This is an interesting item but it misses so much. Extremely unbalanced economies resolve by way of painful adjustments. We have dodged nothing but the new methods and tools have transferred risk to the dollar system and our ability to sustain capital inflows. We are not out of the woods yet by any means and even our denial at this point is part of the pattern.
http://www.voxeu.org/index.php?q=node/3421
What would be surprising is the misplaced confidence and complacency when you consider the US and UK are still in the ICU on full life support but this is just as it was then, hope springs eternal.
Market wrap: Leading stocks made further progress on the rally. Bulls encouraged by optimism from steel industry and Farm Board, by more foreign buying, and by market ability to resist bad news. Major industrials including US Steel, American Can, and GE, staged good gains in first 4 hours. Reactionary tendencies developed in late afternoon on profit taking, but sales were well absorbed on moderate price recessions, with the setback appearing technical. Bond market more active; US govts. and high grade corp. strong; speculative corp. irregular; foreign govts. mixed.
Broad Street Gossip: The head of one prominent Exchange firm has been seeking opinions among his 1,200 customers; finds that experienced traders are now optimistic, having “been through numerous panics” in the past only to see the country recover and become “more prosperous than ever before”. On the other hand, the young trader with less than 10 years experience “can see nothing but black clouds ahead ... and just cannot see how industry can get back on its feet again.”
In past few weeks, fire insurance company funds have been increasingly invested in common stocks of leading companies with safe dividends; viewed as significant since these investments “are directed by shrewd and conservative observers.”
S. Strawn, Montgomery Ward chair., says recovery depends on business men not politicians; warns against “drift toward Bolshevism”; says great problem now is gearing production down so that it will “synchronize with consumption”; implies some wage cuts may be needed.
Market ability to resist bad news is in contrast with a short time ago, when it “ignored any favorable development.” In past week, market has dealt with failure of an Exchange house, wheat irregularity, decline in rail car loadings, bank failures, etc., with little more than a hesitation in the upward trend.
See what I mean? The focus is already on why it was all so easy to fix.
http://newsfrom1930.blogspot.com/2009/11/friday-november-21-1930-dow-18709-048.html
The mild recession we've experienced bears no comparison with the much-mentioned Great Depression. But the difference is more the result of hard lessons learnt than better luck.
This week, Dr David Gruen of Treasury gave a lecture about what economists have learnt from the Depression and how the two events compare.
In Australia, the lead-ups to the two crises were quite different. In the present episode, we'd experienced 17 years of uninterrupted growth, falling unemployment and, in the past five years, booming export prices, leading to hugely improved terms of trade.
By contrast, in the lead-up to the Depression we experienced no real growth for five years, with the unemployment rate rising to 7 per cent. After the Depression began, real GDP fell by almost 10 per cent in 1930-31. The unemployment rate peaked at just under 20 per cent in 1930 (but had fallen to 9 per cent by 1937).
This time, of course, the economy hasn't contracted and is forecast to grow reasonably strongly next year, with the total rise in the unemployment rate expected to be just under 3 percentage points.
And this time we have a standard of living five times what it was then (even for the unemployed) and unemployment benefits which, despite their miserliness, are way better than ''the susso'' of the Depression era.
Gruen says the Depression in Australia had three main causes. First, the extremely unfavourable conditions in the world economy, particularly a large and prolonged deterioration in our terms of trade caused by a fall in the price of wool. This deterioration started in the mid-1920s, well before the Depression began.
By contrast, the deterioration in the terms of trade this time has been much smaller, with the latest level still more than 50 per cent above the average of the 1990s.
The second cause of our Depression was our adherence to the ''gold standard''. (Actually, many Depression scholars have concluded that the decision of most countries to return to the gold standard after World War I was the primary cause of the Depression around the world. So much for Wall Street's crash in October 1929.)
The value of the Australian pound was fixed to a certain amount of gold (the same amount as for the British pound) and anyone could demand that their pound note be exchanged for gold.
Without the gold standard, countries have ''fiat money'', where the value of a $5 note comes simply from the issuing government's command that it be accepted as legal tender in payment of five dollars of debt.
For a long time people disapproved of fiat money, fearing that governments could erode the value of money by permitting inflation or by deciding to ''devalue'' their currency against other countries' currencies.
The hyperinflation in Germany's Weimar Republic in the early 1920s convinced central bankers of the need to return to the gold standard. (In those days, the Commonwealth Bank was a government-owned trading bank and the central bank.)
Trouble is, a country that suffers a major fall in the value of its exports - a deterioration in its terms of trade - needs to respond by devaluing its currency. So sticking with the gold standard ensured the avoidance of inflation, but did so by crunching the economy.
Despite pressure from our deteriorating balance of payments to devalue our currency, we held the line until March 1931, when we left the gold standard and devalued by 25 per cent against the British pound. By then, however, our foreign exchange reserves were run down.
Subsequent research has shown that the sooner a country left the gold standard, the sooner it recovered from the Depression. Big Mistake No.1.
By contrast, in the present crisis our dollar was floating. It acted as a shock absorber for our economy, first by depreciating by 25 per cent in the four months to November last year, then by recovering almost as rapidly.
The third cause of our Depression, according to Gruen, was our inability to borrow abroad from early 1929. Australian governments had borrowed heavily from the London capital market during the 1920s to fund a string of large infrastructure investments, rapidly increasing our foreign debt.
London banks pressed Australian governments for repayments. Our banks restricted their loans to businesses, which put pressure on the economy.
By contrast, although the latest crisis would have shut our banks out of world capital markets, our Government used the strength of its own balance sheet to guarantee the banks' overseas borrowings, for a fee.
Turning to monetary (interest-rate) policy, it was ''tragically tight'' in the run up to the Depression because of the defence of the gold standard, and even after the devaluation the banks delayed cutting interest rates for two years. Big Mistake No.2.
By contrast, this time the official interest rate was slashed late last year and early this year, even while our exchange rate was depreciating rapidly. That we got away with this without adverse reaction from the market or fears of high inflation is a testament to the credibility of the inflation-targeting framework we installed in the early 1990s.
Turning to fiscal (budgetary) policy, the low level of foreign exchange reserves caused by the delay in devaluing the pound prevented fiscal policy from being used to stimulate activity and actually forced governments to curtail their spending.
Then, under the Premiers' Plan of 1931, government spending was cut by 20 per cent and federal and state taxes were increased to finance repayments to the British banks. So fiscal policy was managed in a way that made the economy worse rather than better. Big Mistake No.3.
By contrast, this time the Federal Government's financial position was strong and the Rudd Government quickly lashed out with big stimulus spending.
Now, you can conclude that this time we were lucky to have the economy in good shape when the crisis struck. But we weren't in better shape by accident. Economists have been studying the mistakes of the Depression for decades and have been taking steps for just as long to ensure they aren't repeated.
One lesson was to steer clear of the gold standard and (later) to move to floating exchange rates. Another was that fiscal and monetary policies should be used to stimulate private demand during downturns, but also (and more recently) that they should be ''reloaded'' during the good times to be ready for the next recession.
And don't forget that the better shape of our external environment this time is thanks largely to other countries - including China - having learnt the same lessons.
Ross Gittins is the Herald's economics editor.
http://www.smh.com.au/business/learning-from-the-great-depression-20091113-iens.html
Showing posts with label history. Show all posts
Showing posts with label history. Show all posts
22 November 2009
9 September 2009
Back to 1874
Nice short item. Thx to Jesse.
http://pragcap.com/1929-or-1873
The search is on to identify historical precedents for the present global crisis in the hope that they may give useful pointers to the strategies to adopt, and those to avoid, for an effective cure and a solid return to the stability and growth of the 80s and 90s.
So far, most commentaries on historical parallels for the present financial crisis have focused on the Great Depression as the period when the US economy suffered effects most similar to the present turmoil. A contributing factor in this identification is no doubt the
fact that presiding Fed chairman Ben Bernanke did his major academic work describing and analyzing the Great Depression, its aftermath and the efficacy of the various policy moves adopted at the time.
But from a global viewpoint, a more accurate and significant parallel looks to be the depression which started in 1873, which lasted more than five years and was ultimately referred to as the Long Depression. That depression, like the present one, was accompanied by widespread financial turbulence, including bubbles in credit, land prices and mortgage-lending in the major European countries and the collapse of many large banks in the USA and Europe. The end result was the widespread adoption by many countries of protectionist policies and currency floating.
Moreover, it was during the 1870s that the USA entered global markets for the first time as a major exporter of agricultural and manufactured goods. The USA had by then become the low-cost producer of a wide range of products and in the 1870s began to flood Europe with cheap commodities (agricultural goods, minerals, timber) as well as manufactures. The economic effect on Europe was devastating. The existing international flows of production and consumption were rendered instantly obsolete, unemployment soared and there was widespread and lasting hardship.
The origin of this upheaval was the decisive shift in economic competitiveness from the old high-cost producers in Europe to the new low-cost producer, the USA. From then on the international competitive edge of the USA continued to gather strength as its economy developed rapidly with the expansion of the railroad system and the creation of a large-volume internal market enabling economies of scale.
It is this shift that makes the Depression of 1873 rather than the 1929 Great Depression the most relevant parallel for the present crisis. Over the last ten years China has grown to become today the ascendant global economic power, with India and the other developing economies in its train.
This shift will not be reversed. The developing economies have for some years now contributed the lion’s share of global growth.
At the time the adjustment to this massive secular shift in economic ascendancy was immediate and was realized through sharply lower living standards in Europe. There was no possibility of delaying its effects through the accumulation of the enormous imbalances of today. It is likely to take a long period of adjustment, economic and financial certainly, but also probably social and political, for the G3 economies to adapt to their reduced status.
If this analysis is accurate, simply avoiding the mistaken tight-credit policies adopted at the time of the 1929 Depression and flooding the US economy with money will in the end prove irrelevant and ineffective. The problem is not a simple lack of liquidity but more deep-seated, serious and challenging: that, after 130 years in the economic sun, the US, along with Europe and Japan, is no longer economically competitive. The US, at least, has always demonstrated a remarkable ability to adapt to changing economic conditions; we must hope that it manages to do so again.
http://pragcap.com/1929-or-1873
The search is on to identify historical precedents for the present global crisis in the hope that they may give useful pointers to the strategies to adopt, and those to avoid, for an effective cure and a solid return to the stability and growth of the 80s and 90s.
So far, most commentaries on historical parallels for the present financial crisis have focused on the Great Depression as the period when the US economy suffered effects most similar to the present turmoil. A contributing factor in this identification is no doubt the
fact that presiding Fed chairman Ben Bernanke did his major academic work describing and analyzing the Great Depression, its aftermath and the efficacy of the various policy moves adopted at the time.
But from a global viewpoint, a more accurate and significant parallel looks to be the depression which started in 1873, which lasted more than five years and was ultimately referred to as the Long Depression. That depression, like the present one, was accompanied by widespread financial turbulence, including bubbles in credit, land prices and mortgage-lending in the major European countries and the collapse of many large banks in the USA and Europe. The end result was the widespread adoption by many countries of protectionist policies and currency floating.
Moreover, it was during the 1870s that the USA entered global markets for the first time as a major exporter of agricultural and manufactured goods. The USA had by then become the low-cost producer of a wide range of products and in the 1870s began to flood Europe with cheap commodities (agricultural goods, minerals, timber) as well as manufactures. The economic effect on Europe was devastating. The existing international flows of production and consumption were rendered instantly obsolete, unemployment soared and there was widespread and lasting hardship.
The origin of this upheaval was the decisive shift in economic competitiveness from the old high-cost producers in Europe to the new low-cost producer, the USA. From then on the international competitive edge of the USA continued to gather strength as its economy developed rapidly with the expansion of the railroad system and the creation of a large-volume internal market enabling economies of scale.
It is this shift that makes the Depression of 1873 rather than the 1929 Great Depression the most relevant parallel for the present crisis. Over the last ten years China has grown to become today the ascendant global economic power, with India and the other developing economies in its train.
This shift will not be reversed. The developing economies have for some years now contributed the lion’s share of global growth.
At the time the adjustment to this massive secular shift in economic ascendancy was immediate and was realized through sharply lower living standards in Europe. There was no possibility of delaying its effects through the accumulation of the enormous imbalances of today. It is likely to take a long period of adjustment, economic and financial certainly, but also probably social and political, for the G3 economies to adapt to their reduced status.
If this analysis is accurate, simply avoiding the mistaken tight-credit policies adopted at the time of the 1929 Depression and flooding the US economy with money will in the end prove irrelevant and ineffective. The problem is not a simple lack of liquidity but more deep-seated, serious and challenging: that, after 130 years in the economic sun, the US, along with Europe and Japan, is no longer economically competitive. The US, at least, has always demonstrated a remarkable ability to adapt to changing economic conditions; we must hope that it manages to do so again.
24 August 2009
why money is collapsing and why central banks need adult supervision
Hat Tip Taichi
Introduction: Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. Brown's eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Can you tell us your book's thesis in a nutshell?
Brown: Our money is an illusion. Except for coins, which compose only one ten-thousandth of the money supply, all of our money today consists of debt to private banks. Banks always take back more money in principal and interest than they put into the money supply as principal, making the system basically a pyramid scheme. After 300 years, this scheme has spread around the world and has now reached its mathematical limits. The whole world has been captured in the debt trap of a private international banking monopoly.
Daily Bell: These are clearheaded deductions about economics. How did you get interested?
Brown: In my earlier books, which were on health and the politics of health, I saw the pharmaceutical industry as the force to be reckoned with and exposed. I was on the legal team of a Tijuana cancer therapist named Jimmy Keller, who showed Ed Griffin's documentary "World Without Cancer" to all his patients. I read Griffin's book of the same name and realized that the banking, drug and oil cartels were basically the same entities, and that their power came from the power to create money that they had usurped from the people themselves. This was such a mind-boggling insight that I felt I had to write about it.
Daily Bell: How did you make the jump from nutrition to finance?
Brown: My first book was on nutrition but my later books focused on the politics of health and what is wrong with our health care system. I feel we have been misled about drugs and healing, and I wanted to expose that and set it right. After reading "World Without Cancer," I read Ed Griffin's book "The Creature from Jekyll Island," which I thought was great right up to the end; but I felt his solution would not work. I then read other books on the subject and got my grounding in it. I actually got interested in writing on economics and the Federal Reserve in the seventies, but that was before the Internet, and I wasn't able to follow my hunches to the end. When that remarkable tool became available, the missing puzzle pieces fell into place and I could see the larger picture and had to write about it.
Daily Bell: Tell us some more about your background, where you grew up and when you traveled.
Brown: I was born in California, grew up in the Detroit and Denver suburbs, graduated from UC Berkeley in English and then from UCLA Law School. I met my husband Cliff in law school, and we worked as attorneys in L.A. for 10 years (11 for him), until he burned out on Beverly Hills law and decided to join the U.S. Agency for International Development. He always wanted to go abroad, and it gave me a chance to write and have more time with the kids (we have two). From 1989 to 2000, we lived in Kenya, Honduras, Guatemala and Nicaragua. Then I got divorced and returned to the States, where I discovered this most interesting of writing subjects. I'm still good friends with my ex; I just ran out of topics overseas! There was more to it than that, of course, but I do feel I had to come back to the States to find this topic du jour. My daughter now works for a U.N. N.G.O. and my son is a graduate student in economics in Michigan.
Daily Bell: What's been the reaction to your book?
Brown: Remarkably good. I get flooded with email, which is great. With my other books, I didn't have much contact with readers and felt like a ghostwriter. With this one, I feel like a lightning rod, attracting ideas from everywhere. I credit it to the Internet, an amazing historical development that has changed the game worldwide.
Daily Bell: Are you familiar with Austrian finance? What do you think of it?
Brown: I am, and I enjoyed reading Murray Rothbard; but I don't think the Quantity Theory of Money is correct. Prices do not benignly adjust to a contraction in the money supply; this has been shown historically. When the money supply contracts, workers get laid off, businesses shut down, and the economy goes into a recession or a depression. It's a fallacy to think you can control prices by controlling the money supply - or even that you can control the money supply ("you" meaning, of course, the central bank). In the 1970s and 1980s, when Milton Friedman's monetarism was popular, attempts were made to regulate prices by regulating the money supply, and they didn't work. Some major recessions resulted, and Third World countries got locked hopelessly in debt from a radical increase in interest rates, but the money supply couldn't be controlled.
The Federal Reserve doesn't create money; banks do. The Federal Reserve just responds by providing the reserves they need after the fact if they come up short. And adding money to the system doesn't raise prices - not if workers and materials are available to make goods. If you add money to the system, the money will go looking for goods, and merchants will respond by making more. Supply and demand will go up together and prices will remain stable. An increase in interest rates is more likely to raise prices. Merchants raise their prices to cover their costs, and interest is a major cost.
Daily Bell: Are you a free-market economist or something else?
Brown: I believe in free markets, but I don't believe we have them today. Virtually every market now is manipulated and controlled. We lost our free markets when we gave away the power to create money to a private banking elite. They got their power through sleight of hand, and it can be reversed only by reversing the sleight of hand. Ironically, to get back our free markets, we need some government intervention. The economy has been captured by thieves, and we need some rules and regulations to put the genie back in the bottle.
Daily Bell: What's wrong with a gold or silver monetary system?
Brown: To answer that question properly will take more than a few sentences, but I'll try to be succinct. There are three ways a precious metal system could be set up: (1) a "gold-backed" fiat currency, of the sort we had until 1933 domestically and until 1971 internationally; (2) 100% gold coins, as Ed Griffin recommends; or (3) gold, silver and anything else trading freely with dollars, as recommended by Ron Paul.
The first alternative failed historically and doesn't work mathematically. Nixon had to take the dollar off the gold standard internationally after DeGaulle traded in his dollars for gold and the British then tried to trade in theirs, and the U.S. was about to run out of gold. In a "fractional reserve" system, only a fraction of the gold necessary to cash in all the dollars "backed" by gold is actually held in the banks' vaults. When people figure that out, you get runs on the banks and the banks have to close their doors. Roosevelt was faced with the same problem. People had panicked and were trading in their dollars for gold at the banks. The dollar was then 40% backed by gold, so whenever anyone cashed in $2 in paper money, $3 in loans had to be called in. The result was a radical collapse in the money supply.
Option #2, an all-gold currency, won't work for a number of reasons, but I'll just mention one: where are you going to get the gold? To be fair, the government would have to swap all the dollars in the money supply for gold. Assume a $13 trillion money supply (M3) and that there is $4 trillion worth of gold in the world (per the last report I saw). Even if you could acquire every penny's worth of gold, you'd have to revalue the gold so that it was worth $3000/ounce. Goldbugs say that's doable, but here's my question: how are you going to get the gold? What are you going to buy it with? Your paper dollars are going to be worthless. What Indian woman wearing that gold around her neck is going to be foolish enough to trade it for your paper dollars?
Ed Griffin would just divide the outstanding money supply by the gold in Fort Knox, but we don't know if there's any gold left in Fort Knox, and even assuming there is, the dollar value per ounce is going to be so far from anything resembling the real market value of gold that tying the dollar to gold will lose all meaning. If you want a fixed money supply, why not just have Congress order up X number of dollars, forbid any more to be issued, and make it illegal for banks to create credit on their books? Let them lend what they have and no more. Even that won't work though; you'll quickly degenerate into recession or depression, because there won't be enough money for innovation, development and the like. The ability to create and extend credit is a good thing and is necessary to a thriving economy. It's just a question of who gets to create it, private banks (which then proceed to charge interest on it that they siphon off the top as profits) or public banks, drawing on the "full faith and credit of the United States" because they are the United States and can return the profits to the United States, maintaining a mathematically sound system?
The third idea - allowing people to trade in any currency they want - doesn't solve anything and just creates new problems. What's the exchange rate going to be between these various domestic currencies, and who is going to set it? Are you going to allow shortselling between currencies, derivative bets, etc.? If you have silver and gold coins trading together, what happens if gold goes up in value relative to silver? Will you have to change the face value of the coins? They could be left unstamped, but then you won't really have coins; you'll just have round gold bars. Then why not just keep your gold bars and sell them for paper dollars as needed? If the paper dollars lose value, as goldbugs are sure they will, the gold bars will fetch more dollars when sold, so value will have been preserved just as it would have been if the gold were actually turned into gold coins.
Daily Bell: You are somewhat cynical about government, yet your solutions feature government involvement. Can government really be trusted to do the right thing?
Brown: I have faith in the sort of government "of the people, by the people, for the people" described by Abraham Lincoln; but we don't have that now. What we have is government controlled by a few giant corporations, and they got their power by acquiring the power to create the national money supply. "Allow me to issue and control a nation's currency," Amschel Mayer Rothschild allegedly said in the 18th century, "and I care not who makes its laws." That statement may be apocryphal, but that is how they did it, and that is the power we have to get back if we want a just and trustworthy government that represents people rather than wealthy corporations.
Daily Bell: Do you believe in a business cycle - and that central banks aggravate it by printing too much money?
Brown: We had obvious business cycles in the 19th century when we were on the gold standard. Banks would issue banknotes that were many multiples of the gold they held in their vaults, until the paper money supply so far outstripped its backing that people realized the banks could not make good on all their gold-backed notes and there would be runs on the banks. "Fiat money" was not the problem though. The whole system was a ruse. The gold backing allowed private bankers to create paper money on a printing press and lend it at interest, pretending it represented gold the bankers did not really have in their vaults. Privately-issued paper money that is only partially backed by precious metals is a form of counterfeiting whether the sums are prudently managed or not.
Daily Bell: Was central banking over-printing of money the proximate cause of the economic crisis?
Brown: No. Alan Greenspan did lower interest rates to ridiculously low levels in 2001, precipitating the housing bubble that precipitated the current crisis; and he gave his blessing to derivatives, which allowed banks to move loans off their books, package them up, and sell them to investors, making room on their books for more loans and fanning the housing bubble. But it wasn't the central bank that over-printed money. It was the commercial banks, and of course they don't actually "print" it. They just create it as accounting entries on their books. The "crisis" came when there was a sudden shift in accounting rules, from "mark to fantasy" to "mark to market". The idea was to rein in the over exuberance\ of the banks; but the banks were just doing what they had to do to keep the Ponzi scheme going: create ever more loans. The real cause of the crisis was the Ponzi scheme itself: it just ran out of its food source.
Daily Bell: What are the best investments to make throughout the business cycle, and do they change over time?
Brown: They change over time, and because markets are so heavily manipulated, you can't really know what they are unless you're an insider. The rest of us just have to pay very close attention and ride the roller coaster. A case in point was a year ago, when gold was about to break through $1000, oil was hovering near $150/barrel, bank stocks were plummeting, and so was the dollar. Suddenly in July, everything miraculously reversed - the dollar and bank stocks shot up, and gold and oil plunged. What happened? The Japanese central bank later admitted in its local paper that the central banks had colluded to manipulate the markets.
Daily Bell: What do you think of the current economic crisis. Are Western countries handling it well?
Brown: Yes and no. The credit system has collapsed and Western central banks are trying to pump it back up with "quantitative easing," which is a better approach than President Hoover took when he tried to tighten the government's belt and "balance the budget" in the early 1930s. But bailing out the banks is the wrong approach. Governments should be using quantitative easing (essentially money-printing) to build infrastructure and pay the government's bills rather than trying to clean up the toxic books of failed banks. The problem is that the central banks are there to serve the banking system, not the people. We need truly national central banks. England and Canada technically own their central banks, but their governments still borrow from private banks. They don't use their central banks as if they owned them. China, Malaysia, and South Korea do; and they're faring quite well these days.
Daily Bell: Do you believe in the bailouts taking place in America?
Brown: No. We've been extorted into them. We've been made to believe the only way we can save our credit system is to spend our hard-earned taxpayer money to save the banks that got us into the mess, but that's not true. We can set up our own public credit system and let the private parasitic cartel fend for itself. They made billions in the free market; let them go down in the free market.
Daily Bell: Can you explain the genesis of the financial crisis?
Brown: Taking the long view, it's the end of a 300 year Ponzi scheme. Virtually all of our money is created by banks as loans; but banks create only the principal, not the interest necessary to pay their loans back. More is always owed back than is created in the first place, and new borrowers must continually be found to take out new loans to create the money to pay this extra interest. After 300 years, the whole world has been locked in debt, and the parasitic pyramid has run out of its food source.
All sorts of scams and schemes were devised to plunder the last dollar out of borrowers - securitization of subprime mortgages to move them off the banks' books and make room for more, derivatives to supposedly eliminate the risk of subprime default and induce investors to buy, etc. But the schemes have been exposed, and the "shadow lenders" - the investors induced to buy these bundles of subprime debt - have gone away and they aren't coming back any time soon.
The shadow lenders made up $10 trillion worth of the mortgage market. Virtually all of our money consists of credit (or debt), and a big chunk of this credit has disappeared. The money supply is collapsing, and that is what has caused the financial crisis. The solution is to put money back into the system; but the banks can't do it, because the Bank for International Settlements has imposed a tourniquet on lending with the Basel Accords.
We need to set up our own public banks, which cannot run short of "the full faith and credit of the United States" because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks.
Daily Bell: Do you believe that some of your ideas will be taken up officially?
Brown: I keep trying, knocking at any doors I see; but it's a slow-moving machine. The first step is mass education and popular understanding.
Daily Bell: Have you heard from Wall Street about your ideas?
Brown: No.
Daily Bell: Are you at all worried about the reaction to your ideas?
Brown: I try to suggest solutions that are good for everyone. I think the private banking business has actually come to the end of the line. They're scrambling desperately to hold it all together, but there's not much more they can do. The whole multi-trillion dollar derivatives edifice was constructed in an attempt to bring business back that the banks were losing to their competitor non-bank institutions, but it didn't work in the end. I think the bankers might be relieved to pass the baton. Not that they want to lose their existing fortunes, but they might be ready to retire to their favorite islands and let the next generation tackle the problem; or to take jobs exercising their expertise in a new public banking arrangement with the stable backing of the government.
Daily Bell: You do a great deal of public speaking. What do you emphasize most in your talks?
Brown: Solutions, solutions, solutions. This nut can be cracked. We've been looking at the problem wrong. When we step outside the box and look again, it's all quite simple. Truth is simple.
Daily Bell: What are the most important - seminal -- articles of yours that you would encourage everyone to read? Where can they be found?
Brown: My articles can all be found on my website at WebofDebt.com. I try to write one every week or two, and they're quite topical, but the most popular (per the OpEdNews ratings) have been "It's the Derivatives, Stupid!", written in September 2008 after the Lehman/AIG collapse; "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking" (December 29, 2008); and "Toward a Solution to the Debt Crisis in California" (July 13, 2009). My latest article is "The Public Option in Banking: How We Can Beat Wall Street at Its Own Game" (August 8, 2009), posted on the Huffington Post among other places.
Daily Bell: On behalf of all of our readers we thank you for sharing your views with us - and for your courageous and important work.
Brown: You're welcome. I don't feel courageous; I just write. I live with my 90-year-old mother in a senior village. I need the excitement!
http://www.thedailybell.com/496/Ellen-Brown-Web-of-Debt.html
Introduction: Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. Brown's eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Can you tell us your book's thesis in a nutshell?
Brown: Our money is an illusion. Except for coins, which compose only one ten-thousandth of the money supply, all of our money today consists of debt to private banks. Banks always take back more money in principal and interest than they put into the money supply as principal, making the system basically a pyramid scheme. After 300 years, this scheme has spread around the world and has now reached its mathematical limits. The whole world has been captured in the debt trap of a private international banking monopoly.
Daily Bell: These are clearheaded deductions about economics. How did you get interested?
Brown: In my earlier books, which were on health and the politics of health, I saw the pharmaceutical industry as the force to be reckoned with and exposed. I was on the legal team of a Tijuana cancer therapist named Jimmy Keller, who showed Ed Griffin's documentary "World Without Cancer" to all his patients. I read Griffin's book of the same name and realized that the banking, drug and oil cartels were basically the same entities, and that their power came from the power to create money that they had usurped from the people themselves. This was such a mind-boggling insight that I felt I had to write about it.
Daily Bell: How did you make the jump from nutrition to finance?
Brown: My first book was on nutrition but my later books focused on the politics of health and what is wrong with our health care system. I feel we have been misled about drugs and healing, and I wanted to expose that and set it right. After reading "World Without Cancer," I read Ed Griffin's book "The Creature from Jekyll Island," which I thought was great right up to the end; but I felt his solution would not work. I then read other books on the subject and got my grounding in it. I actually got interested in writing on economics and the Federal Reserve in the seventies, but that was before the Internet, and I wasn't able to follow my hunches to the end. When that remarkable tool became available, the missing puzzle pieces fell into place and I could see the larger picture and had to write about it.
Daily Bell: Tell us some more about your background, where you grew up and when you traveled.
Brown: I was born in California, grew up in the Detroit and Denver suburbs, graduated from UC Berkeley in English and then from UCLA Law School. I met my husband Cliff in law school, and we worked as attorneys in L.A. for 10 years (11 for him), until he burned out on Beverly Hills law and decided to join the U.S. Agency for International Development. He always wanted to go abroad, and it gave me a chance to write and have more time with the kids (we have two). From 1989 to 2000, we lived in Kenya, Honduras, Guatemala and Nicaragua. Then I got divorced and returned to the States, where I discovered this most interesting of writing subjects. I'm still good friends with my ex; I just ran out of topics overseas! There was more to it than that, of course, but I do feel I had to come back to the States to find this topic du jour. My daughter now works for a U.N. N.G.O. and my son is a graduate student in economics in Michigan.
Daily Bell: What's been the reaction to your book?
Brown: Remarkably good. I get flooded with email, which is great. With my other books, I didn't have much contact with readers and felt like a ghostwriter. With this one, I feel like a lightning rod, attracting ideas from everywhere. I credit it to the Internet, an amazing historical development that has changed the game worldwide.
Daily Bell: Are you familiar with Austrian finance? What do you think of it?
Brown: I am, and I enjoyed reading Murray Rothbard; but I don't think the Quantity Theory of Money is correct. Prices do not benignly adjust to a contraction in the money supply; this has been shown historically. When the money supply contracts, workers get laid off, businesses shut down, and the economy goes into a recession or a depression. It's a fallacy to think you can control prices by controlling the money supply - or even that you can control the money supply ("you" meaning, of course, the central bank). In the 1970s and 1980s, when Milton Friedman's monetarism was popular, attempts were made to regulate prices by regulating the money supply, and they didn't work. Some major recessions resulted, and Third World countries got locked hopelessly in debt from a radical increase in interest rates, but the money supply couldn't be controlled.
The Federal Reserve doesn't create money; banks do. The Federal Reserve just responds by providing the reserves they need after the fact if they come up short. And adding money to the system doesn't raise prices - not if workers and materials are available to make goods. If you add money to the system, the money will go looking for goods, and merchants will respond by making more. Supply and demand will go up together and prices will remain stable. An increase in interest rates is more likely to raise prices. Merchants raise their prices to cover their costs, and interest is a major cost.
Daily Bell: Are you a free-market economist or something else?
Brown: I believe in free markets, but I don't believe we have them today. Virtually every market now is manipulated and controlled. We lost our free markets when we gave away the power to create money to a private banking elite. They got their power through sleight of hand, and it can be reversed only by reversing the sleight of hand. Ironically, to get back our free markets, we need some government intervention. The economy has been captured by thieves, and we need some rules and regulations to put the genie back in the bottle.
Daily Bell: What's wrong with a gold or silver monetary system?
Brown: To answer that question properly will take more than a few sentences, but I'll try to be succinct. There are three ways a precious metal system could be set up: (1) a "gold-backed" fiat currency, of the sort we had until 1933 domestically and until 1971 internationally; (2) 100% gold coins, as Ed Griffin recommends; or (3) gold, silver and anything else trading freely with dollars, as recommended by Ron Paul.
The first alternative failed historically and doesn't work mathematically. Nixon had to take the dollar off the gold standard internationally after DeGaulle traded in his dollars for gold and the British then tried to trade in theirs, and the U.S. was about to run out of gold. In a "fractional reserve" system, only a fraction of the gold necessary to cash in all the dollars "backed" by gold is actually held in the banks' vaults. When people figure that out, you get runs on the banks and the banks have to close their doors. Roosevelt was faced with the same problem. People had panicked and were trading in their dollars for gold at the banks. The dollar was then 40% backed by gold, so whenever anyone cashed in $2 in paper money, $3 in loans had to be called in. The result was a radical collapse in the money supply.
Option #2, an all-gold currency, won't work for a number of reasons, but I'll just mention one: where are you going to get the gold? To be fair, the government would have to swap all the dollars in the money supply for gold. Assume a $13 trillion money supply (M3) and that there is $4 trillion worth of gold in the world (per the last report I saw). Even if you could acquire every penny's worth of gold, you'd have to revalue the gold so that it was worth $3000/ounce. Goldbugs say that's doable, but here's my question: how are you going to get the gold? What are you going to buy it with? Your paper dollars are going to be worthless. What Indian woman wearing that gold around her neck is going to be foolish enough to trade it for your paper dollars?
Ed Griffin would just divide the outstanding money supply by the gold in Fort Knox, but we don't know if there's any gold left in Fort Knox, and even assuming there is, the dollar value per ounce is going to be so far from anything resembling the real market value of gold that tying the dollar to gold will lose all meaning. If you want a fixed money supply, why not just have Congress order up X number of dollars, forbid any more to be issued, and make it illegal for banks to create credit on their books? Let them lend what they have and no more. Even that won't work though; you'll quickly degenerate into recession or depression, because there won't be enough money for innovation, development and the like. The ability to create and extend credit is a good thing and is necessary to a thriving economy. It's just a question of who gets to create it, private banks (which then proceed to charge interest on it that they siphon off the top as profits) or public banks, drawing on the "full faith and credit of the United States" because they are the United States and can return the profits to the United States, maintaining a mathematically sound system?
The third idea - allowing people to trade in any currency they want - doesn't solve anything and just creates new problems. What's the exchange rate going to be between these various domestic currencies, and who is going to set it? Are you going to allow shortselling between currencies, derivative bets, etc.? If you have silver and gold coins trading together, what happens if gold goes up in value relative to silver? Will you have to change the face value of the coins? They could be left unstamped, but then you won't really have coins; you'll just have round gold bars. Then why not just keep your gold bars and sell them for paper dollars as needed? If the paper dollars lose value, as goldbugs are sure they will, the gold bars will fetch more dollars when sold, so value will have been preserved just as it would have been if the gold were actually turned into gold coins.
Daily Bell: You are somewhat cynical about government, yet your solutions feature government involvement. Can government really be trusted to do the right thing?
Brown: I have faith in the sort of government "of the people, by the people, for the people" described by Abraham Lincoln; but we don't have that now. What we have is government controlled by a few giant corporations, and they got their power by acquiring the power to create the national money supply. "Allow me to issue and control a nation's currency," Amschel Mayer Rothschild allegedly said in the 18th century, "and I care not who makes its laws." That statement may be apocryphal, but that is how they did it, and that is the power we have to get back if we want a just and trustworthy government that represents people rather than wealthy corporations.
Daily Bell: Do you believe in a business cycle - and that central banks aggravate it by printing too much money?
Brown: We had obvious business cycles in the 19th century when we were on the gold standard. Banks would issue banknotes that were many multiples of the gold they held in their vaults, until the paper money supply so far outstripped its backing that people realized the banks could not make good on all their gold-backed notes and there would be runs on the banks. "Fiat money" was not the problem though. The whole system was a ruse. The gold backing allowed private bankers to create paper money on a printing press and lend it at interest, pretending it represented gold the bankers did not really have in their vaults. Privately-issued paper money that is only partially backed by precious metals is a form of counterfeiting whether the sums are prudently managed or not.
Daily Bell: Was central banking over-printing of money the proximate cause of the economic crisis?
Brown: No. Alan Greenspan did lower interest rates to ridiculously low levels in 2001, precipitating the housing bubble that precipitated the current crisis; and he gave his blessing to derivatives, which allowed banks to move loans off their books, package them up, and sell them to investors, making room on their books for more loans and fanning the housing bubble. But it wasn't the central bank that over-printed money. It was the commercial banks, and of course they don't actually "print" it. They just create it as accounting entries on their books. The "crisis" came when there was a sudden shift in accounting rules, from "mark to fantasy" to "mark to market". The idea was to rein in the over exuberance\ of the banks; but the banks were just doing what they had to do to keep the Ponzi scheme going: create ever more loans. The real cause of the crisis was the Ponzi scheme itself: it just ran out of its food source.
Daily Bell: What are the best investments to make throughout the business cycle, and do they change over time?
Brown: They change over time, and because markets are so heavily manipulated, you can't really know what they are unless you're an insider. The rest of us just have to pay very close attention and ride the roller coaster. A case in point was a year ago, when gold was about to break through $1000, oil was hovering near $150/barrel, bank stocks were plummeting, and so was the dollar. Suddenly in July, everything miraculously reversed - the dollar and bank stocks shot up, and gold and oil plunged. What happened? The Japanese central bank later admitted in its local paper that the central banks had colluded to manipulate the markets.
Daily Bell: What do you think of the current economic crisis. Are Western countries handling it well?
Brown: Yes and no. The credit system has collapsed and Western central banks are trying to pump it back up with "quantitative easing," which is a better approach than President Hoover took when he tried to tighten the government's belt and "balance the budget" in the early 1930s. But bailing out the banks is the wrong approach. Governments should be using quantitative easing (essentially money-printing) to build infrastructure and pay the government's bills rather than trying to clean up the toxic books of failed banks. The problem is that the central banks are there to serve the banking system, not the people. We need truly national central banks. England and Canada technically own their central banks, but their governments still borrow from private banks. They don't use their central banks as if they owned them. China, Malaysia, and South Korea do; and they're faring quite well these days.
Daily Bell: Do you believe in the bailouts taking place in America?
Brown: No. We've been extorted into them. We've been made to believe the only way we can save our credit system is to spend our hard-earned taxpayer money to save the banks that got us into the mess, but that's not true. We can set up our own public credit system and let the private parasitic cartel fend for itself. They made billions in the free market; let them go down in the free market.
Daily Bell: Can you explain the genesis of the financial crisis?
Brown: Taking the long view, it's the end of a 300 year Ponzi scheme. Virtually all of our money is created by banks as loans; but banks create only the principal, not the interest necessary to pay their loans back. More is always owed back than is created in the first place, and new borrowers must continually be found to take out new loans to create the money to pay this extra interest. After 300 years, the whole world has been locked in debt, and the parasitic pyramid has run out of its food source.
All sorts of scams and schemes were devised to plunder the last dollar out of borrowers - securitization of subprime mortgages to move them off the banks' books and make room for more, derivatives to supposedly eliminate the risk of subprime default and induce investors to buy, etc. But the schemes have been exposed, and the "shadow lenders" - the investors induced to buy these bundles of subprime debt - have gone away and they aren't coming back any time soon.
The shadow lenders made up $10 trillion worth of the mortgage market. Virtually all of our money consists of credit (or debt), and a big chunk of this credit has disappeared. The money supply is collapsing, and that is what has caused the financial crisis. The solution is to put money back into the system; but the banks can't do it, because the Bank for International Settlements has imposed a tourniquet on lending with the Basel Accords.
We need to set up our own public banks, which cannot run short of "the full faith and credit of the United States" because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks.
Daily Bell: Do you believe that some of your ideas will be taken up officially?
Brown: I keep trying, knocking at any doors I see; but it's a slow-moving machine. The first step is mass education and popular understanding.
Daily Bell: Have you heard from Wall Street about your ideas?
Brown: No.
Daily Bell: Are you at all worried about the reaction to your ideas?
Brown: I try to suggest solutions that are good for everyone. I think the private banking business has actually come to the end of the line. They're scrambling desperately to hold it all together, but there's not much more they can do. The whole multi-trillion dollar derivatives edifice was constructed in an attempt to bring business back that the banks were losing to their competitor non-bank institutions, but it didn't work in the end. I think the bankers might be relieved to pass the baton. Not that they want to lose their existing fortunes, but they might be ready to retire to their favorite islands and let the next generation tackle the problem; or to take jobs exercising their expertise in a new public banking arrangement with the stable backing of the government.
Daily Bell: You do a great deal of public speaking. What do you emphasize most in your talks?
Brown: Solutions, solutions, solutions. This nut can be cracked. We've been looking at the problem wrong. When we step outside the box and look again, it's all quite simple. Truth is simple.
Daily Bell: What are the most important - seminal -- articles of yours that you would encourage everyone to read? Where can they be found?
Brown: My articles can all be found on my website at WebofDebt.com. I try to write one every week or two, and they're quite topical, but the most popular (per the OpEdNews ratings) have been "It's the Derivatives, Stupid!", written in September 2008 after the Lehman/AIG collapse; "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking" (December 29, 2008); and "Toward a Solution to the Debt Crisis in California" (July 13, 2009). My latest article is "The Public Option in Banking: How We Can Beat Wall Street at Its Own Game" (August 8, 2009), posted on the Huffington Post among other places.
Daily Bell: On behalf of all of our readers we thank you for sharing your views with us - and for your courageous and important work.
Brown: You're welcome. I don't feel courageous; I just write. I live with my 90-year-old mother in a senior village. I need the excitement!
http://www.thedailybell.com/496/Ellen-Brown-Web-of-Debt.html
23 June 2009
Wandering from a dead past toward an unknown future
I beleive real change is afoot. The debt bubble in the final analysis is the endpoint of a money system which mispriced capital too cheap and therefore pumped up asset prices, then monitised to pay for lots of fossil fuels and consumption. With the illusions on which it was based shattered this credit creation system is completely busted. The centrality of Wall Street and the City has hit the brick wall of investor sentiment, physics (obsolete production paradigms) and politics and in the medium term will be disintermediated by a long credit winter. The baton has been passed to almost invisible organisms with snug burrows and good prospects that are out of sight to most.
The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.
In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..
The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.
The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.
Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.
So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.
We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.
The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.
For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.
For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.
Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.
QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.
QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.
Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.
That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.
King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".
These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.
By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.
Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.
Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.
In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?
Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.
As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.
If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.
Alarm bells on public sector pensions
Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.
Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.
Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.
The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.
This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.
A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.
The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.
BRICs at the top table
Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.
Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.
Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.
Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.
For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.
These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.
It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.
You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
Report this comment
We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.
If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.
The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.
In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..
The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.
The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.
Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.
So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.
We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.
The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.
For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.
For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.
Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.
QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.
QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.
Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.
That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.
King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".
These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.
By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.
Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.
Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.
In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?
Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.
As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.
If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.
Alarm bells on public sector pensions
Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.
Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.
Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.
The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.
This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.
A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.
The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.
BRICs at the top table
Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.
Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.
Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.
Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.
For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.
These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.
It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.
You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
Report this comment
We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.
If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.
22 April 2009
Rear Vision on the IMF
Reporter: The G20 Summit in London has ended with a regulatory blueprint designed to derail the worst financial crisis since the Great Depression.
Central to the plan is agreement to triple the resources available to the International Monetary Fund which in turn will help troubled economies.
Barack Obama: In a world that's more and more interconnected, we all have responsibilities to work together to solve common challenges and, although it will take time, I am confident that we will rebuild global prosperity if we act with a common sense of purpose and the optimism that the moment demands.
Keri Phillips: At the recent G20 meeting in London, world leaders agreed to put the International Monetary Fund centre stage in the battle to restore global economic health. Today on Rear Vision, we'll look at the history of the IMF, an organisation with a chequered past that has moved far beyond its original role.
David Vines is Professor of Economics, Balliol College, Oxford.
David Vines: Towards the end of the Second World War, the US and the UK and their allies were inspired by the possibility offered by John Maynard Keynes in his general theory of managing economies to avoid disaster. They had in their memory the end of the First World War which had seen a catastrophic collapse, followed ten years later by the Great Depression, and they were determined that countries should be able to manage their economies to keep full employment, and they saw that doing this might lead to balance of payments difficulties. And they wanted a world where this shadow didn't hang over them any longer.
Keri Phillips: Even as World War II continued, allied leaders were looking beyond the conflict in a belief that cooperation between nations would allow for future economic stability and growth for all. The International Monetary Fund, along with the World Bank specifically to help developing nations, was created even before the war ended. James M Boughton is the historian of the IMF.
James M. Boughton: Now then, the founding of the IMF is quite an interesting story because it was founded during World War II at a time when it was very difficult, and even dangerous for government officials to try to get together and meet in one place. But they all came together in 1944 at the what is now the very famous Bretton Woods conference in Bretton Woods, New Hampshire, up in the north-east part of the United States. And what they were trying to do, these were all finance officials from all the allied countries fighting against the axis in World War II, and what they were trying to do was to avoid the kind of conflicting policies and really destructive policies that countries had followed in the period between World War I and World War II, and that had led to the Great Depression; it had led to all kinds of policies where countries tried to get an advantage over their neighbours.
The term that was popular in the 1930s was 'Beggar thy neighbour policies', and what this meant was countries would devalue their currencies; they would cheapen their currencies relative to others, and that would make their products cheaper in foreign trade, and so that they, in the hope that they could sell more goods. And they would set up tariffs against, or other barriers, against imports from other countries. And what that led to was a lot of currency instability and it led to a drastic reduction in international trade, and that reduction in trade then led to a great increase in unemployment, reductions in output, and ultimately it was a contributing factor at least in leading to a Second World War, because the poverty and the despair that came out of the Depression led to an increase in dictatorships and other disastrous political decisions.
Keri Phillips: The primary role of the IMF would be to oversee a system of fixed exchange rates. The ultimate goal was to help countries maintain an equilibrium between imports and exports, without having to resort to devaluing their currencies to keep what they produced cheap and their workers employed.
This kind of economic discipline was difficult for the many democracies which emerged throughout the late 19th and early 20th centuries, according to James Raymond Vreeland, Associate Professor of International Relations in the Edmund A Walsh School of Foreign Service, Georgetown University.
James Raymond Vreeland: Under democracy, a government survives by keeping the population happy, and if the population recognises that they can't buy as much as they used to, consumption goes down, then they find that government not to be very popular. And so the government actually finds it very difficult to impose discipline on its population. When I've talked about discipline, I'm talking precisely about people earning less and sometimes just not having jobs. And if you have an authoritarian form of government you might be able to manage that, but under democracy, the government's going to be voted out of office and so either they should pursue populist policies or they'll be voted out, and a new populist government will come to power. And that populist government may be willing to actually burn the currency in order to maintain employment, but that's not sustainable over a long run with a fixed exchange rate. And the idea of having an IMF was to deal with temporary problems, loans to countries for 6 to 18 months and that basically as I said before, softened the blow of that adjustment period.
Keri Phillips: So the idea was that instead of devaluing their currencies, members would borrow from the IMF while they made the adjustments necessary to get a balance back between imports and exports. But almost from the very beginning, governments found it politically impossible to stick to the fixed rates.
Ben Chifley: Good morning, listeners. The Australian government has carefully considered the implications for Australian and the movement in the sterling-dollar rate. The government has decided that the rate of 125 pounds Australian to 100 pounds sterling, shall remain unchanged. Accordingly, the Australian pound will be devalued as against the United States dollar in the same proportion as sterling. The International Monetary Fund has been consulted and has agreed.
Keri Phillips: Australian prime minister Ben Chifley, announcing Australia's response to Britain's devaluing of its currency by almost a third in September, 1949. IMF members would struggle with the fixed exchange rate arrangements until they were finally abandoned in the 1970s when the US got into trouble. But there were other features of the fledgling fund that would distort its operation as well. Professor Ngaire Woods is director of the Global Economic Governance Program, University College, Oxford.
Ngaire Woods: One of the elements that they built into the IMF was that each country would be assigned a quota and that quota would reflect their weight in the global economy. So it's a very complicated formula that ostensibly represents their share of global trade and so forth, and on the basis of that quota they would be assigned certain voting rights and also a figure of how much they would have to lodge with the organisation. What's rather fun is that when you look at the formula you think it's all terribly scientific, but in fact Raymond Mikesell, the author of the formula, reveals in his memoirs that he was actually simply told by the United States and Britain, to go off into a corner and come up with whatever formula it took to ensure that the United States had a certain share of votes and that Britain had a certain smaller share of votes, and then to sort the rest.
Right from the start, the IMF had an executive board created, which would sit permanently and the executive board is five countries who had their own representative on the board, and so those representatives are not particularly independent. If the United States or Britain isn't very happy about what their executive director is doing, they can actually recall and replace them instantly. But all the other countries in the IMF are represented in groups, called constituencies and those constituencies elect a director. And why I'm going into that detail is because once they elect a director, they can't touch that director for two years. So in fact, those directors are very independent, they can do whatever they like.
The negotiations for creating the IMF took place at Bretton Woods in the United States, and the countries came up with an agreement, and for example, within that agreement was an agreement that gold would be the reserve currency, and that there would not be conditionality attached to IMF loans. But very quickly after that conference, in subsequent actions, the dollar very quickly became the reserve currency. The United States produced something it called their interpretation of the Articles of Agreement, and in their interpretation, they laid out that there would be conditionality. Right at the outset it was agreed by all countries that the IMF should safeguard its resources, it shouldn't just be wanton and profligate with its resources. What the United States then leapt upon which this definition of what it meant to safeguard the resources, and it's that that then they expanded, and has expanded further and further through the decades to imply a huge program of conditionality, so that by the 1990s countries were being asked to do 120 different very specific policy measures in return for their IMF loan. So both through formal politics, the United States ensured that in the Charter it had a veto, that the organisation would be in Washington DC, that it would have a controlling voice on senior management and staffing.
But also through this informal means of simply announcing what they understood the Articles of Agreement to mean afterwards, the United States quite quickly asserted its dominance.
Keri Phillips: You're listening to ABC Radio National. I'm Keri Phillips. Today's Rear Vision looks at the history of the International Monetary Fund, the agency designed to foster global economic co-operation and prevent global economic catastrophe.
John Maynard Keynes, the British economist behind the Bretton Woods system, had proposed an IMF of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. But the US was not prepared to give that much power to a division of the United Nations.
Nonetheless, many countries, including Australia, did make use of this global credit union.
James Raymond Vreeland: There was this stigma attached to turning to the IMF and taking on IMF austerity conditions. These austerity conditions were supposed to get countries to follow the good policies, the policies deemed by the IMF to be the proper ones to address balance of payments problems, and the loan was supposed to soften the blow while they adjusted. So you did see from time to time, developed countries borrowing from the IMF. Australia borrowed from the IMF in 1961; around that time, so did the United States and Japan. The United Kingdom and France also borrowed from the IMF in the 1970s but those agreements already started to have much more austerity attached to them, and in the case of the British, it became quite a politically distasteful thing to do.
So developed countries started to steer away from the IMF and really cut down on borrowing from the IMF in the late 1970s, such that only Spain and Portugal, which probably we wouldn't really consider developed countries at that time, but they were the last Western European countries to borrow from the IMF in the 1980s.
Now one thing that's kind of interesting is that a lot of people are aware of the fact that the IMF shifted its operations in the 1970s, the early 1970s, when the US went off the gold standard, right? So between 1971 and 1973, you see the world shift away from the gold standard, and the IMF ceases to, over that decade, ceases to lend to the developed world.
In the meantime, however, they had already been loaning to the developing world. You have countries like South Korea that borrowed from the IMF throughout the 1960s, straight, they actually borrowed for 12 years straight; you have a country like Panama that borrowed in the 1970s and 1980s for 20 years straight; a country like Zaire, now the Democratic Republic of Congo, they borrowed for about 14 years straight. Now it's no accident that I just threw out South Korea, Panama and Zaire; these were all Cold War allies of the United States, and so there is some correlation between who borrows from the IMF and who's favoured by the United States, who is the largest shareholder of the IMF.
So what you see is sometimes the IMF is used for political purposes to prop up governments and maybe the loans go towards helping those governments survive in power, as opposed to helping soften the blow as they adjust. If they just adjusted, maybe their program would last 6 months to 18 months, but because they don't adjust, they keep needing more loans and because they're favoured or important to the United States, they keep getting those loans.
Richard Nixon: We must protect the position of the American dollar as a pillar of monetary stability around the world. In recent weeks the speculators have been waging an all-out war on the American dollar. Accordingly, I have directed the Secretary of the Treasury, to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Ngaire Woods: The real pivot point for the IMF came in 1969 when President Nixon announced America's first step away from the Gold Standard, which finally in 1971 he abandoned entirely. Now what that meant was the whole system the IMF had been created to oversee was smashed in one blow. It would no longer be a rule-based exchange system. By announcing that it would no longer back dollars with gold, smashed the fixed exchange rate system, floating the dollar and then all the other major currencies floated in the wake of the dollar. And that created a problem which is still with us today, which is that there is no rule-based exchange rate system, and so countries accuse each other of cheating on their exchange rates.
The reason why you could have fixed exchange rates in the 1950s and '60s, is because countries used capital control. That means they kept the windows and doors closed to foreign capital coming in and out of their systems. Investors couldn't speculate on the value of exchange rates. That's what changed in the '60s and '70s.
Keri Phillips: Once countries, especially industrialised countries, decided that market driven floating exchange rates were a more appealing alternative to the Bretton Woods system, the original raison d'etre of the IMF was gone.
Ngaire Woods: In the 1970s the IMF just seems to be an institution with no purpose, and no role; it looked completely marginal. It was no longer overseeing a fixed exchange rate system, countries weren't particularly in need of its loans, in fact in the 1970s there weren't in need of its loans because the oil price increase of '73 had created vast amounts of wealth which was in search of investment opportunities, and commercial banks took up that money and very quickly started lending it to developing countries. So in the 1970s you saw this fiesta of private lending. And because inflation was high, the real interest rate on the loans that these commercial banks were making to developing country governments, like Mexico and Argentina, were negative.
In other words, banks were going to governments and saying, 'We'll lend you money, and we'll pay you to take it', because the interest rate didn't cover the rate of inflation. Needless to say all those governments did not resist the temptation. They took out millions and millions of dollars in these loans. And the IMF was simply put into a cupboard with the door closed, and it wasn't till that great party of lending crashed and came to a halt after 1979 that the IMF was pulled out of the cupboard and pushed into centre stage.
John Arden: Tremendous efforts have been made to narrow the gap between exports and incomes. In the first six months of this year alone, Brazil had a visible trade surplus of $6 billion, but the interest payments on massive loans wiped out the benefit.
The government failed to impose austerity measures demanded of it for fear of social unrest. Two riotous days in the industrial city of Sao Paolo last April were evidence of that. But convinced that the IMF could get tough, the government has now gone ahead with new measures, and they include reducing the indexation of wages to inflation.
In the '70s, the so-called Brazil Economic Miracle saw growth rates of 10% with inflation rates of only 20% to 30%. Now growth rates are negligible and inflation is running at 127% a year. The foreign debt is $90 billion.
Ngaire Woods: In 1979, the United States Federal Reserve decided dramatically to increase its interest rate, to try to stem inflation. And that very quickly affected these massive loans that had been made to developing countries. You can picture your own mortgage: if you thought you had a mortgage which you paid no interest on and then suddenly overnight you were told that you were going to start paying 13% interest on it, which is what happened, you'd either go bankrupt or start looking distinctly unstable financially. And that's what happened to these countries.
Now that might not have been a problem for the United States and Europe if it weren't for the fact that it was their banks that were hugely over-exposed in their loans to those countries, and so it became very quickly apparent that there would be an international financial crisis unless you found a way to ensure that countries like Mexico and Venezuela and Brazil and Argentina repaid the banks their loans to stop the banks from going bust. If they had all collectively defaulted it would have brought down the international financial system.
So the IMF was wheeled out and sent in to provide loans to these countries and to require these countries to adjust. And that was the deal. On the one hand, some financing, and on the other hand some adjustment. The financing was modest, it was just enough money to ensure that for example, Mexico repaid its loans to the banks. The problem of course from the Mexican point of view was that this IMF loan came with a high interest rate of its own, in fact it wasn't bailing out the countries, it was bailing out the banks through the countries, because the loans it was making to these countries had high interest rates, and these countries became more and more indebted through the 1980s. You saw riots and social unrest immediately in these countries, because the places that governments could most easily cut back were things like food subsidies, education for the poor, health for the poor, different kinds of welfare activities, and these were the places that governments first cut back.
What's interesting about the 1980s Latin American debt crisis is that the IMF was sent into a crisis, which it actually didn't have the toolkit to deal with. The approach was premised on the idea that by taking these quite draconian adjustment policies, countries would begin to grow, but by the mid-'80s, it was clear that none of the governments that were undertaking these policies were growing, and that made their debt burden more and more unsustainable.
Keri Phillips: This is Rear Vision on ABC Radio National. I'm Keri Phillips, here with a history of the agency designed to foster global economic cooperation and prevent global economic catastrophe, the International Monetary Fund.
In the decades since the Latin American debt crisis the IMF has found itself at the centre of a continuing series of economic crises.
Ginny Stein: Thailand's financial woes started a domino reaction across South East Asia. It led to Thailand seeking a US$17.2 billion rescue package from the International Monetary Fund. In accepting the bail-out package, Thailand agreed to a number of conditions, including bringing in a budget surplus in 1998, keeping its current account deficit in check, and restructuring its financial sector.
Tarrin Nimmanahaeminda (Thai Finance Minister, 1997): We will work very closely with the IMF. We will try to make our policies, our plans, which will be transparent, concise and implementable, and hopefully creditable.
James Raymond Vreeland: Now with the East Asian financial crisis, there was a major turning point, because a lot of the policies that they imposed in the late 1990s, during the East Asia financial crisis, turned out to be the wrong ones, and exacerbated the crisis, and so many emerging market countries decided to stop borrowing from the IMF. That coupled with reasonably good economic conditions, led to very little borrowing from the IMF and the IMF actually found itself tightening its own belt. And in the early 2000s, it was the IMF going through their own austerity and trimming their own budget. A major problem for the IMF is that it actually generates its own revenue through the loans that it provides. Now because it does charge some interest on the loans, and it's the interest that actually goes towards the operations, make funding the operations of the IMF.
Now with this new financial crisis, there's going to be a new round of lending and the IMF is going to be flush once again with loan repayments, and interest repayments that will help finance them. But this leads to this strange kind of a, what you'd call a perverse incentive, that the IMF does better when there are economic crises, and yet the IMF's job is supposed to be in part to prevent these crises.
Keri Phillips: After the debacle of the Asian crisis and before the current global financial crisis the IMF appeared to be sliding into irrelevance. Although the GFC may have thrust it into the spotlight once more, world leaders will have to commit more money to keep it there.
James M. Boughton: Well the IMF has a very limited amount of money to lend, and part of the discussion that's taking place among major countries now is trying to determine the best way to make sure that the IMF does have enough money to lend. We're not like a central bank that can just create money at will; our members keep the IMF on a pretty tight leash, but by the same token, they want to make sure that the IMF does have enough resources to do its job properly.
James Raymond Vreeland: The first thing that I would point out is that the IMF is still a relatively small organisation in terms of how much money it has to lend. Now on the one hand, they have, depending on the value of the dollar on any given day, they have say roughly $250 billion that they can loan out. That's sizeable, but when you consider the size of the stimulus packages that are being put together in the developed world where we're in the magnitude of trillions of dollars, you can see that the IMF certainly isn't large enough to address any of the crises in the developed world. It's really not even big enough to address crises in the emerging market countries.
Keri Phillips: As everyone keeps telling us, we're travelling through unchartered economic waters, but whatever lies ahead, one thing is certain, the current trade imbalances are unsustainable.
David Vines: What we are seeing now is a transition in the world economy from a world led by the US to a world which will be a really multi-polar world of the US, Europe, and crucially China, India, East Asia and Latin America. And we need a financial system which is stable during the period that this transformation happens and the fund is crucial to make that possible.
Let me just explain to you: a really big circumstance in the world at the minute has been the huge growth in China through very rapid export-led growth. 10% of China's GDP is exported and less than half of China's output is consumed. It's a very extraordinary growth process.
The other side of the coin has been borrowing from the rest of the world, the US, UK, Australia too, the counterparty to the Chinese selling a lot and others borrowing in order to buy it. This can't go on forever, and a stable international system in which these international imbalances are unwound, is absolutely crucial and the Fund's maintaining that stable system is central to us not degenerating into the kind of chaos we've had the last year and the kind of problem that many of us believe will continue to apply until this adjustment of international imbalance has happened. There's a real danger of competitive scrambles for devaluation in a floating rate world, by countries in debt when they get into crisis, and the Fund and the managed international system is necessary now just like it was after the Second World War to stop such a scramble.
Ngaire Woods: I think the key problem for the IMF began first when the rule-based exchange rate system collapsed because what the United States and its partners didn't do was work out what was going to replace the old rule-based system, and they didn't use the IMF as a forum to do that. And I think that's what they're going to be having to sit down to do now.
The other crucial element for the IMF was being forced in the 1980s to become this rather draconian debt collector, rather than a forum of international co-operation, and that gave the institution habits, habits of imposing conditions on countries, rather than really listening to them. So if we look at the world economy today, it's clear that the world very much needs a forum for international monetary cooperation and that it should be a role that the IMF plays. But the play that role, the IMF has to be seen by all of its members as a neutral forum for those conversations, and as an impartial arbiter and enforcer of the rules. And that's a lot of ground that it's going to have to catch up. And the very first steps it's going to have to make to do that are going to be on the representation of countries. The world is no longer a world in which America is the largest creditor. America is now the world's largest debtor. China is the world's largest creditor, and China is going to need not just a seat at the table, but a very important seat at the table.
Keri Phillips: Ngaire Woods, Director of the Global Economic Governance Program at Oxford University.
We also heard from James Raymond Vreeland, Associate Professor of International Relations at Georgetown University; David Vines, Professor of Economics, Balliol College, Oxford, and the historian of the IMF, James M. Boughton.
http://www.abc.net.au/rn/rearvision/stories/2009/2538035.htm#transcript
Central to the plan is agreement to triple the resources available to the International Monetary Fund which in turn will help troubled economies.
Barack Obama: In a world that's more and more interconnected, we all have responsibilities to work together to solve common challenges and, although it will take time, I am confident that we will rebuild global prosperity if we act with a common sense of purpose and the optimism that the moment demands.
Keri Phillips: At the recent G20 meeting in London, world leaders agreed to put the International Monetary Fund centre stage in the battle to restore global economic health. Today on Rear Vision, we'll look at the history of the IMF, an organisation with a chequered past that has moved far beyond its original role.
David Vines is Professor of Economics, Balliol College, Oxford.
David Vines: Towards the end of the Second World War, the US and the UK and their allies were inspired by the possibility offered by John Maynard Keynes in his general theory of managing economies to avoid disaster. They had in their memory the end of the First World War which had seen a catastrophic collapse, followed ten years later by the Great Depression, and they were determined that countries should be able to manage their economies to keep full employment, and they saw that doing this might lead to balance of payments difficulties. And they wanted a world where this shadow didn't hang over them any longer.
Keri Phillips: Even as World War II continued, allied leaders were looking beyond the conflict in a belief that cooperation between nations would allow for future economic stability and growth for all. The International Monetary Fund, along with the World Bank specifically to help developing nations, was created even before the war ended. James M Boughton is the historian of the IMF.
James M. Boughton: Now then, the founding of the IMF is quite an interesting story because it was founded during World War II at a time when it was very difficult, and even dangerous for government officials to try to get together and meet in one place. But they all came together in 1944 at the what is now the very famous Bretton Woods conference in Bretton Woods, New Hampshire, up in the north-east part of the United States. And what they were trying to do, these were all finance officials from all the allied countries fighting against the axis in World War II, and what they were trying to do was to avoid the kind of conflicting policies and really destructive policies that countries had followed in the period between World War I and World War II, and that had led to the Great Depression; it had led to all kinds of policies where countries tried to get an advantage over their neighbours.
The term that was popular in the 1930s was 'Beggar thy neighbour policies', and what this meant was countries would devalue their currencies; they would cheapen their currencies relative to others, and that would make their products cheaper in foreign trade, and so that they, in the hope that they could sell more goods. And they would set up tariffs against, or other barriers, against imports from other countries. And what that led to was a lot of currency instability and it led to a drastic reduction in international trade, and that reduction in trade then led to a great increase in unemployment, reductions in output, and ultimately it was a contributing factor at least in leading to a Second World War, because the poverty and the despair that came out of the Depression led to an increase in dictatorships and other disastrous political decisions.
Keri Phillips: The primary role of the IMF would be to oversee a system of fixed exchange rates. The ultimate goal was to help countries maintain an equilibrium between imports and exports, without having to resort to devaluing their currencies to keep what they produced cheap and their workers employed.
This kind of economic discipline was difficult for the many democracies which emerged throughout the late 19th and early 20th centuries, according to James Raymond Vreeland, Associate Professor of International Relations in the Edmund A Walsh School of Foreign Service, Georgetown University.
James Raymond Vreeland: Under democracy, a government survives by keeping the population happy, and if the population recognises that they can't buy as much as they used to, consumption goes down, then they find that government not to be very popular. And so the government actually finds it very difficult to impose discipline on its population. When I've talked about discipline, I'm talking precisely about people earning less and sometimes just not having jobs. And if you have an authoritarian form of government you might be able to manage that, but under democracy, the government's going to be voted out of office and so either they should pursue populist policies or they'll be voted out, and a new populist government will come to power. And that populist government may be willing to actually burn the currency in order to maintain employment, but that's not sustainable over a long run with a fixed exchange rate. And the idea of having an IMF was to deal with temporary problems, loans to countries for 6 to 18 months and that basically as I said before, softened the blow of that adjustment period.
Keri Phillips: So the idea was that instead of devaluing their currencies, members would borrow from the IMF while they made the adjustments necessary to get a balance back between imports and exports. But almost from the very beginning, governments found it politically impossible to stick to the fixed rates.
Ben Chifley: Good morning, listeners. The Australian government has carefully considered the implications for Australian and the movement in the sterling-dollar rate. The government has decided that the rate of 125 pounds Australian to 100 pounds sterling, shall remain unchanged. Accordingly, the Australian pound will be devalued as against the United States dollar in the same proportion as sterling. The International Monetary Fund has been consulted and has agreed.
Keri Phillips: Australian prime minister Ben Chifley, announcing Australia's response to Britain's devaluing of its currency by almost a third in September, 1949. IMF members would struggle with the fixed exchange rate arrangements until they were finally abandoned in the 1970s when the US got into trouble. But there were other features of the fledgling fund that would distort its operation as well. Professor Ngaire Woods is director of the Global Economic Governance Program, University College, Oxford.
Ngaire Woods: One of the elements that they built into the IMF was that each country would be assigned a quota and that quota would reflect their weight in the global economy. So it's a very complicated formula that ostensibly represents their share of global trade and so forth, and on the basis of that quota they would be assigned certain voting rights and also a figure of how much they would have to lodge with the organisation. What's rather fun is that when you look at the formula you think it's all terribly scientific, but in fact Raymond Mikesell, the author of the formula, reveals in his memoirs that he was actually simply told by the United States and Britain, to go off into a corner and come up with whatever formula it took to ensure that the United States had a certain share of votes and that Britain had a certain smaller share of votes, and then to sort the rest.
Right from the start, the IMF had an executive board created, which would sit permanently and the executive board is five countries who had their own representative on the board, and so those representatives are not particularly independent. If the United States or Britain isn't very happy about what their executive director is doing, they can actually recall and replace them instantly. But all the other countries in the IMF are represented in groups, called constituencies and those constituencies elect a director. And why I'm going into that detail is because once they elect a director, they can't touch that director for two years. So in fact, those directors are very independent, they can do whatever they like.
The negotiations for creating the IMF took place at Bretton Woods in the United States, and the countries came up with an agreement, and for example, within that agreement was an agreement that gold would be the reserve currency, and that there would not be conditionality attached to IMF loans. But very quickly after that conference, in subsequent actions, the dollar very quickly became the reserve currency. The United States produced something it called their interpretation of the Articles of Agreement, and in their interpretation, they laid out that there would be conditionality. Right at the outset it was agreed by all countries that the IMF should safeguard its resources, it shouldn't just be wanton and profligate with its resources. What the United States then leapt upon which this definition of what it meant to safeguard the resources, and it's that that then they expanded, and has expanded further and further through the decades to imply a huge program of conditionality, so that by the 1990s countries were being asked to do 120 different very specific policy measures in return for their IMF loan. So both through formal politics, the United States ensured that in the Charter it had a veto, that the organisation would be in Washington DC, that it would have a controlling voice on senior management and staffing.
But also through this informal means of simply announcing what they understood the Articles of Agreement to mean afterwards, the United States quite quickly asserted its dominance.
Keri Phillips: You're listening to ABC Radio National. I'm Keri Phillips. Today's Rear Vision looks at the history of the International Monetary Fund, the agency designed to foster global economic co-operation and prevent global economic catastrophe.
John Maynard Keynes, the British economist behind the Bretton Woods system, had proposed an IMF of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. But the US was not prepared to give that much power to a division of the United Nations.
Nonetheless, many countries, including Australia, did make use of this global credit union.
James Raymond Vreeland: There was this stigma attached to turning to the IMF and taking on IMF austerity conditions. These austerity conditions were supposed to get countries to follow the good policies, the policies deemed by the IMF to be the proper ones to address balance of payments problems, and the loan was supposed to soften the blow while they adjusted. So you did see from time to time, developed countries borrowing from the IMF. Australia borrowed from the IMF in 1961; around that time, so did the United States and Japan. The United Kingdom and France also borrowed from the IMF in the 1970s but those agreements already started to have much more austerity attached to them, and in the case of the British, it became quite a politically distasteful thing to do.
So developed countries started to steer away from the IMF and really cut down on borrowing from the IMF in the late 1970s, such that only Spain and Portugal, which probably we wouldn't really consider developed countries at that time, but they were the last Western European countries to borrow from the IMF in the 1980s.
Now one thing that's kind of interesting is that a lot of people are aware of the fact that the IMF shifted its operations in the 1970s, the early 1970s, when the US went off the gold standard, right? So between 1971 and 1973, you see the world shift away from the gold standard, and the IMF ceases to, over that decade, ceases to lend to the developed world.
In the meantime, however, they had already been loaning to the developing world. You have countries like South Korea that borrowed from the IMF throughout the 1960s, straight, they actually borrowed for 12 years straight; you have a country like Panama that borrowed in the 1970s and 1980s for 20 years straight; a country like Zaire, now the Democratic Republic of Congo, they borrowed for about 14 years straight. Now it's no accident that I just threw out South Korea, Panama and Zaire; these were all Cold War allies of the United States, and so there is some correlation between who borrows from the IMF and who's favoured by the United States, who is the largest shareholder of the IMF.
So what you see is sometimes the IMF is used for political purposes to prop up governments and maybe the loans go towards helping those governments survive in power, as opposed to helping soften the blow as they adjust. If they just adjusted, maybe their program would last 6 months to 18 months, but because they don't adjust, they keep needing more loans and because they're favoured or important to the United States, they keep getting those loans.
Richard Nixon: We must protect the position of the American dollar as a pillar of monetary stability around the world. In recent weeks the speculators have been waging an all-out war on the American dollar. Accordingly, I have directed the Secretary of the Treasury, to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Ngaire Woods: The real pivot point for the IMF came in 1969 when President Nixon announced America's first step away from the Gold Standard, which finally in 1971 he abandoned entirely. Now what that meant was the whole system the IMF had been created to oversee was smashed in one blow. It would no longer be a rule-based exchange system. By announcing that it would no longer back dollars with gold, smashed the fixed exchange rate system, floating the dollar and then all the other major currencies floated in the wake of the dollar. And that created a problem which is still with us today, which is that there is no rule-based exchange rate system, and so countries accuse each other of cheating on their exchange rates.
The reason why you could have fixed exchange rates in the 1950s and '60s, is because countries used capital control. That means they kept the windows and doors closed to foreign capital coming in and out of their systems. Investors couldn't speculate on the value of exchange rates. That's what changed in the '60s and '70s.
Keri Phillips: Once countries, especially industrialised countries, decided that market driven floating exchange rates were a more appealing alternative to the Bretton Woods system, the original raison d'etre of the IMF was gone.
Ngaire Woods: In the 1970s the IMF just seems to be an institution with no purpose, and no role; it looked completely marginal. It was no longer overseeing a fixed exchange rate system, countries weren't particularly in need of its loans, in fact in the 1970s there weren't in need of its loans because the oil price increase of '73 had created vast amounts of wealth which was in search of investment opportunities, and commercial banks took up that money and very quickly started lending it to developing countries. So in the 1970s you saw this fiesta of private lending. And because inflation was high, the real interest rate on the loans that these commercial banks were making to developing country governments, like Mexico and Argentina, were negative.
In other words, banks were going to governments and saying, 'We'll lend you money, and we'll pay you to take it', because the interest rate didn't cover the rate of inflation. Needless to say all those governments did not resist the temptation. They took out millions and millions of dollars in these loans. And the IMF was simply put into a cupboard with the door closed, and it wasn't till that great party of lending crashed and came to a halt after 1979 that the IMF was pulled out of the cupboard and pushed into centre stage.
John Arden: Tremendous efforts have been made to narrow the gap between exports and incomes. In the first six months of this year alone, Brazil had a visible trade surplus of $6 billion, but the interest payments on massive loans wiped out the benefit.
The government failed to impose austerity measures demanded of it for fear of social unrest. Two riotous days in the industrial city of Sao Paolo last April were evidence of that. But convinced that the IMF could get tough, the government has now gone ahead with new measures, and they include reducing the indexation of wages to inflation.
In the '70s, the so-called Brazil Economic Miracle saw growth rates of 10% with inflation rates of only 20% to 30%. Now growth rates are negligible and inflation is running at 127% a year. The foreign debt is $90 billion.
Ngaire Woods: In 1979, the United States Federal Reserve decided dramatically to increase its interest rate, to try to stem inflation. And that very quickly affected these massive loans that had been made to developing countries. You can picture your own mortgage: if you thought you had a mortgage which you paid no interest on and then suddenly overnight you were told that you were going to start paying 13% interest on it, which is what happened, you'd either go bankrupt or start looking distinctly unstable financially. And that's what happened to these countries.
Now that might not have been a problem for the United States and Europe if it weren't for the fact that it was their banks that were hugely over-exposed in their loans to those countries, and so it became very quickly apparent that there would be an international financial crisis unless you found a way to ensure that countries like Mexico and Venezuela and Brazil and Argentina repaid the banks their loans to stop the banks from going bust. If they had all collectively defaulted it would have brought down the international financial system.
So the IMF was wheeled out and sent in to provide loans to these countries and to require these countries to adjust. And that was the deal. On the one hand, some financing, and on the other hand some adjustment. The financing was modest, it was just enough money to ensure that for example, Mexico repaid its loans to the banks. The problem of course from the Mexican point of view was that this IMF loan came with a high interest rate of its own, in fact it wasn't bailing out the countries, it was bailing out the banks through the countries, because the loans it was making to these countries had high interest rates, and these countries became more and more indebted through the 1980s. You saw riots and social unrest immediately in these countries, because the places that governments could most easily cut back were things like food subsidies, education for the poor, health for the poor, different kinds of welfare activities, and these were the places that governments first cut back.
What's interesting about the 1980s Latin American debt crisis is that the IMF was sent into a crisis, which it actually didn't have the toolkit to deal with. The approach was premised on the idea that by taking these quite draconian adjustment policies, countries would begin to grow, but by the mid-'80s, it was clear that none of the governments that were undertaking these policies were growing, and that made their debt burden more and more unsustainable.
Keri Phillips: This is Rear Vision on ABC Radio National. I'm Keri Phillips, here with a history of the agency designed to foster global economic cooperation and prevent global economic catastrophe, the International Monetary Fund.
In the decades since the Latin American debt crisis the IMF has found itself at the centre of a continuing series of economic crises.
Ginny Stein: Thailand's financial woes started a domino reaction across South East Asia. It led to Thailand seeking a US$17.2 billion rescue package from the International Monetary Fund. In accepting the bail-out package, Thailand agreed to a number of conditions, including bringing in a budget surplus in 1998, keeping its current account deficit in check, and restructuring its financial sector.
Tarrin Nimmanahaeminda (Thai Finance Minister, 1997): We will work very closely with the IMF. We will try to make our policies, our plans, which will be transparent, concise and implementable, and hopefully creditable.
James Raymond Vreeland: Now with the East Asian financial crisis, there was a major turning point, because a lot of the policies that they imposed in the late 1990s, during the East Asia financial crisis, turned out to be the wrong ones, and exacerbated the crisis, and so many emerging market countries decided to stop borrowing from the IMF. That coupled with reasonably good economic conditions, led to very little borrowing from the IMF and the IMF actually found itself tightening its own belt. And in the early 2000s, it was the IMF going through their own austerity and trimming their own budget. A major problem for the IMF is that it actually generates its own revenue through the loans that it provides. Now because it does charge some interest on the loans, and it's the interest that actually goes towards the operations, make funding the operations of the IMF.
Now with this new financial crisis, there's going to be a new round of lending and the IMF is going to be flush once again with loan repayments, and interest repayments that will help finance them. But this leads to this strange kind of a, what you'd call a perverse incentive, that the IMF does better when there are economic crises, and yet the IMF's job is supposed to be in part to prevent these crises.
Keri Phillips: After the debacle of the Asian crisis and before the current global financial crisis the IMF appeared to be sliding into irrelevance. Although the GFC may have thrust it into the spotlight once more, world leaders will have to commit more money to keep it there.
James M. Boughton: Well the IMF has a very limited amount of money to lend, and part of the discussion that's taking place among major countries now is trying to determine the best way to make sure that the IMF does have enough money to lend. We're not like a central bank that can just create money at will; our members keep the IMF on a pretty tight leash, but by the same token, they want to make sure that the IMF does have enough resources to do its job properly.
James Raymond Vreeland: The first thing that I would point out is that the IMF is still a relatively small organisation in terms of how much money it has to lend. Now on the one hand, they have, depending on the value of the dollar on any given day, they have say roughly $250 billion that they can loan out. That's sizeable, but when you consider the size of the stimulus packages that are being put together in the developed world where we're in the magnitude of trillions of dollars, you can see that the IMF certainly isn't large enough to address any of the crises in the developed world. It's really not even big enough to address crises in the emerging market countries.
Keri Phillips: As everyone keeps telling us, we're travelling through unchartered economic waters, but whatever lies ahead, one thing is certain, the current trade imbalances are unsustainable.
David Vines: What we are seeing now is a transition in the world economy from a world led by the US to a world which will be a really multi-polar world of the US, Europe, and crucially China, India, East Asia and Latin America. And we need a financial system which is stable during the period that this transformation happens and the fund is crucial to make that possible.
Let me just explain to you: a really big circumstance in the world at the minute has been the huge growth in China through very rapid export-led growth. 10% of China's GDP is exported and less than half of China's output is consumed. It's a very extraordinary growth process.
The other side of the coin has been borrowing from the rest of the world, the US, UK, Australia too, the counterparty to the Chinese selling a lot and others borrowing in order to buy it. This can't go on forever, and a stable international system in which these international imbalances are unwound, is absolutely crucial and the Fund's maintaining that stable system is central to us not degenerating into the kind of chaos we've had the last year and the kind of problem that many of us believe will continue to apply until this adjustment of international imbalance has happened. There's a real danger of competitive scrambles for devaluation in a floating rate world, by countries in debt when they get into crisis, and the Fund and the managed international system is necessary now just like it was after the Second World War to stop such a scramble.
Ngaire Woods: I think the key problem for the IMF began first when the rule-based exchange rate system collapsed because what the United States and its partners didn't do was work out what was going to replace the old rule-based system, and they didn't use the IMF as a forum to do that. And I think that's what they're going to be having to sit down to do now.
The other crucial element for the IMF was being forced in the 1980s to become this rather draconian debt collector, rather than a forum of international co-operation, and that gave the institution habits, habits of imposing conditions on countries, rather than really listening to them. So if we look at the world economy today, it's clear that the world very much needs a forum for international monetary cooperation and that it should be a role that the IMF plays. But the play that role, the IMF has to be seen by all of its members as a neutral forum for those conversations, and as an impartial arbiter and enforcer of the rules. And that's a lot of ground that it's going to have to catch up. And the very first steps it's going to have to make to do that are going to be on the representation of countries. The world is no longer a world in which America is the largest creditor. America is now the world's largest debtor. China is the world's largest creditor, and China is going to need not just a seat at the table, but a very important seat at the table.
Keri Phillips: Ngaire Woods, Director of the Global Economic Governance Program at Oxford University.
We also heard from James Raymond Vreeland, Associate Professor of International Relations at Georgetown University; David Vines, Professor of Economics, Balliol College, Oxford, and the historian of the IMF, James M. Boughton.
http://www.abc.net.au/rn/rearvision/stories/2009/2538035.htm#transcript
20 April 2009
And Spengler is ... (a writer outs himself!)
By Spengler
During the too-brief run of the Asia Times print edition in the 1990s, the newspaper asked me to write a humor column, and I chose the name "Spengler" as a joke - a columnist for an Asian daily using the name of the author of The Decline of the West.
Barely a dozen "Spengler" items appeared before the print edition went down in the 1997 Asian financial crisis. A malicious thought crossed my mind in 1999, though, as the Internet euphoria engulfed world markets: was it really possible for a medium
whose premise was the rise of a homogeneous global youth culture to drive world economic growth?
Youth culture, I argued, was an oxymoron, for culture itself was a bridge across generations, a means of cheating mortality. The old and angry cultures of the world, fighting for room to breath against the onset of globalization, would not go quietly into the homogenizer. Many of them would fight to survive, but fight in vain, for the tide of modernity could not be rolled back.
As in the great extinction of the tribes in late antiquity, individuals might save themselves from the incurable necrosis of their own ethnicity through adoption into the eternal people, that is, Israel. The great German-Jewish theologian and student of the existential angst of dying nations, Franz Rosenzweig, had commanded undivided attention during the 1990s, and I had a pair of essays about him for the Jewish-Christian Relations website. Rosenzweig's theology, it occurred to me, had broader applications.
The end of the old ethnicities, I believed, would dominate the cultural and strategic agenda of the next several decades. Great countries were failing of their will to live, and it was easy to imagine a world in which Japanese, German, Italian and Russian would turn into dying languages only a century hence. Modernity taxed the Muslim world even more severely, although the results sometimes were less obvious.
The 300 or so essays that I have published in this space since 1999 all proceeded from the theme formulated by Rosenzweig: the mortality of nations and its causes, Western secularism, Asian anomie, and unadaptable Islam.
Why raise these issues under a pseudonym? There is a simple answer, and a less simple one. To inform a culture that it is going to die does not necessarily win friends, and what I needed to say would be hurtful to many readers. I needed to tell the Europeans that their post-national, secular dystopia was a death-trap whence no-one would get out alive.
I needed to tell the Muslims that nothing would alleviate the unbearable sense of humiliation and loss that globalization inflicted on a civilization that once had pretensions to world dominance. I needed to tell Asians that materialism leads only to despair. And I needed to tell the Americans that their smugness would be their undoing.
In this world of accelerated mortality, in which the prospect of national extinction hung visibly over most of the peoples of the world, Jew-hatred was stripped of its mask, and revealed as the jealousy of the merely undead toward living Israel. And it was not hard to show that the remnants of the tribal world lurking under the cover of Islam were not living, but only undead, incapable of withstanding the onslaught of modernity, throwing a tantrum against their inevitable end.
I have been an equal-opportunity offender, with no natural constituency. My academic training, strewn over two doctoral programs, was in music theory and German, as well as economics. I have have published a number of peer-reviewed papers on philosophy, music and mathematics in the Renaissance. But I came to believe that there are things even more important than the high art of the West and its most characteristic endeavor, classical music, the passion and consolation of my youth. Western classical music expresses goal-oriented motion, a teleology, as it were - but where did humankind learn of teleology? I no longer quite belonged with my friends and colleagues, the artists.
G K Chesterton said that if you don't believe in God, you'll believe in anything, and I was living proof of that as a young man, wandering in the fever-swamps of left-wing politics. I found my way thanks to the first Ronald Reagan administration. The righting of America after it nearly capsized during the dark years of Jimmy Carter was a defining experience for me. I owe much to several mentors, starting with Dr Norman A. Bailey, special assistant to President Reagan and director of plans at the National Security Council from 1981-1984. My political education began in his lair at the old Executive Office Building in 1981, when he explained to me that the US would destroy the Soviet Empire by the end of the 1980s. I thought him a dangerous lunatic, and immediately signed on.
I worked for Bailey's consulting firm after he left government, simultaneously pursuing a doctorate (never quite finished) in music theory. I owe most of all to the music theorists in the school of Heinrich Schenker with whom I studied in the doctoral program at City University.
Another mentor was Professor Robert Mundell, the creator of supply-side economics, among his other contributions. As an economist for the supply-side consulting firm Polyconomics in the late 1980s and early 1990s, I had dozens of conversations with Mundell, who won the Nobel Prize in 1999. I can't claim to be a Mundell student, but he graciously allowed me to acknowledge his help in a 1994 article I published in Journal of Applied Corporate Finance. What I gleaned from Mundell allowed me to begin a successful career on Wall Street at an age when most of its denizens already are over the hill.
By the late 1990s, I no longer believed that solving problems of economic stability and growth was sufficient to resolve problems that manifested themselves in economic form. Working in the inside of the financial world, ultimately as a member of the executive committee for fixed income of America's largest bank, I saw how easy it was to prejudice the efficiency of markets and to introduce distortions that eventually would have awful consequences.
I no longer quite belonged with my old friends the economists. I had left economics for music, and left music for finance, eventually working in senior research positions at Bear Stearns, Credit Suisse and Bank of America. At Bank of America, I created from scratch a highly rated fixed income research department between 2002 to 2005, with 120 professionals and mid-nine-figure compensation budget. By 2005, it was no longer clear how the financial industry would play a helpful role in fostering prosperity, and philosophical differences prompted me to take my leave.
Exile among the fleshpots of Wall Street had its benefits, but I had other ambitions. My commitment to Judaism came relatively late in life, in my mid-thirties, but was all the more passionate for its tardiness. The things I had been raised to love were disappearing from the world, or changing beyond recognition. The language of Goethe and Heine would die out, along with the languages of Dante and Pushkin.
Europe's high culture and its capacity to train universal minds had deteriorated beyond repair; one of the last truly universal European minds belongs to the octogenarian Pope Benedict XVI. In 1996, the then Cardinal Joseph Ratzinger had said in an interview published as Die Salz der Erde, "Perhaps we have to abandon the idea of the popular Church. Possibly, we stand before a new epoch of Church history with quite different conditions, in which Christianity will stand under the sign of the mustard seed, in small and apparently insignificant groups, which nonetheless oppose evil intensively and bring the Good into the world." The best mind in the Catholic Church squarely considered the possibility that Christianity itself might shrink into seeming insignificance.
Renewal could not come from music, nor literature, nor the social sciences. The wells of culture had run dry, because they derived from faith to begin with. I was raised in the Enlightenment pseudo-religion of art and beauty. Initially I looked at faith instrumentally, as a means of regenerating the high culture of the West. Art doesn't exist for art's sake.
The high culture of the West had its own Achilles' heel. Even its greatest cultivators often suffered from the sin of pride, and worshiped their own powers rather than the source of their powers. Painfully and slowly, I began to learn the classic Jewish sources. My guide back to Judaism was the great German-Jewish theologian Franz Rosenzweig, and my first essay on these subjects was published by the Jewish-Christian Relations website in 1999 under the title, "Has Franz Rosenzweig's Time Come?"
The intersection point in the Venn diagram of my background had shrunk to the point of vanishing. As a returning religious Jew, I had less and less to discuss with the secular Zionists who shared my passion and partisanship for Israel, but could not see a divine dimension in Jewish nationhood. So-called cultural Judaism repelled me; most of what passes for Jewish culture comes down to the mud that stuck to our boots as we fled one country after another. The Hebrew Bible and its commentaries over the centuries are the core of Jewish culture, with a handful of odd adjuncts, such as the novels of S Y Agnon or the last, devotional poems of Heine.
Both as classical musician and as a Germanist, I had better insight than most Jews into the lofty character of Joseph Cardinal Ratzinger, now Benedict XVI. His writings on the spiritual riches of Western classical music were an inspiration to me almost thirty years ago, when it seemed possible that this most sublime of Western arts would die out for lack of interest. Ratzinger was kind enough to review and comment on the draft of one of my articles on music theory in the 1980s. There is a connection between Ratzinger's insider's grasp of music and his Fingerspitzengefuhl for Jewish theology - something I tried to express in an essay entitled "The Pope, the Musicians and the Jews."
I was in, but not of, the world of rabbinical Judaism, of classical music, of cultural history, of conservative economics, of practical finance, of cultural history - I belonged everywhere and nowhere. I could address each of these spheres only ironically and aphoristically, in a voice that only could be anonymous - for anonymity allowed me to be in but not of all of them. As First Things editor Joseph Bottum observed to me, "Spengler's" voice freed my style. Why not openly identify myself? Because my readers then would have jammed my thinking into the Procrustean bed of their prejudice.
In 2000, there was nothing to do but to cast my thoughts upon the waters. When the first of these essays appeared I had no expectation that they might interest a wide public. To my astonishment, they were read, and read extensively. Then came 9/11, and my tale of the existential angst of nations was borne up by the Zeitgeist. The Spengler forum at Asia Times Online grew to nearly five thousand registered members. The essays often reached a million readers a month.
As I wrote pseudonymously for Asia Times Online, new friends announced themselves - journalists, academics, clergy, and people of faith from many walks of life, not least the indefatigable group of good friends that manages the Spengler Forum. The editors of First Things asked me for an essay on Franz Rosenzweig and Islam, which I published in 2007, and later a piece entitled "Zionism for Christians", which appeared in 2008 under the pseudonym "David Shushon". That was a milestone for me.
I had subscribed to the journal not long after its inception in 1990, the year I finished my PhD coursework in music. To write for First Things was an unanticipated honor. I came to know the magazine's editor Joseph Bottum, as well as such regular contributors as George Weigel, Russell Hittinger and R R Reno.
On January 8, 2009, the magazine's founder Richard John Neuhaus died. A few weeks later Jody Bottum asked me to join the staff of First Things as an editor and writer. It seems only heartbeats ago that I was in dark seas, looking up at this beacon; now it is my turn to help keep the lighthouse.
As for Asia Times Online - this scrappy, virtual expat bar - I was there at the founding, and will contribute to it as long it continues to upload, if somewhat less frequently than before.
"Spengler" is channeled by David P Goldman, associate editor of First Things (www.firstthings.com).
During the too-brief run of the Asia Times print edition in the 1990s, the newspaper asked me to write a humor column, and I chose the name "Spengler" as a joke - a columnist for an Asian daily using the name of the author of The Decline of the West.
Barely a dozen "Spengler" items appeared before the print edition went down in the 1997 Asian financial crisis. A malicious thought crossed my mind in 1999, though, as the Internet euphoria engulfed world markets: was it really possible for a medium
whose premise was the rise of a homogeneous global youth culture to drive world economic growth?
Youth culture, I argued, was an oxymoron, for culture itself was a bridge across generations, a means of cheating mortality. The old and angry cultures of the world, fighting for room to breath against the onset of globalization, would not go quietly into the homogenizer. Many of them would fight to survive, but fight in vain, for the tide of modernity could not be rolled back.
As in the great extinction of the tribes in late antiquity, individuals might save themselves from the incurable necrosis of their own ethnicity through adoption into the eternal people, that is, Israel. The great German-Jewish theologian and student of the existential angst of dying nations, Franz Rosenzweig, had commanded undivided attention during the 1990s, and I had a pair of essays about him for the Jewish-Christian Relations website. Rosenzweig's theology, it occurred to me, had broader applications.
The end of the old ethnicities, I believed, would dominate the cultural and strategic agenda of the next several decades. Great countries were failing of their will to live, and it was easy to imagine a world in which Japanese, German, Italian and Russian would turn into dying languages only a century hence. Modernity taxed the Muslim world even more severely, although the results sometimes were less obvious.
The 300 or so essays that I have published in this space since 1999 all proceeded from the theme formulated by Rosenzweig: the mortality of nations and its causes, Western secularism, Asian anomie, and unadaptable Islam.
Why raise these issues under a pseudonym? There is a simple answer, and a less simple one. To inform a culture that it is going to die does not necessarily win friends, and what I needed to say would be hurtful to many readers. I needed to tell the Europeans that their post-national, secular dystopia was a death-trap whence no-one would get out alive.
I needed to tell the Muslims that nothing would alleviate the unbearable sense of humiliation and loss that globalization inflicted on a civilization that once had pretensions to world dominance. I needed to tell Asians that materialism leads only to despair. And I needed to tell the Americans that their smugness would be their undoing.
In this world of accelerated mortality, in which the prospect of national extinction hung visibly over most of the peoples of the world, Jew-hatred was stripped of its mask, and revealed as the jealousy of the merely undead toward living Israel. And it was not hard to show that the remnants of the tribal world lurking under the cover of Islam were not living, but only undead, incapable of withstanding the onslaught of modernity, throwing a tantrum against their inevitable end.
I have been an equal-opportunity offender, with no natural constituency. My academic training, strewn over two doctoral programs, was in music theory and German, as well as economics. I have have published a number of peer-reviewed papers on philosophy, music and mathematics in the Renaissance. But I came to believe that there are things even more important than the high art of the West and its most characteristic endeavor, classical music, the passion and consolation of my youth. Western classical music expresses goal-oriented motion, a teleology, as it were - but where did humankind learn of teleology? I no longer quite belonged with my friends and colleagues, the artists.
G K Chesterton said that if you don't believe in God, you'll believe in anything, and I was living proof of that as a young man, wandering in the fever-swamps of left-wing politics. I found my way thanks to the first Ronald Reagan administration. The righting of America after it nearly capsized during the dark years of Jimmy Carter was a defining experience for me. I owe much to several mentors, starting with Dr Norman A. Bailey, special assistant to President Reagan and director of plans at the National Security Council from 1981-1984. My political education began in his lair at the old Executive Office Building in 1981, when he explained to me that the US would destroy the Soviet Empire by the end of the 1980s. I thought him a dangerous lunatic, and immediately signed on.
I worked for Bailey's consulting firm after he left government, simultaneously pursuing a doctorate (never quite finished) in music theory. I owe most of all to the music theorists in the school of Heinrich Schenker with whom I studied in the doctoral program at City University.
Another mentor was Professor Robert Mundell, the creator of supply-side economics, among his other contributions. As an economist for the supply-side consulting firm Polyconomics in the late 1980s and early 1990s, I had dozens of conversations with Mundell, who won the Nobel Prize in 1999. I can't claim to be a Mundell student, but he graciously allowed me to acknowledge his help in a 1994 article I published in Journal of Applied Corporate Finance. What I gleaned from Mundell allowed me to begin a successful career on Wall Street at an age when most of its denizens already are over the hill.
By the late 1990s, I no longer believed that solving problems of economic stability and growth was sufficient to resolve problems that manifested themselves in economic form. Working in the inside of the financial world, ultimately as a member of the executive committee for fixed income of America's largest bank, I saw how easy it was to prejudice the efficiency of markets and to introduce distortions that eventually would have awful consequences.
I no longer quite belonged with my old friends the economists. I had left economics for music, and left music for finance, eventually working in senior research positions at Bear Stearns, Credit Suisse and Bank of America. At Bank of America, I created from scratch a highly rated fixed income research department between 2002 to 2005, with 120 professionals and mid-nine-figure compensation budget. By 2005, it was no longer clear how the financial industry would play a helpful role in fostering prosperity, and philosophical differences prompted me to take my leave.
Exile among the fleshpots of Wall Street had its benefits, but I had other ambitions. My commitment to Judaism came relatively late in life, in my mid-thirties, but was all the more passionate for its tardiness. The things I had been raised to love were disappearing from the world, or changing beyond recognition. The language of Goethe and Heine would die out, along with the languages of Dante and Pushkin.
Europe's high culture and its capacity to train universal minds had deteriorated beyond repair; one of the last truly universal European minds belongs to the octogenarian Pope Benedict XVI. In 1996, the then Cardinal Joseph Ratzinger had said in an interview published as Die Salz der Erde, "Perhaps we have to abandon the idea of the popular Church. Possibly, we stand before a new epoch of Church history with quite different conditions, in which Christianity will stand under the sign of the mustard seed, in small and apparently insignificant groups, which nonetheless oppose evil intensively and bring the Good into the world." The best mind in the Catholic Church squarely considered the possibility that Christianity itself might shrink into seeming insignificance.
Renewal could not come from music, nor literature, nor the social sciences. The wells of culture had run dry, because they derived from faith to begin with. I was raised in the Enlightenment pseudo-religion of art and beauty. Initially I looked at faith instrumentally, as a means of regenerating the high culture of the West. Art doesn't exist for art's sake.
The high culture of the West had its own Achilles' heel. Even its greatest cultivators often suffered from the sin of pride, and worshiped their own powers rather than the source of their powers. Painfully and slowly, I began to learn the classic Jewish sources. My guide back to Judaism was the great German-Jewish theologian Franz Rosenzweig, and my first essay on these subjects was published by the Jewish-Christian Relations website in 1999 under the title, "Has Franz Rosenzweig's Time Come?"
The intersection point in the Venn diagram of my background had shrunk to the point of vanishing. As a returning religious Jew, I had less and less to discuss with the secular Zionists who shared my passion and partisanship for Israel, but could not see a divine dimension in Jewish nationhood. So-called cultural Judaism repelled me; most of what passes for Jewish culture comes down to the mud that stuck to our boots as we fled one country after another. The Hebrew Bible and its commentaries over the centuries are the core of Jewish culture, with a handful of odd adjuncts, such as the novels of S Y Agnon or the last, devotional poems of Heine.
Both as classical musician and as a Germanist, I had better insight than most Jews into the lofty character of Joseph Cardinal Ratzinger, now Benedict XVI. His writings on the spiritual riches of Western classical music were an inspiration to me almost thirty years ago, when it seemed possible that this most sublime of Western arts would die out for lack of interest. Ratzinger was kind enough to review and comment on the draft of one of my articles on music theory in the 1980s. There is a connection between Ratzinger's insider's grasp of music and his Fingerspitzengefuhl for Jewish theology - something I tried to express in an essay entitled "The Pope, the Musicians and the Jews."
I was in, but not of, the world of rabbinical Judaism, of classical music, of cultural history, of conservative economics, of practical finance, of cultural history - I belonged everywhere and nowhere. I could address each of these spheres only ironically and aphoristically, in a voice that only could be anonymous - for anonymity allowed me to be in but not of all of them. As First Things editor Joseph Bottum observed to me, "Spengler's" voice freed my style. Why not openly identify myself? Because my readers then would have jammed my thinking into the Procrustean bed of their prejudice.
In 2000, there was nothing to do but to cast my thoughts upon the waters. When the first of these essays appeared I had no expectation that they might interest a wide public. To my astonishment, they were read, and read extensively. Then came 9/11, and my tale of the existential angst of nations was borne up by the Zeitgeist. The Spengler forum at Asia Times Online grew to nearly five thousand registered members. The essays often reached a million readers a month.
As I wrote pseudonymously for Asia Times Online, new friends announced themselves - journalists, academics, clergy, and people of faith from many walks of life, not least the indefatigable group of good friends that manages the Spengler Forum. The editors of First Things asked me for an essay on Franz Rosenzweig and Islam, which I published in 2007, and later a piece entitled "Zionism for Christians", which appeared in 2008 under the pseudonym "David Shushon". That was a milestone for me.
I had subscribed to the journal not long after its inception in 1990, the year I finished my PhD coursework in music. To write for First Things was an unanticipated honor. I came to know the magazine's editor Joseph Bottum, as well as such regular contributors as George Weigel, Russell Hittinger and R R Reno.
On January 8, 2009, the magazine's founder Richard John Neuhaus died. A few weeks later Jody Bottum asked me to join the staff of First Things as an editor and writer. It seems only heartbeats ago that I was in dark seas, looking up at this beacon; now it is my turn to help keep the lighthouse.
As for Asia Times Online - this scrappy, virtual expat bar - I was there at the founding, and will contribute to it as long it continues to upload, if somewhat less frequently than before.
"Spengler" is channeled by David P Goldman, associate editor of First Things (www.firstthings.com).
18 April 2009
Things to Come, the challenge of the second decade of a new century
Most history buffs agree that the 20th Century, the calendar notwithstanding, began in 1914 with the Great War and the collapse of post-Napoleonic Europe. Similarly, the 19th had taken shape after the Battle of Waterloo in 1815. Looking further back, it could be said that the 18th began with the death of Louis XIV of France in 1714.
I was reading an article written by Dr Nicholas Boyle, president of Magdalene College, Cambridge. His thesis was that this century will be shaped during the next ten years by the looming geo-econopolitical crisis and the way it will be managed by people whom many may see as still immature. For years the news magazines have forecast the leaders of the future with only occasional success. Those of 2015 and years following are not yet well known but the problems they will face are becoming clearer. They include global warming, a fuel crisis, rising food costs, fresh water shortage and an international power shift...Professor Boyle asked what the coming Big Event will be and the questions that it will pose.
He suggests that the supposed clash of cultures between modern civilisation and ancient traditions is the prelude to, but not the main problem of, the 21st Century.. That prelude is the result of our oil dependency and the manipulation of the market by both the suppliers and the refiners. Competition for food, energy sources and an ongoing Spenglerian decline of the West will determine the Big Questions to be faced.
There will be a new balance of economic, political and military power. The democracies of the world will learn the need for togetherness rather than sovereignty, for mutual responsibility and interdependence rather than the luxuries of unilateral action and independence. The United States, the United Kingdom, Canada, Australia and New Zealand which already have similar legislative and judicial systems will have to establish a new solidarity in the way that executive power is wielded. Is an ongoing minority government democratic? Is a cabinet that is not immediately responsible to the elected representatives of the people democratic? And should the rising influence of India not be included in a future Common Law Commonwealth?
What might the coming Great Event of 2015 / 2020 be? The prediction of an 'endtimes' battle that has recurred through the centuries resurfaces with the fear of impending disasters and a final crisis in the Middle East. Some would recognise arcane reference to Armageddon or to the Rapture. Such conjectures are neither a credible warning nor the basis for intelligent planning for many thoughtful people.
It was the rise of Germany as a military-industrial nation a century ago that challenged British hegemony a hundred years ago. Since economic dominance is basic to military efficiency, it is becoming increasingly clear that the international balance is about to change once again. Things are building toward the next Great Event in history. Some say it will the end of an age or, apocalyptically, of the Age. Both possibilities suggest the advisability of broad dialogue rather than of secular versus fundamentalist arguments.
The article by Nicholas Boyle to which I alluded bore the title "The hour is getting late". In it he said that a huge shift is taking place in the distribution of wealth, power and influence. It is contemporary with the knowledge of our planet's inability to sustain the present pattern of production and consumption. That has implications for the internal structures and external relations of the nation states into which settlement, conquest and revolutions have divided us.
By 2015 / 2020 it should be clear whether or not the necessary adjustments will be made by international consultation and agreement or by the action of aggressive states and their death-dealing weapons. Will we, Samson-like, pull down upon ourselves the temples of our enemies or will they preemptively strike at our merchandise marts? Both are a lose-lose scenario.
Modern China, bereft of a democratic past, has an uncomfortable resemblance to Imperial Germany of a century ago. So has Iran - Persia by any other name - that ancient threat to the beginnings and development of freedom in ancient Greece. But, democracy aside, if Western politicians insist on Nationalism, Sovereignty, Independence and similar shibboleths, the Great Event of the 21st Century which is now fast approaching will eclipse all of its historical predecessors and leave behind few of us to cope with global warming and its consequences.
An H.G. Wells 1933 novel had the title The Shape of Things to Come. His earlier 1898 science fiction work The War of the Worlds gave us another warning of an unwelcome future. They both remind us that the status quo is never for long Professor Boyle ended his article with the words of Moses "I have set before you death and life. Choose life".
http://www.citizen.on.ca/news/2008/0612/columns/028.html
I was reading an article written by Dr Nicholas Boyle, president of Magdalene College, Cambridge. His thesis was that this century will be shaped during the next ten years by the looming geo-econopolitical crisis and the way it will be managed by people whom many may see as still immature. For years the news magazines have forecast the leaders of the future with only occasional success. Those of 2015 and years following are not yet well known but the problems they will face are becoming clearer. They include global warming, a fuel crisis, rising food costs, fresh water shortage and an international power shift...Professor Boyle asked what the coming Big Event will be and the questions that it will pose.
He suggests that the supposed clash of cultures between modern civilisation and ancient traditions is the prelude to, but not the main problem of, the 21st Century.. That prelude is the result of our oil dependency and the manipulation of the market by both the suppliers and the refiners. Competition for food, energy sources and an ongoing Spenglerian decline of the West will determine the Big Questions to be faced.
There will be a new balance of economic, political and military power. The democracies of the world will learn the need for togetherness rather than sovereignty, for mutual responsibility and interdependence rather than the luxuries of unilateral action and independence. The United States, the United Kingdom, Canada, Australia and New Zealand which already have similar legislative and judicial systems will have to establish a new solidarity in the way that executive power is wielded. Is an ongoing minority government democratic? Is a cabinet that is not immediately responsible to the elected representatives of the people democratic? And should the rising influence of India not be included in a future Common Law Commonwealth?
What might the coming Great Event of 2015 / 2020 be? The prediction of an 'endtimes' battle that has recurred through the centuries resurfaces with the fear of impending disasters and a final crisis in the Middle East. Some would recognise arcane reference to Armageddon or to the Rapture. Such conjectures are neither a credible warning nor the basis for intelligent planning for many thoughtful people.
It was the rise of Germany as a military-industrial nation a century ago that challenged British hegemony a hundred years ago. Since economic dominance is basic to military efficiency, it is becoming increasingly clear that the international balance is about to change once again. Things are building toward the next Great Event in history. Some say it will the end of an age or, apocalyptically, of the Age. Both possibilities suggest the advisability of broad dialogue rather than of secular versus fundamentalist arguments.
The article by Nicholas Boyle to which I alluded bore the title "The hour is getting late". In it he said that a huge shift is taking place in the distribution of wealth, power and influence. It is contemporary with the knowledge of our planet's inability to sustain the present pattern of production and consumption. That has implications for the internal structures and external relations of the nation states into which settlement, conquest and revolutions have divided us.
By 2015 / 2020 it should be clear whether or not the necessary adjustments will be made by international consultation and agreement or by the action of aggressive states and their death-dealing weapons. Will we, Samson-like, pull down upon ourselves the temples of our enemies or will they preemptively strike at our merchandise marts? Both are a lose-lose scenario.
Modern China, bereft of a democratic past, has an uncomfortable resemblance to Imperial Germany of a century ago. So has Iran - Persia by any other name - that ancient threat to the beginnings and development of freedom in ancient Greece. But, democracy aside, if Western politicians insist on Nationalism, Sovereignty, Independence and similar shibboleths, the Great Event of the 21st Century which is now fast approaching will eclipse all of its historical predecessors and leave behind few of us to cope with global warming and its consequences.
An H.G. Wells 1933 novel had the title The Shape of Things to Come. His earlier 1898 science fiction work The War of the Worlds gave us another warning of an unwelcome future. They both remind us that the status quo is never for long Professor Boyle ended his article with the words of Moses "I have set before you death and life. Choose life".
http://www.citizen.on.ca/news/2008/0612/columns/028.html
9 March 2009
The Real Great Depression ~ repost
The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS NELSON
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
link
By SCOTT REYNOLDS NELSON
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
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