Russia, China Unite Against US Empire Posted on October 20, 2023 by Yves Smith
Yves here. Micheal Hudson gave a wide-ranging interview, focusing on China’s economic model and its recent real estate wobbles, Russia-China cooperation, China and the Global South opposition to financialization and creditor-favoring policies, and the big Belt and Road 10th anniversary meetings in China.
One minor point: Hudson mentions the US thinking it can move against Syria because Russia is tied down in Ukraine. I have not been able to independently verify it, but Alexander Mercouris reported that a key US ally in Syria, the Kurds, are siding with the Muslim world against Israel and its US/EU allies. I welcome reader comment as to how big a setback this represents for the US’ burning desire to topple Assad.
By Dmitry Simes. Originally broadcast at New Rules on Rumble
Dimitri Simes Jr.: Hello everyone! This is the New Rules podcast, and this is our very first ever live stream on Rumble. I’m your host, Dimitri Simes Jr., and our guest today is economist Michael Hudson. And we’re going to be talking about the Putin-Xi meeting, the broader changes in the global economy and to whether the United States can be hold on to its status as the global economic hegemon. Professor Hudson, thank you so much for joining the program.
Michael Hudson: [00:01:03] Well, it’s good to be back here again. [00:01:04][1.1]
So I guess I wanted to start with the bigger context, right? Because when we look at how the US media has been talking about the Chinese economy over the past several months, they’ve been saying that the Chinese economy is in trouble, that the Belt and Road Initiative has stalled. To what extent, in your view, is this a fair assessment of what’s going on right now?
Michael Hudson: [00:01:33] Well, when they say the Chinese economy is in trouble, they mean that despite the fact that it’s growing faster than almost all of the Western countries, it’s not growing as fast as it did before. And the reason is the very heavy real estate debt. Chinese real estate has been financed in a way that finance has been done in the United States for real estate. A company will make plans to develop a building or hundreds of buildings in the case of Evergrande and others, and they’ll begin to borrow money to begin construction. And they have to repay the loan by selling the right to apartments after the building is finished. And for decades that worked in the United States. You would get a seed money to build a building. You’d have pictures of it, you’d how it was going to look. You’d have people buying the buildings. And very often, certainly here in New York City, when a new building would go up, by the time the building was finished in five years or so, the market price of the building would be actually a lot higher. So many people not only wanted their own apartment, but investors who wanted to buy apartments in condominiums or condos, co-ops and rent out would make a profit. [00:03:08][95.3]
[00:03:09] And in China, they thought this is going to go on forever, just like in the United States. People didn’t see that at some point there was going to be a downturn. And the fact is that the borrowers, the developers who were building the buildings weren’t able to sell so many apartments as they were buying and they fell behind in their payments. Well, one of the problems in China is exactly what had happened in the United States. Here you had Fannie Mae, the government insurance real estate insurance company underwrote the risk of all of the real estate mortgages that banks would make. In America almost all mortgages are guaranteed by the United States so that the banks won’t lose money on the mortgages. Today, banks can charge 7.2% on mortgages here, and they’re guaranteed not to lose money by the government. China has done this on an even larger scale. And the Chinese insurance companies, rather the banks, the banks guaranteed the loans of the big developer because it seemed to the banks that our property can only go up in price. It can’t go down. Well, all of a sudden, right now, property prices are turning down in China. [00:04:45][96.5]
[00:04:46] Now, normally you would think that, if property prices are going down, that should be a good thing. If a wage earners can pay less for their housing, then they’ll have more money to pay goods and services and other things. But in this case, falling real estate prices are not good if it means that the developer is not able to pay the banks the money that it stipulated or the bond holders the Country Garden and Evergrande were paying interest rates of about 13 percent a year. Now, that’s an incredible interest rate. If you’re an investor and you buy a bond from one of the big Chinese real estate companies, that means you double your investment in just five years as the interest rates they were paying. No economy can grow that fast. Not even China’s economy. And so you had the government not overseeing these sales of apartments to say, “wait a minute, can the domestic market really grow at such a high exponential rate that the banks are going to be able to keep selling whatever they build at a rising price?” No country has been able to do that, but every country has run into the same kind of real estate slowdown that China is in now. [00:06:14][88.2]
[00:06:15] But it turns out that the amount of money that is guaranteed for the large real estate developers are almost one sixth of all of the foreign dollar reserves that China holds. So this is a real problem of what to do with the fact that the large companies can’t pay their debts, which normally wouldn’t be bad. They can’t pay the debts, okay? They lose their money and another company comes in and finishes building the buildings and sells them for something. But the problem is that Chinese banks and small banks often have guaranteed the bonds and the debts, and essentially their reserves will be wiped out. And if the banks that have guaranteed these real estate loans take a loss, then what’s going to happen to the depositors? Well, China have something like in America, the Federal Reserve, FDIC, Federal Deposit Insurance Corporation, that guarantees that up to 250,000 or so of depositors are going to be guaranteed not to lose their money. Who is going to lose? And how is the government in China going to decide which depositor lose when the banks are unable to cover the losses of the real estate company that they finance? [00:07:47][92.3]
Dimitri Simes Jr.: Obviously, the situation with the real estate market has created a tricky situation for the Chinese economy. But I guess I want to understand to what extent is this abnormal and potentially terminal for the Chinese economy? Because I remember we had Professor Jeffrey Sachs a few episodes back and he made the argument that, yes, there are challenges in the Chinese economy, but it’s normal for economies that go for business cycles to have ups and downs and that it’s premature to say that China’s economic miracle has come to an end or that China’s economy is on the verge of a major bust, as a lot of mainstream outlets are claiming. You know, to what extent is some of the more pessimistic assessments justified in your view?
Michael Hudson: [00:08:38] I don’t think they’re justified. I think the Americans want to say that anything that China does isn’t going to work, because that’s part of the whole juxtaposition of “the US economy works, other economies should be just like us”. But Jeffrey Sachs is right. It is normal for business enthusiasm to underestimate the risk and to realize that a boom, especially in real estate, can’t go on forever. This happens in every country. I think for the last 200 years, there’s been like a 19-year real estate cycle. No economy has been pushed under by it, but there is a cycle and somebody always has to lose. Many large developers are overly optimistic and they go under. I think Donald Trump went under a couple of times and the banks bailed them out. So, in a way, this overenthusiasm is a universal phenomenon, and it usually leads the government to set up checks and balances so that it’s not going to be overshooting the market so much again. [00:09:58][80.5]
[00:09:59] And I’m sure that China is trying to say, how do we prevent this from happening again? They certainly have enough money to cover everything. China can simply wipe out the debt. It has enough money that it can afford the downturn, but it is causing a real problem for investors and the two big real estate companies. And apparently there’s been a lot of bad accounting. And in the United States, accounting firms are very often found liable for not having warned the banks that have hired them that there’s a problem coming. So this overestimation is a byproduct of the bubble. The bubbles created this enthusiasm and it overcreated it. But the underlying Chinese economy is continuing to rise. And I think you mentioned the Belt and Road. The Chinese economy is much more than real estate. And that’s what the critics are not talking about, because everything that’s not real estate is forging ahead wonderfully for China. And its response to the American trade sanctions has been to become independent of reliance on the United States. That’s always the result of trade sanctions. Trade sanctions means it’s the country imposing the sanctions, for instance, on computer chips loses that market forever because the country being sanctioned said, “okay, we’re going to produce our own”. And China’s been able to do that. And even I understand the Taiwanese are investing more in chipmaking equipment on the mainland. So the Belt and Road is doing fine. China’s manufacturing industry is doing fine and the newspapers are looking for something to criticize. And China will have to do what all the other countries have done: decide who’s going to take a loss and how much of a loss and who to bail out. [00:12:15][136.2]
Dimitri Simes Jr.: Yeah, I think your point about the underlying economy is very interesting and very important because again, I’m not an economist, I’m a journalist. But when I look as a dilettante from a distance, it seems that China has a lot of the necessary fundamentals in place. It has strong industry, It has a large population that’s increasingly well-educated and it has a developing high-tech sector. Doesn’t that suggest that even though it’s going through some challenges now due to mistakes in the real estate market, that it’s well-positioned to be competitive over the long run?
Michael Hudson: [00:12:55] Well, you didn’t mention its number one advantage. Unlike the Western economies, China has created money and credit and banking as a public utility. That means that it’s the government that is the ultimate creditor of the banks. Now, in the United States, that’s not what happens. In the United States, if banks go under and the corporation goes under, there are reverberations all through the economy of bankruptcies and also derivatives in 2008. The fact that there are huge Wall Street gambles over whether bonds and mortgages are going to default or not default. [00:13:41][46.0]
[00:13:41] None of this plagues China because the government can always decide when a when a company goes under, suppose it’s a factory, instead of a real estate company, we’re not going to say, “well, the company is bankrupt. Okay, it’s got to be sold to somebody else. Maybe a foreigner will take it over, maybe another investor will take it over and tear it down. Do we really want this business that is in debt to go bankrupt and go out of business?” And if China says, “well, no, the reason we funded it is because it’s playing a positive role in the economy.” So it’s too bad that it can’t pay the debt, but it’s not worth closing it down. And there is not going to be a big stock market and bond market and the financial speculation superstructure that all comes down simply and says, “okay, we’re still financing our industry and much of our real estate for what is in the national interest to raise living standards and prosperity. So because we are the creditor, we don’t have a problem with writing down debts because the debts owed to us.” And it’s very easy for creditors to write down what they’re owed when it’s owed to themselves, not to somebody else. [00:15:09][87.6]
[00:15:10] Well, in the West, the United States government isn’t going to say, “well, this company, like the Rite Aid drugstores, it went bankrupt. So the banks are in trouble. We can’t let it write down the debt because the debts are not owed to us. It’s owed to a bank and let the banks and the bondholders foreclose.” China doesn’t have that problem. And that’s what really is distinguishing this new economic order that we’re seeing outside of the West. A whole restructuring of how economies work. And China has essentially followed the same policy that that made the United States industry so successful in the 19th century. It’s kept infrastructure, transportation, communications, basic needs, health care, education, all in the public domain. And the advantage of that and that it was all spelled out in the 19th century by American industrial capitalists. It was the industrialists that were advocating government spending and investment in infrastructure, because the whole idea of the government transportation, government communications is to supply basic needs at subsidized rates so that employers don’t have to pay wage labor enough to have to pay higher prices for these basic infrastructure needs that are mainly monopolies. [00:16:49][99.4]
[00:16:50] In the West basic infrastructure has been monopolized, very high prices. Look at Thames Water in England as an example. Look at in the beginning of the 1980s, Margaret Thatcher in England and Ronald Reagan in the United States began to sell off all the basic utilities and privatize them. The result is that prices, the cost of living and doing business in the West has gone way up. For instance, education. It costs about $50,000 a year just to go to college in the United States. China and other countries treat education as a basic need, and they don’t have to pay like that. Public health. In America, health insurance costs about $25,000 a year per person. Well, just imagine a country that provides public health freely. That means that its employers, its labor do not have to pay, earn high enough wages to pay this enormous cost for education, public health, or for monopolized transportation, that’s very inexpensive in China, monopolized communication. You’ve avoided monopoly rents when you have government investment in infrastructure. So China is in a way doing what was the ideal of the United States industrial capitalism in the 19th century, German industrial take off, England’s industrial take off. [00:18:29][99.0]
[00:18:29] It has a mixed economy, a government and private sector, with the government providing the basic needs. So that means that China and other countries that are following its policies are going to be much lower cost producers than their counterparts in the West. And this used to be called “industrial capitalism”. It was the capitalists that were advising what’s called “socialized medicine” and so-called “socialized infrastructure”, because the purpose of this government infrastructure was to lower the cost of doing business for American industry so that it could undersell European and other countries that didn’t have mixed economy with public infrastructure. Well, China is doing this, and it’s called socialism now. Not capitalism. But the the basic strategy is exactly the same strategy that led the West that they go. [00:19:30][60.4]
[00:19:30] But the West is not following the strategy anymore. The West has led itself to be financialized and privatized. And what you’re really seeing now is a split in the world between neoliberal privatization, financialization and wealth being created by financial engineering, not by industrial capital formation and actually producing things. Well, that’s what China’s trying to do with the Belt and Road Initiative and with the model for other countries. So we’re really seeing a conflict of economic systems, and this appears to be a geographic split between the US and Europe, on the one hand, what Borrell in Europe, the head of the European Union called “the Garden”, and the rest of the world, meaning “the Jungle”. The jungle meaning countries with strong government investment to lower the cost of living and increase productivity. [00:20:29][58.3]
Dimitri Simes Jr.: So this is really interesting because what your answers suggest is that the US-China competition is not just a geopolitical showdown, but it’s also in the sort of ideological and economic showdown for the model that’s going to dominate the future. Is it going to be this sort of rentier financial capitalism that you describe now, dominating the West? Or is it going to be something along the lines of industrial socialism, industrial state capitalism, something an economic model that is based on producing things instead of just providing services and, you know, high tech toys?
Michael Hudson: [00:21:13] You’ve just said it in a nutshell. That’s exactly what we’re saying, Dimitri. [00:21:17][3.3]
Dimitri Simes Jr.: Yeah. So, I mean, I think that given that we’re on the sort of topic of a showdown between the East and the West, I want to ask you about something Putin said in Beijing today, shortly after meeting with Xi Jinping. He said the following, “Common threats are strengthening cooperation between Russia and China.” Do you agree that Western sanctions are, in effect, helping to push Russia and China closer together?
Michael Hudson: [00:21:46] Well, this is ironic. A few years ago, we were all talking about “will China take the lead with other countries in breaking away from the United States?” All this goes way back to the Bandung conference in 1955 when the third World countries said, “well, can’t we have a third way? Can’t we be independent of the United States?” They couldn’t go it alone. But China and Russia, for the first time, are large enough economy to enable other countries to join together and not be subject to a world order that’s shaped by the United States. But the irony is that today it’s the United States that is driving other countries together. It’s the United States that is breaking up the world order of the International Monetary Fund, the World Bank, the criminal International Criminal Court. The United States is driving these other countries together, not acting in its own self-interest. [00:22:52][65.3]
[00:22:53] And so history seems to be repeating itself. You had the Delphi Oracle in about the 5th century BC. You had the richest king of Asia Minor, Croesus, decided he wanted to attack Persia, and he went to the Delphi Oracle and said, “what is my fate going to be?” And the Oracle said, “You will destroy a great empire.” And so Croesus attacked the King Cyrus and lost. Then it turned out that the empire he destroyed was his own. Well, that’s exactly you could say that President Biden went to his advisers, Blinken and Nuland and his other advisers, have all said, “yes, impose trade sanctions on Russia and China, don’t trade with China, say it’s our enemy, isolate it, and you’ll destroy it.” And what they’ve destroyed is the Chinese, Russian and basically Asian market for products that the United States had hoped to monopolize and benefit from. [00:24:05][72.3]
[00:24:06] The United States plan was to designate certain monopolies that they could charge much more than profit. But huge monopoly rent, for instance, on computer chips and information technology. If they could prevent other countries from producing their own computer chips and their own processors and communication system, phone system, then they could charge enormous prices and they wouldn’t have to employ much labor. It would be the rentier economy that you said. And if American pharmaceutical companies could get patents on vaccines, then they could take a pill that it costs $0.10 to make and they could sell it for 800 or $1,000 because of the monopoly power. [00:25:01][55.6] Ctd....