which was, after all, the trigger for the US to launch its new war for global neoliberal hegemony.

The world economy is being set on fire. The US prepared for a military response and the militarization of its exports of oil, agricultural products and weapons. They will require countries to choose which side of the new Iron Curtain they want to be on.

But what's left of that for Europe? Greek unions are already demonstrating against the sanctions imposed on the country. In Hungary, Prime Minister Viktor Orban has just won elections with a basically anti-European and anti-American worldview, starting with accepting payment for Russian gas in rubles. How many more countries will break ranks and how long will it take?

What's in it for the countries of the Global South who are being squeezed as a result of the US strategy to produce a great divide of the world economy in two? India has already told US diplomats that its economy is naturally connected with those of Russia and China. Pakistan is starting to make the same calculation.

From the US point of view, all that needs to be answered is: “What will be left to reward local politicians and oligarchies for handing over their countries”?

From its planning stages, US diplomatic strategists viewed the impending World War III as a war between economic systems. Which side will the countries choose? Their own economic interest and social cohesion, or submission to local political leaders installed by US interference? In 2014, US Under Secretary of State Victoria Nuland boasted that she had “invested” five billion dollars in Ukraine's neo-Nazi parties to start the fighting that led to the current war?

In the face of all this political meddling and media propaganda, how long will it take for the rest of the world to realize that there is a global war going on, with World War III on the horizon? The real problem is that, by the time the world realizes what is happening, the global fracture will have allowed Russia, China and Eurasia to create a truly non-neoliberal New World Order. It will not need NATO countries and will have lost confidence and hope in the mutual economic benefits of the relationship with the West. The battlefield will be littered with economic corpses.

*Michael Hudson is a professor at the University of Missouri, Kansas City. Author, among other books by Super Imperialism: The Economic Strategy of the American Empire (Island).

Translation: Antonio Martins for the website Other words.

 

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