The current corporate slant of the "new" deficit commission makes this a good time for a little reminder as to how the corporate state uses debt as a shackle for the middle class and working people. This article covers some excellent ground in examining the roots of this ongoing policy.

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"Finance is the new form of warfare --" without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy's banking system can create the most credit, using an army of computer keyboards to appropriate the world's resources. The key is to persuade foreign central banks to accept this electronic credit." [i]

Thirty eight years ago in his book "Super Imperialism" Dr. Michael Hudson described the outlines of an economic strategy the United States has employed to the hilt since then, a strategy in which the rest of the world is deprived of its wealth in exchange for US dollars. Those dollars, at first derived mainly from ill-advised wars the United States fought in a doomed attempt to retain a global empire it acquired at the conclusion of WW II, were collected by foreign central banks returning to the US Treasury to purchase US debt securities. In the vocabulary of financial diplomacy they were "sterilized'. It is the solvency of this strategy, together with the debts incurred in a "full employment for money' that has grown in scale since the 1970s, that has been at stake since the "financial weapons of mass destruction" exploded in 2008. It is this privilege of buying the world with money created in bank and stock exchange ledgers that underlies the quest for hegemony by modern imperial powers like Britain and the United States. It is the debts incurred paying for an economic order in which the wealthy can't lose for which humanity is expected to sacrifice its material welfare now as well as much needed investments if it has any hope of surviving in the future.

By 1971, the volume of US debt had grown to such proportions the government realized there was no longer any possibility of honoring its commitment to redeem foreign-held dollars with gold as promised in the original Bretton Woods Monetary Agreement. Recognizing the world's need for a reserve or key currency in which its business could be conducted and, perhaps above all, its fear of the still extant Soviet Union, the US abrogated Bretton Woods, freeing it from all restraints on financing its balance of payments deficits. Since then, those deficits have been financed with money created as debt by private US financial institutions and repatriated as US Treasury debt.

This US "Empire of Debt" --" as described in a book with that title by two financial luminaries, Bill Bonner and Addison Wiggin - may have been mainly the product of historical "accident' combined with inept diplomacy from a world exhausted by a century of global imperial wars. But US national debt has been systematically exploited since the dollar standard replaced the gold standard embodied in the original Bretton Woods agreement as the ultimate foundation of the international monetary system.

It is what has made possible a world in which the US no longer pays for what it consumes with manufactured goods or gold but with debt. It is the foundation of a globalization in which investors and large multinational corporations book huge monetary profits while they plunge their domestic work forces further into debt peonage and unemployment via off-shoring the jobs workers need to remain financially solvent. It is what Richard Nixon's Treasury Secretary John Connolly was referring to when he said "It's our currency but your problem", what Dick Cheney was referring to when he said ""deficits don't matter." [ii]

It is this Empire of Debt which US authorities and their accomplices around the world are fighting so desperately to maintain rather than their real Main Street economies. Even a cursory look at the numbers of bailouts and quantitative easings around the world shows the numbers don't justify any other interpretation. For example, at the end of 2007 it would have taken just $1.4 trillion for the US government to have purchased all the subprime loans outstanding [iii] allowing families to remain in their homes and, by scaling payments to ability to pay, increasing their disposable incomes - incomes that could have been used to sustain the employment of those fortunate enough to still have jobs here.

However, unlike Wall Street, the banks, oil companies and US defense (sic) contractors, the inhabitants of Main Street in the US and elsewhere do not have effective political representation. Whenever the demand for "change" grows too loud in the US, politicians promise it will be coming with their victory in the next election --" and then proceed with business as usual. This is the general outline of the political status quo prevailing in the world's other industrial democracies. Party labels may be different and the political dialog more subtle elsewhere. But around the world, Main Street no longer matters. The finance, insurance and real estate (FIRE) sector of the economy is calling the shots.

Dr. Hudson repeatedly expresses surprise the world's diplomats would allow the blatantly exploitive nature of economic relationships inherent in the current US dollar-based international monetary system to persist so long. For the United States - or at least for those in the US who possess a lot of money or the right to create it as bank credit or financially-engineered securities, there is no mystery. With a few computer keystrokes, the US can buy the world --" and may be in the process of doing just that right now with its quantitative easings.

For China, India and many countries in the developing world the answer may also be relatively straight-forward; they are getting something for the money they are being forced to ingest as the price for continued access to Western markets, i.e. factories, jobs, access to advanced industrial technology - as opposed to the old imperial / colonial relationships persisting up to and immediately following WW II.

For the rest of the world, the answer may well be a combination of fear and inertia. The former Soviet Union may be gone and with it any immediate threat of more brutal and overt foreign domination and exploitation --" not to mention the threat to an established social order in the West based upon money and inherited wealth if "the Communists' actually practiced what they preached. What remains however is an absolute dependence in most of the developed world on foreign sources of energy and other natural resources, particularly from the Middle East and other unstable areas around the world.

The instability there, in large part the consequence of artificial borders cobbled together for the administrative convenience for former imperial powers, is very real. But US threats to remake the Middle East, bring "Iraqi Freedom" to countries like Iraq and Iran or rid the latter of its purported nuclear weapons program threaten to send that instability off the charts --" and with it the world's access to irreplaceable energy sources.

The United States once supplied this energy and other natural resources to the rest of the world and was able to act as a swing producer, guaranteeing access at stable prices. By 1970, however, the demands of two world wars, together with its own burgeoning population and demand for resources to support an American lifestyle based heavily upon conspicuous consumption put an end to its ability to act as a swing producer. The status quo in the US circa 1970 consisted of: huge financial fortunes held and administered by US banks, Wall Street and the CEOs of multinational corporations; a vast segment of the economy dominated by oil and fossil fuels-based industries; and a booming real estate market and shrinking urban core as its population migrated to the suburbs --" a lifestyle heavily dependent upon automobiles and access to petroleum no longer available from domestic US sources in sufficient quantities at production costs competitive on world markets.

The United States emerged from WW II with overwhelming military as well as economic ascendency. As its economic preponderance weakened, however, it has come more and more to rely upon brute military force or the threat of force to hold onto its global empire --" to insure the US dollar continues to be accepted as the world's "legal tender'. But force has its limits in sustaining a US "Empire of Debt". If at a minimum the holders of that debt no longer receive some compensation for the wealth they exchanged to acquire it, e.g. interest or capital gains, the exploitive nature of the dollar-standard based international monetary system can no longer be denied.

Dr. Hudson repeatedly uses the tautology "Debts that can't be repaid won't be." as his principle argument for a debt jubilee, a general write-down of existing debts. That, no doubt, is where things are headed. In the meantime, however, we will continue to hear that US deficits are unsustainable and that we must all sacrifice to bring them under control. The real intent behind all of this, however, is not to do anything about existing debt or the international political and economic order which gave rise to it. Rather, the intent is to shore up the status quo so the US "Empire of Debt" can be expanded even further, i.e. to sustain the ability of Wall Street, banks, the US government and an increasingly international cast of characters to maintain the fiction of solvency for and increase the illusory value of their US dollar and Euro-denominated wealth.

There is a systemic aspect to the deficit game. Over the centuries the inhabitants of market-oriented economies like that of the US have come to accept the notion that the primary purpose of economic activity is to produce a profit for those who provide the money or credit that employs labor and industrial capital. But from time to time, though there is a very real need for the products and services produced by industry and labor, it is not possible for them to be produced at a profit --" or at least a rate of profit considered sufficiently high by creditors and investors to compensate for the presumed risk.

Capitalism excels at turning advances in science and technology, particularly those improving the productivity of workers, into new or less resource-intensive real-world products. The "creative destruction' precipitated by new products and new ways of producing existing products is responsible for both the huge profit margins for new investment capital and "destruction' of the value of money invested in existing industrial products and processes --" not to mention the laboriously acquired skills of a country's work force. When these waves of "creative destruction' ebb, however, the opportunities for large monetary profits ebb with them. In fact, in periods of intense innovation and change, the safest place for money is in the bank, poised to spring on the next opportunity for large profits and immune from the risk of being "creatively destroyed'.

In "America's Sixty Families", Ferdinand Lundberg explains this qualitative advantage in the monetary wealth accumulated by the descendants of the US Robber Barons:

"In contrast with the American millionaires the Indian princes, however, are mere paupers. Their wealth is frozen in jewels and land, and cannot be readily liquidated or transferred into other vehicles; moreover, their society does not utilize on a large scale the wealth-producing technology of the West. But the securities of American millionaires can be exchanged in a flash for any currency in the world, for land, for other stocks and bonds. The wealth of the Indian princes is immobile, static; the wealth of their American counterparts is mobile, dynamic. In the money markets of the world the feudal wealth of the Indian princes is of no consequence." [iv]

It is the profitability of money and credit creation which the economic policies of governments around the world are struggling desperately to preserve. By intervening indirectly as a consumer of last resort through, for example, defense contracts or public infrastructure projects, governments can restore profitability for the entire economy by providing a sink for idle capital and labor. In the last several years, we have witnessed more massive, direct government economic intervention in the form of bailouts and stimuli. Contrary to popular perception however, these interventions have been different from the past only in scale, not in kind.

In "Stabilizing an Unstable Economy", Hyman Minsky explains:

"The Federal Reserve was given the responsibility of assuring a flexible currency so it could carry out its original mandate to act as a lender of last resort. Federal Reserve currency is therefore readily available to substitute for bank deposits in the portfolios of households and businesses whenever a run on banks occurs. In substituting Federal Reserve deposits or notes for customers' deposits, Federal Reserve banks acquire assets that banks had acquired in financing commerce and production"" [v]

In the process of sustaining asset values --" and thus profitability, the US government has incurred enormous debts purchasing, usually at bubble-inflated prices and thus at a loss, private sector financial assets.

This is obviously a Rube Goldberg approach to the problem of providing the employment and hence the income most of the world's population requires to sustain itself. If we have learned anything in the years since Ronald Reagan, it is that trickle-down economics doesn't work because the money given to the wealthy doesn't trickle down. Cumbersome as it is, this approach to keeping the world's workers working may have been preferable to that used during the first half of the 20th century. No serious student of history and economics will challenge Vladimir Ilyich Lenin's characterization of imperialism as ""the highest stage of capitalism".

WW I was almost completely a contest for hegemony between Europe's established and aspiring imperial powers. Rather than sharing the material rewards of advances in science and technology with the workers who turned them into real-world wealth, Europe's leaders, reflecting the interests and preferences of the dominant financial interests in their respective countries, chose to invest those rewards in attempts to eliminate their foreign rivals, i.e. in mass slaughter - in war.

For financial interests in the United States, WW I couldn't have come at a better time. Its work force was becoming militantly aggressive in challenging a status quo characterized by increasingly severe bouts of unemployment --" the result of too much money accumulated in the hands of too few people chasing diminishing opportunities for profit. Besides providing employment for a restive labor force, furnishing munitions gave leading financial interests in the US the opportunity to furnish its imperial competitors in Europe the means to destroy themselves.

From this perspective the only real mistake in this policy was the decision to violate the George Washington's warning against avoiding foreign entanglements and alliances and intervene on the side of Britain and France. From this decision and the incompetent, short-sighted diplomacy pursued by the US-enabled victors, flowed the even more massive carnage of WW II.

In short, war or preparation for war have for almost a century absorbed the possibilities for material and cultural progress made possible by advances in science and technology. Actual physical destruction when cold wars turned hot has been accompanied by increased waste, both in government and in the daily lives of consumers in the US and around the world. Bridges to nowhere and mindless conspicuous consumption have provided two principle types of peaceful, private sector efforts to, purportedly, keep workers employed but really to provide profitable employment for money and credit. Huge government debts in the US and around the world have been required to finance this "full employment for money' program. These debts have reached such a scale that consumption in the real economy needs to be curtailed to come up with the money to pay the interest on them and thus maintain the fiction the underlying monetary figures still represent anything close to their assumed value.

For close to 50 years, the US has been engaged in creative accounting to sustain a "full employment for money' program --" both that of its own and the world's investors. Minsky was aware of the artifice involved. He explained the justification:

"Thus, economic policy must be concerned with the design of institutions as well as operations within a set of institutions. Institutions are both legislated and the result of evolutionary processes. Once legislated, institutions take on a life of their own and evolve in response to market processes. We cannot, in a dynamic world, expect to resolve the problems of institutional organization for all time. On the other hand, we cannot always be engaged in radically changing institutions. Once an institutional arrangement embodies the day's best perception of processes and goals, it should be allowed a run of time in which the details are permitted to evolve"

The concluding sentence in this paragraph, written in 1986, is:

Only as the inadequate performance of an economic and social order becomes evident and serious does it become necessary to engage in thorough-going institutional reform. Such a time has arrived. (emphasis added) [vi]

The "inadequate performance of an economic and social order" has become evident and serious. The necessity for thorough-going institutional reform is now a quarter century overdue.

[i] Hudson, Michael, Why the U.S. has Launched a New Financial World War -- And How the the Rest of the World Will Fight Back, http://www.counterpunch.org/hudson10112010.html

Authors Bio:
Steven Lesh is a retired software engineer with a life-long interest in economics and history and an undergraduate degree in the latter.