Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 25 - Another Look at the Inflation Humbug

The “international funds” that threatened a speculative attack on the currency were the so-called “vulture funds” that had previously bought Argentina’s public debt, in some cases for as little as 20 percent of its nominal value. Vulture funds are international financial organizations that specialize in buying securities in distressed conditions, then circle like vultures waiting to pick over the remains of the rapidly weakening debtor. To avoid a speculative attack on its currency from these funds, the Argentine government was forced to issue public debt of $11 billion, in order to absorb the pesos issued to buy the dollars to pay a debt to the IMF of under $10 billion. But to Kirchner, it was evidently worth the price to get out from under the thumb of the IMF, which he said had been “a source of demands and more demands,” forcing “policies which provoked poverty and pain among Argentine people.”12

The Case of Zimbabwe

The same foreign banking spider that has been busily spinning its debt web in the former Soviet Union and Latin America has also been at work in Africa. A case recently in the news was that of Zimbabwe, which in August 2006 was reported to be suffering from a crushing hyperinflation of around 1,000 percent a year. As usual, the crisis was blamed on the government frantically issuing money; and in this case, the government’s printing presses were indeed running. But the currency’s radical devaluation was still the fault of speculators, and it might have been avoided if the government had used its printing presses in a more prudent way.

The crisis dates back to 2001, when Zimbabwe defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Apparently, the IMF intended to punish the country for political policies of which it disapproved, including land reform measures that involved reclaiming the lands of wealthy landowners. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. dollars on the foreign-exchange market. These dollars were then used to pay the IMF and regain the country’s credit rating.13 Unlike in Argentina, however, the government had to show its hand before the dollars were in it, leaving the currency vulnerable to speculative manipulation. According to a statement by the Zimbabwe central bank, the

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hyperinflation was caused by speculators who charged exorbitant rates for U.S. dollars, causing a drastic devaluation of the Zimbabwe currency.

The government’s real mistake, however, may have been in playing the IMF’s game at all. Rather than using its national currency to buy foreign fiat money to pay foreign lenders, it could have followed the lead of Abraham Lincoln and the Guernsey islanders and issued its own currency to pay for the production of goods and services for its own people. Inflation would have been avoided, because the newlycreated “supply” (goods and services) would have kept up with “demand” (the supply of money); and the currency would have served the local economy rather than being siphoned off by speculators. But while that solution worked in Guernsey, Guernsey is an obscure island without the gold and other marketable resources that make Zimbabwe choice spider-bait. Once a country has been caught in the foreign debt trap, escape is no easy matter. Even the mighty Argentina, which at one time was the world’s seventh-richest country, was unable to stand up to the IMF and the “vulture funds” for long.

All of these countries have been victims of the Tequila Trap – succumbing to the enticement of foreign loans and investment, opening their currencies to speculative manipulation. Henry C K Liu writes that the seduction of foreign capital was a “financial narcotic that would make the Opium War of 1840 look like a minor scrimmage.”14 In the 1990s, a number of Southeast Asian economies would find this out to their peril . . . .

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Chapter 26

POPPY FIELDS, OPIUM WARS,

AND ASIAN TIGERS

Now it is well known that when there are many of these flowers together, their odor is so powerful that anyone who breathes it falls asleep. And if the sleeper is not carried away from the scent of the flowers, he sleeps on and on forever.

– The Wonderful Wizard of Oz,

“The Deadly Poppy Field”

The deadly poppy fields that captured Dorothy and the Lion were an allusion to the nineteenth century Opium Wars, which allowed the British to impose economic imperialism on China. The Chinese government, alarmed at the growing number of addicts in the country, made opium illegal and tried to keep the British East India Company from selling it in the country. Britain then forced the issue

militarily, acquiring Hong Kong in the process.

To the Japanese, it was an early lesson in the hazards of “free trade.” To avoid suffering the same fate themselves, they tightly sealed their own borders. When they opened their borders later, it was to the United States rather than to Britain. The Japanese Meiji Revolution of 1868 was guided by Japanese students of Henry Carey and the American nationalists. It has been called an “American System Renaissance,” and Yukichi Fukuzawa, its intellectual leader, has been called “the Benjamin Franklin of Japan.” The feudal Japanese warlords were overthrown and a modern central government was formed. The new government abolished the ownership of Japan’s land by the feudal samurai nobles and returned it to the nation, paying the nobles a sum of money in return.1

How was this massive buyout financed? President Ulysses S. Grant warned against foreign borrowing when he visited Japan in 1879. He

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said, “Some nations like to lend money to poor nations very much. By this means they flaunt their authority, and cajole the poor nation. The purpose of lending money is to get political power for themselves.” Great Britain had a policy of owning the central banks of the nations it occupied, such as the Hongkong and Shanghai Bank in China. To avoid that trap, Japan became the first nation in Asia to found its own independent state bank. The bank issued new fiat money which was used to pay the samurai nobles. The nobles were then encouraged to deposit their money in the state bank and to put it to work creating new industries. Additional money was created by the government to aid the new industries. No expense was spared in the process of industrialization. Money was issued in amounts that far exceeded annual tax receipts. The funds were, after all, just government credits – money that was internally generated, based on the credit of the government rather than on debt to foreign lenders.2

The Japanese economic model that evolved in the twentieth century has been called a “state-guided market system.” The state determines the priorities and commissions the work, then hires private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state. Chalmers Johnson, president of the Japan Policy Research Institute, wrote in 1989 that the closest thing to the Japanese model in the United States is the military/industrial complex. The government determines the programs and hires private companies to implement them. The U.S. military/industrial complex is a form of state-sponsored capitalism that has produced one of the most lucrative and successful industries in the country.3 The Japanese model differs, however, in that it achieved this result without the pretext of war. The Japanese managed to transform their warrior class into the country’s industrialists, successfully shifting their focus to the peaceful business of building the country and developing industry. The old feudal Japanese dynasties became the multinational Japanese corporations we know today – Mitsubishi, Mitsui, Sumitomo, and so forth.

The Assault of the Wall Street Speculators

The Japanese state-guided market system was so effective and efficient that by the end of the 1980s, Japan was regarded as the leading economic and banking power in the world. Its Ministry of International Trade and Industry (MITI) played a heavy role in guiding national

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economic development. The model also proved highly successful in the “Tiger” economies -- South Korea, Malaysia and other East Asian countries. East Asia was built up in the 1970s and 1980s by Japanese state development aid, along with largely private investment and MITI support. When the Soviet Union collapsed, Japan proposed its model for the former communist economies, and many began looking to Japan and South Korea as viable alternatives to the U.S. free-market system. State-guided capitalism provided for the general welfare without destroying capitalist incentive. Engdahl writes:

The Tiger economies were a major embarrassment to the IMF free-market model. Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda. So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course. In east Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy – an Asian form of benevolent paternalism.4

High economic growth, rising social security, and universal education in a market economy – it was the sort of “Common Wealth” America’s Founding Fathers had endorsed. But the model represented a major threat to the international bankers’ system of debt-based money and IMF loans. To diffuse the threat, the Bank of Japan was pressured by Washington to take measures that would increase the yen’s value against the dollar. The stated rationale was that this revaluation was necessary to reduce Japan’s huge capital surplus (excess of exports over imports). The Japanese Ministry of Finance countered that the surplus, far from being a problem, was urgently required by a world needing hundreds of billions of dollars in railroad and other economic infrastructure after the Cold War. But the Washington contingent prevailed, and Japan went along with the program. By 1987, the Bank of Japan had cut interest rates to a low of 2.5 per cent. The result was a flood of “cheap” money that was turned into quick gains on the rising Tokyo stock market, producing an enormous stock market bubble. When the Japanese government cautiously tried to deflate the bubble by raising interest rates, the Wall Street bankers went on the attack, using their new “derivative” tools to sell the market short and bring it crashing down. Engdahl writes:

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No sooner did Tokyo act to cool down the speculative fever, than the major Wall Street investment banks, led by Morgan Stanley and Salomon Bros., began using exotic new derivatives and financial instruments. Their intervention turned the orderly decline of the Tokyo market into a near panic sell-off, as the Wall Street bankers made a killing on shorting Tokyo stocks in the process. Within months, Japanese stocks had lost nearly $5 trillion in paper value.5

Japan, the “lead goose,” had been seriously wounded. Washington officials proclaimed the end of the “Japanese model” and turned their attention to the flock of Tiger economies flying in formation behind.

Taking Down the Tiger Economies:

The Asian Crisis of 1997

Until then, the East Asian countries had remained largely debtfree, avoiding reliance on IMF loans or foreign capital except for direct investment in manufacturing plants, usually as part of a long-term national goal. But that was before Washington began demanding that the Tiger economies open their controlled financial markets to free capital flows, supposedly in the interest of “level playing fields.” Like Japan, the East Asian countries went along with the program. The institutional speculators then went on the attack, armed with a secret credit line from a group of international banks including Citigroup.

They first targeted Thailand, gambling that it would be forced to devalue its currency and break from its peg to the dollar. Thailand capitulated, its currency was floated, and it was forced to turn to the IMF for help. The other geese then followed one by one. Chalmers Johnson wrote in The Los Angeles Times in June 1999:

The funds easily raped Thailand, Indonesia and South Korea, then turned the shivering survivors over to the IMF, not to help victims, but to insure that no Western bank was stuck with nonperforming loans in the devastated countries.6

Mark Weisbrot testified before Congress, “In this case the IMF not only precipitated the financial crisis, it also prescribed policies that sent the regional economy into a tailspin.” The IMF had prescribed the removal of capital controls, opening Asian markets to speculation by foreign investors, when what these countries really needed was a

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supply of foreign exchange reserves to defend themselves against speculative currency raids. At a meeting of regional finance ministers in 1997, the government of Japan proposed an Asian Monetary Fund (AMF) that would provide the needed liquidity with fewer conditions than were imposed by the IMF. But the AMF, which would have directly competed with the IMF of the Western bankers, met with strenuous objection from the U.S. Treasury and failed to materialize. Meanwhile, the IMF failed to provide the necessary reserves, while insisting on very high interest rates and “fiscal austerity.” The result was a liquidity crisis (a lack of available money) that became a major regional depression. Weisbrot testified:

The human cost of this depression has been staggering. Years of economic and social progress are being negated, as the unemployed vie for jobs in sweatshops that they would have previously rejected, and the rural poor subsist on leaves, bark, and insects. In Indonesia, the majority of families now have a monthly income less than the amount that they would need to buy a subsistence quantity of rice, and nearly 100 million people

– half the population – are being pushed below the poverty line.7

In 1997, more than 100 billion dollars of Asia’s hard currency reserves were transferred in a matter of months into private financial hands. In the wake of the currency devaluations, real earnings and employment plummeted virtually overnight. The result was mass poverty in countries that had previously been experiencing real economic and social progress. Indonesia was ordered by the IMF to unpeg its currency from the dollar barely three months before the dramatic plunge of the rupiah, its national currency. In an article in Monetary Reform in the winter of 1998-99, Professor Michel Chossudovsky wrote:

This manipulation of market forces by powerful actors constitutes a form of financial and economic warfare. No need to re-colonize lost territory or send in invading armies. In the late twentieth century, the outright “conquest of nations,” meaning the control over productive assets, labor, natural resources and institutions, can be carried out in an impersonal fashion from the corporate boardroom: commands are dispatched from a computer terminal, or a cell phone. Relevant data are instantly relayed to major financial markets – often resulting in immediate disruptions in the functioning of national economies. “Financial warfare” also

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applies complex speculative instruments including the gamut of derivative trade, forward foreign exchange transactions, currency options, hedge funds, index funds, etc. Speculative instruments have been used with the ultimate purpose of capturing financial wealth and acquiring control over productive assets.

Professor Chossudovsky quoted American billionaire Steve Forbes, who asked rhetorically:

Did the IMF help precipitate the crisis? This agency advocates openness and transparency for national economies, yet it rivals the CIA in cloaking its own operations. Did it, for instance, have secret conversations with Thailand, advocating the devaluation that instantly set off the catastrophic chain of events?

. . . Did IMF prescriptions exacerbate the illness? These countries’ monies were knocked down to absurdly low levels.8

Chossudovsky warned that the Asian crisis marked the elimination of national economic sovereignty and the dismantling of the Bretton Woods institutions safeguarding the stability of national economies. Nations no longer have the ability to control the creation of their own money, which has been usurped by marauding foreign banks.9

Malaysia Fights Back

Most of the Asian geese succumbed to these tactics, but Malaysia stood its ground. Malaysian Prime Minister Mahathir Mohamad said the IMF was using the financial crisis to enable giant international corporations to take over Third World economies. He contended:

They see our troubles as a means to get us to accept certain regimes, to open our market to foreign companies to do business without any conditions. [The IMF] says it will give you money if you open up your economy, but doing so will cause all our banks, companies and industries to belong to foreigners. . . .

They call for reform but this may result in millions thrown out of work. I told the top official of IMF that if companies were to close, workers will be retrenched, but he said this didn’t matter as bad companies must be closed. I told him the companies became bad because of external factors, so you can’t bankrupt them as it was not their fault. But the IMF wants the companies to go bankrupt.10

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Mahathir insisted that his government had not failed. Rather, it had been victimized along with the rest of the region by the international system. He blamed the collapse of Asia’s currencies on an orchestrated attack by giant international hedge funds. Because they profited from relatively small differences in asset values, the speculators were prepared to create sudden, massive and uncontrollable outflows of capital that would wreck national economies by causing capital flight. He charged, “This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations.” Mahathir said he had appealed to the international agencies to regulate currency trading to no avail, so he had been forced to take matters into his own hands. He had imposed capital and exchange controls, a policy aimed at shifting the focus from catering to foreign capital to encouraging national development. He fixed the exchange rate of the ringgit (the Malaysian national currency) and ordered that it be traded only in Malaysia. These measures did not affect genuine investors, he said, who could bring in foreign funds, convert them into ringgit for local investment, and apply to the Central Bank to convert their ringgit back into foreign currency as needed.

Western economists waited for the economic disaster they assumed would follow; but capital controls actually helped to stabilize the system. Before controls were imposed, Malaysia’s economy had contracted by 7.5 percent. The year afterwards, growth projections went as high as 5 percent. Joseph Stiglitz, chief economist for the World Bank, acknowledged in 1999 that the Bank had been “humbled” by Malaysia’s performance. It was a tacit admission that the World Bank’s position had been wrong.11

David had stood up to Goliath, but the real threat to the international bankers was Malaysia’s much more powerful neighbor to the north. The Chinese Dragon was not only still standing; it was breathing fire . . . .

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