[Fwd] Paper: Global Debt (long!)

Magnus Göransson magnus.goransson at iksmas.lu.se
Tue Oct 3 08:44:30 MDT 1995

I was asked by the author to forward this message on the list.

I find the paper very interesting, as it tries to analyze the role of the
global 'debt', in putting market before politics and in constraining the
state's activity . This is, I think very important to understand the last
decade's 'turn to the right' among the socialdemocrats and social liberals.

Here goes:



                            Michel Chossudovsky

Despite the wave of plant closures, mounting unemployment and the
instability of global financial markets exacerbated by the Mexican crisis,
business forecasters in the West haveunequivocally declared that "the
recession is over": "Happy daysare here again ...a wonderful opportunity
for sustained andincreasingly global economic growth is waiting to be
seized..."It is worth recalling that a similar aura of complacency
prevailed during the frenzy of late 1920s in the United States.The
possibility of a financial crash had never been seriously contemplated by
the economic orthodoxy of the time. Optimistic business predictions
continued even after the collapse of WallStreet in 1929...

The present depression is not centred in any single region of theWorld.
National economies are interlocked, commercial banking andbusiness
ownership (controlled by some 750 global corporations) transcend economic
borders. International trade is integrated and financial markets around the
World are connected through instantcomputer link-up. In turn, the movement
of the global economy is "regulated" by "a Worldwide process of debt
collection" which constricts the institutions of the national State and
contributes to destroying employment and economic activity.

The present crisis is far more complex than that of the interwar-period,
its social consequences and geo-political implicationsare far-reaching
particularly in the uncertain aftermath of the Cold War. In the developing
World, the burden of the externaldebt has reached 1.9 trillion dollars:
entire countries have beendestabilised as a consequence of the collapse of
nationalcurrencies often resulting in the outbreak of social strife,ethnic
conflicts and civil war...

In the group of OECD countries, public debts have also increased beyond
bounds (currently in excess of 13 trillion dollars).Ironically, the very
process of "reimbursing this global debt"has been conducive to its
enlargement through the systematiccreation of new debts. In the US --which
is by far the largestdebtor nation-- the public debt increased fivefold
during theReagan-Bush era. It is currently of the order of 4.9 trillion

The disintegration of "the real economy" (which is a directoutcome of the
process of debt collection) is in turn matched bya highly unstable global
financial system. Since Black Monday,October 19, 1987, considered by
analysts to be very close to atotal meltdown of the New York stock
exchange, a highly volatile pattern has unfolded marked by frequent and
increasingly serious convulsions on major bourses, the ruin of national
currencies inEastern Europe and Latin America, not to mention the plunge of
the new "peripheral financial markets" (eg. Mexico, Bangkok,Cairo, Bombay)
precipitated by "profit taking" and the suddenretreat of the large
institutional investors...

A new global financial environment has also unfolded: the wave of corporate
mergers of the late 1980s paved the way for theconsolidation of a new
generation of financiers clustered aroundthe merchant banks, the
institutional investors, the stockbrokerage firms, the large insurance
companies, etc. In this process, commercial banking functions have
coalesced with thoseof the investment banks and stock brokers.

While these "money managers" play a powerful role on financialmarkets, they
are, however, increasingly removed fromentrepreneurial functions in the
real economy. Their activities (which often escape State regulation)
include speculativetransactions in commodity futures and derivatives and
themanipulation of currency markets. Major financial actors are routinely
involved in "hot money deposits" in "the emerging markets" of Latin America
and Southeast Asia, not to mentionmoney laundering and the development of
(specialised) "privatebanks" ("which advise wealthy clients") in the many
offshore banking havens. The daily turnover of foreign exchange
transactions is of the order of one trillion dollars a day of which only 15
percent corresponds to actual commodity trade and capital flows. Within
this global financial web, money transits at high speed from one banking
haven to the next, in the intangible form of electronic transfers. "Legal"
and "illegal"business activities have become increasingly intertwined, vast
amounts of unreported private wealth have been accumulated. Favoured by
financial deregulation, the criminal mafias have also expanded their role
in the spheres of international banking.

Collecting Debt at a World Level

The global financial system has reached a dangerous cross-roads: at the
very heart of the economic crisis are the markets for public debt where
hundreds of billions of dollars of government bonds and Treasury bills are
transacted on a daily basis. In turn, the plight of the bond market and the
massive trade in US dollar denominated debts are accompanied (in an almost
symbiotic relationship) by intense rivalries between America, Europe and
Japan on the World's currency  markets. According to Institutional Investor
(January 1995), "more money was wiped off balance sheets [in the 1994 bond
market crunch] than in any other market debaclesince the crash of 1929--
including the 1987 stock marketplunge". The losses to financial
institutions and money managers in 1994 were estimated at 1.5 trillion
dollars (slightly less than the total external debt of all developing
countriescombined). The bond market plunge (which is a dramatic
reflectionof the enormous and unmanageable public debts transacted in
majorexchanges), however, has barely reached its climax: the Clinton
Administration's Mexican "bail-out" will require the issuing bythe US
Treasury of 20 billion dollars of US public debt and"guarantees". The
plunge of the US dollar is also a consequenceof the large share of the US
public debt held by German and Japanese financial institutions, not to
mention the huge amounts of US dollar banknotes in circulation in the Third
World and Eastern Europe... The depreciation of the American dollar --while
not formally acknowledged as "default on sovereign debt"--nonetheless
denotes a de facto contraction in the real value of US public debt
transacted on international capital markets. In turn, the rise of the yen
and the Deutschmark against the US dollar enables Germany and Japan
(America's Wartime enemies) to acquire American corporate assets "at a good

Moreover, in the uncertain aftermath of the Mexican financial crisis
nothing has been resolved: the "rescue package" supported by the US
Treasury, the IMF and the Bank for International Settlements was largely
intended to allow Mexico to meet its debtservicing obligations (in short
term dollar denominated tesobonos) with international creditor banks and
financial institutions. Private debts were conveniently recycled
andtransformed into public debts. The Mexican economy will be crippled for
years to come leading to a far deeper political and social fracturing:
under the deal, Mexican banks will be thrown open to foreign ownership and
the country's entire oil export-earnings are to be deposited into a bank
account in New Yorkmanaged by its international creditors.

Creditors Dictate State Economic and Social Policy

The Mexican crisis, however, is but one fragment of a complexfinancial
jigsaw: the same mechanism of debt collection has beenreplicated alongside
the adoption of IMF style market reforms inall major regions of the
developing World. The IMF ManagingDirector Mr. Michel Camdessus indeed
intimated in February thatten other indebted countries could meet the same
fate as Mexico: "we will therefore introduce still stronger surveillance to
besure that the convalescence goes well...".

The application of the neo-liberal policy agenda has become almost
universal. "Surveillance" by creditors (without the formalinvolvement of
the IMF) is also being applied in the developedmarket economies. Namely,
the accumulation of large public debts has provided financial and banking
interests with "politicalleverage" as well as the power to dictate
government economic andsocial policy. Since the early 1990s, the
macro-economic reforms adopted in the OECD countries contain many of the
essential ingredients of the "structural adjustment programmes" applied in
the Third World and Eastern Europe. The debts of parastatal enterprises,
public utilities, state, provincial and municipal government's are
carefully categorised and "rated" by financial markets (eg. Moody's and
Standard and Poor ratings). Moreover, ministers of finance are increasingly
expected to report to the large investment houses and commercial banks.
Moody's downgrading of Sweden's sovereign debt rating in January was
instrumental in the decision of the minority Social Democratic government
to curtail core welfare programmes including child allowances and
unemployment insurance benefits. Similarly, the warning by Moody's
concerning the rating of Canada's public debt was a major factor in the
adoption of massive cuts in social programmes and lay-offs by the Canadian
Minister of Finance in February. In the US, the controversial "balanced
budget amendment" (which was narrowly defeated in the Senate) in March,
would have entrenched the rights of the State's creditors in the US

The Conversion of Private Debts

Since the early 1980s, large amounts of debt of large corporations and
commercial banks have been conveniently  erased N and transformed into
public debt. This process of "debt conversion" is a central feature of the
crisis: business and banklosses have been systematically transferred to the
State. (TheMexican "bail-out" is but one example of this process). During
the merger boom of the late 1980s, the burden of corporate losseswas
shifted to the State through the acquisition of bankruptenterprises. The
latter could then be closed down and written off as tax losses. In turn,
the "non-performing loans" of the large commercial banks were routinely
written off and transformed into pre-tax losses. The "rescue packages" for
troubled corporations and commercial banks (including the French
government's controversial FrF. 135 billion bail-out of Credit Lyonnais)
are largely based on the same principle of shifting the burden of corporate
debts onto the State Treasury.

In turn, the many State subsidies rather than stimulating  jobcreation,
were routinely used by large corporations to finance their mergers,
introduce labour saving technology and relocate production to the Third
World. Not only were the costs associated with corporate restructuring
borne by the State, public spending directly contributed to increased
concentration of ownership anda significant contraction of the industrial
workforce. In turn, the string of bankruptcies of small and medium sized
enterprises and lay-off of workers (who were also tax payers) were
conduciveto a significant contraction in tax revenues.

Towards a Narrowing of the Tax Base

The debt crisis had also triggered the development of a highly regressive
tax system, which also contributed to the enlargement of the public debt.
While corporate taxes were curtailed, the new tax revenues appropriated
from the (lower and middle) salaried population (including the value added
taxes) were recycled towards the servicing of the public debt. While the
State was collecting taxes from its citizens, "a tribute" was being paid by
the State to big business in the form of hand-outs and subsidies.

In turn, spurted by the new banking technologies, the flight ofcorporate
profits to offshore banking havens in the Bahamas,Switzerland, the Channel
Islands, Luxembourg, etc., contributed to further exacerbating the fiscal
crisis. The Cayman islands, a British Crown colony in the Caribbean, for
instance, is the fifthlargest banking centre in the World (ie. in terms of
the size of its deposits, most of which are by dummy or anonymous
companies).The enlargement of the budget deficit in the US bears a direct
relationship to massive tax evasion and the flight of unreported corporate
profits. In turn, large amounts of money deposited inthe Cayman Islands and
the Bahamas (part of which is controlled by criminal organisations) are
used to fund business investments in the US.

Under the Political Trusteeship of Finance Capital

A vicious circle had been set in motion. The recipients ofgovernment
"hand-outs" had become the State's creditors. The bonds and treasury bills
issued by the Treasury to fund big business had been acquired by banks and
financial institutions,which were simultaneously the recipients of State
subsidies. An absurd situation: the State was "financing its own
indebtedness",government "hand-outs" were being recycled towards the
purchase of public debt. The government was being squeezed between business
groups lobbying for subsidies on the one hand and its financial creditors
on the other hand. And because a large portion of the public debt was held
by private banking and financial institutions, the latter were also able to
pressure governments for an increased command over public resources...

The Illusory "Independence" of the Central Bank

Moreover, the practices of central banks in many OECD countrieshave been
modified to meet the demands of financial markets. Central banks have
become increasingly "independent" and"shielded from political influence".
What this means in practice is that the national Treasury is increasingly
at the mercy of private commercial creditors. Under article 104 of the
MaastrichtTreaty, for instance, "[c]entral bank credit to the government
isentirely discretionary, the central bank cannot be forced toprovide such
credit". These statutes are therefore directly conducive to the enlargement
of the public debt held by privatefinancial and banking institutions.

In practice, the Central Bank (which is neither accountable to the
government nor to the Legislature), operates as an autonomous bureaucracy
under the trusteeship of private financial and banking interests. The
latter (rather than the government) dictate the direction of monetary
policy. For instance, the abrupt hikes in interest rates in the US in
1994-95 had been dictated by Wall Street, leading to the swelling of
interest payments on the public debt and corresponding cuts in
socialexpenditures, which had also been demanded by Wall Street...

Monetary policy no longer exists as a means of State intervention; it
largely belongs to the realm of private banking. In contrast to the marked
scarcity of State funds, "the creation of money" (implying a command over
real resources) occurs within the inner web of the international banking
system in accordancewith the sole pursuit of private wealth. Powerful
financial actors not only have the ability of creating and moving
moneywithout impediment, but also of manipulating interests rates
andprecipitating the decline of major currencies as occurred withthe
spectacular tumble of the pound sterling in September 1992.What this
signifies, in practice, is that central banks are no longer able to
regulate the creation of money in the broadinterests of society (eg. in
view of mobilising production orgenerating employment).

Crisis of the State

The democratic system has been steered into a quandary: those elected to
high office increasingly act as bureaucrats. TheState's creditors have
become the depositaries of real political power operating discretely in the
background. In turn, a uniform political ideology has unfolded. A
"consensus" on macro-economic reform extends across the political spectrum.
In the UnitedStates, Democrats and Republicans have joined hands; in
theEuropean Union, socialist governments have become the protagonists of
"strong economic medicine"... The fate of public policy is transacted on
the US and Eurobond markets. Policy options are mechanically presented
through the same stylised economic slogans: " we must reduce the deficit,
we must combatinflation"; "the economy is overheating: put on the

The interests of the financial establishment (particularly in theUnited
States) have also permeated the top echelons of theTreasury and the
multilateral banks: the US Treasury Secretary Mr. Robert Rubin was a senior
banking executive at Goldman Sachs,the outgoing President of the World Bank
Mr. Lewis Preston waschief executive at J. P. Morgan, and so on.
Conversely, Mr.Nicholas Brady, a Republican Senator during the Reagan era
and a former US Treasury Secretary in the Bush Administration "throughhis
private US company Darby Overseas is participating in a Cayman islands
registered consortium". (Sally Bowen, "BradyInvestment in Peru", The
Financial Times, London, 22 July 1994)."[Mr. Brady's company] is to invest
in Peru's commercial banking sector, rated a high risk while it awaits a
Brady plan to reschedule its debt... Darby Overseas was set up a year ago
[1993] by Mr Brady, his chief aide at the Treasury  Mr. HollisMcLoughlin,
and Mr Daniel Marx, [former] Argentine finance under-secretary (...). The
prime mover behind IFH, constituted to bid for Interbanc, is Mr Carlos
Pastor, Peru's economy ministerin the early 1980s."(Ibid)  Marred by
conflicts of interest, the State system in the West is in crisis as a
result of its ambivalent relationship to private economic and financial
interests. Under these conditions, the practice of democracy has become a
ritual. No policy alternative is offered to the electorate as evidenced by
the 1995 presidential campaign inFrance. As in a one party  State, the
results of the ballot have virtually no impact on the actual conduct of
State economic andsocial policy...

There are no straightforward and easy "solutions" to a global financial
crisis which looms dangerously in the years ahead. Alternative policies can
indeed be formulated, but do G7political leaders have the power let alone
the propensity, to carry them out in the name of society? The accumulation
of large public debts (and the pressures exercised by creditors on the
State system) are at the heart of this crisis, requiring effective "social
regulation" and intervention in financial markets, namely a form of
"financial disarmament" in view of constraining the destabilising
activities of speculators. A report by the Bundesbank published in 1993
warned that trade inderivatives could potentially "trigger chain reactions
and endanger the financial system as a whole". Moreover, while committed to
financial deregulation, the Chairman of the USFederal Reserve Board Mr.
Alan Greenspan nonetheless recognised that: "Legislation is not enough to
prevent a repeat of the Barings crisis in a high tech World where
transactions are carried out at the push of the button".

Concrete financial mechanisms that secure the cancellation of the external
debt of developing countries and the write-down of the public debts of the
developed countries are also required alongside regulatory policies, which
carefully monitor the activities of the Bretton Woods institutions and
"democratise" the structures of central banks. The World community should
recognise the failure of the dominant neoliberal system. Of crucial
importance, is the articulation of new rules governing World trade as well
as the development of an expansionary ("demand side") macro-economic policy
agenda geared towards the alleviation of poverty and the Worldwide creation
of employmentand purchasing power.

    Michel Chossudovsky
        Department of Economics,
    University of Ottawa,
     Ottawa, K1N6N5
    fax: 1-613-7892051
    e-mail: chosso at travel-net.com

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<199509182323.TAA22022 at travel1.travel-net.com>Date: Tue, 19 Sep 1995
02:02:49 GMTFrom: chosso at travel-net.com (Michel Chossudovsky)

Forwarded by Magnus Goransson (magnus.goransson at iksmas.lu.se)

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