[Marxism] Patrick Bond on world financial volatility
pbond at mail.ngo.za
Mon Dec 27 06:17:14 MST 2004
----- Original Message -----
From: "Jurriaan Bendien" <andromeda246 at hetnet.nl>
>I think Patrick makes a pertinent analysis, but I wonder what political and
>cultural conclusions follow from it, i.e. how he sees all this affecting
>social relations, and just how volatile that volatility is.
I'd make the argument that a critical mass of these emerging markets crises
occurring simultaneously could provide the power shift required to a) get
some new leaders into the semi-periphery who give a damn about the masses;
and b) provide the basis of a sustained default on foreign debt and
portfolio finance liabilities - something we've needed very very badly
indeed across the Third World for about 22 years now. On the more durable
problem of socio-cultural relationships within capitalism, hopefully the end
of the debt-based accumulation trajectory is near, allowing a regrounding of
class struggles in the spheres of production and reproduction - rather than
in sites of what can be considered crisis displacement, such as the
financial/commercial circuits of capital.
> I also wonder why the US savings rate is so low; one sort of explanation
> is that Americans live "like there's no tomorrow" but that doesn't seem
> entirely credible - another possible explanation is that, if we
> disaggregated the data, we might find a large mass of people don't have
> the money to save. One can hardly object if people try to help other
> people into homes, but what is the overall economic effect, apart from
> rising property values?
On this, I'm not sure. Bourgeois economics posits a causal
savings/investment relationship (though Keynes debunked that). Probably the
low savings rate is a function of how close people are indeed living on the
edge, but possibly it's also a function of the overall environment of asset
inflation, which gets ordinary households to imagine a sustainable route to
wealth by speculating in shares (until 2000) and now property. Have to go
back and read Brenner on these processes. Certainly he argues in the NLR a
year ago that the vast rise of property churning in GDP could have a
dramatic impact on 'growth' when the bubble bursts (but that was before the
2004 recovery picked up).
Anyhow, the rest of this article (about 1/4 was posted by Louis) follows:
----- Original Message -----
World financial volatility
by Patrick Bond
Addis Ababa - When an Indian-based network of dissident economists - the
International Development Economics Associates
(http://www.networkideas.org) - recruited critical African intellectuals for
two dozen seminar sessions last week, the stability of world capitalism
naturally came up for debate. The Council for the Development of Social
Science Research in Africa and the Ethiopian Economics Association mainly
lamented the structural conditions in world markets which have left African
cash-crop exporters ever poorer and more vulnerable.
Is a different, inward-oriented strategy appropriate? I think so, but
perhaps a prior question is whether the world financial power center, in
Washington, might weaken sufficiently to make a progressive approach more
politically attractive, technically feasible and economically rewarding.
To answer affirmatively requires adding more meat to the bones of my last
column, 'Crunch time for U.S. capitalism' (ZNet Commentary, December 4). I
argued that the economic slowdown since the 1970s generated falling
corporate profit rates and speculative investment bubbles. But the
'displacement' not resolution of these problems meant they actually get
worse: through, for example, volatile financial markets, ineffectual Third
World structural adjustment imposed by the World Bank and IMF, and more
desperate, brutal imperialist looting methods.
It is a good time to think outside the neoliberal box, these economists
agreed, since the Washington Consensus universally failed the masses of
Ethiopians and billions of other Third World people. In addition, financial
volatility has been evident not just in the dollar price, but in other
markets across the world, even after the dust settled in East Asia following
the 1997-98 meltdown. While the Clinton Treasury Department managed to pass
the costs of these problems elsewhere, the chickens have recently been
coming home to roost in the U.S. itself.
The main organizer of our gathering, Jayati Ghosh of Nehru University in New
Delhi, is one of the sharpest critics of bourgeois macroeconomics, combining
robust anti-imperialism with a Keynesian concern for consumption and equity:
'Financial liberalization that successfully attracts capital flows increases
vulnerability and limits the policy space of the government. Unfortunately,
the dominance of finance globally has meant that such debilitating flows
occur even when individual developing countries or developing countries as a
group have no need for such flows to finance their balance of payments or
augment their savings.'
Concludes Ghosh, 'The real benefit of such flows is derived by the U.S.
government, which, being the home of the reserve currency, can resort to
large scale deficit financing which it opposes in developing countries.'
This isn't merely a government dilemma. Consumer credit is also expanding
the bubble, as U.S. household debt (as a percentage of disposable income)
ratcheted up from below 70% prior to 1985, to above 100% fifteen years
To be sure, on the one hand, financial product innovations and advanced
technology permit a somewhat greater debt load without necessarily
endangering consumer finances. On the other hand, during the same period,
U.S. individual savings rates fell from a range of 7-12% of income to below
Moreover, household assets are mainly in real estate, in the wake of the
2000-02 stock market crash. But the property market began inflating out of
proportion to underlying values following the 1998 drop in interest rates
(the Fed's response to the Asian crisis), which spurred a dramatic increase
in mortgage refinancings.
As a result of the huge rise in property prices that followed, the
difference between the real cost of owning and of renting soared to
unprecedented levels, according to the left's guru on this issue, Dean Baker
of the Center for Economic and Policy Research in Washington. With the
housing sector contributing roughly a third of U.S. economic growth since
the late 1990s, this bubble is particularly important. Overpriced property
is also a severe threat in cities in nearly every country.
Yet another speculative investment route has opened up in financial
instruments called 'derivatives' (because they are not direct claims on
underlying property - instead, gambles on price movements). Interest rate
futures and options are especially hot trades, soaring by 41% in dollar
activity last year.
Likewise, energy-related derivatives are a popular Wall Street gamble,
resulting in huge price fluctuations in immature markets such as
electricity, gas and oil. Thanks to U.S. dependence on imported oil, which
has increased in price from $12/barrel in 1999 to more than $50/barrel a few
weeks ago, such speculation-driven price swings have exacerbated
trade deficit, already vast at 5% of GDP.
The point, as Ghosh reminds us, is that U.S. financiers can place these
sorts of bets in new markets because they receive vast loans from East Asia,
money otherwise unavailable to the rest of the world for investment. This is
especially unfair, given that Washington was the main beneficiary of the
region's currency crash in 1997-98. Massive capital flows entered the U.S.
banking system, and imports from East Asia were acquired at much lower
prices by U.S. consumers, in turn lowering what might otherwise have been
Still, more than $2 billion of overseas money is required by the U.S. each
work day to cover imports and international debt repayments. As a result,
foreign ownership of all outstanding Treasury bills has soared from 20% to
40% over the course of the past decade. Warns Ghosh, 'The problem now is
that the willingness of private investors and governments to hold more
dollar denominated assets is waning. If that continues, a crisis at the
metropolitan centre of global capitalism is a possibility.'
The U.S. dollar's value is in the midst of a deep plunge, from a peak of
$0.87 to the euro in 2001 to below $1.30/euro. But it may need to fall to as
low as $1.56/euro in the short term before equilibrium is reached, according
to some experts, with 10% annual declines thereafter.
Hence, perhaps aside from China, Japan and Taiwan - whose exporters need to
keep liquidity flowing to U.S. buyers of their goods - it is sensible for
most international investors to ditch the dollar. Not surprisingly, new
international debt securities issued in dollars have been substantially
lower than those denominated in euros since 2001.
The world financial system has been operating in favour of the U.S. and
European players, and to the detriment not only of the poorest countries,
but also roughly two dozen 'emerging markets' (in addition to Japan) which
are suffering from severe capital outflows. These larger, relatively
wealthier Third World countries had received more international investments
than they repaid in profit repatriation and other outflows until 1999. But
from 2000-03, a massive $550 billion flooded away.
Some countries - China, India and Malaysia - maintained stronger exchange
controls and hence did far better during this period. But given the outflow,
most large Third World economies were hit by extreme stock market and
currency crashes, especially Argentina, Brazil, South Africa and Turkey.
(Their subsequent recoveries have to be put into context of how far they
fell from 1998-2003.)
Other risky countries - Nigeria, Bulgaria, Ecuador, Panama, Peru, Russia and
Venezuela - are today paying extremely high rates of interest to attract
foreign funds and also local finance, while the required returns are
stratospheric in Argentina, Uruguay, the Ivory Coast and the Dominican
Worse, because of banking deregulation mainly imposed by the World Bank and
IMF, these countries' own domestic financial markets can be easily upset.
The rating agency Moody's lists the world's dozen most fragile banking
systems: Argentina, Uruguay, Bolivia, Venezuela, Indonesia, Pakistan, China,
Japan, Thailand, the Philippines, South Korea and Ukraine.
Naturally, China's impressive economic growth dominates the data and
complicates matters. In spite of attracting - uniquely in the Third World -
$40-50 billion in new foreign investments each year, the Chinese banking
system is in such bad shape that, like Japan since the early 1990s, enormous
amounts of worthless loans must be very gingerly written off.
Indeed, Central Bank deputy governor Li Ruogu resisted Washington's pressure
to upwardly revalue the Chinese currency a few weeks ago, arguing that 'What
we are trying to do is create the conditions for a market-based exchange
rate. China needs to reform its banking sector first before it can change
its exchange rate policy. How long it will take to get there, I don't know.'
Adding to all these problems is Third World foreign debt, which rose from
$580 billion in 1980 to more than $2.5 trillion today. Most of it remains
simply unrepayable. Moreover, who can disagree with the activist network
Jubilee South that in many different ways, including the North's ecological
debt to the South, it has already been repaid. In 2002 alone, the Third
World lost a net outflow of $340 billion to service foreign debt, compared
to measly overseas development aid of $37 billion.
Instead of repaying the foreign debt - which in so many cases was borrowed
by odious, undemocratic regimes from corrupt commercial bankers without any
input by (and benefit for) the citizenry - is there a default option? Here
in Addis at a meeting of African presidents a few months ago, even the
orthodox Columbia University economist Jeffrey Sachs recommended debt
repudiation, and redirection of resources to health and education. The
response was a frightened silence.
Tellingly, in three prior epochs of financial globalization - the 1830,
1880s and 1930s - similar conditions of international volatility and Third
World overindebtedness led to defaults by at least a third of all countries.
The situation today is different mainly because of centralised creditor
power. By rescheduling the debt and writing off a tiny trickle of it, the
World Bank and IMF now make sovereign defaults against individual lenders or
investors more difficult, unlike in the earlier epochs when the creditors
were not so well cartelized, and less able to call on imperial military
power to collect the collateral.
This is the story, in short, of amplified uneven development, reflected most
starkly in these divergent patterns of financial volatility. It is also
crucial to bear in mind the imperialist agenda, which today mainly links
petro-military interests in the White House to those of Wall Street and its
fraternal financial centers, via the Treasury, Fed and U.S. Trade
Representative, with codification by the main multilateral agencies.
But the situation is not entirely dire. With capitalist vulnerability comes
the potential for countervailing progressive strength, as the Argentine
comrades have shown through sustained pressure against structural
There is also renewed campaigning to urgently limit the power of - and
indeed defund and decommission - the World Bank and IMF. The World Bank
Bonds Boycott continues to be a pain in the neck to outgoing president James
Wolfensohn. If, as rumoured, he is soon replaced by the thoroughly nasty
U.S. Trade Representative, Robert Zoellick, the Bank's legitimacy will
deteriorate yet further.
Indeed, without Wolfensohn's disingenuous charm, ventures like the Bank/NGO
'Joint Facilitation Committee' - a gimmick heartily condemned during a
debate between activists and the Civicus NGO leadership in Lusaka at the
Africa Social Forum last week - will be harder for even opportunistic civil
society groups to endorse (as discussed by Michael Dorsey and myself in this
space on September 11).
The Bank is trying now to bounce back from attacks by principled eco-social
movements and NGO allies. Its International Finance Corporation private
investment subsidiary was systematically boycotted in a series of scheduled
October-November consultative meetings in Rio, Washington, Berlin, Manila,
Tokyo, Nairobi, Paris and London because 'the whole process is a sham,' as a
Friends of the Earth staffer put it.
Yet more encouragingly, last week the Bank was also defeated by an
Indonesian labor-consumer initiative to prevent electricity privatization.
In spite of arm-twisting and an added loan offer by the Bank's Jakarta
representative, the country's supreme court was convinced by international
evidence that the dangers outweighed alleged benefits, and it struck down
Bank-promoted privatization legislation.
These are very good signs, but moving from defensive to offensive measures
will be crucial in coming years. Meantime, you readers will be encouraged
about the feisty tone of the Africa Social Forum, in preparation for next
month's Porto Alegre gathering. More on that, next time.
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