Debt as Modern Slavery PDF Print E-mail

Currency Wars, Chimerican Crisis of Finance Capital and the Debt-based Monetary System

By James Matthew B. Miraflor

Presented to the Southeast Asia Regional Socialism Conference, November 27, 2010, CSWCD, University of the Philippines

Warm revolutionary greetings to all of our comrades here. I was tasked to discuss on the debt and the financial crisis. It is good to begin with a discussion of the current updates in the global financial and monetary practice. Right now, the United States is conducting what it calls as “quantitative easing” (QE). Simply put, this is simply printing dollars out of nowhere. The Federal Reserve already printed $600 billion to buy securities from the US Treasury. The printing press has now become, to paraphrase Ben Bernanke, the secret weapon of the American economy. This devalues dollar vis-à-vis other currencies, making exports to the US more expensive and favoring domestic producers’ access to US market.

Seen as a form of subtle protectionism and as “revenge” over China’s supposedly “undervalued” currency, it had the effect of depreciating the value of dollar worldwide. For export-oriented economies of the world, this may spell ruination, as it means that American exports will be relatively cheaper. This may have the effect of import-substitution in the United States as cheaper American goods replace goods exported by the manufacturing giants like China and Germany to the US market. In the Philippines, this had the effect of shrinking the relative value of the dollars migrant workers send back home, and compromising Business Process Outsourcing (BPO) companies which earn in dollars.

But beyond QE’s immediate effects lie a more structural cause. It is this cause, which will later be called as debt-based monetary system, that I will attempt to discuss in this paper. Knowing what the systemic impulse behind the production of money is brings us closer to a good explanation on the current phase of the finance capitalist system the whole world is now in. It also allows us to understand alternatives which we may have to implement as a global community if we are to avert financial disaster and transition to socialist alternatives.


The Emergence of Chimerica


We have to trace the QE strategy with what we call as the emergence in the past two decades an entity called the “Chimerica” – a marriage of China as producer and creditor and United States as consumer and borrower, fusing the two economies in a form of symbiosis. On this perspective, QE is seen as an annulment strategy, delinking US from the Chinese economy by devaluating the dollar and rendering worthless China’s dollar reserves and dollar-based instruments.


But we are getting ahead of ourselves. Let us first see why the marriage had been done in the first place. According to economist Neil Ferguson who invented the term, China was attracted to the Chimerican marriage because it gives potential to propel its economy forward via an export-led led growth. In fact, China was able to quadruple its economy since 2000, quintuple its export, import Western technology and create tens of millions of manufacturing jobs for the poor.


For the United States, it allowed overconsumption – Americans can consume more, save less, and still maintain low interest rates and a stable rate of investment. The US, in fact outspent its national income by a cumulative 45% from 2000 to 2008, a third of which was spent on Chinese goods. On the macroeconomic level, US debt is rising, pegged at $13.8 trillion as of this month – with each citizen having a debt of $44,571.36.


Focus on the US: The need for credit


Let us take a closer look on America. So why is the American people overspending? At the household level, a large part of this explanation is not just increasing consumption, but also decreasing income.


From a Marxist perspective, this is clear. Before the neoliberal era of the 1980s, US workers are benefitting from the concessions they gained from capital. Strong labor unions pushed President Franklin Delano Roosevelt to enact pro-labor provisions of the “New Deal” which lasted up to Nixon’s time, as expanded by Lyndon Johnson’s Great Society.


With Reaganomics, we have seen this concessions dismantled. Labor power was crushed. Minimum wages have been abolished in favor of “competitive” and “market-set” wages. Pensions have been cut, mandatory retirement age has been raised, and social security has been reduced. Flexi-labor has been started, and labor unions which refused saw their jobs being outsourced offshore or contracted in China or India. Government kept wages down by increasing unemployment – forcing workers to be satisfied with decreasing salary by surrounding them with unemployed citizens.


This is where credit comes in. To address declining wage and prevent under-consumption, the United States ushered an era of credit cards, home mortgage, and other lending instrument to American workers. This resulted in financial boom in the United States. According to Robert Pollin, a contributor for the New Left Review, “wage repression” during the Clinton era resulted into a “financial excess”. Declining labor power translated to increasing financier power.


As we know, the consequences of this have been staggering. The financial capitalists in the United States used these debts to build a whole new gambling economy. Subprime mortgage debts were converted into Special Purpose Vehicles (SPVs) and huge portfolio of Collateralized Debt Obligations (CDO). When the debts aren’t being paid already (they are unsustainable to begin with), this resulted into a into a liquidity crunch that resulted into a catastrophic economy from 2007 up to now.


The United States (US) quantitative easing, and even the earlier $700-billion bailout (through the Emergency Economic Stabilization Act of 2008), does not solve this problem. In fact, it only transferred this debt from the private sector to the government, now saddled with humongous debt and budget deficit – triggering the Republican Party-manipulated Tea Party movement. Debt and credit remains to be the prime mover of American economy.


Focus on China: Currency Regime and Export-oriented Growth


Let us take a look on China and bring our discussion back on the currency regime. Is there a basis on the United States’ claim that China’s currency is overvalued?


We have to remember that the Chinese government’s exchange rate regime is not flexible. For the longest time, it is pegged on the dollar, recently adjusting only through a series of revaluations. In a flexible exchange rate, there is an automatic adjustment according to the balance of trade. Trade deficit increases demand and price for foreign vis-à-vis domestic currency, making the price of foreign goods less attractive to the domestic market which pushes down the trade deficit.


With China’s peg to the dollar for decades, this rebalancing didn’t occur. Trade surplus didn’t decrease the price of dollar relative to RMB, keeping exports to the United States cheap and imports from the United States expensive insofar as China is concerned – and earning China more dollars. We have to see China’s logic on pursuing an export-oriented strategy while maintaining its relatively inflexible exchange rate. This is, in fact, reminiscent of the mercantilist era wherein the primary purpose of public policy is for the economy to gain foreign currency (then gold). China is undergoing the same period. But we should not see this as phenomenal – Japan was in the same situation until the United States forced it to appreciate the Yen in the Plaza Accord of 1985, resulting to two-decades of contraction for the Japanese economy.


That is why China is always leery of currency appreciation, despite constant calls by the capitalist community. It does not want to follow Japan’s path of decline. But with them gaining so much in dollars, China would have to find a way to “recycle” American dollars and inject it back to the American economy. They did so by buying US Treasury securities. In other words, this means lending it back to the Americans. Debt has been the instrument of China to maintain currency stability.


So when the QE strategy kicked in, the Chinese government looks at its huge reserves of dollars and US Treasury securities and sees a continuous deterioration of value in its coffers. If the US keeps up with its reliance on the printing press, a good part of China’s wealth as lender to the United States might be converted into merely, paper money.


The Debt-based Money System


What explains these phenomena? What narrative successfully weaves these seemingly disparate events in China and the United States?


We see a term which props up everywhere, and that is debt. I then assert that both export-oriented growth and the growing need for credit is but a result of what we can call as the “debt-based monetary system” - a consequence of what economists call as the “fractional reserve banking system”. Now, fractional reserve banking has many other problems. But for now, let us zero in on one. Under this system, money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created.


This is only too obvious in the United States. The Federal Reserve (the Central Bank of the United States) is able to inject money in the system mostly by “loaning” the amount to US Treasury. The same is true in the other Central Banks, even here in the Philippines. Increase in monetary supply accompanies increase in debts and deficits, insofar as domestic currency is concerned. Money is simply debt.


We have to see the debt-based monetary system for what it is, because it is crucial to the functioning of capitalist accumulation and finance capital imperialism for a century now. And this begins with the application of interest. We have to remember that all money in any particular economy is debt owed to its Central Bank. This means that for all these debts to be repaid, all money should go back to the Central Bank.


But what happens when Central Bank imposes interest rate? It claims from the economy more money than what is actually available in the system. This now explains the eternal scrambling for money in the micro level. Companies have to keep wages low so it can pay interest from the banks and maintain profit. Wage repression has to occur in order to pay interest.


This also explains the constant need for economic growth at the macroeconomic level. How does economic growth come in? Ask any capitalist what capital accumulation means, and you will begin to understand that in order to expand, he must build his capital stock, not for its own sake, but so he can loan a proportional amount from the banks. It is only through loaning again to the economy that the Central Bank enable us to repay interest. But this only increases debt, perpetually.


To quote Peter Joseph, this is a system of modern slavery. The debt-based monetary system is now the engine of the capitalist system with which it maintains its hegemony. This is the cause of the debt trap that IFIs put Southern nations in (from Latin America to Asia) for a good amount of time decades ago. This is the cause of the financial crisis now as US workers fail to pay their debts. This is the cause of China’s overdrive and the massive exploitation of the environment as the need to earn foreign currency increases.


When Vladimir Lenin elaborated on the parasitism of finance capital, Central Banks around the world are on the rise. The debt-based monetary system is the completion of the merger of bank capital and industrial capital. Industrial capital now can only be bank capital. Coupled with setting loose the financial system through the dismantling of regulations, this finance capital is further divorced for any industrial pretensions. Money has become money for its own sake.


Socialist response for South Countries


Thus, any socialist strategy must address this system. It must seek to replace the debt-based monetary system with a more humane system of capital management and labor. The world thought that a sophisticated and complex financial system is an ‘inevitable’ development in a world in which capital should be allocated rationally, according to the dynamics of supply and demand, and towards further wealth generation. The global financial crisis of 2008-2009 after the US subprime mortgage crisis told us that a financial system is not that effective appendage to the economy after all, it is more often than not irrational and parasitic, and it can even destabilize the basis of our wealth.


The world is now faced with arguments questioning the very validity of our system to determine the value of the things we extract and produce – whether our convoluted asset valuing, monetary, and financial system is still necessary and effective. It is time to put forward the socialist alternative in order to elevate the discourse towards social transformation.


The following are suggestions on how to move forward:


Immediate. Global and domestic structures must urgently be changed as ambulatory response to the crisis. Changes that have to be immediately accomplished include:


1. Fix the currency exchange rate and peg it to a super-sovereign reserve currency. This is similar to John Maynard Keynes’ “bancor” proposal in the 1940s (a proposal that is to couple the Bretton Woods institutions of the International Monetary Fund and the International Bank for Reconstruction and Development) and People’s Bank of China’s suggestion in 2009 – notably by its governor, Dr. Zhaou Xiaochuan. In the process, a lot of financial industries might collapse as its power is being clipped, but this will keep currencies worldwide stable and will prevent speculation.


2. Protectionist policies should be revived. For the Southern countries, this means import-substitution to decrease vulnerability to exogenous price shocks of exported goods and services.


3. As part of these protectionist policies, capital controls (for capital management techniques) of the pre-neoliberal era must be restored. This will accelerate the shift from a foreign capital-led industry to a domestic-driven one.


4. Reserve requirement, which defines a debt-based monetary system, must be increased in order to address monetary supply growth. Other banks and domestic financial regulations must be put into place to stop speculation.


5. In the global side, the adoption of Sovereign, Democratic, and Responsible (SDR) lending principles espoused by movements such as the Jubilee South – Asia Pacific Movement on Debt and Development (JS-APMDD). This is to regulate finance capital and give debt, which is now evolving towards further financialization, a human face for accountability purposes.


Transitional. The immediate reforms must be accompanied by transformations towards a socialist system of finance. Transitional policies must then be adopted. I suggest that the policies should include the following:


1. In order to address price bubbles, states should delink essential services from the market, such as food and housing production. In the United States, for example, had the government merely provided free housing and employed the jobless for this purpose, it wouldn’t have needed huge bailouts for its corporations. For the food industry, “food sovereignty” must replace the global food supermarket in order to prevent food speculation. In the oil industry, countries must shift to bilateral oil agreements and maximize non-traditional trade arrangements such as oil-to-commodity swaps in order to clip the oil futures market.


2. Central banks must be “socially re-embedded”, in the words of Karl Polanyi, and monetary policy must be shifted from mere inflation-targeting to one that links the domestic financial sector with the agriculture and industries. This may mean an expansionary monetary policy, which will have the effect of keeping local currency low as against the dollar and supporting exports in a time when foreign technology is being procured.


3. Expand the presence of industry-specific government-owned banks (similar to Japan’s Keiretsu policy which tied finance capital down to productive needs).


4. Develop cooperative banks that are owned directly by the citizens (Anyonya Co-operative Bank of India, Grameen Bank). This is to democratize capital ownership to tactically weaken the stranglehold of financiers and corporate conglomerates on labor.


Towards a socialist future. #









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