Yves here. Michael Hudson describes how if Trump delivers on his trade and immigration threats (which are also economic threats) to Mexico, Mexico will either suffer a severe economic crisis or default on its dollar debt. Mexico has form here, so the latter is a real possibility.
We have been regularly pointing out that many countries in the Global South are facing debt/default crises. A default by Mexico would almost certainly lead to lower currency prices and higher interest costs across the developing world, particularly among the weakest countries. It’s not hard to see that this could easily kick off a series of crises.
I differ with Hudson that countries across the Global South can or will default on dollar obligations. First, as we saw with the EU in the global financial crisis, Russia in 1997, and the Asian Tigers in the Asian financial crisis, the banks also had substantial dollar debts. Their dollar funding costs would spike and they would unable to roll over maturing dollar debts, which would result in insolvency. This process would likely spread even to banks with limited dollar exposure via depositor bank runs, as in not want to suffer losses of assets or be caught in a freeze.
None of these governments, without the tender help of the IMF and others will the ability to provide emergency dollar funding (in the Financial Crisis, the ECB got dollars via US dollar swap lines) would be able to prevent a banking system collapse. The only exceptions are countries that have substantial dollar holdings at their central banks, which the China and the Asian crisis victims set out to accumulate thereafter.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization
The Road to Chaos
The 1940s saw a series of movies with Bing Crosby and Bob Hope, starting with the Road to Singapore in 1940. The plot was always similar. Bing and Bob, two fast-talking con men or song-and-dance partners, would find themselves in a scrape in some country, and Bing would get out of it by selling Bob as a slave (Morocco in 1942, where Bing promises to buy him back) or committing him to be sacrificed in some pagan ceremony, and so forth. Bob always goes along with the plan, and there’s always a happy Hollywood ending where they escape together – with Bing always getting the girl.
In the past few years we have seen a series of similar diplomatic stagings with the United States and Germany (standing in for Europe as a whole). We could call it the Road to Chaos. The United States has sold out Germany by destroying Nord Stream, with Germany’s Chancellor Olaf Scholtz (the hapless Bob Hope character) going along with it, and with European Commission President Ursula von der Leyen playing the part of Dorothy Lamour (the girl, being Bing’s prize in the Hollywood Road movies) demanding that all Europe increase its NATO military spending beyond Biden’s demand for 2% to Trump’s escalation to 5%. To top matters, Europe is to impose sanctions on trade with Russia and China, obliging them to relocate their leading industries in the United States.
So, unlike the movies, this will not end with the United States rushing in to save gullible Germany. Instead, Germany and Europe as a whole will become sacrificial offerings in our desperate but futile effort to save the US Empire. While Germany may not immediately end up with an emigrating and shrinking population like Ukraine, its industrial destruction is well under way.
Trump told the Davos Economic Forum January 23: “My message to every business in the world is very simple: Come make your product in America and we will give you among the lowest taxes of any nation on earth.” Otherwise, if they continue to try and produce at home or in other countries, their products will be charged tariff rates at Trump’s threatened 20%.
To Germany this means (my paraphrase): “Sorry your energy prices have quadrupled. Come to America and get them at almost as low a price as you were paying Russia before your elected leaders let us cut Nord Stream off.”
The great question is how many other countries will be as quiescent as Germany as Trump changes the rules of the game – America’s Rules-Based Order. At what point will a critical mass be achieved that changes the world order as a whole?
Can there be a Hollywood ending to the coming chaos? The answer is No, and that the key is to be found in the balance-of-payments effect of Trump’s threatened tariffs and trade sanctions. Neither Trump nor his economic advisors understand what damage their policy is threatening to cause by radically unbalancing the balance of payments and exchange rates throughout the world, making a financial rupture inevitable.
The Balance-of-Payments and Exchange-Rate Constraint on Trump’s Tariff Aggression
The first two countries that Trump threatened were America’s NAFTA partners, Mexico and Canada. Against both countries Trump has threatened to raise U.S. tariffs on imports from them by 20% if they do not obey his policy demands.
He has threatened Mexico in two ways. First of all is his immigration program of exporting illegal immigrants and permitting short-term work permits for seasonal Mexican labor to work in agriculture and household services. He has suggested deporting the Latin American immigration wave to Mexico, on the ground that most have come to America via the Mexican border along the Rio Grande. This threatens to impose an enormous social-welfare overhead on Mexico, which has no wall on its own southern border.
There also is a strong balance-of-payments cost to Mexico, and indeed to other countries whose citizens have sought work in the United States. A major source of dollars for these countries has been money remitted by workers who send what they can afford back to their families. This is an important source of dollars for families in Latin American, Asian and other countries. Deporting immigrants will remove a substantial source of revenue that has been supporting the exchange rates of their currencies vis-à-vis the dollar.
Imposing a 20% tariff or other trade barriers on Mexico and other countries would be a fatal blow to their exchange rates by reducing the export trade that U.S. policy promoted starting under President Carter to promote an outsourcing of U.S. employment by using Mexican labor to keep down U.S. wage rates. The creation of NAFTA under Bill Clinton led to a long line of maquiladora assembly plants just south of the US/Mexican border, employing low-wage Mexican labor on assembly lines set up by U.S. companies to save labor costs. Tariffs would abruptly deprive Mexico of the dollars received to pay pesos to this labor force, and also would raise costs for their U.S. parent companies.
The result of these two Trump policies would be a plunge in Mexico’s source of dollars. This will force Mexico to make a choice: If it passively accepts these terms, the peso’s currency exchange rate will depreciate. This will make imports (priced in dollars on a worldwide level) more expensive in peso terms, leading to a substantial jump in domestic inflation. Alternatively, Mexico can put its economy first and say that the trade and payments disruption caused by Trump’s tariff action prevents it from paying its dollar-debts to bondholders.
In 1982, Mexico’s default on its tesobono bonds denominated in dollars triggered the Latin America debt bomb of defaults. Trump’s acts looks like he’s forcing a replay. In that case, Mexico’s countervailing response would be to suspend payment on its US-dollar bonds.
This could have far-reaching effects, because many other Latin American and Global South countries are experiencing a similar squeeze in their balance of international trade and payments. The dollar’s exchange rate already has been soaring against their currencies as a result of the Federal Reserve raising interest rates, attracting investment funds from Europe and other countries. A rising dollar means rising import prices for oil and raw materials denominated in dollars.
Canada faces a similar balance-of-payments squeeze. Its counterpart to Mexico’s maquiladora plants are its auto-parts plants in Windsor, across the river from Detroit. In the 1970s the two countries agreed on the Auto Pact allocating what assembly plants would work on in their joint production of U.S. autos and trucks.
Well, “agreed” may not be the appropriate verb. I was in Ottawa at the time, and government officials were very resentful at being assigned the short end of the auto deal. But it is still going today, fifty years later, and remains a major contributor to Canada’s trade balance and hence the exchange rate of its dollar, which already has been falling against that of the United States.
Of course, Canada is no Mexico. The thought of it suspending payment on its dollar bonds is unthinkable in a country run largely by its banks and financial interests. But the political consequences will be felt throughout Canadian politics. There will be an anti-American feeling (always bubbling under the surface in Canada) that should end Trump’s fantasy of making Canada the 51st state.
The Implicit Moral Foundations of International Economic order
There is a basic illusory moral principle at work in Trump’s tariff and trade threats, and it underlies the broad narrative by which the United States has sought to rationalize its unipolar domination of the world economy. That principle is the illusion of reciprocity supporting a mutual distribution of benefits and growth – and in the American vocabulary it is wrapped together with democratic values and patter talk about free markets promising automatic stabilizers under the U.S.-sponsored international system.
The principles of reciprocity and stability were central to the economic arguments by John Maynard Keynes during the debate in the late 1920s over U.S. insistence that its European wartime allies pay heavy debts for arms bought from the United States before its formal entry into the war. The Allies agreed to pay by imposing German reparations to shift the cost onto the war’s loser. But the demands by the United States on its European allies, and in turn by them on Germany, were far beyond the ability to be met.
The fundamental problem, Keynes explained, was that the United States was raising its tariffs against Germany in response to its currency depreciating, and then imposed the Smoot-Hawley tariff against the rest of the world. That prevented Germany from earning the hard currency to pay the allies, and for them to pay America.
To make the international financial system of debt service work, Keynes pointed out, a creditor nation has an obligation to provide debtor countries with the opportunity to raise the money to pay by exporting to the creditor nation. Otherwise, there will be currency collapse and crippling austerity for debtors. This basic principle should be at the heart of any design for how the international economy should be organized with checks and balances to prevent such collapse.
Opponents of Keynes – the French anti-German monetarist Jacques Rueff, and the neoclassical trade advocate Bertil Ohlin – repeated the same argument that David Ricardo laid out in his 1809-1810 testimony before Britain’s Bullion Committee. He claimed that paying foreign debts automatically creates a balance in international payments. This junk-economic theory provided a logic that remains the basic IMF austerity model today.
According to this theory’s fantasy, when paying debt service lowers prices and wages in the debt-paying country, that will increase its exports by making them less costly to foreigners. And supposedly, the receipt of debt service by creditor nations will be monetized to raise its own prices (the Quantity Theory of Money), reducing its exports. This price shift is supposed to continue until the debtor country suffering a monetary outflow and austerity is able to export enough to afford to pay its foreign creditors.
But the United States did not permit foreign imports to compete with its own producers. And for debtors, the price of monetary austerity was not more competitive export production but economic disruption and chaos. Ricardo’s model and U.S. neoclassical theory was simply an excuse for hard-line creditor policy. Structural adjustments or austerity have been devastating to the economies and governments on which it has been imposed. Austerity reduces productivity and output.
In 1944 when Keynes was trying to resist U.S. demand for foreign trade and monetary subservience at the Bretton Woods conference, he proposed the bancor, an intergovernmental balance-of-payments arrangement calling for chronic creditor nations (namely, the United States) to lose their accumulation of financial claims on debtor countries (such as Britain would become). That would be the price to be paid to prevent the international financial order from polarizing the world between creditor and debtor countries. Creditors had to enable debtors to pay, or lose their financial claims for payment.
Keynes, as noted above, also emphasized that if creditors want to be paid, they have to import from the debtor countries to provide them with the ability to pay.
This was a profoundly moral policy, and it had an additional benefit of making economic sense. It would enable both parties to prosper instead of having one creditor nation prosper while debtor countries succumbed to austerity preventing them from investing in modernizing and developing their economies by raising social spending and living standards.
Under Donald Trump the United States is violating that principle. There is no Keynesian bancor-type arrangement in place, but there are the harsh America-first realities of its unipolar diplomacy. If Mexico is to save its economy from being plunged into austerity, price inflation, unemployment and social chaos, it will have to suspend its payments on foreign debts denominated in dollars.
The same principle applies to other Global South countries. And if they act together, they have a moral position to create a realistic and even inevitable narrative of the preconditions for any stable international economic order to function.
Circumstances thus are forcing the world to break away from the U.S.-centered financial order. The U.S. dollar’s exchange rate is going to soar in the short term as a result of Trump blocking imports with tariffs and trade sanctions. This exchange-rate shift will squeeze foreign countries owing dollar debts in the same way that Mexico and Canada are to be squeezed. To protect themselves, they must suspend dollar debt service.
This response to today’s debt overhead is not based on the concept of Odious Debts. It goes beyond the critique that many of these debts and their terms of payment were not in the interest of the countries on which these debts were imposed on in the first place. It goes beyond the criticism that lenders must have some responsibility for judging the ability of their debtors to pay – or suffer financial losses if they have not done so.
The political problem of the world’s overhang of dollar debts is that the United States is acting in a way that prevents debtor countries from earning the money to pay foreign debts denominated in US dollars. U.S. policy thus poses a threat to all creditors denominating their debts in dollars, by making these debts practically unpayable without destroying their own economies.
The U.S. Policy Assumption That Other Countries Will Not Respond to U.S. Economic Aggression
Does Trump really know what he’s doing? Or is his careening policy simply causing collateral damage for other countries? I think that what’s at work is a deep and basic internal contradiction of U.S. policy, similar to that of U.S. diplomacy in the 1920s. When Trump promised his voters that the United States must be the “winner” in any international trade or financial agreement, he is declaring economic war on the rest of the world.
Trump is telling the rest of the world that they must be losers – and accept the fact graciously in payment for the military protection that it provides the world in case Russia might invade Europe or China send its army into Taiwan, Japan or other countries. The fantasy is that Russia would have anything to gain in having to support a collapsing European economy, or that China decides to compete militarily instead of economically.
Hubris is at work in this dystopian fantasy. As the world’s hegemon, U.S. diplomacy rarely takes account of how foreign countries will respond. The essence of its hubris is to simplistically assume that countries will passively submit to U.S. actions with no blowback. That has been a realistic assumption for countries like Germany, or those with similar U.S. client politicians in office.
But what is happening today is system-wide in character. In 1931 there was finally a moratorium declared on Inter-Ally debts and German reparations. But that was two years after the 1929 stock market crash and the earlier hyperinflations in Germany and France. Along similar lines the 1980s saw Latin American debts written down by Brady bonds. In both cases international finance was the key to the system’s overall political and military breakdown, because the world economy had become self-destructively financialized. Something similar seems inevitable today. Any workable alternative involves creating a new world economic system.
U.S. domestic politics is equally unstable. Trump’s America First political theater that got him elected may get his gang unseated as the contradictions and consequences of their operating philosophy are recognized and replaced. His tariff policy will accelerate U.S. price inflation and, even more fatally, cause chaos in U.S. and foreign financial markets. Supply chains will be disrupted, interrupting U.S. exports of everything from aircraft to information technology. And other countries will find themselves obliged to make their economies no longer dependent on U.S. exports or dollar credit.
And perhaps in the long-term view this would not be a bad thing. The problem is in the short run as supply chains, trade patterns and dependency are replaced as part of the new geopolitical economic order that U.S. policy is forcing other countries to develop.
Trump bases his attempt to tear up the existing linkages and reciprocity of international trade and finance on the assumption that in a chaotic grab-bag, America will come out on top. That confidence underlies his willingness to pull out today’s geopolitical interconnections. He thinks that the U.S. economy is like a cosmic black hole, that is, a center of gravity able to pull all the world’s money and economic surplus to itself. That is the explicit aim of America First. That is what makes Trump’s program a declaration of economic war on the rest of the world. There is no longer a promise that the economic order sponsored by U.S. diplomacy will make other countries prosperous. The gains from trade and foreign investment are to be sent to and concentrated in America .
The problem goes beyond Trump. He is simply following what already has been implicit in U.S. policy since 1945. America’s self-image is that it is the only economy in the world that can be thoroughly self-sufficient economically. It produces its own energy, and also its own food, and supplies these basic needs to other countries or has the ability to turn off the spigot.
Most important, the United States is the only economy without the financial constraints that constrain other countries. America’s debt is in its own currency, and there has been no limit on its ability to spend beyond its means by flooding the world with excess dollars, which other countries accept as their monetary reserves as if the dollar is still as good as gold. And underneath it all is the assumption that almost with a flick of the switch, the United States can become as industrially self-sufficient as it was in 1945. America is the world’s Blanche duBois in Tennessee Williams’ Streetcar Named Desire, living in the past while not aging well.
The American Empire’s Self-Serving Neoliberal Narrative
To obtain foreign acquiescence in accepting an empire and living peacefully in it requires a soothing narrative to depict the empire as pulling everyone ahead. The aim is to distract other countries from resisting a system that actually is exploitative. First Britain and then the United States promoted the ideology of free-trade imperialism after their mercantilist and protectionist policies had given them a cost advantage over other countries, turning these countries into commercial and financial satellites.
Trump has pulled away this ideological curtain. Partly this is simply in recognition that it no longer can be maintained in the face of US/NATO foreign policy and its military and economic war against Russia and sanctions against trade with China, Russia, Iran and other BRICS members. It would be madness for other countries not to reject this system, now that its empowering narrative is false for all to see.
The question is, how will they be able to put themselves in a position to create an alternative world order? What is the likely trajectory?
Countries like Mexico really don’t have much of a choice but to go it alone. Canada may succumb, letting its exchange rate fall and its domestic prices rise as its imports are denominated in “hard currency” dollars. But many Global South countries are in the same balance-of-payments squeeze as Mexico. And unless they have client elites like Argentina – its elite being themselves major holders of Argentina’s dollar bonds – their political leaders will have to stop debt payments or suffer domestic austerity (deflation of the local economy) coupled with inflation of import prices as the exchange rates for their currencies buckle under the strains imposed by a rising U.S. dollar. They will have to suspend debt service or else be voted out of office.
Not many leading politicians have the leeway that Germany’s Annalena Baerbock has of saying that her Green Party does not have to listen to what German voters say they want. Global South oligarchies may rely on U.S. support, but Germany is certainly an outlier when it comes to being willing to commit economic suicide out of loyalty to U.S. foreign policy without limit.
Suspending debt service is less destructive than continuing to succumb to the Trump-based America First order. What blocks that policy is political, along with a centrist fear of embarking on the major policy change necessary to avoid economic polarization and austerity.
Europe seems afraid to use the option of simply calling Trump’s bluff, despite its being an empty threat that would be blocked by America’s own vested interests among the Doner Class. Trump has stated that if it does not agree to spend 5% of its GDP on military arms (largely from the United States) and buy more US liquid natural gas (LNG) energy, he will impose tariffs of 20% on countries that resist. But if European leaders do not resist, the euro will fall perhaps by 10 or 20 percent. Domestic prices will rise, and national budgets will have to cut back social spending programs such as support for families to buy more expensive gas or electricity to heat and power their homes.
America’s neoliberal leaders welcome this class-war phase of U.S. demands on foreign governments. U.S. diplomacy has been active in crippling the political leadership of former labor and social democratic parties in Europe and other countries so thoroughly that it no longer seems matter what voters want. That is what America’s National Endowment Democracy is for, along with its mainstream media ownership and narrative. But what is being shaken up is not merely America’s unipolar dominance of the West and its sphere of influence, but the worldwide structure of international trade and financial relations – and inevitably, military relations and alliances as well.
We certainly have a lot to look forward to, and it probably won’t take long to come to fruition. We’d better buckle up.
“Mexico … will have to suspend its payments on foreign debts denominated in dollars.”
I suggest a new bancor method: Mexico imposes an export tariff matching US import tariffs, paid (paying the import tariff) by deduction from the outstanding value of bonds owned by US interests. Or more simply, pay the tariff by reducing debt payments accordingly, by any corresponding adjustment of the debt amount. That should get the attention of US political gangs and change their tactics: they can only tariff their credit sources.
Looks like we are going to be in for a rough ride the next four years. It sounds like that Trump is now doing mafia tactics and telling the world’s manufacturers to move to America or else be slugged with sanctions. And that is his only plan to get Americans working again – by cannibalizing the world’s industries. Like so many in Washington, Trump is going for zero-sum games and is not a fan of win-win negotiations as there is no loser to compare yourself against. Come to think of it, this is a continuation of US policy to go around the world and set countries on fire, even vassal – errrr – allied states. Trump here wants to do it with tariffs and sanctions more than military operations. But with countries like Mexico, they may have no choice but to go into default which might trigger other central and south American nations to do as well. Maybe Asian and African nations too come to think of it. Trump imagines that America is a fortress that has everything it needs within it’s borders but that is not quite true and he may learn before too long that a lot of his macho man assumptions are fatally wrong. Time to batten down the hatches.
Notice that United States manufacturing productivity has actually decreased for 14 years. This is dramatically unprecedented since 1905:
https://fred.stlouisfed.org/graph/?g=m2mB
January 30, 2018
Manufacturing Productivity, * 1988-2024
* Output per hour of all persons
(Indexed to 1988)
United States multifactor productivity in manufacturing has not increased since 2008, and is actually where it was in 2004.
https://fred.stlouisfed.org/graph/?g=1C2ry
January 30, 2018
Manufacturing Multifactor Productivity, * 1988-2023
* Real value-added output divided by combined inputs.
(Indexed to 1988)
https://scholarcommons.scu.edu/cgi/viewcontent.cgi?article=1117&context=econ
November, 2003
The Most Technologically Progressive Decade of the Century
By Alexander J. Field
Abstract
There is now an emerging consensus that over the course of U.S. economic history, multifactor productivity grew fastest over a broad plateau between 1905 and 1966, and within that period, in the two decades following 1929. This paper argues that the bulk of the achieved productivity levels in 1948 had already been attained before full scale war mobilization in 1942. It was not principally the war that laid the foundation for postwar prosperity. It was technological progress across a broad frontier of the American economy during the 1930s.
*Sigh*
I will run this by an academic who is in the business of reviewing and approving economic research to find out what is wrong with this paper. The claim on its face is not credible. Periods of business failures and widespread distress and innovation do not go together.
The thesis is problematic. From my contact:
However, the paper appears to have a narrow definition of what innovation amounts to, as in “technological progress” which I take to mean, per my contact, new technologies and devices. Professor Amar Bhide, who has focused on innovation and entrepreneurship in his many studies, has argued that important advances take place not just at the product level but the business process level Japan’s just in time manufacturing is a textbook case.
“I will run this by an academic…”
This is a terrific response, for which I am quite grateful.
The reference to the “business process” work of Amar Bhide is especially important for me to read and think about.
Terrific!
I’ve long entertained the notion that the U.S. is capable of a very high degree of autarky as regards at least the basic material necessities and that this is potentially a good thing in the event of major international supply chain disruptions. And taking that happy, admittedly simplistic thought further, I’ve also entertained the notion that it could reduce the material if not psychological pressures and incentives driving imperial projects. Ever the giddy optimist, me.
The US cannot be an autarky. For starters, the oil we have here is all pretty light sweet crudes. You need heavier grade for diesel, asphalt, heating oil and other products over my pay grade. This is why Biden was arm twisting Venezuela after we banned Russian oil imports. Urals crude is medium sour and I understand very suitable for diesel. With no Urals crude we needed to find heavier crudes to mix at refineries. Venezuela crude is heavy sour.
And 80% of our chemicals for drugs and even a lot of finished drug products come from China. We get pretty much all our ascorbic acid from China. Think the US will replicate that just for the US market at much higher cost?
I could go on…
And Trump assumes that Canadian crude (heavy sour) is not going to stop flowing south. After all in his mind, we Canucks are already the 51st state. (I’m overlooking his latest goofy remark that the U.S. doesn’t need Canada’s oil)
The U.S. also needs Canada’s lumber, iron and steel, vehicles, aircraft, spacecraft, precious stones, metals, minerals, and (oddly) plastics:
https://www.usimportdata.com/blogs/canada-usa-trade-statistics-data-top-10-us-imports-from-canada
B.C. being on the west coast, can shift imports and exports to and from Asia more easily than other parts of Canada. This, however, takes time to set up.
And Trump listed reasons why Canadians would love to become Americans, including-
‘They’d also have better health coverage – much better health coverage, in fact. I think the people of Canada would like it if it’s explained [to them].’
https://www.rt.com/news/611590-us-trump-canadians-offer/
I’m sure that Canadians would love to get themselves some American-style healthcare.
That, and a government that shuts down completely every winter to decide that it’s not going to pay for the measures it enacted through the spring and summer.
And the inability to run honest elections — everybody agrees on that right across the political spectrum.
Certainly those licking their chops at the prospect of becoming the private sector replacement for Medicare would love it — at the expense of their fellow citizens, of course.
We have a small but noisy lobby group up here busily trying to undermine Medicare every chance they get …
@The Rev Kev
And being dragged into all those U.S. forever wars.
Trump 2.0 reminds me of the Wizard of Oz–albeit a pissed off Wizard. After his first term of learning the ways of Washington (and its being far too slow for his taste), he’s back and determined not to waste time, pulling levers hard to achieve his America first vision. Unfortunately, he has almost no conception about what pulling all these levers at the same time will do, but we’re likely to find out soon and the blowback (as it always is for this Empire) is likely to be a [bleep].
I think it’s going to be a rough ride much longer than four years. Trump is just a manifestation of this. Our (meaning collective west) current and unchanging trajectory is more of a major car crash. The question is when.
Trump’s policies seem entirely rational if you are running a protection racket / rules-based international order. Squeeze your clients with high priced energy and tariffs and defence purchase requirements rather than protection money per se. If some rebel, shoot them pour encouragez les autres or cut them loose if not a threat.
I agree with the first order impacts of tariffs but I don’t understand Michael Hudson’s policy prescription of debt default. Mexico is also self-sufficient in energy (or it could be with investment) and it can feed itself with purchases from BRICS countries. Surely a better policy response would be an Asian currency crisis response, of pursuing self sufficiency and a domestic savings pool to replace dollar debt? And to work on persuading China to diversify its USD holdings into the peso by replacing Mexican debt, achieving two goals at once?
First, I have no idea where you get the objective of self sufficiency for Asian crisis victims from. They aren’t and can’t be autarkies. Even Indonesia is not self sufficient in energy: https://tvbrics.com/en/news/indonesia-inaugurates-37-projects-to-achieve-energy-self-sufficiency/ and not in food. Thailand is almost self sufficient in food but not in energy. They’ve had nearly 30 years since the crisis and they are not there.
Second, as for domestic FX reserves, if they had them, they would not be facing a crisis. You accumulate them after a crisis and then by running persistent trade surpluses. But Trump is trying to put an end to having the US be the chronic trade deficit country. So who does Mexico run surpluses against in light of that?
They are pursuing it; they just haven’t achieved it yet. :-)
I should have been more precise than self-sufficiency. I did not mean autarchy in any event (which is a use of self-sufficiency). I should have said not running a capital account deficit and allowing domestic industry to borrow in foreign currency etc.
It’s not really important to the point I was making which is, why is the Asian Financial Crisis response (acquire dollars, reduce vulnerability) not still a good strategy (but probably requiring updated tactics) for Mexico?
Why default? (Obviously there are intrinsic benefits to default, I have no issue with it as part of a wider strategy, but these are not presented in the article and Michael Hudson deliberately eschewed discussion of odious debt repudiation)
An approach by Mexico to China for dollar assistance (a peso bond for US Treasury swap, for example) would give Mexico excellent leverage with Trump. “The President who lost Mexico”? No thank you! He would offer a better deal (he’s a pragmatist).
Although the people surrounding him might just invade. Especially if China denandedd the right to build the Trans Yucatan canal, for example, or to open naval bases. Perhaps the real deal is for Trump to build the Trans-Yucatan Canal in return for dollar forgiveness to Mexico and China can have Panama, which is better located (I.e. further from USA :-)….
Please don’t do this. I do not like having to deal with poorly thought through ideas. It encourages readers to do the same and wastes my time having debunking it.
There is no advantage in the transaction sequence you proposed (Mexico selling peso bonds and using the proceeds to buy dollars), UNLESS China pays well above market prices for the peso bonds. And why should China do that? China has far better places to waste money where it can at gain durable political and economic influence for a very bad financial trade. Start with Indonesia, in a far more geostrategically important location, far easier access for trade, and very valuable natural resources (oil, copper, many others).
Mexico is not in its sphere of influence. It is not a large trade partner of Mexico. The US can and will screw with its economy. So why should China become a partner in Mexico’s victimization?
I always admired Michael’s clear writing, but from my simple perspective, this essentially boils down to what the architects of the present global payment system created is incompatible with Democracy. The only solution for creditor counties is to hollow themselves out so that debtor countries can repay their debts and the impacted in this process possess the ability vote. At what point do the architects of this system recognize that what they have created is not stable in the long-term or do nukes have to fly first? I think many people fear what will happen if Trump succeeds and implements tariffs but I’d more fearful of what comes next if he/tariffs fail. Trump or not, the issue doesn’t go away.
Yes. That’s what I see too. And I’m sure it is what the BRICS see very clearly. Power politics has come full circle and all we have to show for it is an almost absurdly powerful MIC along with growing dysfunction in the rest of the world. Not to even mention right here in the US. We could decide to decentralize power, sell off our military bases, invest hugely in global sustainability and maybe use this new environmental industrialization as the new carrot to organize international cooperation. We could use “the Gaia” and virtually run the books backwards, since we embraced our unenlightened dollar imperialism in the 40s. To use my favorite metaphor, it is just good evolution (enlightened democracy). It’s pretty weird that we humans have never been able to operate that optimistically. Or responsibly.
It’s Dani Rodrik’s trilemma: hyper-globalization, national sovereignty, and democracy — pick two …
https://www.projectstatecraft.org/post/rodrik-s-trilemma-and-its-consequences
Well-said, excellent piece!
I find interesting how persistent trade imbalances lead to economic instability. When a country owes another money, the debtor country has to earn it by exporting goods or services to earn that currency and pay back the debt plus interest. As you note Keynes saying, the creditor country needs to run a trade deficit to let that happen. Multiplying that over many countries, the creditor country can find those deficits to cause internal economic pain – the US has had about 50 consecutive years of trade deficits and it has led to Americans seeing Trump as a way to relieve their pain. Trump just sees his moves as more jobs and economic growth in the US, all the dislocation that other countries experience is beyond his area of concern.
Notice an important change in the real value stability of the Mexican peso since 1977. The real value of the peso is currently 96.5% of the value in 1977:
https://fred.stlouisfed.org/graph/?g=1DbSC
January 15, 2018
Real Narrow Effective Exchange Rate for United States and Mexico, 1977-2024
(Indexed to 1977)
Notice that while Mexico has grown more slowly than the United States since 1992, Mexican exports have increased 608.4%. Mexico has experienced a remarkable export growth that gives a significantly increased economic stability:
https://fred.stlouisfed.org/graph/?g=1qtRj
August 4, 2014
Real per capita Gross Domestic Product for Mexico as a percent of Real per capita Gross Domestic Product for United States & Exports of Goods and Services by Mexico as a percent of Gross Domestic Product, 1992-2023
(Indexed to 1992)
Much of Mexico’s reported export surplus is fictitious in that it doesn’t reflect actual dollar receipts. Because so many exports are by US-owned affiliates, Mexico only receives a portion of the export proceeds, as parent companies deduct profits and also the cost of the parts to be assembled.
US trade statistics are “as if” the whole value were paid, not the actual payments-flow. Likewise in dollars, only about 15% of the valuation of US oil imports is paid abroad. Parent companies keep 85% in the US economy — their profits, markups, imports of capital goods to produce the oil, management fees, etc.
“Much of Mexico’s reported export surplus is fictitious…”
Thank you so much for the post and explaining. Then, the vulnerability of Mexico is far more than I had understood.
I see, i was wondering how Mexico cant pay dollar debt when they have such large trade with USA. Most of the dollar stay in USA.We the average people is impossible to learn these stuff.
“I was wondering how Mexico can’t pay dollar debt when they have such large trade with USA.”
Put this fine comment in Google search and there will be an extensive answer.
“We, the average people, is impossible to learn these stuff.”
I think AI can change that; especially DeepSeek from here.
An interview with Ben Norton yesterday was amusing. Picturing Trump threatening tariffs and sanctions is too Donald (Duck). Because most of our imports are from us importing our own offshored manufactures. Can it get any screwier? and as far as foreign imports go, the big miscalculation is our assumption that we are the only buyer in town when in fact the whole world wants to trade and the famous American Consumer now has some stiff competition. Contradictions are delightful. To actually impose draconian tariffs will kill the American Consumer that much faster and it is the very carrot which has facilitated all our little extortion rackets. It is no longer a bargaining chip with BRICS rising and etc. Nor will it maintain its position as American society continues to sink into the sewer.
Michael Hudson:
Even with the significant increase in Mexican exports as a percent of GDP since 1992, Mexico has had a balance of payments deficit in every year but 2020 since 1992:
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=273,&s=BCA_NGDPD,&sy=1992&ey=2024&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
Current Account Balance as percent of Gross Domestic Product for Mexico, 1992-2024
If Trumps buys Greenland, he will be remembered as one of the greatest ever president of this country.
He has good instincts in a global world ruled by mafia structures and mentality.
Were Trump to annex Greenland, it would effectively be the end of the United Nations and international law. A return to the law of the jungle, and a reverse of what Borrell meant when he claimed “Europe is a garden and the rest of the world is a jungle”. The US and its accepting vassals being the jungle.
We are already there and have been for some time. The UN is largely ineffectual, an intergovernmental organization that depends on the unanimity of the UNSC. Some call it a talk shop.
International law and domestic law in the US are made a mockery of on a daily basis. What Israel is doing and has done to Palestine and the Palestinians is a glaringly obvious example. The law is simply ignored when not convenient, or reformed to legitimize corruption (Citizens United decision, Commodity Futures Modernization Act, Financial Services Modernization Act etc.)
The largest financial crimes in history (according to prof. Bill Black and others) were not even investigated, let alone anyone indicted or put on trial. The snide quip of “the law and taxes are only for the ‘little people'” is annoyingly apt.
From my long experience, I have come to the conclusion that when it comes to human affairs, there is no such thing as a society of laws, despite all the rhetoric.
Human societies are of men, not laws.
The ultimate proof is the state of exception or emergency that governments always invoke / resort to every time laws get in the way.
Trump is being visionary here.
USA need to unify Greenland, Canada and Mexico to face the leviathan that China has become. EU is irrelevant degenerate soft power. USA is in this alone.
USA need to unify Greenland, Canada and Mexico
Awful lot of dead Americans.
US doesn’t need more territory for that. It needs to have less financialization, more innovation, and lower living costs, to decrease the cost of doing business and be more competitive. Has forgotten how to do that, so getting Greenland or Canada or Mexico would not help one iota.
US needs to consume more and more of everything, until it kills the host, like all malignant tumors do.
Visionary politicians are concerned with defense not economic efficiencies.
In a high tech world, having your trading house near the wall st trade center gives you a competitive advantage.
So it is in world of hypersonic missiles. Big areas are key to survival.
“Visionary politicians are concerned with defense not economic efficiencies……. [for a] competitive advantage.”
“Big areas are key to survival.”
1. A competitive advantage cannot occur nor exist in an any economy which is burdened with the crippling value free rentier overheads imposed upon that economy to satisfy an insatiable creditor oligarchy.
Merely the briefest and cursory consideration of the simple fact, confirmed by comparing the two key graphs – the doubling rate of compound interest debt on an economy, which is exponential, and the growth rate of production in an economy, which is not – will confirm this. At least for anyone attempting an honest analysis.
The real world evidence for this is to compare and contrast the Western Financialised based parasitic rentier system which is, in broad terms, largely not meeting even the basic needs at the bottom of Marlow’s hierarchy of human needs, with that of say, China’s system of democratic control over private oligarch accumulation at the expense of the rest of society which has lifted 750 million people out of poverty.
Even the specialist trade publications were quoting US trade delegation officials as conceding that on the metrics which matter on this issue the Chinese system is outperforming and superior to the US system.
2. In a context in which one participant insists on pursuing a zero-sum everyone else loses while I win approach, with its limited and Philistine mindset, there is no survival for anyone, including that participant.
Because once eveyone else has been pauperised to the point of not surviving that systemic approach will simply eat itself. Just as the same system, as Michael Hudson points out in analytical detail, destoyed Rome and other societies which followed this dead end.
The only way to survive is change this infantile begger my neighbour approach from zero-sum to non-zero sum. That requires an acknowlegement of practical and objective reality and a less individualistic/egotistical approach as a society in the West.
You don’t need defense from anyone. It’s the rest of the world that need defense from you. That is why they came up with hypersonic missiles in the first place. Sorry to burst your bubble.
Oldtimer needs to get with the 21st century. Santa Claus will bring you a great present next year, we promise! Then we can nuke China into the Stone Age and solve the problem eh! merka #1
As far as I can observe from the last decade, international law has been sidelined by the rules-based order, which seems to be whatever the US says this day is what the rule is. Stealing central bank reserves, live streaming genocide, billions of sanctions, well, you get the idea.
Genocides, bombings, billions of sanctions, and the rest, did not start a decade ago. It was always like that, except for the live streaming part. Replacing “laws” with “rules” is just cosmetics (different lipstick on a pig). Some thought that live streaming would make a change in people’s minds, because it removes the “I didn’t know” argument. They were wrong, because “I didn’t know” always meant “I don’t care”.
Global world is indeed ruled by mafia like structures and mentality, USA structures and USA mentality. “Mafia like”, because real mafia have some honor.
«Notice that while Mexico has grown more slowly than the United States since 1992, Mexican exports have increased 608.4%. Mexico has experienced a remarkable export growth that gives a significantly increased economic stability»
But to Yves’ point, 80% of Mexico’s export is to the U.S.:
https://santandertrade.com/en/portal/analyse-markets/mexico/foreign-trade-in-figures
Great article, but does Trump really have the executive power to declare all these tariffs he says he is for? And if so then why does the president have that much power? Will Congress have to sign off? Will there be the chance for a debate?
Congress has a track record of handing its constitutional powers over to the exec. branch, especially when it comes to foreign policy and military action. Plus, if I understand correctly, the exec can just wave the magic wand of “it’s a matter of national security” giving legal power to impose tariffs. However, as noted already, tariffs may be a bluff — the oligarchy in the US would oppose most of them, or get exceptions making the tariffs less effective
I have a question for prof Hudson and the rest of readers: what is stopping China and other dollar-surplus countries to give their surpluses to say Mexico, then redenominate them in RMB etc then open up their import wider to absorb import from Mexico. The dollar will come onshore and these countries diversify creditors composition as well as export partnerships
So is a Mexican debt default inevitable? It depends on whether Mexico loses the dollars coming from the U.S. via remittances and exports, right? This only happens if Trump’s immigration policies and economic policies are enforced and both a significant number of mexican nationals are repatriated and 20% tariffs are imposed on mexican exports. Can Trump actually do this? What is the plan for replacing construction and agriculture workers? Won’t american companies resent 20% tariffs? Some of Mexico’s biggest exports are made in factories owned by american companies, so wouldn’t the tariffs actually hit their bottom line? I get that Trump wants to enforce these policies, but can he actually enforce them?
We are heading straight into a 1929 event.
If I’m reading all this accurately, Michael Hudson’s argument to justify the type of remedies he is proposing is that the alternative to not adopting that approach and those types of remedies is “economic suicide out of loyalty to U.S. foreign policy without limit” for most of the countries on the planet?
The counterargument in the introduction appears to be that such remedies will produce a banking collapse in all but a handful of countries. It would seem reasonable to surmise that this implies such a banking collapse would be a worse outcome than a mass outbreak of economic suicide.
From a systems engineering perspective, focusing on addressing systems failures practically, rather than only a financial one, it would be useful to see some explicit arguments either way as to why this is or is not the case?
I have no idea what you mean by “systems failures”. Finance is inherently pro-cyclical and payment systems providers are exposed to bank runs. This isn’t a systems problem, it’s not escapable. The risk can be reduced but not eliminated.
As for the suicide point, IMHO Hudson’s choice of terms is hyperbolic. Austerity is terrible but the economy still functions.
Look at Greece in 2015. When Greece effectively defied the Troika (we have the very very long form story in our archives), the ECB withdrew emergency support it had been providing to the Greek banking system for a long time in violation of its own rules (the emergency facility, the ELA, was authorized only for short-term use). That forced a substantial collapse of the banking system. Importers were unable to pay for any foreign goods unless they took pallets of currency to the foreign seller (which happened in a few cases) or had accounts with non-Greek banks. Even then, they had to leave Greece to effect the payment. Tourists could not make withdrawals at ATMs so tourist bookings collapsed.
Fish was rotting at docks because petrol supplies quickly became scarce. Greece was also running out of pharmaceutical products despite attempts to exempt them.
Greece capitulated after 20 days and signed a bailout deal in July that was worse than the one they’d been offered in February.
So a banking system collapse is worse.
Seems this makes default and maybe BRICS look attractive, but still seems to ultimately require countries,not least China, to move towards balanced trade.
All of the poor countries need to repudiate their debt–together–on the same day.
Prof. Hudson, any thoughts on using capital controls to put a damper on foreign trading partners using foreign direct investment (into the US) to effect a balance of payments so that they’re forced to achieve a balance of payments through trade instead?
Ref https://www.nakedcapitalism.com/2024/05/us-trade-desperation-trump-insider-robert-lightheizer-recommends-third-world-capital-controls-to-achieve-balanced-trade.html
Maybe the Mexicans will get a short reprieve as in the Eyes of Sauron will turn somewhere further East. The Japanese central bank has just raised interest rates 0.25% to 0.50%, the highest in the last 17 years. Expect a YUGE stock market correction starting Monday, not just in the US but globally. I am sure Trump the Great will start berating the Japanese latest by this Friday for their GALL, you know just after his pompous tirade at the WEF about lower interest rates globally.
With respect to imports from Canada I am skeptical that the Trump administration will apply significant across the board tariffs. At least two thirds are raw materials for US industry, low value-added industrial inputs or energy for industry and consumers. Tariffs in these areas would be damaging to US interests. We’ll see soon enough.
A second point I also wonder about is the level of borrowing in US dollars in Canada. I looked at this some 15 years ago and the Canadian government had no significant US dollar debt then. Other borrowers may have some (provinces, private business) but I don’t remember ever hearing of the Canada/US exchange rate being a concern for debt repayment despite wild and substantial fluctuations over the years.
On that score I remember clearly during one of the times when the CAD was very low compared to the USD the inflation rate in Canada was hardly affected. To some extent it was rather surprising but then again for the basic needs for life Canada is more than self-sufficient in energy, self-sufficient in housing and mostly self-sufficient in food. A prominent economist during one bout of a very low CAD noted that many companies selling consumer items (his example was Armani suits!) will lower their profit margins to keep market share in a normally lucrative market so price increases caused by currency fluctuations tend to be very modest.
I would like to suggest that people watch the better mafia mob movies.
Trump is a mafia mobster boss, he believes he is the no1. and his mob is the no1.
However whilst mobsters had disagreements with other powerful mobs, they usually tried hard not to go to war, much preferring to spend their energies extracting the maximum from their ‘customers’.
So Trump will come to an accommodation with Xi and Putin over spheres of influence. He will probably actively trade with them to cover any shortfalls in US requirements.
Then he will concentrate on extracting as much value as possible from everyone else, everywhere.
If China and Russia are ‘bought off’, the Global Majority will be on their own and will be forced to deal with ‘the boss’ as per 1930’s movies.
It is of course just possible China and Russia don’t play ball, but honestly does anyone really believe that?