I am traveling in Europe for three weeks to discuss the global
financial crisis with government officials, politicians and labor leaders.
What is most remarkable is how differently the financial problem is
perceived over here. It¹s like being in another economic universe, not just
another continent.
The U.S. media are silent about the most important topic policy
makers are discussing here (and I suspect in Asia too): how to protect their
countries from three inter-related dynamics: (1) the surplus dollars pouring
into the rest of the world for yet further financial speculation and
corporate takeovers; (2) the fact that central banks are obliged to recycle
these dollar inflows to buy U.S. Treasury bonds to finance the federal U.S.
budget deficit; and most important (but most suppressed in the U.S. media,
(3) the military character of the U.S. payments deficit and the domestic
federal budget deficit.
Strange as it may seem and irrational as it would be in a more
logical system of world diplomacy the ³dollar glut² is what finances
America¹s global military build-up. It forces foreign central banks to bear
the costs of America¹s expanding military empire effective ³taxation
without representation.² Keeping international reserves in ³dollars² means
recycling their dollar inflows to buy U.S. Treasury bills U.S. government
debt issued largely to finance the military.
To date, countries have been as powerless to defend themselves
against the fact that this compulsory financing of U.S. military spending is
built into the global financial system. Neoliberal economists applaud this
as ³equilibrium,² as if it is part of economic nature and ³free markets²
rather than bare-knuckle diplomacy wielded with increasing aggressiveness by
U.S. officials. The mass media chime in, pretending that recycling the
dollar glut to finance U.S. military spending is ³showing their faith in
U.S. economic strength² by sending ³their² dollars here to ³invest.² It is
as if a choice is involved, not financial and diplomatic compulsion to
choose merely between ³Yes² (from China, reluctantly) , ³Yes, please² (from
Japan and the European Union) and ³Yes, thank you² (Britain, Georgia and
Australia).
It is not ³foreign faith in the U.S. economy² that leads foreigners to ³put their money here.² This is a silly anthropomorphic picture of a more sinister dynamic. The ³foreigners² in question are not buying U.S. exports, nor are they private-sector ³investors² buying U.S. stocks and bonds. The largest and most important foreign entities putting ³their money² here are central banks, and it is not ³their money² at all.They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.
When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers China, Japan and Arab OPEC oil producers.Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently. That is why China and Russia took the lead in forming the Shanghai Cooperation Organization (SCO) a few years ago.
Here in Europe there is a clear awareness that the U.S. payments deficit is much larger than just the trade deficit. One need merely look at Table 5 of the U.S. balance-of-payments data ompiled by the Bureau of Economic Analysis (BEA) and published by the Dept. of Commerce in its urvey of Current Business to see that the deficit does not stem merely from consumers buying more imports than the United States exports as the financial sector de-industrializes its economy. U.S. imports are now plunging as the economy shrinks and consumers are now finding themselves obliged to pay down the debts they have taken on.
Congress has told foreign investors in the largest dollar holder, China, not to buy anything except perhaps used-car dealerships and maybe more packaged mortgages and Fannie Mae stock the equivalent of Japanese investors being steered into spending $1 billion for Rockefeller Center, on which they subsequently took a 100% loss, and Saudi investment in Citigroup.
That¹s the kind of ³international equilibrium² that U.S. officials love to see. CNOOK go home² is the motto when it comes to serious attempts by foreign governments and their sovereign wealth funds (centralbank departments trying to figure out
what to do with their dollar glut)tomake direct investments in American industry.
So we are left with the extent to which the U.S. payments deficit stems from military spending. The problem is not only the war in Iraq, now being extended to Afghanistan and Pakistan. It is the expensive build-up of U.S. military bases in Asian, European, post-Soviet and Third World countries. The Obama administration has promised to make the actual amount of this military spending more transparent. That presumably means publishing a revised set of balance of payments figures as well as domestic federal budget statistics.
The military overhead is much like a debt overhead, extracting revenue from the economy. In this case it is to pay the military-industrial complex, not merely Wall Street banks and other financial institutions. The domestic federal budget deficit does not stem only from ³priming the pump² to give away enormous sums to create a new financial oligarchy. It contains an enormous and rapidly growing military component.
So Europeans and Asians see U.S. companies pumping more and more dollars into their economies, not only to buy their exports in excess of providing them with goods and services in return, and not only to buy their companies and ³commanding heights² of privatized public enterprises without giving them reciprocal rights to buy important U.S. companies (remember the U.S. turn-down of China¹s attempt to buy into the U.S. oil distribution business), and not only to buy foreign stocks, bonds and real estate.
The U.S. media somehow neglect to mention that the U.S. Government is spending hundreds of billions of dollars abroad not only in the Near East for direct combat, but to build enormous military bases to encircle the rest of the world, to install radar systems, guided missile systems and other forms of military coercion, including the ³color revolutions² that have been funded and are still being funded all around the former Soviet Union. Pallets of shrink-wrapped $100 bills adding up to tens of millions of the dollars at a time have become familiar ³visuals² on some TV broadcasts, but the link is not made with U.S. military and diplomatic spending and foreign central-bank dollar holdings, which are reported simply as ³wonderful faith in the U.S. economic recovery² and presumably the ³monetary magic² being worked by Wall Street¹s Tim Geithner at Treasury and Helicopter Ben Bernanke at the Federal Reserve.
Here¹s the problem: The Coca Cola company recently tried to buy China¹s largest fruit-juice producer and distributor. China already holds nearly $2 trillion in U.S. securities way more than it needs or can use, inasmuch as the United States Government refuses to let it buy meaningful U.S. companies. If the U.S. buyout would have been permitted to go through, this would have confronted China with a dilemma: Choice #1 would be to let the sale go through and accept payment in dollars, reinvesting them in what the U.S. Treasury tells it to do U.S. Treasury bonds yielding about 1%. China would take a capital loss on these when U.S. interest rates rise or when the dollar declines as the United States alone is pursuing expansionary Keynesian policies in an attempt to enable the U.S. economy to carry its debt overhead.
Choice #2 is not to recycle the dollar inflows. This would lead the renminbi to rise against the dollar, thereby eroding China¹s export competitiveness in world markets. So China chose a third way, which brought U.S. protests. It turned the sale of its tangible company for merely ³paper²U.S. dollars which went with the ³choice² to fund further U.S. military encirclement of the S.C.O. The only people who seem not to be drawing this connection are the American mass media, and hence public. I can assure you from personal experience, it is being drawn here in Europe. (Here¹s a good diplomatic question to discuss: Which will be the first European country besides Russia to join the S.C.O.?)
Academic textbooks have nothing to say about how ³equilibrium²in foreign capital movements speculative as well as for direct investment is infinite as far as the U.S. economy is concerned. The U.S. economy can create dollars freely, now that they no longer are convertible into gold or even into purchases of U.S. companies, inasmuch as America remains the world¹s most protected economy. It alone is permitted to protect its agriculture by import quotas, having ³grandfathered² these into world trade rules half a century ago. Congress refuses to let ³sovereign wealth² funds invest in important U.S. sectors.
So we are confronted with the fact that the U.S. Treasury prefers foreign central banks to keep on funding its domestic budget deficit, which means financing the cost of America¹s war in the Near East and encirclement of foreign countries with rings of military bases. The more ³capital outflows² U.S. investors spend to buy up foreign economies the most profitable sectors, where the new U.S. owners can extract the highest monopoly rents the more funds end up in foreign central banks to support America¹s global military build-up. No textbook on political theory or international relations has suggested axioms to explain how nations act in a way so adverse to their own political, military and economic interests. Yet this is just what has been happening for the past generation.
So the ultimate question turns out to be what countries can do to counter this financial attack. A Basque labor union asked me whether I thought that controlling speculative capital movements would ensure that the financial system would act in the public interest. Or is outright nationalization necessary to better develop the real economy?
It is not simply a problem of ³regulation² or ³control of speculative capital movements.² The question is how nations can act as real nations, in their own interest rather than being roped into serving whatever U.S. diplomats decide is in America¹s interest.
Any country trying to do what the United States has done for the past 150 years is accused of being ³socialist² and this from the most anti-socialist economy in the world, except when it calls bailouts for its banks ³socialism for the rich,² a.k.a. financial oligarchy. This rhetorical inflation almost leaves no alternative but outright nationalization of credit as a basic public utility.
Of course, the word ³nationalization² has become a synonym for bailing out the largest and most reckless banks from their bad loans, and bailing out hedge funds and non-bank counterparties for losses on ³casino capitalism,² gambling on derivatives that AIG and other insurers or players on the losing side of these gambles are unable to pay. Such bailouts are not nationalization in the traditional sense of the term bringing credit creation and other basic financial functions back into the public domain. It is the opposite. It prints new government bonds to turn over along with self-regulatory power to the financial sector, blocking the citizenry from taking back these functions.
Framing the issue as a choice between democracy and oligarchy turns the question into one of who will control the government doing the regulation and ³nationalizing.² If it is done by a government whose central bank and major congressional committees dealing with finance are run by Wall Street, this will not help steer credit into productive uses. It will merely continue the Greenspan-Paulson- Geithner era of more and larger free lunches for their financial constituencies.
The financial oligarchy¹s idea of ³regulation² is to make sure that deregulators are installed in the key positions and given only a minimal skeleton staff and little funding. Despite Mr. Greenspan¹s announcement that he has come to see the light and realizes that self-regulation doesn¹t work, the Treasury is still run by a Wall Street official and the Fed is run by a lobbyist for Wall Street. To lobbyists the real concern isn¹t ideology as such it¹s naked self-interest for their clients. They may seek out well-meaning fools, especially prestigious figures from academia. But these are only front men, headed as they are by the followers of Milton Friedman at the University of Chicago. Such individuals are put in place as ³gate-keepers² of the major academic journals to keep out ideas that do not well serve the financial lobbyists.
This pretence for excluding government from meaningful regulation is that finance is so technical that only someone from the financial ³industry² is capable of regulating it. To add insult to injury, the additional counter-intuitive claim is made that a hallmark of democracy is to make the central bank ³independent² of elected government. In reality, of course, that is just the opposite of democracy. Finance is the crux of the economic system. If it is not regulated democratically in the public interest, then it is ³free² to be captured by special interests. So this
becomes the oligarchic definition of ³market freedom.²
The danger is that governments will let the financial sector determine how ³regulation² will be applied. Special interests seek to make money from the economy, and the financial sector does this in an extractive way. That is its marketing plan. Finance today is acting in a way that de-industrializes economies, not builds them up. The ³plan² is austerity for labor, industry and all sectors outside of finance, as in the IMF programs imposed on hapless Third World debtor countries. The experience of Iceland, Latvia and other ³financialized² economies should be examined as object lessons, if only because they top the World Bank¹s ranking of countries in
terms of the ³ease of doing business.²
The only meaningful regulation can come from outside the financial sector. Otherwise, countries will suffer what the Japanese call ³descent from heaven²: regulators are selected from the ranks of bankers and their ³useful idiots.² Upon retiring from government they return to the financial sector to receive lucrative jobs, ³speaking engagements² and kindred paybacks. Knowing this, they regulate in favor of financial special interests, not that of the public at large.
The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power. The International Monetary Fund¹s Articles of Agreement prevent countries from restoring the ³dual exchange rate² systems that many retained down through the 1950s and even into the Œ60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for ³capital movements.² Under American pressure, the IMF enforced the pretence that there is an ³equilibrium² rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank or were overthrown.
The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO). For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the U.S. economy is glutting the global economy with surplus ³paper² dollars and U.S. intransigence at stopping its free ride. From the U.S. vantage point, this is nothing less than an attempt to curtail its international military program.
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