Game Theory and Clinton’s Lesson for The Left

In October of 2013, Hillary Clinton gave an interesting talk to Goldman Sachs investors on the global political situation. This talk has since come out in the recent Wikileaks publication — the so-called Podesta emails. Very little so far has been written on that talk, but never to be one to let a capitalist political crisis go to waste, I thought it might be interesting to see what Clinton said in those talks.

I think the reason the talk, although widely anticipated, has received less attention than expected is that people may have been expecting some sort of gotcha moment, where Clinton revealed her secret ties to the illuminati or something. It turns out the talk was mostly what we might think of as a pre-campaign town hall with an exclusive group of finance capitalists; filled with the sort of self-promoting one would expect from any presidential hopeful.

The talk, however, is not simply boilerplate by a person putting together a run for the presidency. Clinton is discussing a recent government shutdown provoked by Ted Cruz in a failed attempt to get rid of Obamacare. She shows why this attempt might have failed and why Cruz overplayed his hand in his own bid to become president. As such, it contains some lessons for radicals who still hold out hope for a political path to the end of capitalism.

If Clinton is correct the Cruz shutdown threatened the most important advantage the US has enjoyed since 1971 and the collapse of Bretton Woods: the world reserve currency status of the dollar.

According to Clinton,“there is a hard core of extremist politicians who have views about decisions as monumental as shutting down our government and defaulting on our debt”. The extremists, led by Cruz, attempted to kill Obamacare, “by holding hostage the entire rest of the government and putting the full faith in credit of the United States at risk.” Says Clinton, these are people “who either don’t know or don’t care about the importance of our being in reserve currency”.

The background story

Basically, Cruz and his followers thought they could take the dollar hostage and force Washington to concede to their demands. Although a only a minority, (albeit a powerful minority), in the GOP, it appears they believed they could accomplish their aims through a simple parliamentary maneuver.

The stupidity of this action is demonstrated by the fact that the reserve currency status of the dollar implies the US faces no real budget constraint and could easily fund any social program. The action amounted to a married couple threatening each other to quit their respective jobs simply because they couldn’t agree on their weekly grocery list.

To put this in perspective, Cruz and his followers were crippling the mechanism that financed the entire national security state in order to eliminate an insignificant program that everyone knew couldn’t last in its present form. Moreover Cruz and his followers come from regions of the country that are precisely the most dependent on military spending, and their political base is among voters who overwhelmingly support military spending.

It was as if they were prefiguring the SYRIZA strategy of putting a gun to their own head and daring everyone to let them pull the trigger. Anyone with an ounce of sense could have seen the very people who are most dependent on fascist state debt — the sectors of the economy most dependent on national security spending — were least likely to actually threaten it credibly.

Thus, as we all know, the gambit failed and Cruz emerged as the most hated man in Congress.

Crossing a line

But even in failure Cruz crossed a line that could not be undone: he exposed the vulnerability of the reserve currency to its singular Achilles Heel: a domestic political crisis.

As a general rule, there is no limit to the quantity of fictitious debt instruments (treasuries) the US can issue so long as there is always a mass of excess capital within the world market that cannot find a place in productive employment. Thus the real limits to the debt accumulated by Washington are determined, in first place, by the mass of capital that cannot, under any circumstances find productive employment, not some arbitrary and imaginary measure like the debt to GDP ratio.

But why would global capital choose to invest in US treasuries versus, say, Brazil or Mexico bonds? And why would they accept a lower return on US bonds than on Indian or Indonesian bonds?

The reason is two-fold: first, the US dollar is essentially treated as if it were money anywhere on the planet. Since the end of the gold standard, it is the closest thing we have to a liquid universal equivalent within the world market. Global capital knows US dollars can be freely exchange for any other currency or commodity in the world, making it possible for capital to move almost friction-less from one currency or commodity form to another.

Second, the stability of the US political system is virtually unquestioned precisely because the US materially benefits directly from the dollar reserve system. Global capital knows there is next to zero financial risk the US would ever default on its obligations.

The two reasons also reinforce one another: because the US dollar plays the role of universal equivalent, within certain limits dollars can, if necessary, be printed to meet any obligation the US incurs. And because it can be printed to meet US obligations with virtually no limit, it is the most liquid universal equivalent in the world. Above all, what gives the dollar its attractiveness is that it can be depreciated like no other currency in the world without running a real risk society will lose faith in it, because, as Marx put it, the ‘inner sphere of circulation’ of the dollar is coterminous with the world market as a whole and is not simply confined to the territory of the United States.

A currency whose capacity for depreciation is the basis of its attractiveness may seem like a contradiction but when have you ever known a capitalist who turns down more money? By depreciating its currency without loss of confidence in it as means of exchange, the US is also able to inflate the prices paid for commodities — which, for capitalists, is always a good (at least  so long as inflation is kept within reasonable and proper limits) because it means capital faces no pricing pressure.

Given this fact (okay, assertion), Cruz essentially was playing with forces neither he nor his followers apparently comprehended. The shutdown not only called the stability of the US political system into question — particularly since this was the second instance of a government shutdown in two years — the vulnerability was highlighted by the fact it prevented President Obama from attending a critical international meeting. The absence of Obama from that meeting, says Clinton, further highlighted the purely domestic US political crisis and called into question US political stability.

China and Russia deftly exploited this absence. According to Clinton, China’s leadership let it be known the US was no longer fit to have exclusive control of the world reserve currency.

“[One] of the high-ranking Chinese officials who publicly commented on it, said, look, it’s time to de-Americanize the world. These people can’t run their own country, why should they be permitted to exercise a disproportionate influence on the rest of the world.”

The barb definitely stung — coming, as it did, on the heels of a massive global financial crisis spawned, in large part, by the mishandling of the reserve currency status of the dollar due to the mindless greed of American finance capital.

The importance of the reserve status of the dollar

Let me say this: saying you want to displace the dollar as world reserve currency is essentially asking for an extinction level event: there is no way the US will ever concede this point short of nuclear holocaust. I’m not being hyperbolic in this statement. The dollar is not just another currency; it is a mechanism through which the United States manages global capitalism in the interest of its own national capital — what France once called an exorbitant privilege.

An attack on the dollar’s role as world reserve currency is tantamount to a physical attack on the United States itself. Even if you are among those who know the US can and will wage a war for control of oil supplies, you probably still have no idea what Washington will do to protect the reserve currency status of a worthless piece of paper, the US dollar.

You would think Cruz knew how important the reserve status of the dollar is to Washington, since his wife worked for Goldman Sachs. Perhaps he did and was banking on the other side caving, but clearly he miscalculated. The GOP Right played a game of chicken they could not hope to win precisely because calling their bluff was as damaging for them as it would have been for Washington.

This is a lesson SYRIZA should have absorbed: to win a game of chicken like this systemic collapse cannot simply be a threat, it must be your conscious aim.