VIDEO: THE KINGDOM OF SURVIVAL + What collapsing (american) empire looks like

What collapsing (american) empire looks like

As we enter our ninth year of the War in Afghanistan with an escalated force, and continue to occupy Iraq indefinitely, and feed an endlessly growing Surveillance State, reports are emerging of the Deficit Commission hard at work planning how to cut Social Security, Medicare, and now even to freeze military pay.  But a new New York Times article today illustrates as vividly as anything else what a collapsing empire looks like, as it profiles just a few of the budget cuts which cities around the country are being forced to make.  This is a sampling of what one finds:

Plenty of businesses and governments furloughed workers this year, but Hawaii went further — it furloughed its schoolchildren. Public schools across the state closed on 17 Fridays during the past school year to save money, giving students the shortest academic year in the nation.

Many transit systems have cut service to make ends meet, but Clayton County, Ga., a suburb of Atlanta, decided to cut all the way, and shut down its entire public bus system. Its last buses ran on March 31, stranding 8,400 daily riders.

Even public safety has not been immune to the budget ax. In Colorado Springs, the downturn will be remembered, quite literally, as a dark age: the city switched off a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.

There are some lovely photos accompanying the article, including one showing what a darkened street in Colorado looks like as a result of not being able to afford street lights.  Read the article to revel in the details of this widespread misery.  Meanwhile, the tiniest sliver of the wealthiest — the ones who caused these problems in the first place — continues to thrive.  Let’s recall what former IMF Chief Economist Simon Johnson said last year in The Atlantic about what happens in under-developed and developing countries when an elite-caused financial crisis ensues:

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or — here’s a classic Kremlin bailout technique — the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk — at least until the riots grow too large.

The real question is whether the American public is too apathetic and trained into submission for that to ever happen.

UPDATE:  It’s probably also worth noting this Wall St. Journal article from last month — with a subheadline warning:  “Back to Stone Age” — which describes how “paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue.”  Utah is seriously considering eliminating the 12th grade, or making it optional.  And it was announced this week that “Camden [New Jersey] is preparing to permanently shut its library system by the end of the year, potentially leaving residents of the impoverished city among the few in the United States unable to borrow a library book free.”

Does anyone doubt that once a society ceases to be able to afford schools, public transit, paved roads, libraries and street lights — or once it chooses not to be able to afford those things in pursuit of imperial priorities and the maintenance of a vast Surveillance and National Security State — that a very serious problem has arisen, that things have gone seriously awry, that imperial collapse, by definition, is an imminent inevitability?  Anyway, I just wanted to leave everyone with some light and cheerful thoughts as we head into the weekend.

Ref: Salon

HISTORY: The Tragedy of Haiti … and Us

Dr. Paul Farmer tells the story of the beautiful young Haitian girl Acéphie, whose family was driven out of their small farm by powerful forces: a hydroelectric company whose dam flooded the farmland; a dictator (Duvalier) who paid workers 10 cents a day; political violence that disrupted the operations of medical clinics. And a soldier who took advantage of her and gave her AIDS. When she died, her grief-stricken father hanged himself. [1]

Francois “Papa Doc” Duvalier became president of Haiti in 1957, and upon his death in 1971 was succeeded by his son Jean Claude “Baby Doc” Duvalier. During their 30 years of rule 60,000 Haitians were killed and many others were tortured by death squads. The Duvaliers, supported by the U.S., enriched themselves with foreign aid money while Haiti became the poorest country in the Western Hemisphere. The Haitian people worked in sweatshops for pennies a day while foreign industrialists made millions. In 1986, a people’s rebellion forced Baby Doc out, and the U.S. installed a military government, which continued to terrorize the citizens. [2]

In 1990 Jean-Bertrand Aristide, a Catholic priest, was elected president in Haiti’s first free democratic election. He surprised the western world by winning 67% of the vote in a field of 12 candidates that included the U.S. candidate, a former World Bank official. Months later Aristide was overthrown by a US-backed military coup. [3] The Council on Hemispheric Affairs stated after the coup: “Under Aristide…Haiti seemed to be on the verge of tearing free from the fabric of despotism and tyranny…”

For the next three years anarchy reigned in Haiti. A study by Boston Media Action revealed that while human rights abuses attributed to Aristide supporters were less than 1% of the total, they comprised 60% of the coverage in major journals during the two weeks following the coup, and over half of coverage in the New York Times through mid-1992. [4]

Aristide was finally allowed to return, provided that he accept a number of political and economic conditions mandated by the United States.

In 2000 Aristide was re-elected president with over 90% of the vote. The Organization of American States claimed that the election was conducted unfairly, and the U.S. began to withhold foreign aid from Haiti. [5] In 2003 the country was forced to send 90% of its foreign reserves to Washington to pay off its debt. Pressure from business and international organizations was relentless. Aristide was vilified by the Reuters and AP wire services, which relied on local media owned by Aristide’s opponents. On February 5, 2004 a major revolt again forced him out of office. He was flown by the U.S. to the Central African Republic. [6]

Conditions in Haiti have remained desperate, with crumbling roads and infrastructure and nonexistent public services, unemployment at 70%, half the adults illiterate, and the richest 1% of the population controlling nearly half of all of the wealth. [7]

It doesn’t seem possible that the situation could get worse. But now it has.

Paul Buchheit teaches at DePaul University. He can be reached at: pbuchhei@depaul.edu

Notes.

1 Paul Farmer, “Pathologies of Power” (University of California Press, 2005)

2 Noam Chomsky, “Year 501: the conquest continues” (Boston: South End Press, 1993)

3 “Coup in Haiti,” by Amy Wilentz, The Nation, March 4, 2004 (http://www.thenation.com/doc/20040322/wilentz)

De-Dollarization: Dismantling America’s Financial-Military Empire (bye bye US fucking A!)

The city of Yakaterinburg, Russia’s largest east of the Urals, may become known not only as the death place of the tsars but of American hegemony too – and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.

Challenging America will be the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).

The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the United States, NATO or the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO.

Yet the meeting has elicited only a collective yawn from the US and even European press despite its agenda is to replace the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry,1 suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush (“I’m a uniter, not a divider”) built on the Clinton administration’s legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum.

What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to “build an increasingly multipolar world order.” What this means in plain English is: We have reached our limit in subsidizing the United States’ military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth.

“The artificially maintained unipolar system,” Mr. Medvedev spelled out, is based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks.”2 At the root of the global financial crisis, he concluded, is that the United States makes too little and spends too much. Especially upsetting is its military spending, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia.

The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the “free market” force up their currency relative to the dollar – thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.

When China and other countries recycle their dollar inflows by buying US Treasury bills to “invest” in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. “Free markets” US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.

This means creating a new alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want,” Mr. Medvedev ended his St. Petersburg speech, “what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate.”

When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were “as good as gold.” Central banks now hold $4 trillion of these bonds in their international reserves – land these loans have financed most of the US Government’s domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations – including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries – the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.

The main political issue confronting the world’s central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending – including military spending on their borders?

For starters, the six SCO countries and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. Toward this end, China has struck bilateral deals with Argentina and Brazil to denominate their trade in renminbi rather than the dollar, sterling or euros,3 and two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in renminbi.[4] Former Prime Minister Tun Dr. Mahathir Mohamad explained to me in January that as a Muslim country, Malaysia wants to avoid doing anything that would facilitate US military action against Islamic countries, including Palestine. The nation has too many dollar assets as it is, his colleagues explained. Central bank governor Zhou Xiaochuan of the People’s Bank of China wrote an official statement on its website that the goal is now to create a reserve currency “that is disconnected from individual nations.”5 This is the aim of the discussions in Yekaterinburg.

In addition to avoiding financing the US buyout of their own industry and the US military encirclement of the globe, China, Russia and other countries no doubt would like to get the same kind of free ride that America has been getting. As matters stand, they see the United States as a lawless nation, financially as well as militarily. How else to characterize a nation that holds out a set of laws for others – on war, debt repayment and treatment of prisoners – but ignores them itself? The United States is now the world’s largest debtor yet has avoided the pain of “structural adjustments” imposed on other debtor economies. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that Washington forces on other countries via the IMF and other Washington vehicles.

The United States tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors. And at home, Congress blocked China’s CNOOK from buying Unocal on grounds of national security, much as it blocked Dubai from buying US ports and other sovereign wealth funds from buying into key infrastructure. Foreigners are invited to emulate the Japanese purchase of white elephant trophies such as Rockefeller Center, on which investors quickly lost a billion dollars and ended up walking away.

In this respect the US has not really given China and other payments-surplus nations much alternative but to find a way to avoid further dollar buildups. To date, China’s attempts to diversify its dollar holdings beyond Treasury bonds have not proved very successful. For starters, Hank Paulson of Goldman Sachs steered its central bank into higher-yielding Fannie Mae and Freddie Mac securities, explaining that these were de facto public obligations. They collapsed in 2008, but at least the US Government took these two mortgage-lending agencies over, formally adding their $5.2 trillion in obligations onto the national debt. In fact, it was largely foreign official investment that prompted the bailout. Imposing a loss for foreign official agencies would have broken the Treasury-bill standard then and there, not only by utterly destroying US credibility but because there simply are too few Government bonds to absorb the dollars being flooded into the world economy by the soaring US balance-of-payments deficits.

Seeking more of an equity position to protect the value of their dollar holdings as the Federal Reserve’s credit bubble drove interest rates down China’s sovereign wealth funds sought to diversify in late 2007. China bought stakes in the well-connected Blackstone equity fund and Morgan Stanley on Wall Street, Barclays in Britain South Africa’s Standard Bank (once affiliated with Chase Manhattan back in the apartheid 1960s) and in the soon-to-collapse Belgian financial conglomerate Fortis. But the US financial sector was collapsing under the weight of its debt pyramiding, and prices for shares plunged for banks and investment firms across the globe.

Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.

On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat – and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China’s Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should “save” first and foremost by cutting back its military budget. “U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars.’”6

At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides “consumers wielding credit cards,” the usual euphemism that the US media cite for America’s balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations – and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.

Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China’s currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don’t mean that the government cannot simply print the paper dollars to “make good” on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a “strong dollar” and China’s US investments therefore were safe and sound, he was greeted with derisive laughter.7

Anticipation of a rise in China’s exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?

To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner’s visit to China, “Zhou Xiaochuan, minister of the Peoples Bank of China, the country’s central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes” when it came to deregulating capital markets and dismantling controls.8

An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.

Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.

US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.

Ref: Global Research

Notes
1 Andrew Scheineson, “The Shanghai Cooperation Organization,” Council on Foreign Relations,

Updated: March 24, 2009: “While some experts say the organization has emerged as a powerful anti-U.S. bulwark in Central Asia, others believe frictions between its two largest members, Russia and China, effectively preclude a strong, unified SCO.”

2 Kremlin.ru, June 5, 2009, in Johnson’s Russia List, June 8, 2009, #8.

3 Jamil Anderlini and Javier Blas, “China reveals big rise in gold reserves,” Financial Times, April 24, 2009. See also “Chinese political advisors propose making yuan an int’l currency.” Beijing, March 7, 2009 (Xinhua). “The key to financial reform is to make the yuan an international currency, said [Peter Kwong Ching] Woo [chairman of the Hong Kong-based Wharf (Holdings) Limited] in a speech to the Second Session of the 11th National Committee of the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body. That means using the Chinese currency to settle international trade payments …”

4 Shai Oster, “Malaysia, China Consider Ending Trade in Dollars,” Wall Street Journal, June 4, 2009.

5 Jonathan Wheatley, “Brazil and China in plan to axe dollar,” Financial Times, May 19, 2009.

6 “Another Dollar Crisis inevitable unless U.S. starts Saving – China central bank adviser. Global Crisis ‘Inevitable’ Unless U.S. Starts Saving, Yu Says,” Bloomberg News, June 1, 2009. http://www.bloomberg.com/apps/news?pid=20601080&sid=aCV0pFcAFyZw&refer=asia

7 Kathrin Hille, “Lesson in friendship draws blushes,” Financial Times, June 2, 2009.

8 Steven R. Weisman, “U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed,” The New York Times, June 18, 2008.

The IMF Rules the World

Not much substantive news was expected to come out of the G-20 meetings that ended on April 2 in London – certainly no good news was even suggested. Europe, China and the United States had too deeply distinct interests. American diplomats wanted to lock foreign countries into further dependency on paper dollars. The rest of the world sought a way to avoid giving up real output and ownership of their resources and enterprises for yet more hot-potato dollars. In such cases one expects a parade of smiling faces and statements of mutual respect for each others’ position – so much respect that they have agreed to set up a “study group” or two to kick the diplomatic ball down the road.

The least irrelevant news was not good at all: The attendees agreed to quadruple IMF funding to $1 trillion. Anything that bolsters IMF authority cannot be good for countries forced to submit to its austerity plans. They are designed to squeeze out more money to pay the world’s most predatory creditors. So in practice this G-20 agreement means that the world’s leading governments are responding to today’s financial crisis with “planned shrinkage” for debtors – a 10 per cent cut in wage payments in hapless Latvia, Hungary put on rations, and permanent debt peonage for Iceland for starters. This is quite a contrast with the United States, which is responding to the downturn with a giant Keynesian deficit spending program, despite its glaringly unpayable $4 trillion debt to foreign central banks.

So the international financial system’s double standard remains alive and kicking – at least, kicking countries that are down or are falling. Debtor countries must borrow a trillion from the IMF not to revive their own faltering economies, not to pursue counter-cyclical policies to restore market demand (that is only for creditor nations), but to pass on the IMF “aid” to the poisonous banks that have made the irresponsible toxic loans. (If these are toxic, who put in the toxin? To claim that it was all the “natural” workings of the marketplace is to say that free markets curdle and sicken. Is this what is happening?)

In Ukraine, a physical fight broke out in Parliament when the Party of Regions blocked an agreement with the IMF calling for government budget cutbacks. And rightly so! The IMF’s operating philosophy is the destructive (indeed, toxic) belief that imposing a deeper depression with more unemployment will reduce wage levels and living standards by enough to pay debts already at unsustainable levels, thanks to the kleptocracy’s tax “avoidance” and capital flight. The IMF trillion-dollar bailout is actually for these large international banks, so that they will be able to take their money and run. The problem is all being blamed on labor. That is the neo-Malthusian spirit of today’s neoliberalism.

The main beneficiaries of IMF lending to Latvia, for example, have been the Swedish banks that have spent the last decade funding that country’s real estate bubble while doing nothing to help develop an industrial potential. Latvia has paid for its imports by exporting its male labor of prime working age, acting as a vehicle for Russian capital flight – and borrowing mortgage purchase-money in foreign currency. To pay these debts rather than default, Latvia will have to lower wages in its public sector by 10 per cent — and this with an economy already depressed and that the government expects to shrink by 12 percent this year!

To save the banks from losing on their toxic mortgages, the IMF is bailing them out, and directing the Latvian government to squeeze labor all the more – and to charge for education rather than providing it freely. The idea is for families to take a lifetime of debt not only to live inside rather than on the sidewalk, but to get an education. Alcoholism rates are rising, as they did in Russia under similar circumstances in Yeltsin’s “Harvard Boys” kleptocracy after 1996.

The insolvency problem of the post-Soviet economies is not entirely the IMF’s fault, to be sure. The European Community deserves a great deal of blame. Instead of viewing the post-Soviet economies as wards to be brought up to speed with Western Europe, the last thing the EU wanted was to develop potential rivals. It wanted customers – not only for its exports, but most of all for its loans. The Baltic States passed into the Scandinavian sphere, while Austrian banks carved out financial spheres of influence in Hungary (and lost their shirt on real estate loans, much as the Habsburgs and Rothschilds did in times past). Iceland was neoliberalized, largely in ripoffs organized by German banks and British financial sharpies.

In fact, Iceland ( where I’m writing these lines) looks like a controlled experiment – a very cruel one – as to how deeply an economy can be “financialized” and how long its population will submit voluntarily to predatory financial behavior. If the attack were military, it would spur a more alert response. The trick is to keep the population from understanding the financial dynamics at work and the underlying fraudulent character of the debts with which it has been saddled – with the complicit aid of its own local oligarchy.

In today’s world, the easiest way to obtain wealth by old-fashioned “primitive accumulation” is by financial manipulation. This is the essence of the Washington Consensus that the G-20 support, using the IMF in its usual role as enforcer. The G-20’s announcement continues the U.S. Treasury and Federal Reserve bank bailout over the past half-year. In a nutshell, the solution to a debt crisis is to be yet more debt. If debtors can’t pay out of what they are able to earn, lend them enough to keep current on their carrying charges. Collateralize this with their property, their public domain, their political autonomy – their democracy itself. The aim is to keep the debt overhead in place. This can be done only by keeping the volume of debts growing exponentially as they accrue interest, which is added onto the loan. This is the “magic of compound interest.” It is what turns entire economies into Ponzi schemes (or Madoff schemes as they are now called).

This is “equilibrium”, neoliberal style. In addition to paying an exorbitant basic interest rate, homeowners must pay a special 18 per cent indexation charge on their debts to reflect the inflation rate (the consumer price index) so that creditors will not lose the purchasing power over consumer goods. Labor’s wages are not indexed, so defaults are spreading and the country is being torn apart with bankruptcy, causing the highest unemployment rate since the Great Depression. The IMF approves, announcing that it can find no reason why homeowners cannot bear this burden!

Meanwhile, democracy is being torn apart by a financial oligarchy, whose interests have become increasingly cosmopolitan, looking at the economy as prey to be looted. A new term is emerging: “codfish republic” (known further south as banana republics). Many of Iceland’s billionaires these days are choosing to join their Russian counterparts living in London – and the Russian gangsters are reciprocating by visiting Iceland even in the dead of winter, ostensibly merely to enjoy its warm volcanic Blue Lagoon, or so the press is told.

The alternative is for debtor countries to suffer the same kind of economic sanctions as Iran, Cuba and pre-invasion Iraq. Perhaps soon there will be enough such economies to establish a common trading area among themselves, possibly along with Venezuela, Colombia and Brazil. But as far as the G-20 is concerned, aid to Iceland and “doing the right thing” is simply a bargaining chip in the international diplomatic game. Russia offered $4 billion aid to Iceland, but retracted it – presumably when Britain gave it a plum as a tradeoff.

The IMF’s $1 trillion won’t help the post-Soviet and Third World debtor countries pay their foreign debts, especially their real estate mortgages denominated in foreign currency. This practice has violated the First Law of national fiscal prudence: Only permit debts to be taken on that are in the same currency as the income that is expected to be earned to pay them off. If central bankers really sought to protect currency stability, they would insist on this rule. Instead, they act as shills for the international banks, as disloyal to the actual economic welfare of their countries as expatriate oligarchs.

If you are going to recommend more of this consensus, then the only way to sell it is to do what British Prime Minister Gordon Brown did at the meetings: announce that “The Washington Consensus is dead.” (He might have saved matters by saying “deadly,” but used the adjective instead of the adverb.) But the G-20’s IMF bailout belies this claim. As Turkey was closing out its loan last year, the IMF faced a world with no customers. Nobody wanted to submit to its destructive “conditionalities,” anti-labor policies designed to shrink the domestic market in the false assumption that this “frees” more output for export rather than being consumed at home. In reality, the effect of austerity is to discourage domestic investment, and hence employment. Economies submitting to the IMF’s “Washington Consensus” become more and more dependent on their foreign creditors and suppliers.

The United States and Britain would never follow such conditionalities. That is why the United States has not permitted an IMF advisory team to write up its prescription for U.S. “stability.” The Washington Consensus is only for export. (“Do as we say, not as we do.”) Mr. Obama’s stimulus program is Keynesian, not an austerity plan, despite the fact that the United States is the world’s largest debtor.

Here’s why the situation is unsustainable. What has enabled the Baltics and other post-Soviet countries to cover the foreign-exchange costs of their trade dependency and capital flight has been their real estate bubble. The neoliberal idea of financial “equilibrium” has been to watch “market forces” shorten lifespans, demolish what industrial potential they had, increase emigration and disease, and run up an enormous foreign debt with no visible way of earning the money to pay it off. This real estate bubble credit was extractive and parasitic, not productive. Yet the World Bank applauds the Baltics as a success story, ranking them near the top of nations in terms of “ease of doing business.”

One practical fact trumps all the junk economics at work from the IMF and G-20: Debts that can’t be paid, won’t be. Adam Smith observed in The Wealth of Nations that no government in history had ever repaid its national debt. Today, the same may be said of the public sector as well. This poses a problem of just how these debtor countries are not going to pay their foreign and domestic debts. How will they frame and politicize their non-payment?

Creditors know that these debts can’t be paid. (I say this as former balance-of-payments analyst of Third World debt for nearly fifty years, from Chase Manhattan in the 1960s through the United Nations Institute for Training and Research [UNITAR] in the 1970s, to Scudder Stevens & Clark in 1990, where I started the first Third World sovereign debt fund.) From the creditor’s vantage point, knowing that the Great Neoliberal Bubble is over, the trick is to deter debtor countries from acting to resolve its collapse in a way that benefits themselves. The aim is to take as much as possible – and to get the IMF and central banks to bail out the poisonous banks that have loaded these countries down with toxic debt. Grab what you can while the grabbing is good. And demand that debtors do what Latin American and other third World countries have been doing since the 1980s: sell off their public domain and public enterprises at distress prices. That way, the international banks not only will get paid, they will get new business lending to the buyers of the assets being privatized – on the usual highly debt-leveraged terms!

The preferred tactic do deter debtor countries from acting in their self-interest is to pound on the old morality, “A debt is a debt, and must be paid.” That is what Herbert Hoover said of the Inter-Ally debts owed by Britain, France and other allies of the United States in World War I. These debts led to the Great Depression. “We loaned them the money, didn’t we?” he said curtly.

Let’s look more closely at the moral argument. Living in New York, I find an excellent model in that state’s Law of Fraudulent Conveyance. Enacted when the state was still a colony, it was enacted in response British speculators making loans to upstate farmers, and demanding payment just before the harvest was in, when the debtors could not pay. The sharpies then foreclosed, getting the land on the cheap. So New York’s Fraudulent Conveyance law responded by establishing the legal principle that if a creditor makes a loan without having a clear and reasonable understanding of how the debtor can repay the money in the normal course of doing business, the loan is deemed to be predatory and therefore null and void.

Just like the post-Soviet economies, Iceland was sold a neoliberal bill of goods: a self-destructive Junk Economics. Just how moral a responsibility – and perhaps even more important, how large a legal liability –should fall on the IMF and World Bank, the U.S. Treasury and Bank of England whose economies and banks benefited from this toxic Washington Consensus junk economics?

For me, the moral principle is that no country should be subjected to debt peonage. That is the opposite of democratic self-determination, after all – and of Enlightenment moral philosophy that economic policies should encourage economic growth, not shrinkage. They should promote greater economic equality, not polarization between wealthy creditors and impoverished debtors.

At issue is just what a “free market” is. It’s supposed to be one of choice. Indebted countries lose discretionary choice over their economic future. Their economic surplus is pledged abroad as financial tribute. Without the overhead costs of a military occupation, they are relinquishing their policy making from democratically elected political representatives to bureaucratic financial managers, often foreign – the new Central Planners in today’s neoliberal world. The best they can do, knowing the game is over, is to hope that the other side doesn’t realize it – and to do everything you can to confuse debtor countries while extracting as much as they can as fast as they can.

Will the trick work? Maybe not. While the G-20 meetings were taking place, Korea was refusing to let itself be victimized by the junk derivatives contracts that foreign banks sold. Korea is claiming that bankers have a fiduciary responsibility to their customers to recommend loans that help them, not strip them of money. There is a tacit understanding (one that the financial sector spends millions of dollars in public relations efforts to undermine) that banking is a public utility. It is supposed to be a handmaiden to growth – industrial and agricultural growth and self-sufficiency – not predatory, extractive and hence anti-social. So Korean victims of junk derivatives are suing the banks. As New York Times commentator Floyd Norris described last week, the legal situation doesn’t look good for the international banks. The home court always has an advantage, and every nation is sovereign, able to pass whatever laws it wants. (And as America’s case abundantly illustrates, judges need not be unbiased.)

The post-Soviet economies as well as Latin America must be watching attentively the path that Korea is clearing through international courts. The nightmare of international bankers is that these countries may bring the equivalent of a class action suit against the international diplomatic coercion mounted against these countries to lead them down the path of financial and economic suicide. “The Seoul Central District Court justified its decision [to admit the lawsuit] on the kind of logic that would apply in the United States to a lawsuit involving an unsophisticated individual investor and a fast-taking broker. The court pointed to questions of whether the contract was a suitable investment for the company, and to whether the risks were fully disclosed. The judgment also referred to the legal concept of “changed circumstances,” concluding that the parties had expected the exchange rate to remain stable, that the change in circumstances was unforeseeable and that the losses would be too great for the company to bear.”

As a second cause of action, Korea is claiming that the banks provided creditor for other financial institutions to bet against the very contracts the banks were selling Korea to “protect” its interests. So the banks knew that what they were selling was a time bomb, and therefore seem guilty of conflict of interest. Banks claim that they merely were selling goods with no warranty to “informed individuals.” But the Korean parties in question were no more informed than were Iceland’s debtors. If a bank seeks to mislead and does not provide full disclosure, its victim cannot be said to be “informed.” The proper English word is misinformed (viz. disinformation).
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Speaking of disinformation, an important issue concerns the extent to which the big international banks may have conspired with domestic bankers and corporate managers to loot their companies. This is what corporate raiders have done for their junk-bond holders since the high tide of Drexel Burnham and Michael Milken in the 1980s. This would make the banks partners in crime. There needs to be an investigation of the lending pattern that these banks engaged in – including their aid in organizing offshore money laundering and tax evasion to their customers. No wonder the IMF and British bankers are demanding that Iceland make up its mind in a hurry, and commit itself to pay astronomical debts without taking the time to ask just how they are to pay – and investigating the creditor banks’ overall lending pattern!

Bearing the above in mind, I suppose I can tell Icelandic politicians that I have good news regarding the fate of their country’s foreign and domestic debt: No nation ever has paid its debts. As I noted above, this means that the real question is not whether or not they will be paid, but how not to pay these debts. How will the game play out – in the political sphere, in popular ideology, and in the courts at home and abroad?

The question is whether Iceland will let bankruptcy tear apart its economy slowly, transferring property from debtors to creditors, from Icelandic citizens to foreigners, and from the public domain and national taxing power to the international financial class. Or, will Iceland see where the inherent mathematics of debt are leading, and draw the line? At what point will it say “We won’t pay. These debts are immoral, uneconomic and anti-democratic.” Do they want to continue the fight by Enlightenment and Progressive Era social democracy, or the alternative – a lapse back into neofeudal debt peonage?

This is the choice must be made. And it is largely a question of timing. That’s what the financial sector plays for – time enough to transfer as much property as it can into the hands of the banks and other investors. That’s what the IMF advises debtor countries to do – except of course for the United States as largest debtor of all. This is the underlying lawless character of today’s post-bubble debts.

Ref: counterpunch

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached at mh@michael-hudson.com

IMF sounds ‘meltdown’ warning

The International Monetary Fund has said that the world’s financial system is near meltdown.

The warning came hours before European leaders began a meeting in the French capital to tackle the deepening financial crisis.

“Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” Dominique Strauss-Kahn, the IMF chief, said on Sunday.

Spreading crisis

Strauss-Kahn expressed hope that government actions would prove powerful enough to persuade banks to resume lending and bring an end to a spreading credit crunch.

IN DEPTH

How the financial bubble burst

Q&A: The US financial meltdown

Reacting to the financial crisis

Russian markets feel the chill

“In the coming days … what I expect is that the reaction by the different institutions will be positive enough to unfreeze the different markets and to restore the necessary funding,” he said.

Earlier, Australia announced that it would guarantee all bank deposits for three years and guarantee wholesale funding to Australian banks in an attempt to combat the credit crisis.

Australia would make $2.6bn available for mortgage-backed securities to help maintain liquidity for non-bank lenders, Kevin Rudd, the prime minister, said.

Amid the financial turmoil, markets in the Middle East continued to spiral downward on Sunday, the first day of the business week for most countries in the region.

The IMF said it backed a plan by the G7 most industrialised nations to try to stabilise markets and urged “exceptional vigilance, co-ordination and readiness to take bold action” to contain a firestorm that pushed global stocks to five-year lows on Friday.

Beyond talk

Christine Lagarde, France’s economy minister, said that the gathering would go beyond talking about remedies to “put meat, muscles on the bones of that skeleton and to develop, follow up and execute upon it”.

The US appealed for patience but the IMF said time was short after the G7 nations – which include the US, Britain, France, Germany, Italy, Japan and Canada – failed to agree on concrete measures to end the crisis at a meeting on Friday.

George Bush, the US president, met G7 economic chiefs and officials from the IMF and World Bank and said top industrial nations would work together to solve the crisis.

“I’m confident that the world’s major economies can overcome the challenges we face,” he said.

Ref: Al Jazeera

Speculate to accumulate

he International Monetary Fund and the World Trade Organisation promised that more trade would help to eradicate poverty and hunger. Foodcrops? Self-sufficiency in food? They had a better idea. Local farms would be closed down or encouraged to concentrate on exports. This would make the most, not of natural conditions which might be good for growing tomatoes in Mexico or pineapples in the Philippines, but of the fact that production costs are lower in Mexico and the Philippines than they are in Florida or California.

Farmers in Mali would rely on more highly mechanised, more productive producers in the Beauce or the Midwest for grain supplies. The farmers would pack up, move into town and get jobs in some western firm that had relocated to take advantage of cheaper labour than it could find at home. The countries on the East African seaboard would lighten their load of foreign debt by selling their fishing rights to the factory ships of wealthier countries. The Guineans would import tinned fish from Denmark or Portugal. Never mind the additional pollution generated by transporting all these goods. A life of bliss was guaranteed and so were the profits of the middlemen – wholesalers, shippers, insurers, advertisers.

The World Bank, prime promoter of this “development” model, now tells us that there may be food riots in 33 countries. And the WTO fears a resurgence of protectionism: some food-exporting countries – India, Vietnam, Egypt, Kazakhstan – have decided to reduce exports in order to feed their own people. What a nerve! The North is easily upset by other people’s selfishness. The Chinese eat too much meat, that’s why the Egyptians are short of wheat.

Some states have followed the World Bank and IMF advice and turned over their food crops. They can no longer keep their produce for themselves. Well, they will pay, that’s the law of the market. According to UN Food and Agriculture Organisation figures, their bill for grain imports has risen by a massive 56% in one year. Naturally the World Food Programme (WFP), which feeds 73 million people in 78 countries every year, is asking for a further $500m.

Someone must have decided this was excessive, as it got only half that amount. But the sum it sought was only what the war in Iraq costs every couple of hours, and a tiny fraction of what the sub-prime mortgage crisis will cost the banking sector, which has been bailed out by the state. To look at it another way, the WFP asked on behalf of millions of starving people for 13.5% of the sum earned last year by John Paulson, the astute hedge fund manager who realised that thousands of Americans are in negative equity and face ruin. No one knows how much the incipient famine will yield or who will reap the profits, but nothing is ever lost in a modern economy.

History repeats itself, one speculation after another. The Federal Reserve’s monetary policy encourages debt, first the internet bubble, now the real estate bubble. In 2006 the IMF was still saying there was “every indication the mechanisms for granting loans on the US property market were still relatively effective”. Market effective. Perhaps the two words should be welded together once and for all. The real estate bubble has burst. So the speculators are resurrecting an old eldorado: the grain markets. Purchasing contracts to deliver wheat or rice at a future date and counting on selling them at a higher price. And what ensures prices will keep on rising? Famine.

So what does the IMF do? The IMF, which has “the best economists in the world” according to its managing director, explains that “one way to solve the problem of famine is to increase international trade”. The poet Leo Ferré once said that “all you need to sell despair is the right formula”. It looks as though they’ve found it.

Ref: Le Monde