Giovanni Arrighi: finance capital's 600 year old playbook

In Arrighi's The Long Twentieth Century, the features that allowed the capitalist state, as pioneered by fifteenth century Venice and Genoa, to grow out of and transform medieval Europe read like the elements of a playbook still in use today:

1) Profits determine all. Apply cost-benefit analysis to all uses of state power, which is deployed to serve the financial interests that control the state.

2) Increase banking profits by delaying the settlement of debts, expanding the amount of credit issued by making deferred repayments overlap one another, a system which collapses if all accounts are cleared simultaneously. When periodic financial crises force counter parties to clear accounts simultaneously, shift the losses onto clients and competitors.

3)  Use sound money as a store of value to reliably measure profits and losses from far flung deals, and profit from the monetary ignorance of trading and financial partners who use less stable currencies that vary in value geographically and over time.

4) Create a central bank for the control of public finances by private creditors. Inflate the pubic debt to strengthen the hand of creditors and progressively empower the central bank to take over the administration of government revenues for the benefit of financial interests.

5) Protect financial interests by limiting the amount the state spends on warfare. Maintain a balance of power among rivals and manipulate it in your favour, for example by having other states fight your wars for you for as little financial cost to yourself.

6)  Run an extensive diplomatic and espionage network to gather intelligence about the ambitions and capabilities of rivals in order to manipulate the balance of power, reduce the amount spent on warfare and increase the military costs borne by others.

7) When conflict is necessary generate revenues from wars to make them pay for themselves. For example, through having military spending boost the incomes of citizens, thereby increasing tax revenues and the capacity of the state to finance more military expenditure.

China, the Global South and Progressive Politics: Giovanni Arrighi and David Harvey

Giovanni Arrighi (The Long Twentieth Century) writes from Marxist tradition but takes an empirical approach and talks common sense. In this symposium on Arrighi's Adam Smith in Beijing, David Harvey by contrast looks to be a Marxist who lauds Mao while demonizing present day China as brutally neoliberal. What the views of Arrighi and Harvey point to is a divide in left politics between those who see the lifting out of poverty of hundred of millions in the 'global south' as a progressive trend for the 21st century and those eager to cast the developing world as the problem - for global security, the environment and human rights - in effect giving left cover to the reactionary project of conserving power in the west. Arrighi provisionally sides with the 'global south', saying it's too early to tell how China will develop, while seeing in her history of mostly peaceful interstate relations a potentially different sort of rise than that of western capitalist states, which was inextricably linked to militarism and territorial expansion (see Capitalism's 600 year old playbook).

Review of deflation risks - Middle East, Eurozone, China, U.S.

In the near to medium term the risk of a deflationary shock to the global economy comes from one or more of the following scenarios:

       Oil price shock –  Alongside ongoing Iran-Israel tensions, the Syrian civil war, a proxy regional conflict between Turkey and the Gulf states on one side and Iran on the other, is spilling over into Lebanon and Iraq. The USA and Russia are backing opposing sides in the region therefore a general middle-east war is possible and may be probable. The resulting oil price shock would have a deflationary impact on the global economy. While higher food and energy prices may increase household inflation expectations, in a depressed economy with considerable slack company profits will fall, depressing wages and consumption. Rising import prices and falling or flat export prices would deteriorate terms of trade globally, further reducing demand for goods and services (Seeking Alpha February 2011).
  
Eurozone crisis – with European banks exposed to stressed eurozone debt markets, a sustained recession increases the risk of a crisis event that destabilises, restructures or ends the euro, contracting global trade in goods and services. In periphery countries the credit contraction looks set to continue as ongoing deleveraging by an over indebted private sector is coupled with fiscal restraint imposed by Maastricht public deficit rules and Germany’s bailout conditions. Fiscal restraint is preventing governments from acting as borrowers of last resort, a necessary role in a liquidity trap if consumer spending is to be stimulated and bank lending revived (INET 2013). For example, Spanish bank lending to the private sector was down 7% year-on-year in May in one of the fastest contractions among advanced economies (Reuters July 15^th). Italy’s economy has contracted for 8 consecutive quarters (Business Insider August 6^th).

Present policy and therefore the potential for crisis is likely to continue over the near to medium term. The German Constitutional court has ruled that further significant EU integration would require a referendum. Given such a poll would likely be based on the adoption of a new EU treaty, and the Lisbon treaty took five years to negotiate, the Eurozone may have to wait until the 2017 German general election for ‘more Europe’ to finally resolve the crisis, meaning a continuation of the present policy of structural adjustment and little prospect of reversing the negative unemployment trend over the next four years (Bond Vigilantes August 2013; Eurostat June 2013).

      China hard landing – an overleveraged financial system, a reliance on exports to depressed western consumer markets and political barriers to reform that rebalances the economy towards domestic consumption are significant structural problems that increase the risk of a deflationary crisis. Indicators such as the level of leverage as measured by the domestic credit-to-GDP ratio, asset price inflation in property and land prices, and factors pointing to a structural slowdown in China’s potential growth rate all suggest a correspondence between the country’s financial-risk profile and those of Thailand, Japan, Spain, and the United States on the eve of their recent financial crises. Further policy easing in these conditions would push the leverage ratio and inflation even higher, risking a disruptive and unpredictable deleveraging process, or‘hard landing’ (Nomura, March 2013).

A persistently weakening Yen (see Threats, Stagflation) could also be a factor in triggering a hard landing and a wider emerging market crisis. A falling yen raises China’s real exchange rate with Japan (7% of exports), and negatively impacts ASEAN’s terms of trade with Japan (ASEAN is 10% of China’s exports). With consumer demand in the EU (16% of China’s exports) already depressed, if the US (17% of exports) also tightens policy, deteriorating balance of payments could trigger a currency crisis in China and across the region. In this scenario the use of large FX reserves to prop up currencies adds to the deflationary monetary squeeze, as domestic currency is taken out of circulation. A weakening yen was a causal factor in the 1998 Asian Crisis (Valuewalk, April 2013, Trading Economics/China).

      U.S. monetary policy – QE Tapering may signal a shift away from easy monetary policy, increasing deflation risks. Money creation through QE has only partially offset the ongoing contraction of bank credit since 2007-8, preventing deflation but delivering subpar levels of growth (Cato Institute, April 2013). Federal Reserve purchases of mortgage backed securities and treasuries have supported demand for those assets, despite negative real interest rates for much of the period, by preventing falling prices/ rising yields from increasing borrowing costs in those markets and causing a deflationary spiral in the wider economy. In May of this year Bernanke’s announcement of a planned ‘tapering’ of QE over the coming quarters was followed by a hundred basis point rise in U.S. treasury yields. This pushed the national average rate on a 30-year fixed mortgage up to 4.36% from 3.4% on May 1^st, risking the recovery in the housing market (Bloomberg July 2013).

To taper, the Federal Reserve is looking for the unemployment rate to fall below 7% and inflation to rise towards 2% - they are 7.4% and 1.8% respectively and presently moving toward target (Bloomberg June 2013, Trading Economics, August 2013). The effect of rising bond yields may delay tapering but if introduced any resulting interest rate impact may be eased by the reinvestment of maturing bond holdings into new asset purchases and a lowering of the Government borrowing requirement due to this year’s sequester and payroll tax rises (Aviate Global June 2013, USA Today February 2013, CNN July 2013). However, if having to begun to taper upward pressure on interest rates were to prompt the Federal Reserve to reverse policy, confidence in the central bank’s ability to implement an exit strategy may erode, increasing the risk of a deflationary interest rate shock.

The human cost of Dhaka's tannery industry: World Bank ignores land-lease solution

Prompted to look in to this after watching an RT documentary on the tannery industry in Bangladesh. Its not viewable at the website but you can get an idea of the human cost from this youtube short:

Colors of Water: Dhaka's Leather Tanneries

http://www.youtube.com/watch?v=XL1u5aCo2r0

It highlights the desperate need for infrastructure investment in Bangladesh - the country isn't credit worthy enough to attract foreign loans nor does it have the domestic savers to raise funds from bonds issues.

Yet it looks as if a solution has been around for two decades. In 1994 China started self-financing infrastructure development through its land-lease model: government sold usage rights to land it owned to commercial enterprises building offices, factories and housing, and then used the income from leases to develop local amenities such as roads, water and electricity services that in turn enhanced the land's potential for economic growth.

No taxes, no foreign creditors required. The land-lease option is given here, p11:

Financing infrastructure spending in Bangladesh

No such solutions from international financial institutions charged with fostering 'development' in countries like Bangladesh. The World Bank's involvement in the country seemingly goes back to 2001 and is summarised here. No mention of the above option. Two World Bank research papers on land-lease in 2006 and in 2010 talk up the negatives:

Integrating Land Financing Into Subnational Fiscal Management

Land Leasing And Land Sale As An Infrastructure-Financing Option

 

Debt-based money and wealth concentration

Former central banker and currency trader Bernard Lietaer has criticised the global monetary system for “concentrating wealth upwards”, a position that should be uncontroversial given that, according to Oxfam, last year 26 people owned as much as the 3.8 billion people who make up the poorest half of humanity. Intuitively we understand that debt lies at the heart of the problem, but how exactly does the present system produce such inequality? The following features of the debt-based monetary system suggests how at every level it works to concentrate wealth:

1. Credit worthiness- loans are readily available to the wealthy and scarce to those on lower incomes deemed to be higher credit risks.
2. Compound interest - the wealthy benefit from potentially exponential rises in interest income on large bank deposits as interest is earned both on the principal sum of a deposit and all previously accumulated interest. This incentivises the wealthy to hoard capital in low risk deposits and interest bearing assets like bonds rather than invest capital in risky business ventures, slowing the circulation of money in the wider economy.
3. Leverage - access to credit and financial expertise allows the wealthy to use debt to amplify returns from trading low risk securities, for example allowing an investor with £1000,000 of capital to earn a 2% profit on a £10,000,000 security. 
4. Asymmetric information- access to exclusive and timely knowledge about complex financial markets and products enables wealthy investors to take advantage of upward or downward movements in market prices.
5. Cantillion effect- new credit issued by banks typically goes to credit-worthy individuals and institutions first, who are able to spend the new money before this increase in the money supply inflates the prices of goods and services in the economy. Those who receive new money later, either indirectly through the wider circulation of money spent by early recipients of credit or directly through knock on demand for new credit, are only able to spend after prices have inflated. This relative difference in spending power between early and late recipients of new money works to distribute resources and incomes to the wealthy.
6. Global capital - wealthy investors can deploy capital internationally, and typically do so to profit from indebted less developed countries with weaker, more unstable currencies. When a government meets its international debt obligations, a portion of that country's wealth is siphoned off in interest payments to foreign creditors, but if these debts, which are denominated in stronger overseas currencies, become un-repayable in the weaker currency of a less developed country, the resulting loss of confidence in bond and foreign exchange markets leads to a sell off and devaluation of that currency, causing domestic prices and incomes to fall relative to those in countries with stronger currencies where international creditors are based. This gives foreign creditors and investors the purchasing power to buy up the country's assets cheaply, redistributing wealth and resources away from the poorer indebted country to holders of capital in richer countries (see Dollar Risk: Hot Money and the East Asian Currency Crisis).
   
   

From Greed to Green: Bernard Lietaer's global demurrage currency

Bernard Lietaer is a monetary thinker who is already envisioning a post dollar crisis world. His proposal, a global demurrage or negative interest rate currency backed by a basket of commodities, running alongside local, national and regional currencies, is presented here:

In his proposal, as summarised in this white paper on the terra, countries transfer ownership of excess production of important commodities such as gold, oil, wheat, copper, tin, and carbon credits to a private trade alliance in exchange for a currency, the terra, 100% backed by those commodities. A 3-4% annual demurrage fee for holding the terra pays for its operating costs and incentivises users to spend the currency into circulation rather than hoard it.

In his presentation, Lietaer describes our present interest bearing monetary system as 'patriarchical', which he deems problematic in three main ways:

1) In enforcing a monopoly where only one form of money is lawful among a community of users (eg a national currency) the resilience that comes from diversity is sacrificed for efficiency, making this 'patriarchal' money inherently unstable.

2) The time value of money, the interest income forgone today to receive cashflows from an investment project in the future, has two main effects in his view:
a) it promotes short termism, making it more profitable or less costly to bring future cash flows forward to the present, focussing firms on next quarter's results rather than long term returns.
b) compounding interest ultimately requires firms to grow faster than the ever rising cost of capital, converting more and more natural resources into goods and services at an unsustainable rate.

3) Interest bearing money has socially negative consequences. It is necessarily scarce (see The State, Debt and the Value of Fiat Money), forcing competition among money users and tending to concentrate wealth upwards into the hands of a few.

For Lietaer, a 'matrifocal' monetary system is by contrast diverse and therefore stable, abundant in supply and distributive in effect.

Lietaer's implied thesis is that 'monetary system design' is a powerful factor in cultural evolution, which  he believes can be directed to nurture desired ethical instincts, for him represented in the transition from 'Greed to Green'.  But his prescription - a global demurrage currency 100% backed by a commodity basket - by itself only partly delivers the outcomes he desires.

Yes, demurrage would encourage investors to think longer term. If holding demurrage money costs the user (as opposed to earning him interest) and does so at an annually compounding rate, then an investment project that returns 0% a year, for example, would be profitable and increasingly so over the very long term.

But:

1) The terra as global complimentary currency is necessarily a post crisis solution, not a factor that would stabilise the present system

The terra's 100% commodity backing gives it an "inflation resistance" that might work to add a stabilising layer to the international monetary system, but why would money users prefer a demurrage currency that costs money to hold over currencies that earn interest.  The acceptance of the terra as an "international standard of value" therefore would have to follow a serious failure in the global monetary system, which Lietaer  predicts will come from a dollar crisis, creating conditions where national currencies would stand in relation to the terra as soft currencies do to hard currencies today, in other words without the purchasing power or exchange rate stability for international trade.

2) A global demurrage currency in the conditions described above may deliver an ecologically sustainable economy but is unlikely to address the scarcity, social competition and wealth concentration created by the present system of interest bearing money:

If conditions were such that the terra became the international currency of choice, then it would deliver the goal of an ecologically sustainable ecomony in three ways. It would constrain the overall supply of money available for international trade since new terras are only created when countries produce excess commodities in exchange. By withdrawing excess supply of oil, wheat, copper and tin from consumption markets the terra would likely support a rising trend in the price of these commodities, raising the cost of living and slowing growth. This price effect may be counterbalanced by declining demand in commodity poor countries poor opting to contract their economies to earn terras in exchange for carbon credits. But whether through supply constraint or falling demand the overall quantity of resources converted into goods and services might be expected to decline relative to world population growth.

Therefore there will be scarcity and social competition in the new monetary ecology Lietaer envisages. And concentration of wealth and power? If Lietaer's proposed system produces the above effects, presumably intended given his perspective and ultimate goal, then capital accumulation would likely become more difficult. Would not those who have accumulated capital under the present monetary system consolidate their gains? What do the historical examples of demurrage money cited by Lietaer - Ancient Egypt and the European middle ages from 1000 to 1300 - tell us about the kind of society that may result?

Obama's 2nd inauguration: climate change, values and beliefs

Climate change headed a list of policy priorities in Obama's 2nd inaugural address:

The speech frames his policy agenda within a values framework historically relevant to the United States. But the relationship between the values we hold and our beliefs about the problems we think exist in the world is an interdependent one. Just as our values can influence what we believe to be true, an open-minded appraisal of our beliefs can determine which values we prioritise. If this is true, a sincere assessment of the issue of climate change must combine judgements about the values at stake - fairness to the next generation, prevention of harm to the environment and those affected - with a critical assessment of the nature of the problem and the proposed solutions. Thoughtful people in a democratic society should therefore want credible answers to the following set of practical questions, which apply to any public policy problem. 

Is there a problem?

How serious is the problem?

What feasible strategies are there for dealing with the problem?

Will a chosen solution be effective in solving the problem?

Will an effective solution cause more harm than good?

Hot Money and the East Asian Currency Crisis.

My summary of the East Asian currency crisis of 1997. Fears about low international reserves relative to external debt undermined investor confidence in these countries. The resulting withdrawal of short term credit from overseas lenders created liquidity crises. Expectations of deteriorating macro-economic performance led to selling pressure on currencies and then speculative raids on government reserves as countries tried to defend the currency pegs that had brought prosperity over the previous decade.

The dynamics and consequences of disruptive international flows of capital can be seen in the East Asian crisis of 1997, involving South Korea, Thailand, Malaysia and Indonesia. The crisis affected each country differently, but all had liberalised their capital accounts to foreign institutional investors and lenders.[1] Importantly, the affected countries also maintained fixed or narrow band foreign exchange rate regimes prior to 1997, pegging their currencies to the US dollar (Gottschalk & Griffith-Jones, 2006). Attracted by sound macroeconomic fundamentals,[2] the ‘East Asian 4’ received very high levels of capital inflows in the 1990s, rising as a proportion of GDP to an average of 9.2% in 1995 and 1996. Crucially, the composition of these external liabilities was skewed towards to the short end, with 66% of total flows into these countries between 1989 and 1996 made up of foreign portfolio investments (15%) and short term international bank loans (51%).[3] The withdrawal of short maturity bank credit constituted 92% of the capital outflows from the four countries during the crisis, as foreign lenders stopped rolling over loans. In total, bank credit of $27.6 billion and $30.6 billion left the countries in 1997 and 1998, amounting to 18.6% and 26.6% of GDP (Cailloux & Griffith-Jones, 2006). The ensuing liquidity and currency crisis devastated economies. South Korea, Thailand and Indonesia experienced massive devaluations of 46%, 56% and 84% (Gottschalk & Griffith-Jones, 2006). This massively increased the foreign debt-to-GDP ratios of these countries, bankrupted firms exposed to overseas debt and deteriorated the balance sheets of domestic banks, leading to a contraction of domestic demand that was only partially offset by rising exports (Takagi, 2007). GDP growth in some cases did not return to pre-1997 levels for several years.[4]
 

Liberalising the capital account when financial sectors were still immature made these economies dependent on foreign credit and investment, making them vulnerable to massive capital reversals. However, exchange rate policy and devaluation fears were also major factors in the liquidity crisis. A surge in the dollar in 1996-7 appreciated the dollar-pegged East Asian currencies against those of non-dollar countries, worsening current account deficits at a time when levels of international reserves relative to stocks of external debt were low, reducing the ability of governments to defend their currency pegs.[5] With debt collateral and paper assets denominated in vulnerable currencies the prospect of devaluation exposed international banks and investors to increased default and portfolio risk. The resulting capital outflows increased the supply of domestic currency,[6] which combined with speculative attacks by hedge funds, investment banks and other actors forced these countries off their pegs (Gottschalk & Griffith-Jones, 2006). The ‘East Asian 4’ have since allowed their currencies to trade freely in international markets, but they have also built up massive reserve holdings in part to safeguard against future financial and currency crises.[7]

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[1] The term ‘capital account liberalisation’, often used in the literature, refers to the ‘financial account’ as discussed earlier.

[2] The countries were performing well in terms of GDP growth, fiscal deficits and inflation (Gottschalk et al, 2006, p292).

[3] The ratio of short term external debt to total debt was especially high in South Korea (57.5%) and Thailand (41.4%) (Gottschalk & Griffith-Jones, 2006).  

[4] Thailand and Indonesia did so in 2006 and 2004(Trading Economics, 2012).

[5] In 1997 short term foreign capital amounted to $101 billion in South Korea and $75 billion in Thailand, 3 and 2.4 times the size of reserves respectively. A 1:1 ratio between international reserves and stocks of external short term debt is considered sufficient to safeguard against liquidity crises (Gottschalk & Griffith-Jones, 2006).

[6] For example as domestic borrowers sold assets to buy foreign currencies to repay principals on unrenewed foreign loans.

[7] In 2007 South Korea held $240 billion in reserves (20 percent of GDP), Thailand $59.1 billion (9.9 percent of GDP), Malaysia holds $82.3 billion (62.2 percent). Prior to the crisis, most countries' reserve holdings were less than 10 percent of their GDP (Baker, 2007).