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Debt: Yesterday Latin America, today Europe
Translated by Anoosha Boralessa (Jan 2016); not reviewed by bilaterals.org or any other organization or person.
by Umberto Mazzei - ALAI, 9-1-15
Today’s crisis relates neither to trade nor the production of goods and services. It is the banks and the financial sector that are in crisis. The origin of this crisis is remote and its nature ideological; it comes from David Ricardo distorting Adam Smith’s ideas.
Smith conceded business self-interest was an engine to stimulate the economy, but regulations were also needed to sanction it. Ricardo, on the other hand, argued for abolishing restrictions, in particular, restrictions on three things:
• Issuing paper money;
• Industrial over-production; and
• Capital flows.
From then, issuing paper money produced an overproduction of money and continual loss of purchasing power. Industrial overproduction has led to trade imperialism. Unrestricted circulation of capital has led to speculations and international scams.
In the current era, this is exacerbated, complicated and expanded by the creation of “financial products” (because now financial services claim to be an industry) which circulate and are accepted without any genuine guarantee of value, whether national or international. A number of those roles seek to sound technical with English euphemisms: default swaps, derivatives, sub-prime or quantitative easing. The reality is that the world is a victim of a scam that originated on Wall Street and in the City. Nothing new – the distinction this time, is its stellar dimension.
The Background to Sovereign Debt
Since the 19th century, there have been crises, each with the same origin, at approximately 40-year intervals. The cause of each: the collapse of financial speculation, that normally results in the outbreak of war; the two World Wars are not extraneous to this trend. War-like deals, the elimination of trade rivals and booty poured into the bags of the victor, shifted the balance to banks in difficulties.
The current European crisis and the 1980s crisis find their roots in 1944, at Bretton Woods. Here, at a meeting between the final victors, in order to establish a post war global economy, the dollar was adopted as the international reference currency, but guaranteed with a gold standard of $35/ounce. The US reneged on this agreement in 1971, the year it stopped exporting oil that kept its trade balance in check. There is no doubt that this was a debt default (an action which, when committed by others, produced shockwaves in the US). From then, the Federal Reserve began to issue dollars without funds to cover a trade deficit. To avoid the eventuality that the dollar would stop being used as a benchmark currency, OPEC reduced production and only sold its oil in dollars: the so-called petrol dollars, issued for this purpose.
Those surplus petrol dollars could not be absorbed in the oil economies and ended up being deposited in banks (principally Anglo Saxon). The banks did not hold on to the money; they invested it. Thus the most elegant bankers went out to invest money in the corners of the Third World, offering low interest, unsecured loans.
This is the familiar mechanism to lend capital, knowing that, instead of being exhausted for productive ends, it will be squandered on ordinary expenditure, the importation of industrial products or in corrupt transactions, where profits flow back to foreign banks. But the debt remains and the state assumes it as a sovereign debt to be paid by squeezing national resources with the usual “austerity” programme. The result is fruitless, creates unemployment and serves as a pretext for privatizing national assets, notably, indispensable, monopolistic public services.
The History of Latin American Debt
The account of Latin American foreign debt is pulled out of its independence. The Swiss economic philosopher, Jean Charles Sismondi, describes its birth with technical precision: ...
“in plentiful nations, production is invariably determined, not by needs, but the abundance of capital. Thereafter, when it rapidly exceeds consumption, cruel poverty arises.”
“The opening of the immense market that Spanish America offered, was the fact that English manufacturers could discharge more. The English government appears make a similar evaluation; and during the seven year period following the 1818 trade crisis, unprecedented activity took place to allow English trade to penetrate right to the most remote corners of Mexico, Colombia, Brazil, Rio de la Plata, Chile and Peru.…”
“But, while free America was offering a huge relief, it might not have been sufficient to absorb all the goods that England had produced in surplus of its needs, if loans made to the new republics had not suddenly increased immeasurably their means to buy English goods. Each American state borrowed from the English a sum sufficient to allow its government to function; and, even though this was capital, it spent it immediately during the year as earnings; in other words, it used the whole amount to purchase English merchandise on behalf of the public, or to pay those that had been sent on behalf of individuals. In this period, numerous companies were formed to exploit all mines in America; but all the money they spent, returned to England, that is for machines … or for exported goods....”
“The whole time that this singular trade lasted, when the English asked the Americans if they would condescend to use English capital to buy English merchandise and consume them out of love for them, the prosperity of the English manufacturers appeared brilliant. It was not income, but English capital that was harnessed to stimulate consumption; the English, by buying and paying themselves for their own products that they were sending to America, only spared themselves the pleasure of also using them.”
“Never were English manufacturers as sought after as during the series of speculations in 1825, that shocked the world so much; but, when the capital was exhausted, and the moment came to pay for it, the veil suddenly fell, the illusion was shattered, and poverty began once more, with greater force than in 1818” (Sismondi, Nuevos Principios de Economía, 1927. Book Four, Chapter 4).
That Latin American debt assumed by English banks was sold on stock markets and caused setbacks for the whole of Europe. This is how coalitions of collectors arose that shot them with canon shots. The most famous case is the Anglo- Spanish – French occupation of Veracruz, that ended dusting the throne of Iturbide and giving it to Maximiliano of Austria.
In the 1980s, Latin America witnessed a replay of the same debt mechanism: only this time gun boats did not come, but the IMF, the IDB and the World Bank that were requested to guarantee payment. Neither did they bring a foreign prince; today there are more discrete ways and collection is entrusted to local, trustworthy politicians. Debt collection becomes more efficient, because the appearance of legitimacy reduces the risk of a violent rebellion. This is how the Lost Decade of Latin America occurred.
The Situation Today
Following the Third World’s sad experience with foreign debt, broadly speaking, these countries’ governments refrained from getting into debt. Another reason for this debt aversion is that some are still paying off their debts and have neither credit nor political will. Their sufferings only gave temporarily relief to the banks’ finances and has even hardened players that operate in financial casinos.
Peter Drucker explained that the flow of the financial economy has been separated off from the flow of the commercial economy of goods and services; indicating that its size had increased and was several times greater than the real economy. That – he claimed - resulted from the US trade deficit (Drucker, 1986). Emmanuel Todd said that the United States’ role in the world economy appeared to be to provide virtual money (Todd, 2005). Wall Street and the City appear to forget a basic principle of economics: that money is not a resource; it is only symbolizes resources.
According to the International Bank for Settlement, in Basle, (BIS, 2013) for April 2013, 5.3 billion (trillion in English) derivatives are sold daily in the world; on a daily basis, this represents a third of the US GDP. These products in circulation is estimated then to total around 700 billion. If you take into account that in 2013, the Global Gross Production was 75 billion, it is impossible to ground this imaginary money in the real economy. This falls under the legal and technical definition of a scam. The BIS does not have more recent published figures but the figures for the period 2010 - 2013 indicate an upward trend.
This overabundance of rising stocks that is independent of the performance of the real economy, results from a lethal combination of the constant, cumulative creation of inorganic money by the US Federal Reserve (a consortium of private banks) under the euphemism, “quantitative easing” (QE). In this way, banks and other agents may invest massively in stock markets which increase once again the diminished value of their portfolios; this is linked to a liberalizing deregulation of any elementary prudence in the speculative activity of banks.
In contrast to the real economy which is socially useful (because when it grows, its profits are shared among all actors), the speculative economy is socially bankrupt. Invariably, its players are nation-less businesses, without social ties. Their base is a fictitious abstraction, that issues papers called stocks, because they are supposed to be based on some guarantee, that are going to be sold in financial markets. Actually, their principal activity is to manipulate perceptions of the future and their sole motive is short-term profit that is not distributed but maintained in the financial circuit, dislocated from the real economy which produces socially-perceptible well-being.
The history of the real economy is marked by crises that precede the relief of the protagonist countries, whose decline invariably includes war like episodes. I think that we are living in one of those times. The real economies of two Anglo Saxon countries with major financial centres with marked recessive symptoms, while their stock markets only rise because their traders’ computer keyboards create the illusion of creating risk. A tap on the keyboard raises and lowers prices in the stock markets even though there has been no change in the underlying assets. Prices are inflated and balloon purchases, until they explode like bubbles and deflate when purchases cease.
In 2008 four of these speculative bubbles exploded:
1. The bubble of raw materials and fuel, demonstrates what was called the «tortilla crisis» in Mexico. Likewise, all of a suddenly, corn, oil and cereal prices were rising and falling without any increase in consumption or, at least, production;
2. The property bubble, stimulated by easy loans with mortgages on goods of inferior value, that packaged as a combo, were sold as “Sub-Prime Mortgages” instead of “junk”;
3. The stock market bubble where shares and stocks rise and fall without major investment or fluctuation in dividends; and
4. Bubbles in exchange rates where currencies rise and fall without changes in the macro-economic figures of countries.
Apart from the fall in real estate prices and eviction in favour of banks, there has been no great change in speculative conduct from 2008.
Concocting the European Crisis
In 2008, the dollar began to fall and this fatally threatened US hegemony. Towards 2010, the big press began a campaign against the Euro, echoing the pessimistic declarations of politicians of the European “establishment” and international financial organizations. The alleged weakness of the Euro was the crisis for the public debt of some Eurozone countries. These were countries put into debt by their governments that paid to «rescue» national private banks with public funds. This debt does not originate in an internal economic imbalance; it comes from the stupidity of those who made risky loans and from the dishonesty of those who paid somebody else’s debts with someone else’s money.
The case par excellence was Greece. In 2011, its GDP was 1.5% of the European Union’s economy and 2.6% of the Eurozone (Eurostat, 2014); accordingly, it lacked the economic weight to pull down the economy supporting the Euro, with its debts. It was somewhat discriminatory that Greece, with a GDP of €215 billion and debt which was 166% of GDP, was considered to be a big risk and had to pay higher interest than Japan whose GDP was €4.4 billion and whose debt was 228% of its GDP (World Bank, 2014); but this is how Wall Street’s risk evaluators considered it. The same pattern was repeated with Portugal, Ireland, Spain and Italy. This served to instil a lack of confidence in the European economy and… in the Euro.
The European Union is the biggest economy in the world and the chief exporter. Its second economic partner is China with €428 billion ($567 billion) and its first is the United States, with €444 billion (Eurostat, 2013). As the Chinese economy is growing at 7.7% and the US economy at 2.5% (World Bank, 2013), it is probable that in 2014, China is Europe’s biggest partner. For China, the EU is already its biggest trading partner. The IMF predicts that in 2014, the EU GDP will be €14,303 billion (US$18,451 billion) and its trade surplus in September 2014, was already €18.5 billion (Eurostat, 2014). The European real economy is not ill. However its financial sector that has been infected by the Anglo-Saxon financial sector. Hegemonic political pressures are not unrelated to this contagion.
There were the banks of Germany, France and Italy and Holland that pay big salaries and bonuses to executives with little insight, who bought junk stocks, sponsored by Anglo-Saxon banks and that are sold to banks of the peripheral EU economies: Greece, Portugal, Spain, Cyprus, and co which also pay their executives well. Now they are in shock because the shares they sold, have dropped to their real value and their clients cannot pay. As always, the IMF, the World Bank and the European Central Bank have intervened to give the necessary credit to pay the lending banks; with the innovation that in Cyprus the bank that is paying foreign creditors has also confiscated its customers’ money.
For a little while, there were tremors lest Greece did what it ought: return to the drama. But this will not be so, because the banks of the European Core Group wish to guarantee their loans in Euros. An additional detail that is never mentioned: all these obligations of banks in peripheral countries are guaranteed by bonds against default (Credit Default Swaps), whose premiums are covered, but that are not applied to cancel debts because these bonds are extended and sold between the same lending banks.
The Transatlantic Agreement
The United States proposed to the European Union a Transatlantic Trade and Investment Agreement (TTIP), that claims to integrate both economies. There have been various econometric studies all of which agree that the agreement would lead to the substitution of intra-European trade for trade with the US. This implies European disintegration. Paradoxically, the European Commission is the main advocate of the agreement. This gives an idea of who calls the shots in Brussels.
Jeronim Capaldo’s study (GDAE/Tufts University, 2014) finds that if the UN global political model were used, the results would be the following in the first ten years:
1. Net losses for the European exports principally from North Europe (2.7% of the GDP, followed by France (1.9%) and the United Kingdom (0.95%).
2. Net losses in terms of GDP for Northern European countries (-0.5), followed by France (-0.48) and Germany (-0.29).
3. A loss of income for workers: France with -5,500€ per worker, countries of North Europe -4,800€, the United Kingdom -4,200€ and Germany -3,400€.
4. A loss of 600,000 jobs. 223,000 in North Europe, 134,000 in Germany and 130,000 in France and 90,000 in South Europe.
5. Reduction of the participation of salaries in the GDP, which implies a shift in revenue from work to capital. In France, a 8% reduction; in the United Kingdom, a 7% reduction; and in Germany and North Europe, a 4% reduction.
6. A loss of public revenues of the States through a reduction in revenues from indirect taxes. In France, 0.64% of the GDP, and in all, this pushes to bigger public deficits than those agreed under Maastricht.
7. Greater instability and financial imbalances, caused by lower revenues from exports, lower salaries, lower earnings and lower sales. The benefits of investment would be sustained by an increased share price, otherwise known as bubbles.
8. Major vulnerability to any crisis in the United States.
We draw two conclusions:
a) The studies commissioned by the European Commission do not employ a good model. On the basis of the UN model, the results are not in favour of the TTIP; b) in this period of low growth and austerity, a commercial reorientation would reduce wages, which in turn would reduce economic activity.
Regarding the section of the proposal relating to Foreign Direct Investment, both France and Germany have said that they are not ready to negotiation clauses that permit investors to have recourse to extraterritorial arbitral tribunals.
Our opinion is that the European economy is still healthy, its problems stem from contagion from the Anglo Saxon financial sector and North American pressures against trade with old strategic clients such as Iran and Russia. The United States wants to sign the TTIP to wipe out the bad example of a European welfare state, to suck the resources of the world’s most powerful economy, to maintain the fiction of the stock market and to maintain the dollar as the international currency. Furthermore, this policy of destroying European energy providers or distancing Europe from them is unsettling. It would appear that the United States is out to eliminate Europe’s energy options and induce dependency on US’s dubious resources in shale gas; sold in dollars of course.
Conclusion: as Louis XVIII, King of France and a man of the world, said, only ambition never matures. An economic system based on the dollar is falling apart, but ambition will keep it active up to its final ruin. Umberto Mazzei, IREI SISMONDI, Geneva
Sismondi, Jean Charles (1827). Nouveaux Principes de Economie Politique ou De la richesse dans ses rapports avec la population. Paris: Delunay.
Drucker, Peter. (1986). The Changed World Economy, Washington: Foreign Affairs.
Todd, Emanuel. (2002). Après l’ Empire: essai sur la décomposition du systeme américain. Paris:Gallimard.
Capaldo, Jeronim, 2014. The Trans-Atlantic Trade and Investment Partnership:
European Disintegration, Unemployment and Instability, GDAE Working Paper 14-03, Tufts University, Medford, MA.http://ase.tufts.edu/gdae/policy_research/TTIP_simulations.html
BIC / BIS, 2014 Bank of International Settlements, Basel:http://www.bis.org/statistics/dt1920a.pdf,
Eurostat, 2014; 2013, European Commission,
BM, 2014 ; BM 2013. World Bank.http://databank.worldbank.org/data/download/GDP.pdf