NIMA ALKHORSHID: Hi, everybody. Today is Thursday, February 27, 2025 and our friends Richard Wolff and Michael Hudson are back with us. Welcome back.

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RICHARD WOLFF: Thank you. Glad to be here.

NIMA ALKHORSHID: Let’s get started with what’s going on in Germany. People wanted some sort of change in terms of domestic and foreign policies of Germany. They ended up with the same sort of policies. New names got the same sort of policies. How did you find the changes in Germany? Let’s get started with Richard.

RICHARD WOLFF: All right. Here’s the things that struck me, that the three parties that represent in my mind, the conventional German political establishment, that is the conservatives, which is an alliance between basically Northern Germany and Southern Germany, the Christian Democratic Union and the Christian Socialist Union. All those words have lost whatever meaning they once had anyway, but they are the conservatives more or less. If you want to think from an American perspective, you might call them the Republican Party or even the Republican and centrist Democratic collection of people who have been used to for a long time exchanging the role of who’s the president, who’s the second in command. But it is musical chairs and most people, including most Germans, long ago lost interest. They were the government under Mr. Schultz, who’s now gone. But as you rightly suggest, it’s the same people, it’s the same program, the same parties, slightly different, and I mean slightly different faces. And the interesting thing about them is if you put them together, the Christian Democratic Union, the Christian Socialist Union, the Social Democrats, and the Greens, we need to remind people that in Germany the Greens have none of the left-wing aroma that Greens in other parts of the world cultivate and want to have. The German Greens split years ago, and the people who have been green ever since are very much eager to be parts of the government run by the conservatives and the social Democrats. So they really belong together.

And the interesting thing is over the last four or five years since the last federal election in Germany, all three of those parties lost dramatically. Huge portions of their voting base abandoned them. That’s what we just learned from last Sunday’s election.

Who picked up? Basically, and this is so important because it’s so similar to what is happening in other Western capitalist countries. The voters who left the old coalition were not enough to bump them from power. That’s why we’re seeing the same old, same old again with a couple of new faces. Frederick Mertz and instead of Olaf Scholz. Okay, but not much difference when it comes to it. So they still had enough, roughly half the vote in Germany, roughly, to be a government. Okay, so that’s why we’re going to see, in all likelihood, a government of the Christian Democrats, the Socialists, and the Greens, which is what we had before. But they all lost votes, the Greens particularly, but all of them. And those votes either went to the right with the Alternative für Deutschland, English translation, Alternative for Germany, which is a right-wing party that is remarkable in three ways. As a political program, other than getting, being hostile towards immigrants, they don’t really offer all that much. Number two, they have inherited the Nazi left, whatever’s left of Nazism in Germany finds its way into that party, or at least a large part of it does. And the third interesting thing about that party is that it is overwhelmingly based in the eastern part of Germany. In other words, in that part of Germany, that used to be a separate country, East Germany. And that was only unified a relatively short time ago. Those people were all involved, basically, in something called the Socialist Unity Party, which was the old Communist Party of eastern Germany. And that’s gone, or largely gone. And these people have felt in the east that they were very much misled about the unification of Germany. Very important to understand. They were led to believe that by unifying, East Germany would enjoy the standards of living and all the rest of it, that West Germany had reached. But that we all have to remember, West Germany was given enormous financial support, because it was crucial to the West, in the aftermath of World War II, to isolate Western Europe from the infection of Socialism and Communism. I want to remind people, after World War II, the first government of General Charles de Gaulle in France had several members of the Communist Party in the Cabinet of France. That’s how powerful they were. The backbone of the resistance to the Nazis in places like France, and Italy, and elsewhere, were communists and socialists. And so they emerged from World War II with a level of popular support that frightened people in the West. Just like the fact that Russia was crucial to winning World War II frightened people in the West. So they pumped a lot of money into Western Germany, giving it the ability to make a politics that said, “Hey, you guys in Eastern Germany, you may have communism and socialism and, you know, guaranteed childcare and all the rest of it, but we have a higher standard of living.” Which they did. I mean, they did. And the Easterners then believed, after decades of propaganda, that if they unified with the West, they would become, like West Germany, rich, comfortable, at least relative to other working classes and relative to themselves.

If I had time, I’d talk to you about East Germany. It had a very hard time after World War II, because it was part of the Eastern European Soviet bloc. And yet, inside Russia, there was understandable hostility towards Germany, which had subjected the Russians to an unspeakable destruction during World War II. People should know more Germans died, excuse me, more Russians died than any other nationality. That’s how bad that war was. So helping East Germany was not a high priority inside the Soviet Union. And it showed.

Anyway, they made a unification, as I think many people will remember. And the Easterners expected to have the jobs, and the job security, and the incomes, and they never got it. Because for the West, all that Eastern Europe, Eastern Germany represented, was cheap labor. Those people had been getting much lower wages. They were used to living in that way, with low individual wages, partly because they got a lot of collective consumption. The socialist government there provided education and health care and subsidized transport and all of that. And so these Eastern folks were used to low individual wages. And so the capitalists of the West said, “Okay, great. We’ll either put a factory in East Germany, paying low wages, or you can come here and we’ll pay you low wages if you migrate into the West.”

Long story short, you deeply betrayed your fellow Germans. Remember, the East Germans speak the same language, have the same ancient culture, etc. Americans don’t know, but Berlin, the capital, was in East Germany. It used to be the capital divided, but Westerners had to drive through East Germany to get to Berlin because of where it’s located. All right. So this anger and this bitterness turned to the political establishment in Germany naively, thinking that they could appeal either to the Christian Democrats or to the socialists to get what they had been led to expect they would get. But they couldn’t get it. Neither the socialists nor the Christians were prepared to do anything like what would have had to be done to deliver on the promise. And so…

NIMA ALKHORSHID: Yeah, we’ve lost Richard. Michael.

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NIMA ALKHORSHID: Hi everybody, today is Thursday, February 20, 2025, and our friends Richard Wolff and Michael Hudson are back with us. Welcome back.

RICHARD WOLFF: Glad to be here.

NIMA ALKHORSHID: Let’s get started, Michael, with your recent article about the price of gold and how the United States is trying to manage that. What’s your point in that article?

MICHAEL HUDSON: Well, the point is that the demand for gold has been running way ahead of supply for the last 15 years, and yet the prices remained remarkably quiet. There was a range of gold from $1,400 to $1,600 an ounce maybe 10 years ago, and then there was another range from $1,800 to $2,000 an ounce until just a year or two ago, and all of a sudden, finally, the prices began to rise. There are notes in the newspapers about England bullion dealers sending enormous plane loads of gold to the United States. So, needless to say, how do you explain what’s happening?

So, just a half hour before this show began, I got a phone call from one of the big cable networks wanting me to go on their show and to explain why gold today hit a new price. And I’m talking to you, not them. So, here’s what the situation is.

The United States wants to keep the dollar as the main international reserve. And the one thing that frightened American policymakers was that other countries would begin to de-dollarize by increasing the proportion of gold in their foreign exchange reserves. China, way up. Russia, way up.

About six years ago, Germany said, “You know that gold that we moved to you in the 1950s to keep in the Federal Reserve’s safety? Could you send that physical gold back to us? You know, we’re noticing that you’re grabbing the gold supplies of Venezuelan countries you don’t like. We’d just like to have the gold here.” And the United States said, “Well, you know, we really can’t send it right now. How about in six years?” Which is right about now. They still haven’t sent the gold.

And the question is, is there any gold left in Fort Knox? And why not? How can it be that the price of gold has been held down by the U.S. Treasury manipulating the price?

And it turns out that we can all now see that the price of gold is not like the price of copper or wheat. It’s not based on supply and demand. It’s all based on the Treasury manipulating the price of gold. And it does it in two ways. One is a very technical way that I won’t go in. It sells gold short. In other words, it sells. Well, the price may be $2,900 now, but we’ll sell it to you in three months’ time for $2,800 an ounce. Well, that means that nobody’s going to buy more gold now if you know you can buy it at $2,800 an ounce in three months. So, they keep holding the price down.

And the other way, for the last 15 or 20 years, the United States Treasury, the Bank of England, and other central banks have made money leasing their gold to gold bullion dealers. In other words, it’s like Avis leasing a car to somebody to drive. And the U.S. will lease to a bullion dealers for a given price. Yes, we’ll lease you this gold. Here’s the current price of gold. You’ll pay us a premium for renting this gold. And then the bullion dealers will meet the supply of gold from hoarders, whether they’re jewelry makers, whether they’re investors, whether they’re hedge funds.

And this has worked pretty much ever since the United States went off gold in 1971. But what’s happened is that this making money by leasing the gold to other countries all of a sudden means that there’s no gold here. The United States has a claim on bullion dealers to say, well, send us back the gold that we’ve leased to you. Now, it’s like Avis saying, you’ve rented our car, you know, for two weeks. Now, give us back the car.

But the bullion dealers have sold most of the gold. And so, they’ll say, well, we’ll give you the money for the gold, but we don’t have the gold. So, it looks like all of a sudden, the United States, I won’t say a paper tiger, what do you call it, a gold lamé tiger? It seems that the United States doesn’t have the gold in its possession that it’s reported.

And so, a few days ago, Mr. Musk said, we’ve been trying to find out to do an audit to see how much gold is there in the Federal Reserve in New York City that acts to hold foreign gold holdings in Fort Knox.

Well, you have some of the monetary conservatives in Congress, like Senator Paul saying, I want to go to Fort Knox. And look, let me see whether there’s anything in the vaults. They wouldn’t let him in. And he said, look, I’m a senator. I’m a Congress. You know, you have to let Congress. We have to get in. The answer was, this is national security. Congress can’t know about how much gold we have or have not got there.

So now, you have Mr. Musk saying, we’re going to do an audit of the Fed, and we’re going to do an audit of the Federal Reserve, Fort Knox. You’ve got to let us in. And the United States panicked, and it’s been, the speculation is now, the gold price is going up because the United States can no longer have the gold to keep it down. And in fact, the United States is trying to buy it all back to put back in Fort Knox so that people will think, gee, it’s not— the U.S. does have the gold after all.

So all of a sudden, you’re seeing the links to which the American government went to say, there is no alternative to the U.S. dollar. Don’t buy gold. It’s not going up. You can make much more money investing in treasury securities where we pay interest. Gold doesn’t pay an interest. All of a sudden, the motivation for buying gold that has existed ever since 1971 has sort of broken out.

And everyone says, okay, now as demand for gold is going up, that means the price of gold is going to go up. When demand exceeds supply, that’s what’s happened. And as gold goes up, other countries, not only Russia and China, but all over Europe, all over the world are going to say, we can make much more money holding gold in our reserves than holding U.S. treasury bills or securities in our reserves. So let’s sell our U.S. treasury claims and buy gold.

Well, if that happens, you can imagine the de-dollarization of the world. And there goes the whole linchpin of American financial control of the world economy. There goes the central role of the U.S. dollar. All of a sudden, it’s given up not only to gold, but it’s been giving it up to foreign currencies, the countries trading in each other’s currency, like China and Russia trading in their own domestic currencies for their imports and exports.

So you’re having a whole unraveling of the fiction that somehow there is no alternative to the treasury securities that foreign governments hold in their foreign exchange reserves that is a better buy than U.S. treasuries. All of a sudden, yes, there is a better buy. It’s gold. And so the gold bugs are all jumping on this.

And we’re all waiting to see whether Mr. Musk and his investigatory team gets to go into Fort Knox and the Fed and say, is there really gold there? What happened to it? And you mean that there hasn’t been a free market in gold all these years? Can you explain to us what’s behind U.S. policy?

And essentially, it’ll be the dynamic of America having the exorbitant privilege of being able to pay for all of its military spending abroad, its Cold War, its deindustrialization, simply by printing IOUs that end up in foreign central banks. And finally, they have an alternative just to say, we’re going to buy more and more IOUs. When, if you do the basic accounting, the United States owes foreign governments so much money, while it’s running a balance of payments deficit, mainly because of the war, that there’s no way it can ever pay the other countries the money that it owes them in dollars for the dollars they hold in their reserves.

Why has the price of gold been increasing so fast, breaking records? Economist Michael Hudson explains the politics of the precious metal, and the dynamics of the US dollar system.

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Transcript

(Introduction)

BEN NORTON: The price of gold has been skyrocketing. Since 2018, the price of gold has nearly tripled. This has caused a big debate around the world about why this is happening. There are, of course, several different factors.

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One of them is that central banks around the world have been buying more and more gold, especially with the threat of sanctions from the United States. One-third of all countries on Earth are under US sanctions, including 60% of low-income countries.

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The war in Ukraine has only accelerated this, as the US and the EU seized $300 billion and euros worth of assets held by Russia’s central bank. This has scared many other countries’ central banks, which fear that they could be next to have their assets seized by the West.

Gold is being seen as an alternative to dollar- or euro-denominated assets.

But it’s not just central banks. There’s also a lot of private demand, especially as there was a lot of inflation coming out of the Covid pandemic.

What’s interesting is that, typically, gold is seen as an inflation hedge. And when inflation increases, the price of gold tends to increase. But in the past two years, inflation has come down, yet the price of gold has continued to skyrocket.

So why is this happening?

Well, today I had the privilege of being joined by the award-winning economist Michael Hudson, and he explained why the price of gold continues to rise, and what the implications could be for the entire global economy, and the politics of gold — because, as Michael often stresses, you cannot separate economics from politics.

So here are a few highlights of Michael Hudson, and then we’ll go straight to the interview.

(Highlights)

MICHAEL HUDSON: Demand for gold, as I said, has been far outstripping the supply for many, many years now. And as we’re taught in Economics 101 textbooks, when demand outstrip supply, prices go up.

But that hasn’t been happening with the gold price until just the last few months. And the question is, why hasn’t it happened?

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Well, the obvious answer is that the gold market isn’t like regular commodity markets.

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So the United States has sought to keep gold prices down ever since it was revalued in 1971… The aim of this was political: to keep the world viewing the US dollar, meaning essentially US Treasury securities, as the most secure form of their international reserves.

It’s secure in the sense that, unlike other countries, the United States can simply print the dollars. It can’t go bankrupt.

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People like to say gold is an inflation hedge. But you could say eggs are an inflation hedge, or pork is an inflation hedge.

The point is, the real problem is the US balance of payments deficit pumping dollars into the world.

You’ll pay dollars to an exporter, from China or Germany — when there was still a German industry — and they turn the dollars over to their central bank, and the central bank would then say, “What are we going to do with these dollars? If we don’t send them back to the United States, our currency is going to go up against the dollar, and that is going to make our exports less competitive. So we have to keep our currency, our exchange rate, down; and we do that by buying Treasury securities”.

It has always been political. And the newspapers don’t want to talk about politics, because if they talked about politics, all of a sudden people would realize the Western political and economic system cannot last in the way that it’s structured now.

When you talk about politics, you realize the game is over for the West.

(Full interview)

BEN NORTON: Hi, Michael. It’s always a real pleasure having you. The last time we had a discussion, we analyzed the effects of Donald Trump’s tariffs, or his threat of tariffs. And you warned that it could cause a global financial crisis, as countries won’t be able to get the dollars they need to pay off their dollar-denominated debt.

After we had that conversation, you raised some other points about the gold market that you wanted to talk about, and I thought there would be a great separate episode.

So why do you think we’ve seen this massive shift, the near tripling of the price of gold in the past seven years?

MICHAEL HUDSON: Well, we’ve been talking for many years now about how the international financial system works, and central bank reserves, and de-dollarization, and the split of the BRICS away from the West.

And that’s what my book Super Imperialism was about, how America was driven off the gold standard because of the balance of payments drain from the Vietnam War and for world military spending, up to 1971. The entire U.S. balance of payments deficit from the Korean War in 1950, all the way through the ‘50s, the ‘60s, and into the ‘70s was military spending.

The result was that the United States had, every month, to sell the accumulation of dollars that ended up in France, Germany, and other countries. The dollars spent in Vietnam that were exchanged for local currencies ended up in French banks, because Southeast Asia was a part of the French empire; and the French banks, sent these dollars to Paris, and General [Charles] de Gaulle would then cash in the dollars [for gold] every week.

Until 1971, every printed dollar — your dollar bills in your pocket — had to be backed, by law, 25% by gold. So we were watching the American gold supply go down, down, down to the gold cover.

Every week, on Friday morning, when the Federal Reserve gold report would come out on Wall Street in the mid ‘60s, we were all saying, “When is the breaking point going to come?”

Well, it came in August 1971. At that time, the US government thought, “This is terrible. We have controlled the whole world financial system ever since World War One, by holding gold, and that was what other countries used to have their monetary reserves. We have controlled other countries ability to run budget deficits, to fund their own economy with gold; now we don’t have it anymore”. And there was a lot of hand-wringing.

I wrote my book Super Imperialism, to say that this is not going to interfere with the American empire, because if countries, central banks, governments can’t buy gold, they have only one big alternative at that time, and that was to buy dollars.

And how do they buy dollars? They buy US Treasury bonds, Treasury notes, short-term Treasury securities. They put their money and hold it in the form of US debt.

As they got more and more dollars, they spent more and more money buying US debt. And that became an increasing way of how the United States funded its own budget deficits.

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Donald Trump’s tariffs could destabilize the global economy, warns economist Michael Hudson. US protectionist policies could cause financial crises, as many currencies depreciate and countries can’t earn the dollars needed to pay their foreign debts.

Transcript

(Introduction)

BEN NORTON: Donald Trump is threatening to impose tariffs on countries all around the world, including the top three trading partners of the United States: Canada, Mexico, and China.

DONALD TRUMP: The word “tariff” is the most beautiful word in the dictionary — more beautiful than “love”, more beautiful than “respect”. No, less beautiful than “religion”, no. Right? I don’t want to get into that argument. But the word “tariff” is the most beautiful word in the dictionary, remember that. It’s going to make our country, it’s going to make our country rich.

BEN NORTON: Now, Trump says he’s doing this because he wants to reduce the trade deficit that the US has with the rest of the world.

However, there’s a major contradiction in Donald Trump’s economic policy, because he also wants to maintain the US dollar as the global reserve currency.

And Trump has threatened other countries, especially countries in BRICS, that are trying to de-dollarize. Trump has said that if countries de-dollarize, he will put 100% tariffs on them.

DONALD TRUMP: We will keep the US dollar as the world’s reserve currency. And it is currently under major siege. Many countries are leaving the dollar.

They’re not going to leave the dollar with me. I’ll say, “You leave the dollar, you’re not doing business with the United States, because we’re going to put 100% tariff on your goods”.

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I’m very much a traditionalist. I like staying with the dollar. You know that from when I was there. Make the dollar the choice. I hate when countries go off the dollar. I would not allow countries to go off the dollar.

BEN NORTON: So what Trump’s trying to do is have his cake and eat it too, because this is a contradictory policy. Trump wants to reduce the US trade deficit, but he also wants to maintain the US dollar as the global reserve currency.

The problem is that if Trump wants other countries to continue using the US dollar in international trade and finance, the US has to run a deficit, so other countries can get access to those dollars. If Trump wants to use tariffs to reduce the US trade deficit, it means that other countries will not be able to get the dollars that they need in order to use the dollar in international trade and finance.

So these very contradictory policies that Trump is trying to maintain could have severe repercussions on the global economy. And today, I had the pleasure of speaking with the award-winning economist Michael Hudson, who has warned that if Trump imposes high tariffs on countries like, for instance, Canada and Mexico, their currencies will fall significantly against the US dollar, which will mean that they will not be able to pay off the debt that these countries have denominated in US dollars.

This could cause a global debt crisis, as countries around the world can’t get the dollars they need to pay off their debts.

Here are a few highlights from my discussion with the economist Michael Hudson. And after I will go straight to the interview.

MICHAEL HUDSON: To Trump, a win-win is a loss, because a win-win means some other country also wins, not only you, the United States. And if some other country also wins, that means the United States has not grabbed everything there is to grab, and Trump wants to grab everything that is available, the entire economic surplus.

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Here, again, you have one of the features that makes the United States an exceptional country. And Trump is making use of that exceptional characteristic of the United States.

The United States can do what no other country does. It can it can threaten to hurt other countries if they don’t do what the United States wants. It can bomb them. It can engage in regime change, through the National Endowment for Democracy Democracy and USAID.

It can hurt other countries. Other countries don’t have a foreign policy anything like that.

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What Trump realizes is normally you don’t need military force to subjugate and colonize another economy. You can use financial warfare, and you can use trade warfare, and that’s “peaceful”.

You don’t need, to mobilize American troops to invade a country. Vietnam showed you can’t do that anymore.

You can simply use trade and financial sanctions. That’s what he’s trying to do.

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That’s America’s strong point. It’s not that it’s going to use the hydrogen bomb. It can wreck world trade, wreck world finance, and try to force the kind of economic relationship that Trump and the deep state wants.

And Trump has made it clear that America has to be the winner in any kind of trade agreement that it makes with any other country.

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If American companies are unable to export to China, then their profits will be down, and they will lack the money to engage in the research and development they need to keep up with the technology that the rest of the world is doing.

And so the result is that Trump’s policy is deliciously self-defeating for US policy. It will mean inflation. It won’t mean more industrialization.

(Full interview)

BEN NORTON: Michael, it’s a real pleasure having you today. Thanks for joining us.

I wanted to ask you about an article that you recently published warning about the impact that Trump’s tariffs could have on the global economy.

The basic point you make is that the US designed the global financial system in a way in which the US dollar is at the center, and other countries need to get access to dollars to pay off their dollar-denominated debt, and to pay for imports.

Yet, in order for this system to work, the US has to run a deficit with the rest of the world, a current account deficit, so other countries can get those dollars.

But Trump wants to disrupt this. He says he wants to tariff other countries to reduce the US trade deficit, which means that other countries won’t be able to get the dollars they need to pay off their debt and to pay for imports.

Now, this could be good news, if you actually wanted to end the US dollar’s role as the global reserve currency. But then Trump also is threatening countries that de-dollarize, threatening 100% tariffs on BRICS countries.

As you put it in your article, he has two completely contradictory ideas in his head.

At the same time, you warn that this could cause a financial crisis. So can you explain your argument and why you’re concerned?

MICHAEL HUDSON: Well, people usually think of the dollar as being used for international trade, but the vast use of dollars is on capital account, for financial transactions. And the great majority of international debts, owned by governments to other governments and to bondholders, is denominated in US dollars. That’s quite different from using the dollars.

By denominating them in dollars, that means that you have to use your domestic currency to buy dollars. And if the dollar goes up in price relative to other currencies, if it appreciates, then you use much more of your domestic currency to spend. And that requires governments to essentially cut back their spending on [things] other than debt service.

For instance, the Canadian dollar is gone way down against the US dollar. So Canadians have to spend much more money in their currency to pay their dollar debts.

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 Lehen tplaying 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 51^st state.

The implicit moral foundations of international economic order