ISBN 13: 9780300122602
It is here we encounter the source of the financial instability that has devastated economy after economy—from Brazil and Mexico, to Japan, Thailand, Malaysia, Indonesia, South Korea, and Russia. This is far more money than controlled even by the most powerful of central bankers. Though unrelated to anything real, these money movements do have real world consequences.
A few weeks ago the integrity of the entire U. The total borrowing was sufficient to threaten the financial integrity of a number of large banks if the fund were to go bankrupt. Some hedge funds are leveraged as high as to one and there are an estimated 4, such funds in the world trafficking in trillions of dollars in financial derivatives—most of which are little more than sophisticated gambling instruments.
During a two day period last month, the U. This fundamentally changed the terms of trade between the two countries, resulting in significant changes in the sales prospects for thousands of legitimate businesses in both countries, with all the related implications for their workers, suppliers, and the communities in which they are located.
These swings had nothing to do with any change in underlying economic reality.
There is often, however, a drop in actual output for the simple reason that banks left with uncollectible loans stop lending and the money supply dries up—leaving the economy with insufficient money to finance real production and exchange. The cases of Thailand and Russia are especially instructive.
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During the latter days of its economic miracle period, Thailand was attracting large inflows of foreign money with high interest rates. These inflows fueled rapidly growing financial bubbles in stock and real estate prices.
The inflated bubbles attracted still more money. Much of the money was created by international banks eager to profit from loans to the speculators. Generally these loans were secured by the inflated assets. Most commonly it financed a rapid growth in the importation of luxury consumer goods—which created the illusion of prosperity and a booming economy. Since speculation in stocks and real estate was producing much higher returns than were productive investments in industry and agriculture, the real entrepreneurs who are invested in productive industrial and agricultural enterprises stopped investing in maintaining the productive potential of their own enterprises, instead siphoning off the cash flow to participate in the speculative frenzy.
Real production stagnated or even declined in both agriculture and industry. Exports also began to decline. Once the speculators realized their money was at increasing risk, they started pulling out their money and the meltdown phase began. Stock and real estate prices plummeted, banks and other lending institutions were left with large portfolios of uncollectible loans.
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Financially impaired, the banks stopped making loans even for legitimate businesses, a liquidity crisis ensued and financial collapse threatened. The Wall Street bankers and investment houses that had helped to create the crisis through their speculative excesses and reckless lending—inveterate champions of the free market when the profits were rolling in—responded in typical capitalist fashion. They ran to governments and the IMF for public bailouts. Yet most of us do recall that not so long ago the Soviet Union was considered a major industrial power and a significant military threat by the West.
Now, having embraced capitalism under the tutelage of the IMF and legions of Western advisors, Russia has become an economic and social basket case. Over a seven year period GDP has fallen at least by half and possibly by as much as 83 percent. Capital investment has fallen by 90 percent, meat and dairy livestock herds by 75 percent.
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Except for energy, the country is no longer able to produce much of anything. Most consumer goods, especially in the large cities, are now imported. Tens of millions of people are not receiving earned salaries. Male life expectancy has fallen to 57 years.
An estimated 15 million people are actually starving and malnutrition has become the norm among school children. Money is so scarce that an estimated half of all transactions are by barter. Then in the late spring of , the market turned downward and investors started pulling money out of the country. Russian suspended payment on its foreign debt, depositors were unable to withdraw their money from Russian banks, and store shelves emptied of goods as foreign suppliers cut off deliveries. We see important parallels in the Thai and Russian experiences.
Both involve implementing IMF recommended policy actions to remove barriers to the free flow of goods and money in and out of the country, while maintaining high domestic interest rates. This encouraged large inflows of foreign money as loans and stock investments. Those who were invested in productive enterprises found the returns did not compete with the returns from stock and real estate speculation. So real enterprise were decapitalized and domestic production fell. Export earnings fell as dependence on imports to meet daily needs increased.
This in turn meant that ever greater foreign portfolio investments were needed to finance consumer imports.
Since there was no prospect of being able to repay the now inflated foreign financial claims, financial collapse became inevitable—all thanks to what the IMF and World Bank tout to the world as sound economic policies. There is reason to believe that something similar is happening to nearly every country in the world.
Real economies are becoming mortgaged to the global financial system as domestic capacity to sustain real beneficial production declines. I now draw your attention to this overhead Figure 2. A study by McKinsey and Company found that since , the financial assets of the OECD countries have been growing at two to three times the rate of growth in gross domestic product GDP —a result of inflating assets values through pumping up financial bubbles.
This means that potential claims on economic output are growing from two to three times faster than the growth in output of the things that money might be used to buy. The distortions go far deeper, however, because an important portion of the output that GDP currently measures represents a decrease, rather than an increase, in our well-being.
When children buy guns and cigarettes, the purchases count as an addition to GDP—though no sane person would argue that this increases our well-being. An oil spill is good, because it generates expensive clean up activities. When a married couple gets divorced, that too is good for GDP. It generates lawyers fees and requires at least one of the parties to buy or rent and furnish a new home. Other portions of GDP represent defensive expenditures that attempt to offset the consequences of the social and environmental breakdown caused by harmful growth.
Examples include expenditures for security devices and environmental clean-up. GDP further distorts our reality by the fact that it is a measure of gross, rather than net domestic product. The depreciation or depletion of natural, social, human, institutional, and even human-made capital is not deducted. So when we cut down our forests or allow our physical infrastructure to deteriorate, there is no accounting for the loss of productive function.
We count only the gain. Economists in the United States, the U. Yet even the indices of net beneficial output are misleading as they do not reveal the extent to which we are depleting the underlying base of living capital on which all future productive activity depends. I know of no systematic effort to create a unified index giving us an overall measure of the state of our living capital.
However, what measures we do have relating to the depletion of our forests, soils, fresh water, fisheries, the disruption of our climatic systems, the unraveling of our social fabric, the decline in educational standards, the loss of legitimacy of our major institutions, and the breakdown of family structures give us reason to believe that the rate of depletion of our living capital is even greater than the rate of decline in net beneficial output. This is represented by the sharply downward sloping line. The indicators of stock market performance and GDP our leaders rely on to assess the state of the economy create the illusion that their policies are making us rich—when in fact they are impoverishing us.
Governments do not compile the indicators that reveal the truth of what is happening to our wealth and well-being. And the power holders, whose financial assets are growing, experience no problem. In a global economy their money gives them ready access to the best of whatever real wealth remains. Those whom capitalism excludes have neither power nor voice.