The Power of the Financial Markets

One of the things that one often hears among politicians is that they may be interested in financing stronger social safety nets, more roads, bridges, infrastructure, better schools, better hospitals etc., but that they can not afford to borrow more money, or else have their nation’s creditworthiness downgraded. Well, we should note that after the outbreak of the Great Recession, government deficits and debt have increased in most developed countries anyway, but now the politicians are making an even more insistent case for deficit reduction. Ironically, after bailing out the same financial institutions, who are now admonishing their debtor states for fiscal imprudence. So if the debt to GDP ratio was 50% in most OECD countries, it would be closer to 100% nowadays.

And public sector borrowing is only one of the borrowing streams in a country. If you take the private sector, and combine all debts, then the debt-to-GDP ratio is closer to 1,400% (OECD 2013). In this environment, we are being told that it is not possible to borrow even more money in order to finance important things that matter to the society. What we have to practice is fiscal discipline instead, debt deleveraging, paying off old debts, and hoping that the markets would no longer punish governments with bond downgrading, which raises the cost of borrowing.

We have seen the austerity policies in many European countries (Liu 2013a). We have seen similar retrenchment here in the US. We are being told that if we simply follow the wisdom of fiscal prudence then everything will turn out to become better. Well, the reality is that debt deleveraging will depress economic development, and will create unnecessary economic suffering in the form of lower wages, fewer benefits, and unemployment among the mass of the population.

But aside from that, what the debt situation in most countries is exposing is the unmitigated power of the financial sector over the fates of countries. It is the collective global investor class, as fickle as it might be, that is determining the fates of countries and companies. When Malaysia was brutally attacked by investors in the Asian financial crisis, which had really begun in Thailand and spread to other Asian countries in a contagion, the Malaysian prime minister Mahathir bin Mohamad attacked those same investors for having brought his country’s economy to its knees. “We are told we must open up, that trade and commerce must be totally free. Free for whom? For rogue speculators. For anarchists wanting to destroy weak countries in their crusade for open societies, to force us to submit to the dictatorship of international manipulators,” Mahathir said in a speech (quoted in Frieden 2006, 392).

Further, Mahathir stated, “All along we had tried to comply with the wishes of the rich and the mighty… We did all that we were told to do. but when the big funds use their massive weight in order to move the shares up and down at will and make huge profits by their manipulations then it is too much to expect us to welcome them, especially when their profits result in massive losses for ourselves. The currency traders have become rich, very very rich through making other people poor. The poor people in these countries will suffer and these are the people who have to be protected from George Soros, who has so much money and power but it totally thoughtless.” (ibid., 393)

The issue was that after the Asian countries lifted their capital control in the early 1990s, huge capital amounts flowed into these countries in the pursuit of fancy projects of dubious value. When it came time to pay off the foreign creditors, the builders, speculators and other debtors were not able to repay the foreign debt, and so foreign investors speculated against the local currencies, since they could not defend the currency peg with their limited reserves. When the countries began to float the currency, huge amounts of capital had fled, leaving behind more unemployed workers and bankrupt firms. Asian countries had become wiser, and exported their way out of the crisis, building up a cushion of foreign reserves to defend against future speculative attacks if necessary (a full history here: Wikipedia, “1997 Asian Financial Crisis”).

What the Asian financial crisis, and many other sovereign debt histories show is that the financial sector has become enormously powerful over the last few years, and free capital flows in the ownership of private individuals will further the instability of countries and economies. Politicians, instead of listening to the constituents that brought them to power, are cowering in front of the global investor class. Because these investors often have a veto right over what government politicians decide on, they can be described as a “virtual parliament”, that operates above and beyond elected parliaments, as Noam Chomsky (“Rogue States”, 2000) pointed out. In that case, the supremacy of finance completely subverts democracy.

There is even evidence that a volatile and unrestrained financial sector creates uncertainty in the business sector, and reduces potential returns on investment (Eatwell and Taylor 2000, 120). Less investment means fewer jobs. We have seen the consequences of enormous layoffs and restructuring in big firms, that used to provide secure and well-paid jobs with career advancement opportunities. The US has shed 3.6 million high wage jobs, and created only 2.6 million of them since the last recession. In contrast, low-wage jobs were reduced by 2 million and increased by 3.8 million (Lowrey 2014). Insecurely employed contract workers, who do not receive the same kinds of protections and benefits of regularly employed workers, have grown to about 2% of the total workforce, with a tendency of further growth (Fledderjohann 2014).

From a sociological viewpoint, the intricacies of the strength of the financial sector and the class of creditors, the weakness of what former German finance minister Steinbruck (2011) had called the “primacy of politics” over the financial sector, the weakness of organized labor and debtors in general, indicate a massive shift in power from one group of people to another. Debt is after all a social relationship. The anthropologist David Graeber (“Debt: the first 5000 Years”, 2011) had pointed out that whenever debt has meant the mathematically precise and firmly enforced debt, impoverishment and violence are the common result, and only very few societies have been able to escape this tragic fate. Rebellion can end the oppression by killing the creditors and the elites. The other alternative has been to have debt jubilees, which forgives debt but retains the current class structure. (There may be some benign exceptions like the Spanish Communist village, Marinaleda, where debt does not exist, and where houses are built by the community at very low cost rather than by expensive mortgages, see Stucke 2012Hancox 2013)

Politically, it is clear that changes in this unfair economic arrangement can only be accomplished outside of the logic of the prevailing system. In other words, it will not do to subscribe to current stale principles like being more like the Swabian housewife that German chancellor Merkel had glorified (Kollewe 2012). It is not possible to save one’s way to debt payoff. The irrational financial markets will continue to be the fetter over most countries, and we require a visionary political leadership, who will defy the dictates of the financial market and carry out populist economic policies that can help alleviate unemployment and poverty in our countries.

Debts need to be either cancelled or dramatically lowered. In order to control international capital flows, which lies at the heart of global investor power, there needs to be an international financial transaction tax and a global regulatory authority to ensure that capital is used only for productive investments rather than speculation.

The showdown over the unforgiven Argentinian government bonds are continuing. Argentina had declared a default of its debts in 2001, steering the country into a financial crisis, but it made it out of the crisis with more vigor and strength (Liu 2013b). Argentina restructured 90% of the debts and paid a fraction of the value owed in debt to the bondholders. But there has been a group of so-called hold-out creditors, which includes hedge funds like Elliott Management Corp., whose goal it is to take on debt of distressed debtors, and then sue them in court to enforce full payment.

The US court has sided with the hedge funds (what a surprise), and ordered Argentina to pay up, but Argentina rejected the deal. Since when does a US lower court have jurisdiction over a foreign, sovereign country? In the mean time, the rating agencies have lowered Argentina’s bond rating to C-, which is equivalent to near default (Lough, Raszewski and Bases 2014). The financial markets and the investors are conspiring against Argentina to warn other nations not to mistreat investors. Do the poor and homeless people possess the same disciplining tools on governments? If Argentina can hold out, and if other countries come to its help, it might be able to engage its financial enemies longer. The alternative of complete submission a la Washington Consensus is not more promising.

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