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The United States at 250: Steve Keen and Michael Hudson on Empire, Finance, and Crisis

Class Unity recently spoke with economists Steve Keen and Michael Hudson about the political and economic crisis surrounding the 250th anniversary of the United States. Their conversation ranges across the constitutional structure and party system of the United States, deindustrialization and financialization, and what they describe as the decline of American imperial power. They also assess the legacies of Alan Greenspan and Lindsey Graham, the influence of Wall Street and the military-industrial complex, and the political consequences of campaign finance. The final part of the discussion turns to Federal Reserve policy, the conflict with Iran, oil-price shocks, and the possibility that inflation will give way to debt deflation and a global depression. You can find more from Class Unity, Steve Keen, and Michael Hudson on their respective websites.

Class Unity: Hello, everyone, and welcome to another Class Unity event. Please remember to like, subscribe, and share this video, consider joining or making a donation at classunity.org, and make sure to let us know what you think in the comments. Today we are very happy to be joined by returning guests Michael Hudson, an economist and professor of economics at the University of Missouri–Kansas City, and Steve Keen, an economist and honorary professor at University College London. We’re going to jump right into the questions. There’s a lot to talk about with everything happening in the world today. First, regarding the recent 250th birthday of the United States, what are your thoughts, Steve and Michael, on where the country stands, where it’s coming from, and where it’s likely headed? What should we expect in the near and longer term, given the chaos that seems to be increasingly unfolding?

We recently spoke to Christian Parenti and Wolfgang Streeck, who suggested that what’s in store might be more of the same, but only worse, for a while to come. Do you think that’s right, or are changes in store? For instance, with the dollar or BRICS, is an inflection point coming? Michael?

Michael Hudson: With all of the discussion about the U.S. Constitution and how the country was formed, we can now see that the United States is a failed state. It failed because of the way in which the Constitution was created and put all the power in the hands of the Supreme Court, whose justices have been put up for sale. The court system and constitutional law have been privatized by having the Supreme Court justices elected by politicians whose campaigns are funded by the wealthiest classes—primarily the financial classes, the monopolies, and the real-estate sector, the FIRE sector. The political system has been turned into a pay-for-play system in which campaign contributors look around for politicians willing to represent their interests. Their interests essentially lie in deindustrializing the U.S. economy by privatizing and financializing it. There is no longer a concept of a mixed public-private economy, as there was during America’s takeoff in the nineteenth century, when the United States said, “We don’t want to have monopolies. We want to pass antitrust legislation.

We want the economy to be run basically as a democracy for the people.” But from the very beginning there was a two-party system: first the Whigs and Democrats, and then the Northern Republicans as opposed to the Southern, Solid South Democratic Party. At least in the 1850s, leading up to the Civil War, there was room for a new party. There were a number of parties. The Republican Party was a new party alongside the Whigs and the Democrats. But now there’s a uniparty state. The politicians of both parties are funded by the same group and class of campaign contributors, and they have worked through state laws in the United States to block any third party from developing. In the last election, the main third party was the Green Party. I was the political and economic adviser to Jill Stein, who was its candidate. We couldn’t even get onto the New York State ballot, so here in New York City I had to write in the name.

There’s a solid uniparty group that is essentially ruling and appointing Supreme Court justices who are able to interpret the Constitution in whatever way they want, just as the Dred Scott case before the Civil War justified slavery. You can justify everything. We now see that the reason this country was malstructured politically was that the Southern slave power wanted to insist on states’ rights to prevent any kind of federal oversight or federal power. They worried that, as the population of America grew in the North, it would lead to a growing anti-slavery, abolitionist policy, and they wanted to prevent that. The South also wanted to prevent any kind of national bank, such as Henry Clay wanted to introduce and Hamilton had wanted to introduce. They didn’t want banking to develop because that would finance industry, and industry would urbanize the country. The urban population would have to be fed by Western grain, and the Southern slave states wanted to feed their plantation slaves with low-priced grain from the Western states.

The population in the North was driven there because of the South’s opposition to protective tariffs, internal improvements, and the creation of a national bank such as Henry Clay had proposed in opposition to Andrew Jackson. So this 250th anniversary has become an opportunity to see just why the U.S. political system doesn’t work and why that crisis in the political system has led the economy not to work. The Supreme Court and most of Congress realize that you need some federal power over and above state power. The Supreme Court has largely been appointed by Republicans, especially by President Trump in his two administrations. They’ve given President Trump the ability to pursue policies that a different Supreme Court would have ruled unconstitutional. The United States needs a new constitution. Two hundred and fifty years is a long time to go without modernizing the Constitution, and we’re not in the agrarian economy—especially not the slave economy—that we were in before. So we have to depend on elected presidents like President Obama.

But both parties are essentially anti-immigrant, anti-Hispanic, anti-Black, anti-labor, and anti-industry. That’s how the United States has ended up. While U.S. foreign policy looks forward to breaking up Russia into its component sections, breaking up Iran into separate sections, and ultimately breaking up China into separate sections, other people are asking, “Is the United States going to break up?” In the 1970s, I worked with Alvin Toffler and Norman Mailer, who was running for mayor of New York and wanted New York City to split off from New York State. We were all wondering at that time: at what point are American states going to split apart simply in order to survive? The United States right now cannot survive on its own resources. It can survive only by extracting a free lunch from foreign countries, largely through the dollar standard, by running balance-of-payments and trade deficits without any foreseeable means of paying and having other countries somehow provide money for the United States. That’s called affluence, meaning a flowing in.

The United States is surviving in its broken form by obtaining a free lunch despite its foreign military spending, its foreign wars, and its self-serving, increasingly exploitative policies such as Trump’s tariff policy and his oil war. It is doing all of this because foreign countries have not sought to create an alternative world system of trade and payments—to de-dollarize. Once they de-dollarize, this is going to lead the United States to try to survive as if it were an eighteenth-century economy in a constitutionally unworkable political order.

Steve Keen: To me, this should be a point for celebration: 250 years. But 250 years is also the usual lifespan of empires, and I think what we’re seeing is the end of the American empire right now for a whole range of reasons. In some ways, of course, you can blame Trump for it, but I think Trump is basically the icing on a rotten cake. As Michael alluded to, the political structure of America in the first instance wasn’t designed for democracy and the voice of the people, which is how the Hollywood ideology of America presents it. It was designed to constrain the possibility of slave revolts. It was designed to make sure that power was held by the white men who, at the time the Constitution was formed, were the only ones allowed to vote. Americans eulogize their Constitution, but I think what they’re really thinking about is the Declaration of Independence, which is a very positive, humane document.

The actual Constitution is set up to constrain the possibility of the public taking power away from the oligarchs of the system, whether those were the slave owners and Northern industrialists of 250 years ago or the oligarchs of today. Trump has come along at the perfect time to end an empire. It’s like the Romans appointed Caligula rather than Caligula by birth. Fundamentally, you’ve got Caligula in control when the empire is collapsing and Attila the Hun at the doorway. I think it’s a huge embarrassment for the world. I expected quite a lot of pomp and ceremony in America. What do we get? A UFC fight on the lawn of the White House. It’s incredibly embarrassing. I think it should be a time for Americans to say: as much as we swear allegiance to the Constitution, the Constitution does not swear allegiance to us. The Constitution guarantees only, as George Galloway brilliantly put it, that you get a chance to say which cheek of the bum you’re going to answer to.

They both shit on you. But it’s destructive for the wealth of the oligarchs as well, and that’s what we’re seeing right now. The attempt to control the world’s oil resources, which is a major part of American foreign policy, has cracked up against the one nut it couldn’t crack, and that’s Iran. That is now, I think, accelerating the decline of the American empire.

Michael Hudson: I agree with that. The solution isn’t going to come from the United States because we’re sort of powerless. The reason Trump was elected the first time around was that his opponent, Hillary Clinton, was the most hated politician in the United States. It was an anti-vote. They voted for Biden because faith in Trump had utterly fallen and Biden wasn’t Trump. Now they’ve voted for Trump because Trump wasn’t Biden and Harris. All that Americans can do is throw the rascals out—vote for the opposite party, thinking there will be a change. What Trump did was basically what Boris Johnson and the leading British candidates did. They said, “We’re going to smash things up.” That’s why Britain, I think, left Europe. They saw: wait a minute, why does Britain want to be in Europe? Because of this international banking class in London, and that’s what has wrecked the whole economy. Thatcherism and Tony Blair wrecked it. Let’s pull the strings away from their financial power.

Well, that happened, and look where it has left Britain. America is probably going down exactly the same path. People wanted someone to smash things up. What Trump is doing is smashing up the rest of the world much more than the domestic economy. The war—the interruption of the oil trade in West Asia—is going to bring about a world depression by the end of this year. Without oil, you’re going to have industries closing down and unemployment. Who is going to solve the problem of America as a failed economy? Only foreign countries can provide an alternative, and nobody is really talking about that. Steve and I are talking about it before you guys, not on the front pages of the major media.

Class Unity: We definitely want to get to the conflicts in the Middle East. Michael, you mentioned Thatcher and Blair in the UK. I want to ask about two major U.S. political figures who recently passed away, namely Alan Greenspan and Lindsey Graham. For the benefit of our viewers, I’ll give a short background on them, and then we’ll get into the question. Greenspan was often called “the Maestro” for his stewardship of the 1990s boom and was closely associated with the Great Moderation. Yet several major disruptions occurred during his tenure, including the October 1987 stock-market crash, the rise and collapse of the dot-com bubble, and the economic fallout from the September 11 attacks. After leaving the Federal Reserve in 2006, he faced sharp criticism for keeping interest rates too low in the early 2000s and for his permissive approach to financial regulation—policies that critics argued helped create the conditions leading to the 2007–09 financial crisis. Is any of that right? How do you both think we should remember the legacy of Alan Greenspan?

Does his career outline a period of policy in America? Are its effects lasting, or is it still active? What can or should people learn from it? Give me just a moment; I’m going to cover Lindsey Graham very quickly. Lindsey Graham was one of the most fanatical advocates of the conflicts with Russia and Iran. How should we understand his activities and his absence? Will it make any difference that he is gone? Are there other tendencies or interests in the American establishment that might pull things in different directions? Both of those are fair game, but let’s start with Greenspan. Steve?

Steve Keen: Greenspan, I’d say, was the leading horseman of the “roving cavaliers of credit.” One of Marx’s most brilliant comments on capitalism was to warn about the danger of letting the financial sector take over the real economy. I’ll read this from, I think, the third volume of Capital. You can find it at Marxists.org, which has a brilliant database of classical writings. Marx says that a high rate of interest can indicate that a country is undermined by the roving cavaliers of credit, who pay high interest out of other people’s pockets while living grandly on anticipated profits. That is the nature of the financial sector. Marx was right to warn us not to let this mob take over production, because they know nothing about it and should have nothing to do with it. He adds that the credit system, centered on the national banks, large moneylenders, and usurers, gives this class of parasites enormous power: they can despoil industrial capitalists and interfere dangerously in production.

That is what Greenspan enabled after the 1987 stock-market crash, when the market fell 20 percent in one day. Rather than letting the speculators fail, he effectively said that the government would underwrite them. This became known as the Greenspan put. It was not the original cause of America’s domination by financial speculation, but it enabled that domination to continue. A realistic maestro who knew how to run an orchestra would have said, “That particular wing is sacked. You’re going to lose your money. We’re not going to underwrite irresponsible behavior by the financial sector.” Instead, Greenspan encouraged it. I see him as the person who encouraged America’s financialization and the resulting decline of its industrial power. Equally, with Graham—I don’t know from personal experience, but many people in Washington will tell you that he was a closet gay. I think his embarrassment about being gay meant that he wanted a sense of authority, so he became the military’s best friend.

Alongside the great power Greenspan gave the political-financial class, you had the military-industrial complex on steroids, courtesy of people like Graham. Dwight D. Eisenhower warned about that complex in his retirement speech as president. What we see is a political system beholden to financial interests, with those interests tied to the military. They want military incursions because, although those incursions may fail, they make a profit. That led to the most ridiculous failed venture in American history: the attempt to take on Iran. Iran was ready. It was like watching a 500-pound drunk idiot jump into the ring with Muhammad Ali and get the beating he deserved.

Michael Hudson: Two points, largely for the foreign audience here. Why was Lindsey Graham so powerful in the Senate? The heads of every Senate and House committee have to buy their positions from the party. The candidates who raise the most money can buy committee chairmanships, which give them power over which laws are passed or even introduced for a vote. The most profitable monopoly in the United States is the military-industrial complex. It gave money to Lindsey Graham because he was the military hawk, enabling him to reward his campaign contributors by following their policies. Congressmen and senators have various ways of ensuring that they receive lobbyists’ money. One major source, at the center of the last few weeks of this election, has been Israel. America gives enormous amounts of money to Israel, which sets aside a portion for lobbying and recycles those dollars into the campaigns of U.S. politicians supported by AIPAC. Lindsey Graham and his colleagues were recipients of this enormous circular flow from Congress to Israel.

Likewise, Congress’s allocation of money to the military-industrial complex was recycled by the arms makers into the campaigns of politicians representing their interests. This circular flow has privatized the political process. The Supreme Court’s Citizens United decision permitted politics to be put up to the highest bidder. Elections don’t matter. As Mark Twain said, if voting mattered, they wouldn’t let you do it. This is built into the U.S. political system. I want to return to Alan Greenspan. I met him and had dealings with him in 1965, when I was Chase Manhattan Bank’s balance-of-payments economist. Greenspan was known as a political hack, which is why so many people hired him. My job at Chase for a year was to study the balance of payments of the U.S. oil industry. In January 1965, President Johnson limited foreign investment by American firms to five percent overall. The oil industry said this was hurting it: every dollar it spent abroad was earned back for the U.S. balance of payments within eighteen months.

It was that profitable—or, I shouldn’t say “profit”; it yielded economic rents to us at their expense. I was hired to study all of this by Standard Oil of New Jersey and Socony, the Standard Oil Company of New York. Socony insisted on hiring Alan Greenspan. My boss at Chase, the head of the economics department, John Deaver, said, “Michael, the statistics you have were all submitted by the companies. They’re great, but I don’t trust Alan Greenspan. He’s such a little bastard. Can you find the mistakes?” It took me a few days to find where Greenspan had faked the figures, mainly in the depreciation statistics from Europe. My boss said, “We don’t want Greenspan to blame Chase. That would be bad publicity for us, and he’s a very vicious little guy. You have to go and tell him we can’t use his figures.” I went to Greenspan’s office at the other end of Wall Street and spoke, I think, with Lucille Woo, one of his two Chinese assistants.

I kept saying, “These statistics are not from U.S. oil companies. That is not the overall U.S. international balance.” She kept saying, “It’s all implicit.” I replied, “But it’s implicit in things that are irrelevant. We can’t use him on the study.” So I became known as the man who fired Alan Greenspan. I was 25 or 26 years old; nobody cared about me, but they would have cared if David Rockefeller had fired him. When Greenspan stepped down, the BBC asked me to come to its studio near the World Trade Center for an interview. The front of its website ran the phrase I had used: “After me, the deluge: Alan Greenspan,” from Michael Hudson. That was how I summarized what Greenspan had created by deregulating. He was a follower of Ayn Rand: get rid of government; everything should have a free ride. We don’t want government. Any way of making money is profitable and therefore a benefit to the economy.

Even if the money is made parasitically, there is supposedly no such thing as parasitism. Greenspan was part of that clique. Everybody was warning about the mortgage fraud that was going on. Edward Gramlich, one of the Fed governors, was trying to intervene. Greenspan’s position was: “People are making money. Crime is private enterprise. It has been privatized, and it is the most profitable area of the whole economy. Of course you don’t want to stifle it. That’s the economy; that’s the profit center.” Well, that is what the American economy has turned into.

Steve Keen: I think this is a good general point. There is so much hagiography about conventional people who reach positions of power, as if they were uniquely gifted individuals. Read what they actually write: they’re uniquely hampered individuals. Greenspan was just a mouthpiece for Ayn Rand, and apparently she didn’t actually like him, which is quite funny. Ben Bernanke received the same hagiography. He had the hide to title his book about the financial crisis The Courage to Act, even though he had again encouraged the stock-market and subprime bubbles after Greenspan gave way. When you read what Bernanke writes, he’s a juvenile. It is low-grade neoclassical thought. But because he is in a position of power, they have to write about him as though he were some greatly gifted individual. They are all pretty low-grade morons, frankly, following a moronic theory: neoclassical economics. Anybody who falls for it is an idiot. They are the front representatives. It would all work well if the theory were right—but look what happened. The theory is wrong.

Michael Hudson: Well, Steve, don’t knock the bubble. That is what has been supporting the dollar and the whole economy. After the United States went off gold, it could pump dollars into the world economy through military spending, deindustrialize, and run a trade deficit. Those dollars ended up in the hands of foreign central banks, which recycled them by treating them as the new form of monetary reserves. In the last few years, the great support for the U.S. balance of payments has been private inflows into U.S. stock and bond markets. The bubble has had two effects. All the growth in America’s wealth has taken the form of rising stock, bond, and real-estate prices, and almost all of it has accrued to the wealthiest ten percent—mainly the top one percent. The other 99 percent have had no increase at all in their wealth, while the bottom 40 percent run deeper and deeper into net debt every year. This money is coming in while polarizing the U.S. economy.

The United States has become the target of the Japanese carry trade, for instance: investors in countries with low interest rates borrow cheaply and speculate in U.S. stock and bond markets. The zero-interest-rate policy created the largest bond-market boom in American history. Right now, I don’t know any major investor among the people I talk to who thinks they can make any more money in stocks and bonds. They are just trying to preserve what they have gained since 2009, when the Obama bubble began. Yet foreigners, retail investors, and pension funds have all been putting money into this. Some economists call this the confidence fairy. But as Steve and I have been saying, this bubble cannot be sustained. By the end of this year, when there is a world depression from the oil war, you are going to see breaks in the financial chain of payments, defaults, foreclosures, and a huge transfer of property from debtors to creditors amid a worldwide breakdown.

If you are very rich and have enough billions of dollars to be a player, it is much easier to get wealthy very quickly in a situation of economic collapse than through economic growth.

Class Unity: We have one question about the Federal Reserve and Kevin Warsh, and we would like to use it to segue into the conflict in the Middle East because those topics are related. It seems that Trump chose Warsh to replace Jerome Powell as Federal Reserve chair in hopes of a more dovish monetary policy. Now it seems that the Federal Reserve is holding steady and even entertaining rate cuts amid inflation caused by the conflict in Iran. What do you make of this? Did we have a real chance of a responsible, dovish rate policy, or was there never any hope to begin with? Obviously, a recession would be very bad for the United States, especially considering the military conflicts in which it is engaged. What is driving Federal Reserve policy, and do you see any possibility of a change soon?

Steve Keen: Partly, the policy is driven by neoclassical theory. You might put somebody different at the head of the Federal Reserve, but the people conducting its so-called economic policy and research do not change. They believe they can control the economy by varying interest rates. They think that, when the inflation rate rises, they have to raise the interest rate twice as fast, thereby stabilizing long-term consumption, which is what they think they are controlling. In fact, this just makes it more expensive for new debtors to finance their debt. It does not have much effect on the American economy because so many mortgages are long-term: their interest rate does not vary over the life of the loan. What Warsh is fighting against is an entire advisory group that says the economy can be controlled by raising interest rates, which will reduce inflation. He cannot break out of that trap. Warsh may be the chairman, but he is not the dictator, so it has to be a majority vote, I presume.

If the others saw the inflation rate rising, they would consult their neoclassical advisers, who would tell them to raise interest rates. That is going to happen, and Trump cannot escape the trap because he does not understand neoclassical economics. It is neoclassical theory about how the economy operates that really determines the Federal Reserve’s interest-rate policy, and that theory is delusional. The idea that interest rates can control inflation comes from neoclassical theory; it is not something you find when you look at the actual economy. Interest rates affect the economy only if they are made crushingly high, as Paul Volcker did, causing a recession. Warsh is not going to do that, but if inflation rises he is likely to raise rates. I look forward to Trump dumping on yet another Federal Reserve chair whom he appointed.

Michael Hudson: Steve is absolutely right. Here is what is so ironic: the whole idea of raising interest rates rests on the pretense that doing so is going to cause a boom by slowing investment. Neoclassical economics pretends that the Federal Reserve lends money to banks, which then lend it to build factories, buy machinery, and hire labor. That is not what banks do. Banks lend against collateral—against assets. They lend money to buy real estate, stocks, and bonds, not to employ labor. The inflation they create is asset-price inflation, not consumer-price inflation. To the extent that higher rates slow the economy, as Paul Volcker’s policy did under Carter in 1980, they at least slow inflation. But one of the district Federal Reserve banks said that, of the 3.2 percent U.S. consumer-price inflation this year, one percentage point results from Trump’s tariffs. Much of the rest will come from the explosion in oil prices and the prices of commodities made from oil, along with electricity and fertilizer.

Food prices will also rise because of global bad weather and fertilizer cutbacks. Interest rates have no ability to deal with the real economy; they deal with its financial wrapping. Raising interest rates while companies are already struggling to pay their labor forces and their bills, and while oil, chemical, and other prices are rising, will exacerbate the crash and make it the worst since 1929. As in 1929, it will spread across the whole world economy. At least in 1931, the world realized that it had to write down the inter-Allied debts and the reparations debt; there was a moratorium. I see a coming write-down of all sorts of debt, including official government debts that cannot be paid. But there will be a huge financial crisis spreading from the United States to foreign countries. What are other countries going to do about it?

Steve Keen: This is a point Michael and I discussed some time ago. Everybody expects inflation, and we expect it in the short term as well. But in the longer term—perhaps a year away, not ten years away—we can see a deflationary surge coming out of this. The destruction being done to the planet’s productive capabilities by the closure of the Strait of Hormuz and by global warming will mean that people cannot produce and sell the goods and services needed to service their debts. Initially, prices will rise because oil and inputs such as sulfuric acid and helium will become more expensive. That will be the inflationary surge. But companies relying on those inputs will then be unable to produce as much output or service their debts. They are likely to enter a price-deflationary period, cutting prices to draw customers through their doors rather than those of their rivals. With everybody doing it, the result could be deflation and certainly a private-debt crisis.

We therefore expect inflation followed by deflation, rather like what happened at the beginning of the 1930s. As Irving Fisher explained, if we had followed his economics, we would not be in the hell we are in right now. When people generally try to liquidate because of cash-flow problems, they cut their prices in an attempt to generate more revenue and pay down debt. But cutting prices increases the debt burden. As Fisher said, “The more the debtors pay, the more they owe.” We think we are on the verge of that crisis as well.

Michael Hudson: This is what is so important about what Steve is saying. Most people are looking at price increases—price inflation—but when Steve talks about deflation, he means deflation of the economy. Workers and businesses have to spend more on energy to light and heat their homes and businesses, buy electricity, drive their cars, and have trucks deliver crops and other products. If they have to pay for all of this, they have less money to buy the goods and services that are produced. America produces fewer and fewer goods, but the domestic market is going to shrink. Deflation of the real economy—the industrial economy of production and consumption—is a byproduct of the financial sector’s inflation. That inflation has pushed up wealth in the form of creditor claims on an economy that is increasingly in debt. All the wealth made by the top ten percent takes the form of increasing debt owed by industry, labor, and the other 90 percent of the economy. That is what Steve means when he talks about deflation.

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