Never forget that everything Hitler did in Germany was legal – Martin Luther King Jr.
Every era has its economic zeitgeist, its ‘spirit.’ From 1500 to 1800 in Europe mercantilism was the dominant economic rationale, which served as the theoretical basis for colonialism. After Adam Smith wrote the Wealth of Nations in 1776 a new wave of classical economic theories were in the ascendancy, which was followed by neoclassical economics since around 1870 with the likes of David Ricardo and James Mill. In the 1920s, supply-side economics dominated the administrations of 3 consecutive Republican presidents and subsequently created the Roaring Twenties, which eventually developed into a massive bubble that ended in the Crash of 1929. Then came the Great Depression, with Keynesian-style government planning and control became the most influential economic ideology of the era.
In the post-war period between 1949 and 1973 the implementation of social-liberalism’s development economics under the banner of Keynesianism, topped with the adoption of the Bretton Woods system and the implementation of Glass-Steagal Act, produced what often referred as the Golden Age of Capitalism. This period marked low income inequality, the longest stretch without banking crises, a steady economic growth with annual growth rates averaged 4% in the US and 4.6% in Europe, and impressive income growth rates per capita. In Europe, the income growth rate per capita rose from 1.3% in the ‘first globalisation era’ (1870-1913) to 4.1% during the Golden Age of Capitalism, with the US rose from 1.8% to 2.5%, while Japan skyrocketed from 1.5% to 8.1%. Indeed, it was a prosperous time, which prompted British Prime Minister Harold MacMilan to summed up the mood of the era by saying in 1957 that “most of our people have never had it so good.”
One significant factor of the success of the Golden Age of Capitalism, argues heterodox economist Erik Reinert, was the Marshall Plan conducted by the US at the start of the Cold War. Launched by US Secretary of Treasury George Marshall in June 1947, the Marshall Plan was created with the urgency to build a defence line to protect Europe and Asia from the spread of communism, in the same manner like the Truman Doctrine that was set forth on 12 March 1947 to protect Greece and Turkey from falling into the Soviet sphere.
At the time, the US just came out as the winner of World War II, and subsequently took the mantle of ruler of the world from the British Empire (which got damaged by the war even though the British were on the winning side) with the US left with the possession of nearly two-thirds of the globe’s gold reserves and more than half of its industry. The US mark their dominance in the post-war world through the creation of international organisations such as the Bretton Woods system (IMF and World Bank), the United Nations, and North Atlantic Treaty Organisation (NATO), all of which are controlled by the US through their funding and ultimately through their veto power. And so with both Marshall Plan and Truman Doctrine they began their domination in the world, starting by rebuilding Europe.
The US understood that the best way to create the defence line against communism was to create wealth in the nations bordering communism, and the way to create wealth was to industrialise them and support the project wholeheartedly by sending billions in economic and military assistance, and implement the same protectionist strategies that they conducted themselves successfully in the 19th century. The US’ agenda was clear, as described by Stephen E. Ambrose and Douglas G. Brinkley in their book Rise to Globalism, where in presenting the plan to the congress “[the administration] pointed out that a rejuvenated Europe could produce strategic goods that the United States could buy and stockpile, preserve Western control over Middle Eastern oil supplies and free Europeans from economic problems so they could help the United States militarily.”
As a result, with US assistance, the Italian Christian Democrats defeated the Communist-Socialist alliance in the 1948 election, the Greek government army won their civil war against the military branch of the Greek Communist Party in 1949, and by the 1950s and 1960s Western Europe, Greece and Turkey were all successfully industrialised. Friedrich List’s theory that free trade had to wait until all countries were industrialised was quickly adopted, with the US once again test-proof the formula that can make countries become rich.
Furthermore, according to Cambridge economist Ha-Joon Chang, another big part of the success of the era was the General Agreement on Tariffs and Trade (GATT) – which was also launched in 1947 – where the US and other rich countries allowed developing countries to protect and subsidised their local industries more actively than the rich countries, a big contrast to the era of colonialism and unequal treaties. As a ripple effect, between 1960s and 1970s developing countries also did very well, with their income growth per capita reached 3% per year, way above what they had during 1870-1913 and twice the rate since the 1980s under neoliberal policies. In Latin America, the economies were growing faster than those in the industrialised West, with domestic industry supplied 95% of consumer goods in Mexico and even up to 98% in Brazil.
Indeed, under the banners of FDR’s New Deal, the Bretton Woods system, the GATT, Truman Doctrine and Marshall Plan; Keynesian-style economics successfully dominated the Golden Age of Capitalism 1949-1973, with the latter two were created to fight off another dominating ideology of the era: Marxism. But there was another ideology being built in the background, one that started as a small movement among the business elites.
The rise of neoliberalism
According to historian Kim Phillips-Fein in her book Invisible Hands: The Businessmen’s Crusade Against the New Deal besides the size of the federal government control and the tamed financial sector, the power of the labour union was also influential in creating equality in the US during the Golden Age of Capitalism, at the expense of vast corporate profits. This situation concerns the business elites and the corporations, in which Lemuel Boulware – who was in charge of labour relations and community affairs for GE – believed that GE and all American capitalism was in grave danger.
From their positions, people like Boulware tried to work towards something impossible at the time: to end the reigning rule of the New Deal (there was even an attempt to assassinate FDR) and revive an age of laissez-faire where corporations thrived; with Boulware credited with architecting GE’s effective and widely influential strategy of union busting. Furthermore, through fund raising, institution building and fervent activism, men such as Jasper Crane, William C. Mullendore and Leonard Read joint forces with the titans of the National Association of Manufacturers and the Chemical giant DuPont to conduct a crusade to educate and organise their peers as a political conservative force to preserve the “American way” of doing business and thus preserve their higher chunks of profits.
These men subscribed to the economic theories of Ludwig von Mises, Friedrich von Hayek and ultimately Milton Friedman – with his Chicago School ideology – which have a strong socio-political identity focusing on the free-market and less intervention from the ‘nanny state’ of the government. This is somewhat ironic, since the emergence of the business elites – the industrialist – in America was a result of protectionist high tariffs that nurtured the infant industries into global powerhouses.
However, Joseph Stiglitz explains the intentions behind the choice of free-market economics ideology by commenting that “Every economy needs lots of public investments – roads, technology, education. In a democracy you’re going to get more of those investments if you have more equity. Because as societies get divided, the rich worry that you will use the power of the state to redistribute. They therefore want to restrict the power of the state so you wind up with weaker states, weaker public investments and weaker growth.” In other words, their choice of free-market economics was not because they believe in the theory for the good of the economy, but because it gives them the tools to exploit the economy for their own benefit. This echoes the tricks used by the British in 19th century when they used protectionism but then preach free-trade to the world for their unfair advantage.
Furthermore, the business elite movement use the Republican party as their political platform, and it sparked a some kind of civil war between the governing wing and this new ideological wing of the Republican Party, with the divide still persist till this day. Political realignment was ultimately achieved by gaining the support of religious organisations like the Moral Majority, who exploit white working-class contempt with public integration with other races in school, transportation and other cultural issues and turned it into a more generalised hostility against the “big government.” And in the 1950s they found the perfect spokesman for their movement, Lemuel Boulware’s work colleague, former actor turned GE’s spokesman, Ronald Reagan.
The business elites’ movement gained a big boost in the domestic politics when in the 1970s the collapse of the Bretton Woods system, the oil crisis caused by the Yom Kippur war, and Petrodollar Recycling created a stagflation in the Keynesian model. This perceived failure eventually led to their political momentum, with the crown achievement occurred in 1980 when Ronald Reagan was finally elected as US president under the reformed Republican Party. And thus the economic zeitgeist swung back to supply-side economics, in the name of neoliberalism.
At the core of neoliberalism lies the theory that argues that free-market and its drive for commercial-oriented competitions are the fuel that would really move an economic growth, hence justifying their push to the world for austerity, liberalisation and privatisation. In practice, however, this same push for free-market means that the powerful American corporations can now compete with weaker and smaller local competitions worldwide without these companies protected by their respective governments, and thus establishing the corporations’ supremacy and profitability in the free-market world.
These same powerful corporations, as mentioned earlier, were of course built with the help of protective tariffs and subsidies by the US government. In fact, as mentioned in part 1 and 2, the golden age of innovation in the US was made possible by substantially high tariff barriers and subsidies, which created unprecedented period of prosperity, strong economic growth and innovations that nurtured the likes of Thomas Alva Edison, Alexander Graham Bell, the Wright Brothers and Henry Ford, and produced industries like railroads, automobile, steam powers, telecommunications and other technology-intensive industries.
Moreover, commercial-oriented competitions in reality are not necessarily a key driver for innovation. Take Chinese inventions, for instance. The majority of Chinese inventions (such as clocks, paper and money, gunpowder, the compass, porcelain, waterpower and spinning wheels) were made between 960 and 1279 during the reign of the Song Dynasty, which ruled China with absolute power and oversaw growth under extractive institutions (institutions designed by the politically powerful elites to extract resources from the rest of society). Under the ruling of the Song Dynasty nothing resembles a parliament, the only political representation for groups in society was the monarchy, and the great inventions were brought into existence under the auspices and the orders of the government, not spurred by market incentives, as almost none of this was commercialised.
Therefore, if compared with the golden age of inventions in China and in the US, the aim of neoliberalism became clear right from the beginning: it is not about championing a fair competition in a free market, but instead it is simply a new tool to penetrate each one of the world’s “markets” for exploitation, and to gain superiority.
The neoliberal revolution reached new heights in 1991 when the Berlin Wall fell, an event that Francis Fukuyama inaccurately called “the end of history”, where the centrally planned communist system had failed and thus made neoliberalism with its free trade and free-market economy (aka the winner in the ideological battle for capitalism) perceived as the undisputed champion of economic theory. Most Western intellectuals then saw liberal capitalist democracy as humanity’s ultimate form of government, a some kind of perfected end product of a long process of evolution.
Previously during the Cold War, as the economic arguments between capitalism and communism developed and became fierce, the key issues to understanding uneven development slowly began to vanish without leaving traces in our contemporary discourse, making the Cold War view became too over-simplistic into the good capitalism versus the evil communism. On the process – on top of the US-backed brutal killings of people associated themselves with communism, in the likes of Indonesia, Vietnam and most of Latin America – for the sole purpose of eliminating their competition altogether, the neoliberals had not only destroyed important theoretical issues of the opposition ideologies, but also destroyed past axes and dividing lines of agreements and disagreements which have shaped the world we live in today.
For example, as described by Erik Reinert, in an edited Cold War world view Karl Marx and Abraham Lincoln represent an extreme opposite of the political axis with Marx represents the left with big government and planned economy, while Lincoln represents the right with freedom and markets. However, in reality they both often found themselves on the same side of the economic spectrum, where both disliked English economic theory that ignore the role of production, use slavery and impose free trade prematurely on a nation. Although of course they did not agree on everything, they found mutual agreement that what creates wealthy nations are industrialisation and technological change. There were even polite exchange of letters between these two historical figures, where from 1851 to 1862 Karl Marx contributed a weekly column to the New York Daily Tribune, the organ of Lincoln’s Republican Party.
Moreover, Ha-Joon Chang remarked that one of Lincoln’s top economic advisors was Henry Carey, a well-known protectionist economist at his time, whom Karl Marx and his colleague Friedrich Engels in 1850s described as “the only American economist of importance.” But yet, somehow he has now been almost completely erased from the history of American economic thought due to his protectionist nature. Seems that the old adage rings true, just like the “History of the Civil War in the U.S.S.R” – a historical account that celebrates the Soviet revolution – that was revised in 1938 to erase Stalin’s political rivals and to exaggerate Stalin’s cult hero image, history was indeed being (re)written by the victors.
This is evident in today’s mainstream economic textbooks, where we would often learn that the founding fathers of the first well-developed theory of economics, the predecessor of the first modern school by Adam Smith, were the French Physiocrats in the 18th century. However, in reality the French physiocrats’ laissez-faire ideas never actually reached Smith’s England, they were short-lived even in France where the implementation of their theories caused food scarcities and famines, and was quickly replaced by the competing ideas of the anti-Physiocrats – whom have existed long before the physiocrats themselves. In fact, the spark that triggered the storm of the Bastille in 14 July 1789 was when news reached Paris that the anti-Physiocrat Jacques Necker had been sacked as Minister of Finance. But yet, today the ideas of anti-Physiocrat economists such as Jacques Necker are almost completely air brushed from history.
Another case in point was found by a Harvard professor who was doing a comparative work on Adam Smith and Friedrich List, in which he complained about the lack of material on Friedrich List in the Baker Library. As it turns out, many of the title pages of the books that the professor needed had a ‘discarded’ stamp covering the bookplate and nowhere near to be found. It was then further discovered that despite the big American university libraries’ policy requires at least one of them must retain a copy of every book, it is not a coincidence that they sometimes ‘lose’ their copy. And among the lost collection of books from libraries not just in the US but from around the world, a lot of them were the type for understanding the successful economic policies implemented by the present wealthy countries during their transition from poor to rich.
For example, one of Germany’s most important 18th century economist was Johann Friedrich von Pfeiffer (1718-87), where during the World War II the only known copy of his book was mysteriously disappear from the University of Heideelberg library and has since assumed that no copies were to be found in Germany. As Erik Reinert put it “It was as if the genetic material of past wisdom was slowly being destroyed.” This should come to no surprise, however, as history shows that beside dismantling the defence, the head of state and the media, any invading nation would also destroy the native’s intellectual sources, just like on 47 BC when the Roman Empire invaded Egypt and burnt down thousands upon thousands of papyrus scrolls in the Library of Alexandria, in the same manner as George W. Bush’s invasion on Iraq 2003 in which thousands upon thousands of books in the Library of Baghdad were reduced to ashes.
Thus, with the opposition ideologies either beaten, discredited through smear campaigns, or simply erased from history, under the reigning neoliberalism the world have effectively been asked to accept the ideology that thinks “the market” is a self-regulating system, with the rise and fall of prices seen as a some kind of force of nature, and thus there is no need for regulations. And although the US have been forcing the world to implement free-trade (for US’ benefit) long before this, it was only through neoliberalism and its Chicago School formula of austerity, liberalisation and privatisation that the US have finally fully-succeeded to create the self-regulating environments in the world that hugely benefit the likes of modern robber barons, corporations and Wall Street.
The reigning Plutocracy
In 1981, with the support of Chicago School economists and lobbyists from various industries, the newly-elected Ronald Reagan began his term with a bang, by implementing the Great Deregulations with 4 pillars of controlling the money supply to reduce inflation, reducing government spending (aka austerity), reducing government regulations (aka liberalisation) and cutting capital gain tax as well as federal income tax. Reagan’s tax cuts, in particular, were aimed for corporations and for the wealthy, in which he cut top income tax from 70% to 28%, with the argument that its trickle down effects will somehow boost up the economy. Some pointed out that the tax cuts was indeed the driving force behind the solid growth in the 1980s, where they were able to cut loopholes for old-line industries such as real estate, railroads and utilities, thus freeing capital for restructuring corporate America.
However, in reality the tax cuts nearly doubled the public debt from 26% to GDP in 1980 to 41% GDP by the end of Reagan’s 2nd term in 1988, which in dollar term the public debt rose from $712 billion in 1980 to $2.052 trillion in 1988, a three-fold increase. Perhaps even worse, by cutting income taxes for the wealthy while at the same time increasing payroll taxes (which are paid by the working poor and middle class) Reagan actually shifted the tax burden down the income class. This can be seen throughout the 1980s where the total effective federal taxation rate for the poorest one-fifth of American families was increased by more than 16%, while federal taxation rate for the wealthiest one-fifth of families fell by 5.5%, with the richest 1% saved even more with their tax rate fell by 14.4%.
Meanwhile, the solid growth during Reagan’s two terms, rather than an effect of the tax cuts, was actually generated by a new trend created by Reagan’s Great Deregulation, particularly in the heartbeat of the economy: the financial sector. Before the 1980s, in response to the Great Depression the financial industry in the US was tightly regulated, with most banks were local businesses and were prohibited from speculating with depositors’ savings. Meanwhile, investment banks were then small and private partnerships, with the partners put their own money and invested that money very carefully in the market. A prime example of this was Morgan Stanley, while today they have 50,000 employees spread in offices all around the world, with capital of several billion dollars, in 1972 they had only 1 office, 110 personnel and capital of just $12 million.
But all of this changed when Reagan took power, where the Great Deregulation practically created the environment for high numbers of mergers and acquisitions (M&A) and leveraged buyout (LBO) that created the boom of the 1980s. The M&A and LBO boom were mostly financed using junk bonds, a high-risk-high-return security that was hugely developed by Drexel Burnham’s Michael Milken, nicknamed as the Junk Bond King. With the creation of the junk bond market, many corporations that were considered unworthy of investment or any deals that have high risk of defaults (such as these highly leveraged M&A and LBO deals) became a new form of investment because they gave high returns to its junk bond purchasers to compensate the risk.
During the same period, the deregulated financial sector also eased the restrictions for corporations to conduct an Initial public Offering (IPO), thus sparked an IPO boom (with the new trend of microcomputers as the top growing industry) and created a trading euphoria and bubble arguably not seen since the radio and automotive boom in the 1920s. Just as The Great Gatsby was inspired by the Roaring Twenties, the decade of greed was immortalised in several true-story tales such as the Barbarians at the Gate, Liar’s Poker and The Wolf of Wall Street, and the era was arguably epitomised in the fictitious movie Wall Street where Gordon Gekko presented his “greed is good” speech. In this environment, investment banks thrive to be the engine that listed the companies and the middlemen that made the M&A and LBO deal happened. And on top of this, they themselves also went public, and thus gave the partners huge amount of shareholder money in this bull market euphoria. And so, alongside the many booming corporations, Wall Street was also starting to get rich.
In the 3 decades after Reagan elected President, Wall Street and corporations have slowly developed into the reigning plutocracy, where step by step their excessive profits and bonuses were transmitted into political power through the likes of campaign contributions, and also paved the road for them to occupy positions that allow them to directly write rules and regulations. To get an idea of how big the flow of money is, according to OpenSecrets.org in 2011 US corporations spent around $3.32 billion to lobby lawmakers in Washington and billions more in campaign contributions and other practices that many describe as “legalised bribery”, legal simply because lobbying is protected by the First Amendment. This not including those “rent-seeking” stereotypical individuals such as the Koch Brothers who roughly speaking buy out fellow politicians to write rules and regulations that benefit them and their business empire.
Furthermore, a so-called revolving door culture between government and the business world – where people from corporations / Wall Street get a position in strategic government posts, and go back to business world after serving their term, thus blurring the line of conflict of interests between government and business – became a more common practice, especially by Wall Street executives. This made government power increasingly fall into to the hands of the few that Tom Wolfe in his novel The Bonfire of the Vanities referred as the masters of the universe, which complements their power grab on US central banking system in 1910.
For instance, William E. Simon, the Secretary of Treasury under the Nixon and Ford administration, was previously a partner at Salomon Brothers. After Washington he then became US governor of the IMF, the World Bank, the Inter-American Development Bank and the Asian Development Bank. Reagan’s first Secretary of Treasury was Donald Reagan, the CEO of Merrill Lynch. James Baker, Reagan’s Secretary of Treasury in 1985-88 was previously in a Houston law firm Andrews and Kurth, and after public service he became a senior counselor for the private equity firm Carlyle Group. His deputy Secretary of Treasury 1985-87 Richard Darman was a partner and managing director of Carlyle Group and managing director of Shearson Lehman Brothers before he became a government official.
Moreover, Nicholas F. Brady, who was appointed Secretary of Treasury by Reagan in 1988 and remained in office throughout the Bush administration, was the former chairman of Dillon, Read and Co., a New York investment banking firm. David Mulford, senior international economic policy official at the US Treasury under Reagan, Baker and Brady – the lead thinker in Republican administration’s international debt strategy and key figure in the development and implementation of the Baker and Brady plans – was the managing director and head of international finance at investment banking firm White, Weld & Co. before he went to office, and after Washington he became vice-chairman and member of the executive board of Credit Suisse First Boston.
This pattern continued in Clinton’s Democrat administration, when Clinton appointed the CEO of Goldman Sachs Robert Rubin as Treasury Secretary and Harvard economic professor Larry Summers as Deputy Treasury Secretary; where both men acted, and produced rules and regulations for the benefit of the financial sectors. The Mexican bailout in 1994, for example, attracted criticism in the US congress and the press for the central role of Robert Rubin, who used a Treasury department account under his personal control during the Tequila Effect 1994 to distribute $20 billion to bail out Mexican bonds, which Goldman Sachs was a key distributor.
Moreover, in 1998 Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) and formed Citigroup, a conglomerate consist of commercial banking, insurance and securities services – which violated the Glass-Steagal Act 1933 and the Bank Holding Company Act 1956. The Clinton administration, however, did not sanction Citigroup for breaking the law and Fed Chairman Alan Greenspan also did not punish them, instead on September 1998 they gave Citigroup a temporary waiver.
A year later on 12 November 1999 the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act 1999) was introduced, which effectively repealed the Glass-Steagal Act 1933 and removed barrier for commercial banks, investment banks and insurance companies to merge into one institution. The legislation was signed into law by President Clinton, and thus making the Citigroup merger legal. Robert Rubin would later join Citigroup as a board member – and for a brief period, the Chairman – after he left the government, making $126 million.
This revolving door between Wall Street and Washington also stretched to the IMF and World Bank. Larry Summers, for instance, was the chief economist of World Bank before taking the job as deputy Secretary of Treasury under Robert Rubin and then succeeded Rubin as the Secretary of Treasury in 1999, before making millions as the managing partner at the hedge fund D.E. Shaw & Co when his term finished. Stan Fisher, the number 2 person at IMF during the Asian crisis, went straight from IMF to become the Vice Chairman of Citigroup, before taking the top position at the central bank of Israel and proceeded to become the 2nd in command in the US Fed as Janet Yellen’s vice chairman.
Hence, with both institutions headquartered in Washington DC, with the US government as the only country that have an effective veto power, and where under Reagan the IMF and World Bank were transformed into the Washington Consensus under the command of the Secretary of Treasury; the revolving door between Wall Street and Washington also means that the Washington Consensus, in the words of Financial Times journalist Nicholas Shaxson, became the instrument of Wall Street, the handmaidens of globalisation, unfettered trade and capital flows.
Zero-sum world
The Asian Crisis 1997 was the result of a butterfly effect caused by the reforms and developments that took place since Ronald Reagan was elected as US president. The re-birth of Wall Street to power in the 1980s due to Reagan’s Great Deregulation, the widespread of global deregulation amid the newly-reformed Washington Consensus, financial liberalisation conducted by the Asian Tigers (due to the pressure to create a “level playing field” from the West) and the currency pegs to the dollar as the engine of American global dominance, were all instrumental in creating the US-interest-rate-sensitive environment for the Asian Tigers.
At first, the economies of the Asian Tigers flourish under a low US interest rates environment. However, the currency peg to US dollar and the newly-liberalised financial sector that sparked a heavy cross-border borrowings also meant when US interest rates unexpectedly jump, it can suddenly make a lot of these dollar-denominated debts become multiple-times more expensive. And this was exactly what happen. Similar like the effect of the murderous interest rates hike imposed by Paul Volcker in 1981, which created the Third World Debt Crisis, Alan Greenspan’s rate hike in 1994 – regardless whether it was deliberate or redundant – not only created global bond market massacre, instantly crashed the Mexican Peso and caused the subsequent Tequila Effect panic, but also triggered foreign-debt crisis in South East Asia that gave huge pressure to their respective economies.
Moreover, Alan Greenspan’s rate hike by 83% within 10 month in 1994 also rapidly strengthening the US dollar, and this made local central banks bleed in their attempts to maintain their dollar peg, leaving their forex reserve alarmingly low. And then during the height of the pressure, when they eventually decided to un-peg their currency and let it float, they no longer have sufficient fire power in their forex reserve to defend the currency. This is the fundamental gap that the likes of George Soros and Julian Robertson spotted, and this is why their short selling strategy on the Tigers’ currencies were damagingly successful.
However, while speculators like Soros and Robertson contributed to the crash they would not be able to crash the Asian market single-handedly if there were no fundamental gap to begin with. While local rulers also shared the blame – where if it isn’t for their brand of crony capitalism their respective countries would have stronger economic fundamentals that can withstand these kind of crises – one of the main causes of the Asian crash 1997 was not necessarily the rulers’ mismanagement of these countries’ economy, but instead it was triggered by the sudden liquidity dry-up from Japanese banks (whom the locals were heavily borrowed from), in an attempt to tackle Japan’s economic problems rooted from the Plaza Accord 1985, another product from the Reagan administration.
Furthermore, while currency depreciation, debt crisis and Japan’s liquidity dry up triggered the crash, flight of capital exacerbate the Asian crash into a full-blown crisis. As described Nicholas Shaxson in his book Treasure Island: Tax Haven and The Men Who Stole the World, due to deregulations and market liberalisation, in the neoliberal environment capital became relatively free to flow across the borders, and it generates new kinds of problems: In a world of floating currency regime, the flow of ‘hot money’ coming in and/or out of the country could make such a big impact on the overall economy, thus, through their ‘cross-border investments’ investors become powerful as they hold veto power over national governments and the fate of the millions of real lives of its citizens. Demand management by governments is replaced by uncontrollable bubbles and busts, as the government have less freedom to set their own economic policies without worrying about “hot money” coming out of the country.
And this “hot money” was exactly the problem that the Asian Tigers immediately had after their liberalisation on cross-border borrowing. During the height of the crash in 1997, outflows of “hot money” (i.e. flight of capital) was the key element that made the crash into a full-blown crisis. And vital for the arrangement of this flight of capital was the Structural Adjustment Program (SAP) and the bailout money by the IMF arm of the Washington Consensus, which opened the window for wealthy people to get their huge sums of money out of the country at favourable exchange rate – while the country was undergoing austerity, liberalisation and privatisation at a murderously high local interest rates -, leaving behind a very fragile economic infrastructure that ensured that the Asian Tigers were left wide open for plundering by Wall Street and multi-national corporations.
Therefore, with the petrodollar recycle of the 1970s – which made US dollar become the global reserve currency and the principal currency for commodities trading, and gave tremendous power for the Fed Chairman – and with the recapture of power for Wall Street in Treasury department and the Washington Consensus, it is then visibly clear that the main actors that created the Asian Market Crash and Asian Crisis were the same men that Wall Street and corporations saw as their cult hero, those who in their powerful positions can control the fundamental gaps on the majority of interconnected economies across the world: the Fed Chairman Alan Greenspan who controls the flow of dollar and who had increased interest rates by 83% causing several crises, and Robert Rubin and Larry Summers the Wall Street insiders who control the Washington Consensus. And behind these men lies a very powerful network of business elites who started out as a small grassroots movement in the 1950s using Ronald Reagan as their spokesman, and eventually ascended to power when their spokesman elected president in 1980 and began the reforms that open up “markets” and the path for legal corporate plundering in South East Asia and all over the world.
As a consequence of the neoliberal revolution in South East Asia, in a span of 2 years since the Asian Crash 24 million people lose their jobs, with over a decade later employment rates have still not reached pre-1997 levels in Indonesia, South Korea and Malaysia. Working conditions get worsen with labour rights weak at best, and with new foreign owners pushing for ever-higher profits from their investments. In Indonesia, food welfare system (the so-called Bulog system) was immediately dismantled after IMF aid was signed, with the food industry left wide open for foreign penetrations. As a result, local farmers were destroyed, basic food security diminished and through time the versatile lands in the country cannot produce good quality staple goods anymore, and instead Indonesia becomes an importer of food.
Furthermore, just like the Great Depression created the environment for fascism to rise in Europe, the new economic desperation among the unemployed has paved the way for religious extremist to rise in Indonesia, the explosive growth in human trafficking in Thailand, and the continuity of death by suicide in South Korea, where suicide is now the 4th most common cause of death, with the average of 38 people taking their own life everyday or more than double the pre-crisis rate.
However, the effects of the neoliberal revolution were not only suffered by developing countries or the victims of Third World Debt countries, but it also damages the US economy. In the nearly 3 decades after Reagan’s election, while Wall Street and corporations thrived, US public investments in roads, bridges, hospitals, schools, water and sewer systems came to a virtual halt due to significantly reduced government spending. Cities, counties and states were forced to sell public property to private corporations, while more than $2 trillion is needed to repair the infrastructure built during the Golden Age of Capitalism but then neglected after neoliberalism. Furthermore, according to Kim Philips-Fein under republican presidents of Ronald Reagan, George H. Bush and George W. Bush unions found themselves steadily losing influence, while business lobbyists increasingly shaping the legislative agenda and think tanks increasingly define the major issues in the media.
Meanwhile, although the US had managed to increase its GDP per capita by three-fourths from 1980 to 2010, the figures in GDP per capita does not tell much about the real situation for the average citizens. For instance when Bill Gates and Warren Buffett’s income go up the average income for the whole US also goes up. While in reality most full-time workers have seen their incomes go down and living standards deteriorating, not because the US economy has lost its ability to produce but because the benefits of that growth are increasingly given to the small sliver of people at the top.
this can be seen in the findings by US Federal Bureau of Labor Statistics, which pointed out that in 2006 the average American non-supervisory worker earned a lower hourly wage compared with in 1970 (adjusted for inflation), while during the same period the pay of American CEOs increased from under 30 times the average worker’s wage to nearly 300 times. In his book, Hoodwinked, John Perkins then added that when George W. Bush was elected president in 2001, the 400 wealthiest people in the US were approximately worth $1 trillion combined. And 6 years later in 2007 their worth had grown by 60% to $1.6 trillion, while real income for average workers decreased by more than $2000.
If this is a zero-sum world, the structural reforms made by neoliberalism have successfully “re-distribute” the wealth that was once distributed almost equally and fairly in the US during the Golden Age of Capitalism to only a handful of elites, with the top richest 1% took nearly 25% of the nation’s income and controls 40% of the wealth of the nation. Joseph Stiglitz argues in his book The Price of Inequality that much of the “re-distribution of wealth” is due to “rent seeking” by the business elite, i.e. a practice where the rich and wealthy use their resources and leverage such as lobbying or campaign donation to obtain unfair advantages over their particular interests, and this indirectly relocate income and wealth from huge number of people at the bottom of the pyramid (i.e. Taxpayers’ money) to a small number at the very top. Purchasing laws and regulations is one prime example, where bankruptcy laws in the US are actually designed to favour banks and their shareholders over homeowners and debt holders.
Furthermore, in a global scale, thanks to the Structural Adjustment Programs (SAP) imposed by the IMF and World Bank, and thanks to the unequal trade policies imposed by WTO, the growth rate per capita for developing countries was cut in half from 3% before the 1980s to 1.7% after the Washington Consensus era. In sub-saharan Africa, for example, after the 1980s SAP resulted a decline in income per capita at a rate of 0.7%, with GNP of the average country shrank by 10% in the 1980s and 1990s, with poverty nearly doubled. Moreover, a recently published research reveals that while Africa receives $30 billion in aid every year, $192 billion leaves the continent via debt repayments, repatriation of multinational company profits, illegal logging and fishing, illicit financial flows, loss of skilled workers and the costs imposed as a result of climate change. Even when these losses are compared to overall financial inflows (aid, foreign investments and remittances) Africa still left with a $58 billion a year net loss, or almost 1 1/2 times the estimated $37 billion a year of extra funding that would be needed if we are to deliver universal health coverage for everyone in the world.
In addition, as a result of SAP developing countries have lost $480 billion each year in potential GDP and another $160 billion each year to forms of foreign tax evasion legalised as part of the neoliberal package. At the same time, since Ronald Reagan elected president US investment abroad have grown to more than $10 trillion, with profits from those investments have increased from around 20% (compared with domestic profits) in early 1980s to 80% today. While developing countries have been systematically destroyed, US corporations have been enjoying a growing rate of returns from 5% in 1975 to over 11% in as far back as 1990 on these investments.
Meanwhile, as of 2008 the poorest 40% of the world’s population accounts for only 5% of global income, while the richest 20% accounts for three-quarters of world income (75%). While at least 80% of humanity lives on less than $10 a day (1.3 billion of which live on $1.25 a day or less) – where it is estimated that there are 925 million hungry people in the world (13.1% from the total 7 billion people in the world, or almost 1 in 7 people are hungry) – in the same planet there are around 1210 Billionaires living the luxurious life with total net worth of $4.5 trillion (surpasses the GDP of Germany). Of course this is not saying that all wealthy people are frowned upon, but rather highlighting the growing global inequality since the implementation of neoliberal policies, which leave more people at the bottom of the pyramid worse off.
This inequality can not be more clearer than in the percentage of who control the world’s wealth. The bottom 50% of the total world population only control 1% of the world’s wealth, while the wealthiest 10% control 85%. If we narrow the parameter, 40% of the world’s wealth are controlled by only the wealthiest 1% of world’s population, with the richest 358 people in the world have the same wealth as 2.3 billion of the poorest people (45% of total population) and the top 3 billionaires have the same wealth as 600 million people (all of the Lowest Developed Countries put together).
It is with this knowledge of inequality that in his long and thorough book Capital in the 21st Century French economist Thomas Piketty argues that under the existing neoliberal environment capitalism simply cannot work. With the basis of vast amount of impressive data and charts, Piketty concluded that the US and Western Europe may be getting similar with the “patrimonial society” of 19th century Old Europe, where a small number of wealthy rentiers lived extravagantly thanks to their inherited wealth, while the rest of the population had to struggle to be able to keep up.
And this situation, where wealth are increasingly concentrated only in the hands of fewer people, will have political implication and will ignite a crisis – I may add – similar with the class warfare against the monarchy that inspired Karl Marx to wrote the Communist Manifesto, and sparked the October 1917 revolution in Russia led by Lenin and Stalin. As the great classicist Moses Finley once said, in the ancient world all revolutionary movements had a single objective: “cancel the debts and redistribute the land.”
Where has all the money gone?
A vital part for the “re-distribution of wealth” is the role of tax havens in storing the, for the lack of a better word, “legally stolen money.” According to Nicholas Shaxson, the offshore system that tore financial control apart since the 1970s has served as an accelerator for flight of capital, as well as a distorting field that altered capital flows not to where they necessarily find the most productive investment, but rather lured to where they can provide the most lenient regulations, accommodate evasion of prudential banking regulations, offer zero or lenient taxes, grant freedom from rules of civilised society and where they can provide the greatest secrecy. In other words, money becomes increasingly out of reach for those who desperately need funding and investment to build a better future, and instead the majority of those who have money prefer to hide their money where nobody can touch them.
Today there are more than 80 tax havens around the world, including the Caribbean havens, Luxembourg, Lichtenstein, Cyprus, Andorra, Switzerland, Singapore and Hong Kong; and the number of listed offshore subsidiaries in them are staggering. For instance, the British Virgin Islands (with population of 25,000 people) hosts approximately 460,000 corporations, one modest building in the Cayman Islands host more than 18,000 entities, while the tiny South Pacific island of Nauru (with population less than 10,000 people and have only 1 road) host 400 banks and provide laundering services for billions of dollars of Russian money.
On paper, more than half of world trade now passes through these tax havens, with a third of foreign direct investments by multinational corporations are channeled through the offshore routes. Moreover, over half of all banking assets also routed through offshore, with around 85% of international banking and bond issuance takes place in Euromarket, a stateless offshore zone. In 2008 the Tax Justice network discovered that 99 out of 100 Europe’s largest corporations uses offshore subsidiaries, with a bank as the largest users in each country. In a December report of the same year, the US Government Accountability Office (GAO) reveals that 83 of US’ largest 100 corporations had subsidiaries in tax havens, including the big banks that receive bail-out money.
The intentions are clear, thanks to tax havens many of the world’s largest and profitable corporations pay no or little tax, making these corporations more profitable by the years, at the expense of depleted government funding for the development of the country. For example, according to US-bases Citizens for Tax Justice from 2006 to 2011 General Electric’s net federal income taxes have been negative $2.7 billion, despite the fact that they gained $39.2 billion in pre-tax US profit over the same period. Google was able to cut its tax rate by more than $3 billion through a technique called the “Dutch Sandwich,” where the company channel its profits through Ireland, the Netherlands and then to Bermuda. Also thanks to tax haven network, in 2010 the likes of Bank of America, Exxon/Mobil, Boeing and Citicorp paid no federal taxes.
To be fair, by law the number 1 objective for any publicly-traded corporation is to maximise shareholders’ wealth, and this includes seeking the best possible tax arrangements in order to maximise profit, hence tax avoidance is not necessarily a bad thing. However, legal tax avoidance is one thing, but it is a completely different matter if bribing is involved. A March 2012 investigation revealed exactly this, where 30 large US corporations that paid no federal income tax between 2008 and 2010 were also major contributors to US politicians in both parties, specifically to the committee members that control tax policy in both Chambers of Congress. But even this form of bribing is legal, as it is protected by the first amendment, and more crucially because the rules and regulations are made by among themselves, thanks to the revolving-door policy.
Moreover, tax havens also play a vital role in the existence of insider trading ring, gigantic frauds and the growth of complex monopolies in certain markets, while every big financial catastrophe – including the collapse of Long Term Capital Management, Lehman Brothers, AIG and Enron – are also very much an offshore tax haven story. In the case of Enron, before being exposed as a spectacular fraud the company had more than 6,500 shell companies in several tax havens, 600 of which were registered in the Cayman Island. All in all, in 2010 the IMF estimated that the balance sheets of small island tax havens alone added up to $18 trillion, a sum equivalent to around a third of the world’s GDP, and that, it said, was probably an underestimate.
Furthermore, by the end of 2010, according to James S. Henry, a former chief economist at the consultancy firm McKinsey in his report The Price of Offshore Revisited, the global super-rich elite has at least $21-32 trillion of financial wealth hidden in tax havens, or equivalent to the size of the US and Japanese economies combined. Henry’s report was commissioned by UK’s Tax Justice Network, and it used the data from the Bank of International Settlements, International Monetary Fund, World Bank and national governments to highlight the impact on the balance sheets of 139 developing countries that have its citizens’ money held in tax havens (financial wealth only, not including assets such as property, racehorse, goldbricks and yachts) and thus out of reach from their local tax authorities.
In the report, Henry discovered that since the 1970s, with aggressive and often illegal assistance from the international private banking industry, around $7.3 to 9.3 trillion of unrecorded offshore wealth have been accumulated by private elites by 2010 in this sub-group of 139 countries, even when their country were flushed in debts and enduring SAP. When looking at the 50 leading private banks alone, they already collectively managed more than $12.1 trillion for their clients in cross-border investing, with the top 3 private banks in handling the most assets offshore are Goldman Sachs, UBS and Credit Suisse. Henry then commented that “The lost tax revenues implied by our estimates is huge. It is large enough to make a significant difference to the finances of many countries, [and it creates] a huge black hole in the world economy.”
On this scale of the black hole, the offshore economy is large enough to significantly alter the estimates of national income and debt ratios, estimates of inequality of income and wealth, and above all, the negative impacts on the domestic tax bases of key source countries (countries that project net unrecorded private capital outflow over time). A case in point, in 2010 these same developing countries had aggregate gross external debt of $4.08 trillion, and were categorised as debtors. But when the debts are subtracted with their foreign reserves (most of which are invested in developed countries’ securities such as US Treasury bills) their aggregate net external debts were actually minus $2.8 trillion. This has been increasing steadily since 1998 when these 139 countries’ external debt minus foreign reserves was at their peak at plus $1.43 trillion.
In other words, by way of the offshore system, these supposedly debtors countries are not debtors at all, instead they are actually net lenders to the tune of $10.1 to 13.1 trillion. The problem, however, is that the assets of these developing countries are held by a small group of wealthy individuals, with the the majority of the assets ended up stored in tax havens, while the debts of the countries are shouldered by the ordinary citizens through their governments, where the debts normally imposed under dreadful conditions and interests. Henry then elaborates that “these private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.”
David Graeber illustrates this point in his book Debt: the first 5000 years, where after the Petrodollar Recycling in the 1970s and 1980s Western banks suddenly flushed with OPEC profit money from the oil crisis, and these banks began to send agents around the world trying to convince Third World dictators and politicians to take out dollar-denominated loans from them. A surge of First World loans to developing countries then occurred, with corrupt dictators borrowed a lot of money with national assets as the collateral (often persuaded by the bankers themselves), with the majority of the borrowed money would end up being directly transferred to their offshore bank account (i.e. unrecorded capital outflows) and created a black hole in the country’s economy.
But then, when the dictators were toppled or simply replaced by a honest regime, these offshore bank accounts remain untouched while the country (more specifically, the people) have to bear the burden of the debt repayment + interests that they never use, or worse, forced to surrender their control over the country’s economic sovereignty or loose their national assets for plundering.
Take Bolivia for instance. In the late 1970s Western banks were lending flows of money to the fast-changing dictators in then politically unstable Bolivia (where at one point presidents are changing every week), without really concerning about how these dictators and their ever changing ruling regimes would possibly pay back all of the dollar-denominated debts. By the time the Third World Debt Crisis hit Bolivia in the early 1980s, the ruling government at the time was burdened with a lot of debts that they did not use, but instead of defaulting on the loans – or even confiscate the money stolen by the dictators – they chose to print huge sums of money to pay all of its debt service obligations. This caused a massive hyperinflation by 1985, with inflation skyrocketed to as high as 14,000%, making the Bolivian citizens pay dearly for the sins made by their corrupt leaders.
To tackle the hyperinflation another newly-elected Bolivian government then requested help from a Harvard economist Jeffrey Sachs, in which his solution was summed up in a single executive decree D.S. 21060 that consist of 220 separate laws that impose an economic shock therapy. The implementation of the shock therapy was brutal: it called for a 300% hike in price of oil, the elimination of food subsidy, the cancelling of almost all price controls, opening Bolivia’s border wide open to unrestricted imports, the downsizing of state companies and even the freezing of government wages for a year despite the fact that the wages were already low and life was about to get more expensive.
As far as tackling hyperinflation concerns the shock therapy worked, where within 2 years inflation was rapidly pressed down to 10%. And many neoliberal economic reviews boasted this success ever since, emphasizing that in the long run the economic shock therapy were for the better of the country and its citizens. However, many of these economic reviews fail to mention the very high human cost, where the shock therapy increased unemployment rate from 20% in 1985 to 25-30% two years later, with the state mining corporations alone was downsized from 28,000 to just 6,000 employees. Furthermore, for those who still have jobs real wages were down by 40% (which at one point dropped to as low as 70%), and average income per capita dropped from $845 in 1985 to $789 two years later. But even this lower average figure is misleading since a small elite grew far wealthier during this period while Bolivian peasants were earning just $140 a year in 1987, or less than one-fifth of the average income.
Furthermore, the government statistics also fail to reflect the growing number of malnourished children, families forced to live in tents and peasants ended up begging on the streets. This economic situation drove poor Bolivians (including the family of Evo Morales, Bolivia’s current president) into growing coca leaves, as it pays roughly 10 times the normal pay at the time, therefore increasing the supply of coca leaves in the criminal underworld network and enhancing the illegal cocaine supply to the world. Also absent in the economic reviews are the main objectives of all of this rapid austerity, liberalisation and privatisation: to successfully open up Bolivia for plundering by multinational corporations. For example, Bechtel Corp of San Francisco eventually gained control over ALL the water (a basic human necessity) in Bolivia’s 3rd largest city, including the rain that falls from the sky.
This is also what happened with Russia in their post-Soviet economic reform in the 1990s, albeit with a different type of plunder, where economic changes in the transition from centrally-planned Communist system into free-market economy during Boris Yeltsin’s presidency led to mass transfer of money from the Communist state to few former Communist Party elites and their cronies (whom we now know as oligarchs), with the majority of their money were once again being transferred to tax havens. This transfer of wealth mainly occurred between 1990 and 1996, where economic shock therapy made income per capita plummeted by over 30% (slightly less than the decline in the Great Depression), purchasing power parity diminished to equal to the US in 1897 and created enormous rise in poverty, from 2% in the Soviet era 1987-1988 to over 40% by 1995. As a political consequence, within the first few years of his presidency, many of Yeltsin’s political supporters turned against him with vice president Alexander Rutskoy denounced the shock therapy as “economic genocide.”
Just like in Bolivia, Russia’s shock therapy forced austerity, liberalisation and privatisation in a very rapid manner, where in just 500 days Russia privatised more than 100,000 Soviet enterprises. In comparison, it took Margaret Thatcher, the great deregulator of the British economy, 11 years during her reign as prime minister to privatised around 20 large utilities companies, which made the British economy better off in comparison. Moreover, this type of slower deregulation also benefited two other former Soviet Union member countries Poland and Czech Republic in their reforms in the 1990s, where their shock therapy were disrupted and delayed due to pressure from trade unions and angry protesters. The slower pace of deregulation in these two former-Soviet countries made gradual transition from the centrally-planned communist system to free-market system became less dire for the citizens, gave enough time for local corporations to respond to the changes and made a more lasting positive impact on the overall economies.
Indeed, when implemented gradually and with prior economic infrastructure-building, austerity, liberalisation and privatisation can give a positive benefit for an economy. When Keynes himself created the original Bretton Woods system in 1945 he also wanted a world of open trade, but in contrary with neoliberalism he believed that free movement of goods could only be implemented if finance remains tightly regulated by the government. This same believe was also shared by Deng Xiaoping, where he implemented Friedrich List’s theory and created strict regulatory and competition infrastructure before China began their economic deregulation in the 1980s, which became the strong foundation for China’s success story today.
Therefore, with that in mind, the real intention behind rapid neoliberal weapons of austerity, liberalisation and privatisation (the so-called shock therapy or Special Adjustment Program), that are imposed to the world by the West and its Washington Consensus, becomes awfully clear. They were specially designed for plunder.
Plutocrats’s Paradise
For the past 70 years since the US took the mantle of new ruler of the world, we have witnessed a fundamental change in the way world domination are enforced. Gone are the heavy military aggressions that have filled our history books – from the quick expansion of Alexander the Great’s empire, to the vast expansions of the likes of Mongol and Ottoman Empires, to the European colonial times in Asia and Africa – with financial weapons of mass destruction and the resulting economic domination become the main tools to essentially create a softer version of imperialism.
Dilip Hiro analyses this change of imperialism model in his book After Empire, in which he highlighted that the “American Empire” outsourced its exploitation of local resources through its private individuals and corporations “without the expense and opprobrium of maintaining political administrative control, which was an integral part of European imperialism,” with the US government instead taking the role of the provider of military umbrella for these private individuals and corporations.
For example, countries like Iran in 1953, Guatemala in 1954, Indonesia in 1965 and Latin America in the 1970s-1980s were all indeed conquered with the help of CIA-backed local military aggressions. However, unlike the previous ruler of the world, the British Empire – who claimed all the lands that they have conquered -, these countries were never officially became US colonies. But instead, after the military coup and after these countries’ economies have been dismantled, their politics and resources are controlled by private American individuals and corporations from a de-facto position using friendly dictators as their puppet.
Iran was headed by a puppet Shah Reza Pahlavi between 1953 and 1979 but its finances were completely controlled by Rockefeller, and its oil resources were divided among the Seven Sisters of the Oil Industry. Guatemala became the first Banana Republic after the US government (on behalf of United Fruit Company) got rid of democratically-elected Jocobo Arbenz and installed the puppet Colonel Carlos Castillo Armaz.
Furthermore, Indonesia, with founding father Soekarno ousted by CIA-backed General Soeharto, became what Richard Nixon called “the richest hoard of natural resources, the greatest prize in south East Asia”, and, according to John Pilger in his book The New Rulers of the World, was divided among corporations in a 3-day conference in Geneva in November 1967, where all the corporate giants dictate and create the legal system for investment in Indonesia that hugely benefit them, such as the way Freeport operates in West Papua. And in the 1970s Latin American democratically-elected leaders were thrown out and replaced by Chicago-School disciples, with their puppet dictators proceeded to conduct some of the worst human rights violation in history, in order to control the people while the corporate plundering took place. Thus it was not an exaggeration when Martin Luther King Jr. said in the 1960s that without any hesitation, his country was “the greatest purveyor of violence in the world.”
By the time Ronald Reagan took office, however, the development of financial weapons at the hand of the US government have been perfected that they no longer need military aggression anymore to force countries to give up their economic sovereignty. Instead, with Dollar-denominated debts flooding the world since Henry Kissinger’s Petrodollar Recycling in the late 1970s, they can now flip any country burdened by US Dollar-denominated debt in a blink of an eye through their Fed Fund Rate.
Debt traps then became the name of the game. And while in individual cases it has given the US control over the likes of Panama Canal and allowed them to set up military base in places like Kyrgyzstan, collectively with the continuous rate hike of Volcker Shock and Greenspan Hike the US managed to economically conquer Third World Countries in the 1980s and South East Asian countries in 1997 through debt trap, proceeded by IMF’s SAP that tear open economic barriers, and followed by the inevitable corporate plunder; all of which were conducted with no military aggression whatsoever.
Hence it was not a coincidence that since Ronald Reagan elected president US investment abroad (by its private individuals and corporations) have grown to more than $10 trillion, with profits from those investments have increased from around 20% (compared with domestic profits) in early 1980s to 80% today, while the rest of the world population are either burdened by dollar-denominated debts themselves or forced to dearly pay back the money owed by their corrupt / incompetent leaders through their government.
This new imperialism model, however, is not only imposed in third world countries, with the aftermath of 2008 global market crash served as the clearest indication on how the current ruling empire still operates. When the sub-prime mortgage time bomb destroyed the global markets, the need to act swiftly was vital to rescue the global economy, with the ultimate solution narrowed down to the 2 age-old economic options: to increase spending or budget cuts? In the US and Europe (where the crash hit the hardest), the governments opted for a terrible mixture of the two.
First they mobilise an unprecedented Keynesian rescue package using public funds from taxpayers’ money for the banking sector (deemed too big to fail) to the tune of over $2 trillion in the US and UK – despite the fact that the banks had lost private money in a huge speculative gamble on Collateralised Debt Obligation (CDO) – which created massive government debts. But then, to significantly reduce the massive debts the governments launched a new economic policy, where spending not reduced by lowering entitlements to private corporations like the banks they just bailed out, but by launching massive cuts in social welfare spending. In other words, just like money-printing in 1980s Bolivia that caused hyperinflation, ordinary citizens in the US and Europe are taking the hit from the problems made this time not necessarily by corrupt leaders, but rather by the few plutocrats in the private sector that have strong leverage towards their respective governments, whom gave away bonuses of $70 billion among themselves just moments after they have received government bailouts.
Greece is the most badly-hit by this scheme. When the aftermath of the 2008 crash sets in Greece was caught in a mount of debts, and after their failing banks were bailed out by the IMF, European Central Bank and Greece’s northern cousins (together known as Troika) – to prevent systemic banking collapse in Europe – the Greek government was forced to rapidly implement the neoliberal measures of austerity, liberalisation and privatisation in its social programs (despite the IMF themselves bizarrely admitted that austerity has disastrous consequences) in order to pay off this bailout “loan.” In other words the Greek citizens are forced to pay for the bailout made to safeguards European banks who have huge inter-bank interests with the Greek economy (€94 billion exposure, with French banks alone exposed up to €40 billion and German banks up to €24 billion).
By contrast, Iceland was also suffering from the effects of 2008 crash, however in tackling their economic meltdown Iceland ignored the advise from IMF and Western governments and took the opposite road by letting the sinners (the banks) crash, and instead upholding the Keynesian measures to where it’s suppose to be: in its social welfare programs (healthcare, unemployment programs, old-age pensions and housing support), which at first caused recession in its economy but then quickly recovered in ways that Greece and the rest of Europe never could.
Iceland’s move is not without precedent, where in the aftermath of World War II UK’s debt was over 400% of its GDP, but instead of cutting its budget or reducing its deficits the Labour Party launched successful social protection programs such as the National Health Service that saved millions of lives during the hard times. And during the Great Depression in the US, instead of massively bailing out the perpetrators of the crash of 1929 and reducing government debt through austerity, FDR launched Keynesian-style New Deal that were heavy on social protection programs. The New Deal not only prevented public health disaster at a turbulent time, but it also created some of the most important social protection programs that continues till this day, such as Social Security and Food Stamps.
David Stuckler and Sanjay Basu in their book The Body Economic, explains the reason why Iceland’s stimulus worked while Greece’s austerity failed in terms of the well being of their respective citizens by commenting that “when the government cuts its spending during a recession, it drastically reduces demand at a time when demand is already low. People spend less; businesses suffer, ultimately leading to more job losses and creating a vicious spiral of less and less demand and more and more unemployment. Ironically, austerity has the opposite of its intended effect. Far from decreasing debt, austerity increases it as the economy slows. And so debt gets worse in the long run when we don’t stimulate economic growth.”
But of course, as we all now know, the shock therapy is not designed for recovery. Just like the plunder occurring in previous victim countries, not long after their banks were bailed out and draconian cuts on its welfare system kicked-in Greece then forced to embark on a firesale – despite the fact that the Greek government is scrambling to pay off the debts they were forced to take – in a similar fashion like Ecuador was forced to give up their rainforest, while the local Greek oligarchs that control large parts of Greek businesses, financial sector, the media and politicians have also participated in the looting.
With the country’s assets being stripped apart, the effects of the draconian cuts were even more dreadful for the Greek citizens, as critical government programs such as health programs were cut HIV case rise by 200% and malaria returns to the country. The spread of HIV in particular was mainly caused by the largest cuts to housing safety nets in all Europe, where homelessness in Greece then rose by a quarter, and created a conditions of crowding and drug abuse in downtown Athens, thus raising the spread of HIV. Moreover, due to economic problems homicides rates rise and in 2012 alone 600 Greek citizens committed suicide, an alarming number considering prior to the recession Greece had the lowest suicide rate in Europe. As at October 2014 around 60% of Greeks (that’s approximately 6.3 million people) now live at or below poverty level.
Meanwhile, in the US the Keynesian move to bailout the banks and corporations also included substantial cut in the Fed Fund rate down to 0.25% and series of Quantitative Easing (i.e. printing money) in order to boost up its slowing economy. By the end of 2010 the Fed had conducted the Quantitative Easing (QE) through purchasing US Treasury notes in the figure of $1.8 trillion in QE1 and $600 billion in QE2, which means that the Fed has flooded the world with cheap US dollars, plummeting the value of the currency in the process. As commodities prices are tied to US dollar, the fall of US dollar ignited a sharp increase in commodities prices and thus – along with severe drought and other extreme-weather related damages across the world – created global inflation, most crucially in the food sector.
As a result, in 2010 (the year QE2 was launched) the CRB food index was up by a staggering 36% while raw materials were up by 23%. Furthermore, in the same year according to the Food and Agriculture Organization of the United Nations, the worldwide food price index was at an all-time high “surpassing its 2008 peak, when skyrocketing costs caused global rioting and pushed as many as 64 million people into poverty,” while the price of oils, sugar and wheat have all hit new peaks. The price of wheat, in particular, rose from $157 per metric ton on January 2010 to $335 per metric ton on January 2011, an increase of 113% in a year. As the world’s largest importer of wheat, this substantial price increase was especially troubling for Egypt, and not coincidentally January 2011 was the time when the Arab Spring broke out in places like Tunisia, Algeria and indeed Egypt, countries where up to 56% of a person’s income is dedicated for the purchase of food and where inequality level has reached an alarming rate.
Just like the Volcker Shock and Greenspan Rout, Ben Bernanke’s QEs were first and foremost intended to safeguarding the US economy. However, as the price of commodities are tied to US dollar since the late 1970s, Bernanke’s reaction to cut interest rate near zero percent and flood the world with cheap dollar have created a massive butterfly effect, which leave millions around the world worst off economically and hungrier. And just like the Third World Debt Crisis and Asian Crisis, despite not being its primary objective, the US still ensured to reap out the fruit of their making in this 2011 turmoil by middling in Middle Eastern politics: assisting Libyan rebels in toppling Gaddafi, ensuring that Yemen’s Ali Abdullah Saleh (a friendly dictator) is still replaced by the same regime, and experimenting with democracy in Egypt only to back General Abdul Fatah Al Sisi’s military coup to replace inobedient Muslim Brotherhood leadership.
Never in the history of man have an empire being operated in such indirect but powerful manner, where financial instruments can be used to change the destinies of many, even in the remotest corners of the world, in a blink of an eye. Never in the history of man have legal plundering can become so systematically widespread globally as this and with consequences so dire for the majority of world’s population. And never in the history of man have the widening income inequality gap occurring in such an alarming pace. In terms of tackling poverty there is arguably no more pressing and urgent matter to address than this.
Many reforms have been proposed by a lot of scholars and professionals to address these issues, with unifying themes such as transparency for tax havens, more taxation on the rich, more regulation for the financial market, end to corporate welfare and even debt forgiveness for African countries who never touched the loan money stored by their dictators in their offshore bank account. Just as the formula that made rich countries rich are actually pretty straight forward (as described at length in part 2) these solutions to tackle global inequality are also fairly straight forward, with Keynesian solution – if targeted towards the right measures, i.e. Just like what Iceland did – have proven to be successful in cleaning up similar mess made by supply-side economics during the Great Depression, which proceeded to create the Golden Age of Capitalism.
Nevertheless, while the ills of the world arguably have the potentially right remedies, implementing these solutions would mean the end of the neoliberal system, and there is no way for the ruling regime and its plutocrats to dismantle the machine that generate the profitable flows of money that makes them wealthy. The Volcker Rule idea that became the very weak Dodd-Frank Wall Street Reform and Consumer Protection Act in the US – that was supposed to regulate the financial market after the 2008 crash – is one example of the poor attempt to address these issues. Even Thomas Piketty admitted after proposing more than 80% global tax on the largest income (as they were during 1920-1980, when the distribution of wealth was at its most equal) that “it is unlikely that politicians worldwide would agree in taxing the capital of the richest and most powerful citizens in their country.”
This is evident at the annual meeting between the IMF and World Bank in October 2014, where Rupert Murdoch showed this untouchable self-interest side when giving a speech in front of ministers, where he still praised austerity and minimum regulation, spoke against social safety nets desperately needed by the majority of humanity, and lectured on the danger of socialism and big government, despite all of the evidences that refute his world view. Murdoch’s media empire, of course, is famous for its misleading opinions and distorted facts, and in numerous times even instrumental on electing a country’s leader that would benefit Murdoch and his peers, such as when Fox News called George W. Bush the winner in decisive Florida during the 2000 presidential election.
The tone that Murdoch sets in the IMF and World Bank echoes the remark made by Australian Prime Minister Tony Abbott in Davos meeting earlier in January 2014, in which he dellusionally said that the global financial crisis was not caused by unregulated global markets, but instead was caused by too much governance, thus justifying his inaction for reform and his move towards more neoliberal measures.
Not surprisingly, with this kind of unchanged attitude from the so-called leaders in business and politics, according to a report by Oxfam during the period of time Australia has held the G20 presidency (between 2013 and 2014) the total wealth in the G20 member countries has increased by $17 trillion, but with $6.2 trillion of those wealth (36% out of the total) are captured by the richest 1%. Moreover, among the nine G20 countries that have sufficient data, the richest 1% have their income share increased significantly since 1980, with Australia’s top 1% risen from gaining 4.8% of the total share of the national income in 1980 to more than 9% by 2010.
But it is still in the US where wealth inequality are growing in the fastest rate, where in the past 3 decades the share of household wealth owned by the top 0.1% (160,000 families with total net assets of more than $20 million in 2012) has increased from 7% in the late 1970s to 22% by 2012, while by contrast the wealth owned by the bottom 90% of families fell from 36% in mid-1980s to 23% in 2012. In other words the share of wealth owned by the top 0.1% of citizens in the US is now almost equal to the share of wealth owned by the bottom 90%. Just like Mohamed Bouazizi that sets himself on fire in Tunisia during an intense period of economic frustration – which proceeded to ignite the Arab Spring – the inequality problem in the US has arguably reached a sensitive point where one “Bouazizi moment” could spill out what originally an economic frustration, into something else, just like what happened in Ferguson, Missouri, after the Michael Brown verdict.
Meanwhile, while the rich are getting richer and store the majority of their wealth in tax havens, today thanks to bailouts and Quantitative Easings in the post-2008-crash era, public debt level in the developed countries has risen to an average of one year of national income (90% of GDP), making the rich countries indebted at a level not seen since the wartime era in 1945. This have left developed countries still remain rich on paper but the government of the developed countries actually become poor, with the debts once again are burdened to the taxpayers, which simultaneously taking the hits from austerity measures.
“Never in the field of financial endeavour has so much money been owed by so few to so many”, concludes Bank of England governor Mervyn King after series of bailouts in the aftermath of the 2008 crash, “and one might add, so far with little reform.” Because as long as the rulers of the world are still the same plutocrats that created the rules and regulations in the first place, none of the proposed reforms will take any real effect, making the current global environment a plutocrats’s paradise.
Related posts: Part 1 and Part 2
THE CHAOS THEORY 