6). Underlying Processes within Global Capitalism

Strapline: The New Expropriation: Austerity combined with Subsidies for the Financial Hegemons (via Quantative-Easing)


(i). Dollar Imperialism, and the universally-applied model of debt-based money creation by private banks
White man’s economics is proving itself far more ruthless than white man’s colonial rule” (quote from Mike Rowbotham in his book ‘The Grip of Death’ [1998], p-257).

Economic growth since the turn of the millennium has been identified as having been increasingly sustained by increased facilities for debt. This observation can even be seen to be relevant throughout history, in how the capitalist system relies upon the banking system to create finance for speculative wealth creation, by creating new money by lending it into existence through fractional reserve banking, which sustains economic growth for the part of the economic system it is widely acknowledged creates wealth – the private sector. The driving engine of financial capitalism itself is the banking system and debt-based money and the hegemony of private banks in this very process, and how financial capitalism cannot sustain itself without people and whole nations going into debt. It is the extent of the ‘concentration’ of the money creation process within the private-banking system which may be questioned.

At the heart of money creation by banks is the process referred to as ‘Fractional Reserve Banking’, which is where many times the amount of money is loaned out than actually exists in deposits (‘reserve requirements’) – a system based on usury (interest) which is largely accepted by most economists as the necessary means of providing the means for speculative investment to generate wealth creation and spread economic activity, namely bank credit as money created in parallel with debt. The vast bulk of money exists as numbers registered as credit in the banking system by virtue of the fact that numerical transfers have almost entirely replaced cash transactions in the western world (the North), and is a practice which is established now as the international norm across the world. However, through fractional reserve, the banking system brings about a ‘loan-spiral’, since money already loaned out and ‘spent’ in the economy returns into someone else’s bank deposit and so is used as further collateral for further loans. The loan process could have the potential to be exponential if not for the fact that the private banking system’s ability to loan money is curtailed through increasing private banks’ reserve ratios (meaning that a % of their total assets must be held as deposits). In step with increased economic growth (GDP), the money supply logically expands over time. However, the extent of the banking system’s loan spiral has meant that the rate of expansion accelerates over time, for e.g. the UK money supply has increased from £14.1 billion in 1963, to £680 billion in 1996, an increase in the total UK money stock of 98% in just 33 years (Rowbotham p-13). With most economic growth concentrated in the private sector, the long-term trend is towards the increasing privatisation of credit in western societies, emphasised by the case of the UK money supply whereby, while in 1946, the total money stock was comprised of 46% notes and coins printed into circulation, by 2000 it was less than 3%. [El Diwany].

Since much of the banking system’s bank-loan system in concentrated in the mortgage market with the elevated market price of property in relation to peoples’ income, it is no surprise that there is an obvious correlation between house prices and the expansion of banks’ money stock. Banks, in the act of creating a mortgage create the money as a ledger entry; when a bank makes a loan (to a mortgager) it credits their bank account with a bank deposit the size of the mortgage. At that moment new money is created. Higher house prices need higher mortgages which is more profitable for banks, whilst also creating a house price credit-feedback cycle in which the creation of money for the purchase of existing property and land, inflates prices.

This is why the wealthiest nations and corporations are actually the most indebted; by way of example, the United States is the most indebted nation on Earth: its combined national, private and commercial debt to the banking institutions as of 2016 was around $70 trillion and rising – many times all the dollars in it’s economy – as compared to the total of US GDP – which was $18.7 trillion in the same year. Compare this to the total amount of debt sloshing around the world financial sector – colossal in size as compared to any one national economy; by the end of 2008, the level of total derivative debt in the world economy was estimated to be $700 trillion [Kostigen, 2009]. Allied to these ever-widening distortions, there prevails the hypocrisy of the USA who has allowed it’s national debt to increase from $235 billion in 1960 to it’s current level of over $22 trillion [Ref: US National Debt Clock], whilst at the same time, the “truly indebted” countries of the South are frogmarched through the macroeconomic straightjacket of restrictive fiscal (deficit) policy through Structural Adjustment Programmes by the Bretton Woods institutions. This extent of enduring a high national debt is also a trend similarly replicated in other leading industrialised economies such as Germany and Japan. Rather like the hypocrisy of the supposed free trade regime, which opens developing country markets which the rich nations resist adherence to themselves, all-in-all this amounts to a fully-evolved stage of imperialism.

However, long term trends in the banking system worldwide have seen reserve ratios on bank deposits increasingly set at arbitrary levels over time to ease the freedom of international finance capital, where levels of debt have become very large in comparison to the GDP of national economies, with regulatory reform under Basel I and II incorporating greater financial complexity within the financial system such as moving some liabilities off-balance sheet (securitisation – of which, more explanation below).

Within the US banking sector itself, some of the best-known names in American and European finance have been estimated to have liabilities of 40, 60 or even 100 times the amount of their capital. In the UK, by 1981, new monetary arrangements directed by the Bank of England meant the commercial banks were required to hold 0.5% of their eligible liabilities with the Bank of England in non-interest-bearing accounts, and additionally maintain an average of 6% of their eligible liabilities as liquidity reserves in the form of short-term money market instruments. By the time the Bank of England Act was passed in June 1998 the non-interest-bearing balance had been reduced to a ratio of 0.15% (the intermediate steps being 1986: 0.45%; 1991: 0.4%; 1992: 0.35%; and April 1998: 0.25%). [Elliot, & Atkinson, (2008)].

In the United States, the reserve ratios set by the Federal Reserve have been relaxed over time, such as the Garn-St Germain Act of 1982 which exempted the first $2 million of reservable liabilities from reserve requirements, and the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) which removed all remaining legal barriers to affiliations among banks, securities firms and life insurers. Relaxation of minimum capital requirements was lobbied for around this time in particular by leading US banks as they came under pressure from competition from off-shore banks. The relaxation in a 1980 administrative ruling led to a reinterpretation of minimum capital requirements which meant that reserve requirements only applied to a narrower range of deposits, as well as greater flexibility in the regulatory framework to allow commercial banks to affiliate with firms engaged in investment banking [Tarullo, Daniel K. (2008]. In recent years, a credit boom was fuelled by a shift away from the traditional “originate to hold” banking model towards an “originate to distribute” (securitisation) model by major US and European banks – meaning greater lending capacity and so greater opportunity to raise total capital return with more loans issued. {NOTE: Securitisation is the process of conversion of existing assets or future cash flows into marketable securities.}

In the UK, the extent of how much total debt – public and private – increased over the 10-year period between 1997 and 2007 is shown by economists Larry Elliot and Dan Atkinson who wrote in their book ‘The Gods that Failed’ that in October 2007 there was: “£1,200 billion outstanding on mortgage debt and £222 billion outstanding on unsecured consumer credit, giving a grand total, in round numbers, of £1.4 trillion. In other words, using an admittedly imperfect statistic of 46 million for the adult population in the UK gives an average mortgage debt per adult of £26,086 and average consumer credit debt of just under £5,000. Seven years earlier, in Oct 2000, the figures looked like this: on mortgages, £525 billion was outstanding (£11,413 per head) and on consumer credit £125 billion (£2,717 per head), giving a grand total, in round figures, of £650 billion. The increase, in other words, has been of the order of 115% in 7 years. During these same 7 years, earnings rose on average less than 30% “. [Elliot & Atkinson, (2008)]. By 2008, average household debt reached 141% of disposable income in the United States and 177% in Britain. [Elliot & Atkinson, (2008)].

Over recent years, the US and UK economies in particular have been sustained by a prolonged debt-fuelled consumer boom, with both balance of payment deficits and the government’s budget deficits largely financed by borrowing abroad. Economist Martin Wolf explained in July 2012 that government fiscal balance is one of three major financial sectoral balances in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by definition. In the US, a foreign financial (capital) surplus exists because capital is imported (net) to fund the trade deficit. Further, there is a private sector financial surplus due to household savings exceeding business investment. Therefore, by definition, there must exist a government budget deficit so all three net to zero. The government sector includes federal, state and local. For example, the government budget deficit in 2011 was approximately 10% GDP (8.6% GDP of which was federal), offsetting a capital surplus of 4% GDP and a private sector surplus of 6% GDP. [source: Financial Times-Martin Wolf-The Balance Sheet Recession in the U.S.- July 2012].

The US trade deficit, which stood at $566 billion in 2017-18, is effectively financed by the holding of dollar reserves in banks across the world, by persuading the rest of the world to keep buying U.S. Treasury bonds, and through investment income from investments in the newly emerging market economies of Asia (particularly the mega-growth region of China), Eastern Europe and South America, or inward capital investment into America (by late 2002, foreigners had total claims on the US economy of $2,600 billion net of US claims on the rest of the world – equal to 25% of US GDP in 2002). However, it is the US deficit which is sustaining the world economy. If US consumers stopped spending for whatever reason, then the world economy would slow down considerably.

From Gold Standard to Dollar Domination
Since the US economy’s departure from the Gold Standard in 1971 to flexible interest rates and exchange rates, the Dollar has remained the international medium of exchange used by foreign business. In order for investors to buy American stocks or bonds, they exchange their currency for U.S. dollars and so, these countries have to hold more U.S. dollars in reserves to accommodate all the exchanges. Nations around the world keep high reserves of dollars to facilitate their own export trade to America and to ensuring there are enough reserves to withstand currency market fluctuations. The volatile nature of capital flows has exacerbated the liquidity shortage and forced other countries to keep far higher reserves of foreign exchange than used to be necessary, as a protection against sudden market feelings. During the same time as the dollar proportion of global reserves has increased, so has the sensitivity of other countries to its value. Because of the US trade deficit, international liquidity has risen very speedily since 1998. In 2001, total world foreign reserves also rose to $1.53 trillion, a rise of 11% of which 68% was in dollars. (P.Bowring, “From Poor to Rich: Capital is flowing in the wrong direction”, International Herald Tribune, 12/12/2001).

This flow of dollars generated by the US economy because of the dollar’s importance as the world’s main currency on account of the international oil trade being denominated in the dollar is the collateral treadmill that feeds financial credit markets across the world, benefiting the entire world economy. The dollar itself has been the oil that has lubricated world trade, making globalisation a reality. Michael Hudson: “Global oil and mining companies created flags of convenience to make themselves tax-exempt, by pretending to make all their production and distribution profits in tax-free trans-shipping havens such as Liberia and Panama (which use U.S. dollars instead of being real countries with their own currency and tax systems).” (source).

Without the outflow of capital from America, many nations would not have been able to develop their economies as they have over the last 50 years. At the same time, the extent of the American Empire is such that other national economies’ export markets hugely depend on the buying power of American consumers. Meanwhile, the US trade deficit increases over time, as America’s “waistline of consumption” has no bounds (the American population constitute 10% of the world population, but consume nearly a third of total world consumption – Total World GDP). With China now the major epicentre of capital accumulation in the world, with the burgeoning level of China’s export trade, many surplus dollars are coming into the Chinese Central Bank and have been used to buy US government treasury bills – effectively granting the US short-term loans.

High rates of saving in Japan, China and the Far East have also long been said to be funding the US economy, because these countries’ large flows of money from their savings end up being invested in the US, such as in asset-investment portfolios, to the extent that at the end of 2006, foreigners held 44% of federal debt held by the public, with about 66% of that 44% held by the central banks of other countries, in particular the central banks of Japan and China. [Office of Management & Budget, Executive Office of the President of the United States (2008)].

Without the extraordinary power of money creation by international and large commercial banks, financial markets would not operate to such a massive extent. It is obvious that as the amount of debt that can be recycled into loans increases, this generates greater and greater capital for speculative investment. Due to the volatile nature of the stock exchange – effectively gambling shops or dens of predatory speculation – the value of companies ride on the crest of the wave of the market. What is at the centrepiece of this roulette-table of stock and shares, where the chips are peoples’ lives and livelihoods, is the power of international finance – banks, pension and trust funds, investment houses and hedge funds – which is simply colossal and dwarfs even the power of multinationals. Companies can even use this ‘easy credit’ to buy their own stock which drives the price up, making fortunes for the stockholders. From 2014: “Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares — a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.” (Zweig, “Will Stock Buybacks Bite Back?”, Wall Street Journal, Mar 21, 2014).


(ii). The long-term effects of international financialisation

As greater financial liberalisation has further deepened over the years, further increasing the phenomenon of speculative flows across international financial markets, financial capital and the interests of shareholders are ordained a predominance of extraordinary weight, to the extent that whilst in 1970, 90% of total world financial flows were specifically trade related (trade in actual goods or services), by 1990, 90% of these financial flows were purely speculative. Data from the IMF suggests that the year 2001 was the second year in a row when capital flowed from developing countries to support consumption in the west (P.Bowring).

The volatile nature of capital flows experienced in 1997 with the Asian financial crisis in Thailand, Indonesia and South Korea increased awareness of the risk of liquidity shortage. Thereafter, central banks across the world involved in international financial markets and trading with the US ensured they had a buffer of currency in the form of mainly US dollars to insulate the economy, as a protection against sudden economic shocks.

The trend towards financialisation – the banking systems’ ever-increasing pressure for ‘yield’:
Over recent years, as debt has expanded as an impetus for growth (the credit-fuelled booms of the early 21st century), particularly in the US and UK, further reliance on the growth of international finance for domestic wealth generation has created a constant pressure for ‘yield’. “Most wealth is not gained by capital investment for profits. Instead, asset-price gains have been financed by a debt-leveraged inflation of real estate, stock and bond prices.” (Hudson source).

The structure of the U.S. financial services industry (and that of world financial services) were transformed during the past 30 years, with the combined forces of new technologies, deregulation and increased competition removing legal and market barriers that separated banks from securities firms and insurance companies. From the late 1980s onwards, the nature of international private capital investments underwent a change …with a new form of equity and debt financing through the issue of standardised bonds which could be traded on the exchange markets but which remained unregulated unlike bank lending (in terms of reserve ratios), and so, had a tendency to get out of control, (as happened across Asia during the 1990s, culminating in the Asian financial crisis of 1997). New computer systems and new financial instruments (e.g. commercial paper, junk bonds and asset-backed securities) made it possible to “securitise” many types of business and consumer debt, allowing many business firms and consumers who previously relied on bank loans to gain access to credit from non-bank sources, including finance companies, mortgage companies and the markets (“Securitisation” referred to repackaging of debt into new high-risk market assets with greater opportunities for short-term profits). Securities brokers, credit card banks and mutual fund companies offered low-cost cash management and investment management services to the general public. As a result of these innovations, consumers moved a greater and greater share of their investment funds from traditional bank deposits and life insurance policies into investment vehicles linked to capital markets, including high-risk activities closely tied to the capital markets involving underwriting and dealing in securities and derivatives.

It has been the extent of this liberalisation process which was the cause of the banking crisis of 2008 and the resulting worldwide downturn.

During 2001 and the first half of 2002, a general slump in the world’s equity markets caused sharp drops in investment banking revenues at the five largest global banks – J.P. Morgan Chase, Citigroup, Credit Suisse, Deutsche Bank and Amro – as well as the “big three” securities firms (Goldman Sachs, Merrill Lynch and Morgan Stanley). Ever increasing pressure to create quick profit due to the pressure to sustain liquidity and cash flow for bank reserves, where liabilities were increasingly extended in an environment of low interest rates worldwide, put pressure on the banks and financial institutions to constantly find innovative ways of raising profit through greater consolidation within the industry including cross-mergers, but also new conventions in financial liberalisation (‘securitisation’) which involved the use of new high-risk market assets with greater opportunities for short-term profits, but which carried with them much greater risk of default (eg. ‘Mortgage-Backed Securities’ & ‘Collateralized Debt Obligations’). These new financial inventions in international banking also included ‘Credit Default Swaps’. Mortgage-Backed Securities and Credit Default Swaps, in particular, achieved massive growth in short-term profits through vast expansion of leverage and increased risk exposure, doing so at the expense of long-term risk-management strategy as regulators didn’t understand these new complex securities and the bank managers themselves gambled upon these new conventions of ‘securitisation’.

Mortgage-Backed Securities were themselves related to the sub-prime mortgage market in the US, a market that had grown in importance having first started in 1993. The deregulation in the housing market involved the dismantling of previously-defined underwriting standards for home mortgages to allow mortgages to be sold to borrowers with lower income, who previously wouldn’t have qualified to be offered a mortgage under the previously stricter set of guidelines (with sub-prime typically initially fixed, then adjustable as determined by the market interest rate).

With the growth of the sub-prime mortgage market and associated securitisation came a housing bubble in the US caused by a precise combination of the deregulation in the housing market, the interelated constant escalation of securitisation of mortgage-backed securities and low interest rates. This escalation occurred because as mortgage-backed securities paid dividends, the return was so profitable in the short-term that the demand for these types of investments grew and grew. As a result, investment banks such as Bear Stearns and Lehman Brothers were encouraged to find more mortgages to re-finance into MBSs. Mortgage companies were, in turn, happy to sell on mortgages to investment banks dealing in MBSs who had unlimited incentive to supply this product. However, the investment banks themselves also borrowed money to purchase mortgages which they then transferred into MBS. The result was a house-price spiral. Agencies approved the new securities on a continuous basis. However, it emerged only later that “the mortgage-default model that the rating agencies used predated the MBS-fuelled housing market” [Eastland, (2009)]. Furthermore, in the US, the investment banks insured MBS assets against default by insurance companies such as AIG under the agreement that if the MBS no longer yielded a dividend because of default, the insurer would provide the Special Purpose Vehicles (securitisied assets) with money to pay the dividend, for which SPVs had to pay the insurance company insurance premiums, which in effect, was payment for holding amounts of debt.

This further put at risk of default the whole financial sector in the US and worldwide over time since the sub-prime mortgages in themselves were susceptible to large levels of default with approximately 80% of U.S. mortgages issued in recent years to subprime borrowers being adjustable-rate mortgages, therefore leaving these low income mortgage holders in danger of being unable to maintain repayments as interest rates went up.

As the sub-prime market itself was causing the house-price spiral, the demand for yield in the market for MBSs was escalating the demand for sub-prime property, a self-perpetuating positive-feedback loop which was getting out of control, where as profits were made in the short-term at greater and greater speed, the risk of massive default was building-up until such a time as the housing market may stop growing. By mid-2007, financial institutions investing in mortgage backed securities started suffering large losses from mortgage payment defaults. With the rise in interest rates in the US, the amount of people defaulting on their sub-prime mortgages began a steady rise after these sub-prime adjustable-rate mortgages (ARMs) began to reset at higher rates. This trend intensified as the U.S. house price bubble burst in 2006-07, with these sub-prime mortgage holders suddenly then going into negative equity. As a result, the steep rise in the rate of subprime mortgage defaults and foreclosures caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender. [Morgenson, Gretchen (2007)].

It was this crash in the sub-prime mortgage market which resulted in widespread havoc and panic across the entire world’s financial system because many of these MBSs and associated Derivatives, Hedge Funds and Credit Default Swaps were linked to this sub-prime market. The risk of default on these mortgage losses had been transferred onto the investors who purchased these assets. Turmoil was extended to other financial markets such as credit derivative markets, equity and corporate bond markets, as there was a freeze of ‘redemption’, that is to say of repayment at maturity of shares, bonds, etc. In April 2009, the International Monetary Fund (IMF) reported in its latest Global Financial Stability Report that losses resulting from the world financial crisis may reach $4 trillion, about two-thirds of which would be incurred by banks, with an estimate of write-down on US-originated assets (to be suffered by all holders) to be $2.7 trillion, with estimates for write-downs extended to include other mature market-originated assets [Xinhua News Agency, (21/04/2009)]. The total provision of the ‘Troubled Asset Relief Program’(TARP) was $439.6 billion (in the end, TARP didn’t cost the taxpayers anything with the Treasury receiving $3 billion more than the $439.6 billion it disbursed within TARP). At the time, the report published by the ‘Troubled Asset Relief Program’(TARP) in July 2009 of the final cost projection of the total cost of the US government bailout of the financial crisis, estimated it could have been potentially as much as $23.7 trillion (£14.3tn) in a worst possible scenario. The report examined the cost of exposure if all parties requested maximum assistance on all aspects of the relief programme involving large capital infusions into hundreds of financial institutions, to a mortgage modification programme, to public-private partnerships using tens of billions of taxpayer dollars to purchase ‘toxic’ assets from banks. [Kopecki, Dawn and Dodge, Catherine (20/07/2009)]

Debt peonage replaced by financial liberalisation:
For those countries in World Bank/IMF assistance programmes with HIPC status, forced to raise the money they would have paid back to creditors and then spend it according to Western diktat dependent on this international loan capital, the World Bank and IMF are complicit in continually imposing neocolonial conditionality of these countries as a condition of accepting new loans.

Since 2005, the North have been consistently pushing free trade deals which demand that developing countries follow a deregulated and liberalised banking model. Concern with the liberalisation process is attached to how foreign banks can cherry-pick richer customers, which results in an overall decline in services and credit for poorer customers and smaller businesses, because foreign banks shift credit away from investment in productive activities such as agriculture or manufacturing which boosts local economic development. The worry is that fully deregulated and liberalised banking services in less-developed countries will lead to hundreds of millions of people in developing countries lacking access to affordable and sustainable banking services. Financial services liberalisation through the WTO or through Europe’s planned bilateral trade deals threatens to worsen this situation.


References:
1). Mike Rowbotham: “THE GRIP OF DEATH”, 1998 [Jon Carpenter] A study of modern money, debt slavery and destructive economics
2). Tarek Elhttp://bookstore.petersoninstitute.org/book-store/4235.html Diwany: “FRACTIONAL RESERVE BANKING AND THE INTEREST-BASED MONEY SUPPLY”- A paper presented by at a meeting of the Association of Muslim Social Scientists, London School of Economics, London, October 1999.
3). Kostigen, Thomas (Mar 6, 2009), “The $700 trillion elephant”, Market-Watch – Ref: https://www.marketwatch.com/story/the-700-trillion-elephant-room-theres
4). Tarullo, Daniel. K. (2008) “Banking on Basel: The Future of International Financial Regulation’’, Peterson Institute for International Economics – Ref: http://bookstore.petersoninstitute.org/book-store/4235.html
5). Larry Elliot and Dan Atkinson: ‘THE GODS THAT FAILED: HOW BLIND FAITH IN MARKETS HAS COST US OUR FUTURE’, (2008)
6). Financial Times-Martin Wolf-The Balance Sheet Recession in the U.S.- July 2012
7). P.Bowring: “FROM POOR TO RICH: CAPITAL IS FLOWING IN THE WRONG DIRECTION”, International Herald Tribune, 12/12/2001
8). Hudson, Michael: “Socialism, Land & Banking: 2017 compared to 1917”, published on Michael Hudson’s blog on 21st Oct, 2017. Ref: https://michael-hudson.com/2017/10/socialism-land-and-banking-2017-compared-to-1917/
9). Jason Zweig, “Will Stock Buybacks Bite Back?“, Wall Street Journal, (Mar 21, 2014)
10). Office of Management & Budget, Executive Office of the President of the United States (2009) ‘Analytical Perspectives of the FY 2008 Budget’ – Budget of the United States Government – Fiscal Year 2008, Ref: http://www.gpoaccess.gov/usbudget/fy08/pdf/spec.pdf
11). Craig Eastland (2009) “Understanding the Financial Crisis or How We Got In the Mess We’re In”- Compensation and benefits for Law Offices, Issue No 09-06, pp-6
12). Gretchen Morgenson (11th March 2007), “Crisis Looms in Market for Mortgages”, The New York Times, Ref: http://www.nytimes.com/2007/03/11/business/11mortgage.html?_r=1
13). Xinhua News Agency, (21/04/2009)
14). Dawn Kopecki & Catherine Dodge (20th July 2009) “U.S. Rescue May Reach $23.7 Trillion, Barofsky Says”, Ref: http://www.bloomberg.com/apps/news?pid=20601087&sid=aY0tX8UysIaM
15). New Economics Foundation/Jubilee Research: “The US as an HIPC or ‘heavily indebted prosperous country'”; April 2002


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