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It was like a scene out of Le Carré: the brilliant agent comes in from the cold and, in hours of debriefing, empties his memory of horrors committed in the name of an ideology gone rotten.
But this was a far bigger catch than some used-up Cold War spy. The former apparatchik was Joseph Stiglitz, ex-chief economist of the World Bank. The new world economic order was his theory come to life.
He was in Washington for the big confab of the World Bank and International Monetary Fund. But instead of chairing meetings of ministers and central bankers, he was outside the police cordons. The World Bank fired Stiglitz two years ago. He was not allowed a quiet retirement: he was excommunicated purely for expressing mild dissent from globalisation World Bank-style.
Here in Washington we conducted exclusive interviews with Stiglitz, for The Observer and Newsnight, about the inside workings of the IMF, the World Bank, and the bank's 51% owner, the US Treasury.
And here, from sources unnamable (not Stiglitz), we obtained a cache of documents marked, 'confidential' and 'restricted'.
Stiglitz helped translate one, a 'country assistance strategy'. There's an assistance strategy for every poorer nation, designed, says the World Bank, after careful in-country investigation.
But according to insider Stiglitz, the Bank's 'investigation' involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a 'restructuring agreement' pre-drafted for 'voluntary' signature.
Each nation's economy is analysed, says Stiglitz, then the Bank hands every minister the same four-step programme.
Step One is privatisation. Stiglitz said that rather than objecting to the sell-offs of state industries, some politicians - using the World Bank's demands to silence local critics - happily flogged their electricity and water companies. 'You could see their eyes widen' at the possibility of commissions for shaving a few billion off the sale price.
And the US government knew it, charges Stiglitz, at least in the case of the biggest privatisation of all, the 1995 Russian sell-off. 'The US Treasury view was: "This was great, as we wanted Yeltsin re-elected. We DON'T CARE if it's a corrupt election." '
Stiglitz cannot simply be dismissed as a conspiracy nutter. The man was inside the game - a member of Bill Clinton's cabinet, chairman of the President's council of economic advisers.
Most sick-making for Stiglitz is that the US-backed oligarchs stripped Russia's industrial assets, with the effect that national output was cut nearly in half.
After privatisation, Step Two is capital market liberalisation. In theory this allows investment capital to flow in and out. Unfortunately, as in Indonesia and Brazil, the money often simply flows out.
Stiglitz calls this the 'hot money' cycle. Cash comes in for speculation in real estate and currency, then flees at the first whiff of trouble. A nation's reserves can drain in days.
And when that happens, to seduce speculators into returning a nation's own capital funds, the IMF demands these nations raise interest rates to 30%, 50% and 80%.
'The result was predictable,' said Stiglitz. Higher interest rates demolish property values, savage industrial production and drain national treasuries.
At this point, according to Stiglitz, the IMF drags the gasping nation to Step Three: market-based pricing - a fancy term for raising prices on food, water and cooking gas. This leads, predictably, to Step-Three-and-a-Half: what Stiglitz calls 'the IMF riot'.
The IMF riot is painfully predictable. When a nation is, 'down and out, [the IMF] squeezes the last drop of blood out of them. They turn up the heat until, finally, the whole cauldron blows up,' - as when the IMF eliminated food and fuel subsidies for the poor in Indonesia in 1998. Indonesia exploded into riots.
There are other examples - the Bolivian riots over water prices last year and, this February, the riots in Ecuador over the rise in cooking gas prices imposed by the World Bank. You'd almost believe the riot was expected.
And it is. What Stiglitz did not know is that Newsnight obtained several documents from inside the World Bank. In one, last year's Interim Country Assistance Strategy for Ecuador, the Bank several times suggests - with cold accuracy - that the plans could be expected to spark 'social unrest'.
That's not surprising. The secret report notes that the plan to make the US dollar Ecuador's currency has pushed 51% of the population below the poverty line.
The IMF riots (and by riots I mean peaceful demonstrations dispersed by bullets, tanks and tear gas) cause new flights of capital and government bankruptcies This economic arson has its bright side - for foreigners, who can then pick off remaining assets at fire sale prices.
A pattern emerges. There are lots of losers but the clear winners seem to be the western banks and US Treasury.
Now we arrive at Step Four: free trade. This is free trade by the rules of the World Trade Organisation and the World Bank, which Stiglitz likens to the Opium Wars. 'That too was about "opening markets",' he said. As in the nineteenth century, Europeans and Americans today are kicking down barriers to sales in Asia, Latin American and Africa while barricading our own markets against the Third World 's agriculture.
In the Opium Wars, the West used military blockades. Today, the World Bank can order a financial blockade, which is just as effective and sometimes just as deadly.
Stiglitz has two concerns about the IMF/World Bank plans. First, he says, because the plans are devised in secrecy and driven by an absolutist ideology, never open for discourse or dissent, they 'undermine democracy'. Second, they don't work. Under the guiding hand of IMF structural 'assistance' Africa's income dropped by 23%.
Did any nation avoid this fate? Yes, said Stiglitz, Botswana. Their trick? 'They told the IMF to go packing.' Stiglitz proposes radical land reform: an attack on the 50% crop rents charged by the propertied oligarchies worldwide.
Why didn't the World Bank and IMF follow his advice?
'If you challenge [land ownership], that would be a change in the power of the elites. That's not high on their agenda.'
Ultimately, what drove him to put his job on the line was the failure of the banks and US Treasury to change course when confronted with the crises, failures, and suffering perpetrated by their four-step monetarist mambo.
'It's a little like the Middle Ages,' says the economist, 'When the patient died they would say well, we stopped the bloodletting too soon, he still had a little blood in him.'
Maybe it's time to remove the bloodsuckers.
gregory.palast@observer.co.uk
====================
THE DAKAR DECLARATION FOR
THE TOTAL AND UNCONDITIONAL CANCELLATION OF
AFRICAN AND THIRD WORLD DEBT -
Dec.2000
We, participants at the “Dakar 2000 meeting for the cancellation of Third World debt», representing African people’s civil societies, supported by civil societies from Latin America, Asia, Europe and North America, from the analysis of the debt issue, of structural adjustment plans (SAPs) and development.
Realize that:
1. Third World debt to the North is at once fraudulent, odious, illegal, immoral, illegitimate, obscene and genocidal;
2. Countries of the North owe Third World countries, particularly Africa, a manifold debt: blood debt with slavery; economic debt with colonization, and the looting of human and mineral resources and unequal exchange; ecological debt with the destruction and the looting of its natural resources; social debt (unemployment; mass poverty) and cultural debt (debasing of African civilizations to justify colonization)
3. The debt structure and its computation are beyond the debtors’ control. In effect, since 1988, the increase in the sub-Saharan African debt is due for 65% to arrears on amortization and capitalized interests. This shows that the debt burden has become more and more unbearable for the populations
4. Debt and structural adjustment plans (SAPs) constitute the principal causes for the degradation of health, education, nutrition, food security, the environment and sociocultural values of the African and Third World populations;
5. Debt and SAPs are the cause for the aggravation of unemployment, the destruction of families leading to the rise of delinquency and prostitution, the worsening of women’s socio-economic conditions and daily life, the ecological degradation of the continent and wars with their cohorts of refugees and displaced persons;
6. The fall in the incomes and purchasing power of African workers and producers has necessarily negative repercussions on economic growth in Northern countries, and therefore on the rise in unemployment and exclusion
7. To the brain drain, one can add the emigration of Third World vital forces to the North, with all their mafia-like consequences: generating, laundering and circulating dirty money, illegal drug, human organ trafficking, prostitution, weakening of innovative and entrepreneurial capacities;
8. Debt and SAPs weaken Third World countries by exposing them to unequal trade and to the ravages of deregulated financial markets. The World trade Organization (WTO) and the trade agreements imposed by the United States and the European union aim to further weaken Third World countries
9. The World Bank, the International Monetary Fund (IMF) and the governments of G7 countries refuse to cancel the debt because the latter is a mechanism allowing them to impose policies consistent with their interests and their control over the Third World
10. Debt is a neoliberal mechanism aimed at promoting the interests of transnational corporations, and for this reason, there is collusion between the IMF, the World Bank and the World Trade Organization
11. Africa is not immune to economic disorders provoked by international financial speculations
12. Our struggle is similar to those of Seattle, Washington, Prague and Nice
Therefore, conscious of the necessity of a solidarity among progressive social forces from the Third World and the North: NGOs, Labor Unions, Peasant Organizations, Women’s and Youth Organizations, Religious Organizations, Cultural Workers and Actors, Communications Professionals, we participants at Dakar 2000
Declare that:
The right to development and the eradication of poverty is people’s fundamental right.
Condemn the constitution and accumulation of Third World debt, by Northern countries, with the complicity of the former’s rulers
Demand:
13. From Northern creditors (financial institutions and States)
° The unconditional and immediate cancellation of Third World debt in its totality ° The end to the economic and financial exploitation of Africa and the Third World by the abolition of the Bretton Woods institutions which, contrary to their mission, have only succeeded in spreading poverty and increasing inequalities ° The restitution of the amounts that have been unduly perceived ° The compensation of the African and Third World people for the human, moral, physical, material and environmental losses they suffered due the debt burden, SAPs and the spoliation of their wealth ° The democratization of the functioning of the WTO ° The institution of a tax on capital movements to help citizens (Tobin tax)
14. From African and Third World Countries’ Heads of State
° The outright repudiation of debt without warning and delay ° The establishment of a Repudiation Front to resist and fight back the pressures and sanctions which could result from this policy ° The rejection of SAPs ° The restoration in their place of genuine, equitable and sustainable development policies respectful of human rights, workers’ rights, and based on popular participation. This means promoting the Lagos Plan, the African Alternative Framework to SAPs, the Abuja Treaty, the Arusha Charter as alternatives to SAPs. ° To behave as genuine defenders of their people’s interests and care about the future of current and next generations, particularly of women and children ° To establish a sincere dialogue with their civil societies ° To put an end to pseudo ethnic and civil wars and conflicts maintained with the debt at the expense of social spending and productive investments ° To promote the mobilization of endogenous financial resources through internal savings to finance development before resorting to external “aid” ° To display a greater cohesion in the negotiations with international financial institutions, regional organizations (for instance, the European Union) and the WTO
15. From Third World Social Forces
° To resist the pressures and hardship imposed on them by transnational corporations, in collusion with the IMF, the World Bank and the WTO ° To fight back the pressures and be in the forefront of the offensive for social struggles from which will emerge alternative strategies ° To impose on their governments the implementation of concrete and workable solutions to the debt problem and to the negative impact of SAPs ° To impose their participation in the formulation, implementation and evaluation of alternative policies and programs to SAPs ° To demand from their governments the institution of social dialogue and the right to control as a governance method ° To set up independent national commissions on ill-acquired wealth and create a synergy among them ° To organize into national, Pan-African and international coalitions with the people of the Third World and progressive forces from the North ° To build an African People’s Consensus to face up to debt, to trade and financial policies that constitute the neoliberal framework imposed by the World Bank, the IMF, the WTO and the G7 countries ° To build that Consensus from the bottom up, based on the concerns of the people ° To educate the people on the causes of their poverty and support popular resistance movements ° To support the establishment of popular resistance movements within an endogenous development framework, suited for our countries, for our continent ° To organize them into a powerful regional network to strengthen the African People’s Consensus ° To coordinate these activities at the continental level to ensure a stronger coherence ° To coordinate the progress of the African People’s Consensus with the struggle of worldwide progressive forces
16. From African intellectuals, researchers and academics
° To further commit themselves to the search for alternative solutions based on our socio-cultural values of solidarity and from our own resources ° To make their works more visible and accessible to social actors ° The African experts who worked for international institutions should make their experience and relationships available to the African civil society in order to strengthen its capacity ° To formulate and compel our States to implement our own paradigm based on people’s interests and positive African values
17. From African labor unions
° To unite into a continental and international coalition with workers from Asia, Latin America and Northern countries for the total and unconditional cancellation of African and Third World debt
18. From women’s organizations, African youth, artists and sportspeople
° To organize into national and Pan-African coalitions and join the other actors for the success of the struggles, the search for, and the implementation of, alternatives to SAPs and to the Washington Consensus
19. From NGOs supporting development
° To contribute to the economic literacy of grassroots communities and promote the conception and dissemination of appropriate pedagogic tools ° To contribute to education for justice and to education for development according to the recommendations of the Dakar conference on education for all
20. Request from Northern countries’ progressive forces
° To step up the pressure on international financial institutions and their States ° To intensify in their countries the campaigns for a popular movement in favor of the abolition of the IMF, the World Bank and the WTO and the end to their interference in the internal affairs of Africa, Asia and Latin America ° To strengthen their solidarity with the progressive forces and the people of Africa and the Third World
Adopted in Dakar on December 14, 2000
==========================================
DAKAR MANIFESTO «Africa: from Resistance to Alternatives”
THE TOTAL AND UNCONDITIONAL CANCELLATION OF THE AFRICAN DEBT is a demand based on undisputed economic, social, moral, legal and historical arguments. Because the debt problem is not a financial or technical issue as the World Bank and the IMF are tempted to demonstrate. It is fundamentally a human, social and political problem. Debt service and conditionalities associated to it have contributed to the aggravation of poverty. Moreover, debt has been widely reimbursed: for the past few years, Africa has been transferring more resources to developed countries than she receives.
In addition, most of Africa's debt is odious, fraudulent and immoral. In fact, in most cases, debt has been contracted by not representative regimes that have used the amount received for purposes that were not of much use to their people interests. Often, this debt served to consolidate and even legitimize dictatorships that used it to oppress their own people, with the benevolence and complicity of Western countries.
Debt has also been contracted to undertake mega projects designed to stimulate exportations at the expense of the satisfaction of people’s fundamental needs.
The reimbursement of that debt is immoral: its service is diverting resources essential in the struggle against poverty, illiteracy and AIDS.
Thus, from whatever angle we consider the issue of Africa's debt, it is unacceptable. It is all the less acceptable that the historic debt that the West has incurred from Africa is immeasurable.
Accordingly, we demand both the restitution of what has been taken from Africa for centuries by sheer force and reparations for all the crimes and damages inflicted upon its people
Mobilized by the Amsterdam Appeal of April 2000, we representatives of women’s movements, youth movements, rural and urban workers, international solidarity, gathered from 11-14 December, 2000, in Dakar (Senegal), with the support of our partners of other continents,
- call again for the immediate and unconditional cancellation of the African debt - demand the end to Structural adjustment Programs, even as they are renamed Poverty Reduction Strategy Programs (PRSPs) - adopt the following program and promise to take all necessary measures for its implementation
III) SHORT AND MEDIUM-TERM PROGRAM
We are inviting social movements to increase the campaigns calling for the unconditional cancellation of Africa and other Third World countries' debt. We recommend the use of all opportunities to reinforce the pressure on Africa's debtors, by organizing or participating in initiatives of all kinds, to draw the attention of the world public opinion to the criminal nature of the policies imposed by the World Bank and the IMF to compel African countries to pay a "debt", several times reimbursed. All the meetings organized by these two institutions and major Western leaders (G7) as well as other international gatherings will be as many opportunities to show our determination. Simultaneously, we demand that our governments set up a coalition of debtor countries and repudiate external debt by using the sums so saved to the profit of their people.
To better implement the above policy, we will endeavor to strengthen the international network fighting against Third World debt. We will first attempt to strengthen the relationships between organizations committed to this struggle in Africa and in other developing countries as part of the Jubilee South movement. In fact, we think that the strengthening of such links constitutes one of the preconditions for the success of the campaign for debt cancellation. Solidarity between these organizations represents the base on which the solidarity between South and North organizations must be built. The strategic alliance with the latter constitutes a solid link in the chain of the world human solidarity for breaking the resistance and egoism of Western states and multilateral institutions.
In this respect, regional campaigns will be undertaken and articulated to international campaigns. We have to massively involve the public opinion within each country in order to put decisive pressure on governments to make them rethink their relationships with the World Bank and IMF and to refuse debt repayment.
Solidarity among members of the network will be forged and reinforced through data exchanges, organizations of joint events, mutual assistance in the reinforcement of human and organizational capacities in order to be better prepared for a higher level of the struggle.
The credibility of the campaign depends on the ability of civil society organizations to articulate coherent strategies and to propose alternatives. Thus, the reinforcement of the civil society capacity to intervene is an essential task whose implementation requires a patient work.
Citizens movements must reinforce so as to be in a position to not only take away debtors’ arguments but especially to move the debate towards the center and identify the real issues.
IV STRATEGIC PROGRAM
1. Radical change of policies
It is essential to tackle the structural factors, which are at the roots of the debt crisis. In this respect, it is necessary to revisit from top to bottom the external borrowing policies, as well as the use made of the loans. When those loans are necessary, parliamentarian institutions must be involved and the issue must be debated.
Transparent and democratic rules must be applied under the control of the citizens. We must reduce as little as possible the use of external loans by mobilizing internal saving through a progressive fiscal policy, which compels the richest to contribute to the development efforts.
On the external level: we shall act head on. In order to stop or reverse the trend toward the deterioration of the terms of trade, one should set up mechanisms aimed at stabilizing the prices of raw material and commodities. Producers should form cartels to defend the prices of their products subjected to manipulation by big trading companies from the North. Likewise, international agreements of price stabilization should be negotiated under the aegis of the United Nations system. This would allow the increase in export incomes; limit the depletion of the natural resources and save the environment.
On the other hand, African countries should speed up their economic integration in order to reduce their external dependence, create the conditions for establishing a regional market capable of supporting a regional industrialization policy, which could promote export diversification, thanks to a greater value-added of local products. Integration should go hand in hand with the establishment of viable monetary areas in the different regions of the continent; the only means that will allow them to avoid the tyranny of foreign currencies on African economies
2 Reinforcing South-South Cooperation
South-South cooperation shall be considered as an essential stage by social movements and African governments. It will allow African countries to reinforce the trend for less dependence towards developed countries. In this perspective, we are urging African countries, members of the OAU to explore all existing possibilities, especially the recommendations of the South Commission Report, under the supervision of the late Julius K. Nyerere and to implement concretely the agreements concluded between them at the Sirte Summit (Libya) in 1999 regarding debt cancellation The cooperation between G77, that between G15 countries and other forms of cooperation must be developed in all areas.
Social movements must accept, support and widely circulate treaties signed among countries of the South.
African countries and their partners from the South should convince the United Nations to undertake concerted measures to discourage international financial speculations whose devastating effects have been observed in South East Asia, Brazil and Russia in recent years. The imposition of the Tobin tax, the funds of which will be devoted to human development, the fight against money laundering (notably by ending bank secrecy), as well as the shutting down or the penalization of tax havens, constitute appropriate measures.
3. Restitutions and Reparations
Another section of the strategic agenda is the issue of restitution and reparation owed to Africa by Western countries. Slavery, colonization and the various forms of exploitation and wealth plundering have left Africa bloodless, and caused a tremendous economic, social, scientific and cultural backwardness of the continent. One cannot understand the situation of the continent without taking into account the destructions, robbing and plundering Africa has gone through because of Western countries.
From that perspective, we are compelled to demand both the restitution of what has been stolen from Africa by sheer force and reparations for all the crimes and damages imposed on its people. Restitutions include cultural and scientific wealth.
In addition, we must repatriate ill-acquired wealth by African leaders and return them to the people that have been deprived of it. To achieve this objective, we have to use appropriate legal actions. 4. For an endogenous development
We must replace the notorious “Washington Consensus”now largely discreditedwith a vision of development inspired by the values of the African political, social, cultural, economic and scientific Renaissance promoted by an African people’s consensus. The fundamental values associated with this Renaissance include restoring confidence in Africans, rejecting all forms of exploitation and domination, reinforcing the culture of solidarity and the spirit of self-reliance, relying on the creative genius of the African people in order to create a new civilization of autonomous development so as to bring a great contribution to world civilization
The concept of endogenous development is to be conceived as a process of strategic reflection on the fundamental conditions of an African development, understood as a multidimensional emancipating project, i.e. on the economic, social, political, scientific and cultural and gender levels
The need for an approach to endogenous development proceeds from the basic historical fact that there is no “universal model”, out of space and time, e.g., valid everywhere and at all time. Development depends on the history, culture and experience of a people. It cannot be a carbon copy of another experience, especially one based on a reductionist view of the true history of the people, full of abiding cultural prejudices and built on the domination, exploitation and looting of the resources of other peoples. The outlines of an approach to an African endogenous development could have, inter alia, the following essential features:
1. A human-centered development, in order to meet the real basic needs expressed by the African people. The experience of Africa reveals the failure of the neoclassical model imposed as a turnkey model. The more one talks about growth rate, the more poverty expands. Well, what is the use of a “growth” which crushes human beings and increases poverty and exclusion? The truth is that the only kind of development is the one, which contributes to the full blossoming of the human being. Understood from this perspective, development is first of all a qualitative and not purely quantitative phenomenon. It is no longer an unrestrained accumulation of wealth, often for a handful of people, but the permanent search of solutions to the basic problems of the majority of the people.
2. A development based, first and foremost, on our own vision of our future and the defense of our fundamental interests. Therefore, a development formulated and implemented by Africans themselves and according to their own priorities. In fact, the second fundamental break to take place is the rejection of an imported development, which treats our continent as a dumping ground where the waste of industrialized is thrown.
3. Another characteristic of the new approach to development is that the latter can no longer be an “elite” issue, but a participatory, inclusive and democratic development. Especially, it is a development relying on agriculture and the mobilization of the numerous human and material resources of this sector, understood at the same time by intellectuals and non-intellectuals, by the rural areas and the urban zones. This raises the issue of the African cultural Renaissance and the use of the African languages in the formulation and implementation of development programs. The introduction of African national languages would allow hundreds of millions of African to use their creative power in order to fully participate in crafting development strategies and policies. Without the conscious participation of the people in the definition of policies that affect their life and future, there will never be any development, because the people are the driving force of all economic and social transformation.
4. The new approach must also focus on the search for the continent’s collective self-reliance on essential and strategic needs, at the agricultural and industrial level. For this, it is must be within African integration, a fundamental framework of sustainable endogenous development. It is a truism to say that without integration, Africa has no chance to develop. The vicissitudes of history have made Africa one of the most fragmented continents in the world. That is one of the essential factors for its backwardness and current marginalization.
In the 21st century, Africa will be African only if the continent completes its integration and acts with a unique and single voice in the concert of nations. This approach does not mean that Africa will isolate herself from the world. On the contrary, it is to ensure the participation of the people of the continent in an alternative globalization to the neoliberal globalization. We are in favor of a globalization based on a solidarity among people of the North and the South and giving priority to meeting basic human needs.
5. That is why Africa must renew with the ideal of Pan-Africanism and base its practice on the principles and values of the African Renaissance. This also means that we should walk on our two feet, take agriculture as the basis of development and lay the ground for building a modern and efficient industry.
6. Another development means promoting and ensuring social justice, gender equality, democracy and respect for human rights. The high level of poverty and exclusion results from the bad influence of the “all for market” policy and the unrestrained search for private benefit, which pushed the State to abandon the policy, aimed at promoting equality and social justice.
7. Another development in Africa involves the creation of new development institutions, one of which is a new State ridden of its oppressive, exploitative and repressive colonial heritage. In fact, it is imperative to reconsider all institutions inherited from colonization and create instead, new institutions consistent with an endogenous and autonomous approach to development. The State and most present institutions are of “elitist” type and carbon copies of their European counterparts. That is why they participate more in the repression and exploitation of the African people than in the creation of conditions allowing them to develop all their potential and to blossom. In fact, institutions created to enslave Africans would not, under any circumstances, serve to free them. Therefore, new institutions whose nature and functions are different from the ones inherited from colonization are needed. A new State, which will ensure equity between all and promote an integrated human development
8. The governance issue should be examined and resolved from that angle and not from the perspective recommended by Western countries, which aim only at making our institutions much more docile instruments to serve their interests. Citizens must conquer anew the ground lost by democracy. Institutions, consistent with an endogenous development, designed by and for Africans, are the instruments for African people liberation, institutions with which they will identify themselves closely, because they participated in their design, understood their nature and mastered their functioning.
The implementation of the above program requires radical breaks and
major sacrifices from both African leaders and civil society organizations.
The success of the African Renaissance is at this price.
_______________________________________________
Jubilee Year? By
William Krehm
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Surely the finger of the Lord was at work when in time for the
Jubilee year Ottawa announced the introduction of serious accountancy into
its books. Instead of writing off the cost of buildings and equipment in
the year of their acquisition, the cost of such capital items henceforth
is be depreciated over their useful life. To no effect at least two auditors-general,
a Royal Commission, and most persistently we in COMER had been advocating
that for decades.
The government's ignoring this basic rule of accountancy added needlessly to the layer of taxes in price. That helped it whip up the panic about inflation to justify its high-interest rate policy over the past quarter of a century. These rates had deepened further the craters left on the government's balance sheet by having only a token $1 entry for buildings to offset the debt incurred in acquiring them. And that in turn was as the reason for budget cuts that devastated established social programs.
Imagine what your personal net worth would look like if it reported the mortgage on your house as a debt, but omitted the house that debt helped finance as an asset. That is the sort of thing that your government passed off as accountancy when it raised interest rates to the skies and slashed social programs in the interest of "fiscal responsibility."
And now all this madhouse appears finally coming to an end. To prepare for that great event, we got down our dog-eared old Testament, turned to Leviticus XXV and read up on the Jubilee Year that came once each half-century. Whenever it arrived, slaves were freed and debts forgiven. Not only was it a time of hope, but of restitution.
Yet there is no sign of the trumpet sounding throughout our land. Of three Toronto national dailies only Conrad Black's National Post carried a mention of the great event. In its issue of July 20th the Auditor-General Denis Desautels is quoted by Kathryn May saying that the $50 billion worth of assets that suddenly appeared out of nowhere "won't change Canada's financial position." How so? The deficit produced by ignoring the investment of the federal government in physical and human assets of over many decades was exploited to drive up interest rates and slash social services. How then could reversing that not "change the financial position?"
And what about the restoring to the victims what had unjustly been taken from them? With apologies, to be sure, so that that sort of scam would be less likely to happen again. Is the jubilation of the Jubilee year to be only about the "deals done" on the basis of the crooked accountancy, and the booty already stashed away in the Cayman Islands?
And the financial shenanigans that the tardiness of this rectification made possible en route? Since the Parliament Buildings are entered at $1 they could have been sold for $1000 and a capital gain of $999 entered to reduce a deficit that wasn't it turns out really there. And then, privatised and properly appraised, it could be rented back to the government at a "fair market price." And meanwhile hundreds of thousands of families were broken up through the unemployment, bankruptcies precipitated, businesses ruined, careers destroyed and mighty fortunes made.
But more than a shifting of real estate and chattels waits upon the jubilee. My reading of Leviticus XXV leads me to believe that the occasion must be a reconciliation of fellow-Canadians.
It would be a sacrilege in this Jubilee Year for our government to bring in accrual accountancy merely for jacking up the users' fees that have begun cropping up on more and more public services.
There are indications
that the differences between the Auditor-General and the Finance Minister
that led to the former withholding his unconditional approval of the past
two budgets, was
finally settled in a compromise. In return for discontinuing the enormity
of writing off federal capital investments in a single year and other irregularities,
the Auditor-General apparently agreed to provide a misleading spin to the
entire exercise. Hence his outrageous warning that the hidden capital savings
must not be spent to restore the social programs that were cut because
of the bogus debt figure.
And the government worked hard to conserve that misleading accountancy. Until the early 1990s a passage in the Canada Year Book that had been appearing for some thirty years that described the accountancy by which the deficit and debt had been calculated. Then before 1994 it suddenly disappeared. Hardly by coincidence, this happened at a time when COMER in particular had been making considerable noise on the matter. Our requests for an explanation of the disappearance of the crucial CYB passage went unanswered. Elsewhere in this issue we publish some more recent correspondence with Statistics Canada on the issue.
Letting our government get away with this would compromise not only Canada's economic future, but her self-respect. All concerned Canadian organisations and private citizens must make this point.
We suggest the following uses to which the "windfall" could be applied:
1. The repeal
of the GST over the same two-year period with which accrual accountancy
is being introduced.
2. Over a 5-year
period the holdings of the Bank of Canada of federal bonds be increased
from the present approximately 5% of the funded debt to the 20.8% level
at which it stood in 1977. That will eventually produce savings in interest
payments by some $25 billion. The vastly improved federal balance sheet
will support such an interest-free inventory of federal bonds in the hands
of the Bank of Canada. Since the federal government is the one shareholder
of the Bank of Canada interest on such bonds held by the central bank come
back to the government substantially as dividends. And since the phasing
out of the statutory reserves in cash that banks had to put up with the
Bank of Canada as a percentage of the deposits from the public they held,
it would in no way affect the amount of credit the banks can create.
3. The restoration
of cuts to social programs and grants to the provinces for such programs,
provided they are kept at federal standards. That will do more to rejuvenate
Canadian unity than dozens of constitutional talk-fests.
4. Post-secondary
educational fees be reduced to the levels of five years ago.
5. Funding be
increased for environmental conservation programs.
6. Public housing
and other infrastructure programs be expanded.
7. Statutory
reserves be restored for banks and as well as careful re-regulation of
what banks can invest in. Once that is done the amount of credit the entire
banking system -- the BoC and the private banks -- would be reexamined.
This should allay any concerns about possible inflationary effects of the
social program restoration we are proposing. The key factor to be studied
is how much idle capacity was present in the real economy.
Does that seem
too much for our banks to swallow? Not when they will be back for their
next bailout by the government. At present they are operating in areas
that banks simply have no business in. The measures outlined above will
help them find their way back to useful banking. It will prevent their
coming back for a still further bailout ten years down the line.
William Krehm
Chairman, COMER
Editor-Publisher, Economic Reform
mailto:wkrehm@ibm.net
Copyright (C) 1999 COMER. May be reproduced with
proper acknowledgement.
"Economic Reform" is the monthly journal of the
Committee on Monetary and Economic Reform (COMER), a Canada-based publishing
think-tank.
Annual subscription, 12 issues, is $30.
COMER Publications
Suite 107
245 Carlaw Avenue
Toronto ON M4M 2S6
Telephone (416) 466-2642
Fax 466-5827
===============
REBUILDING ECONOMICS TO RELEVANCE
By William Krehm
Economic Reform mailto:wkrehm@ibm.net
More info on comer at the bottom of this article.
Article received via e-mail April 13/99
Among the costs of the "zero inflation push" of the past decade was the demolition of economics as a discipline that might tell us something useful about the economy. It is necessary to reconstruct economic theory to where it might once more become relevant to the world's problems.
In the sixties I became concerned by the widening gulf between conventional economic theory and reality. The financing of the war and the years of peace had proved it possible to run the economy without devastating depressions. The theory for that had been worked out by Keynes and others in the thirties, but it had needed a world war for that theory to put it to a bold practical test. The postwar depression that just about everybody expected, had been avoided. Canada welcomed a huge penniless immigration. Newcomers and natives alike were housed to standards unknown before. By the sixties as the baby boom generation approached college age, post-secondary campuses sprouted like mushrooms across the land. Our health and social security systems were set up.
But the sixties were also a period when prices started inching upward. That was no accident, given the amount of public investment underway. But instead of analysis, the traditional wisdom of the thirties took over. Panic about inflation was whipped up, by those who had an interest in doing just that.
There was an altogether different explanation for much of that mild price rise. The new educational and social services, were not marketed. Instead they were paid for out of taxation. That could only swell the layer of taxation in price. The costs of the new social services entered the price index through that taxation. Their benefits, however, were not picked up by the price index - for the same reason that you can't read the temperature on a barometer, or the air pressure on a clock. By definition, any unadjusted price index must be blind to the benefits of unpriced services.
Let me make a key point. If so unquestionable a relationship is ignored by policymakers for a decade or two or three, it does not lose importance. On the contrary, its importance goes on increasing until it hits crisis proportions.
The policy of pushing up interest rates to force prices to lie flat had to be self-defeating. For interest is a key cost in an economy that has been becoming more capital-intensive by the day. Prices can be brought down by high interest only by bringing down the economy itself.
What had been learned at a shattering cost during the Great Depression and the Second World War could not be completely buried overnight. So when I started writing on the subject it was still possible to get unorthodox ideas published. I made thirty copies of my paper and sent it cold to thirty economic journals throughout the world. It was published in May 1970 in the leading French journal in the field, La Revue Economique. No accident that it was published in France. France had a strong tradition not only of public enterprise, but there was a brilliant school economists there who that tried understanding the economy in social terms. After I had spent a couple of years proving that general equilibrium theory had no relevance to the real world, I found the job had already been done in France.
At the time there was a considerable national diversity in economic theory. Apart from the powerful French school, Scandinavian economists in some respects anticipated Keynes' ideas. The German historical school delved into history for its economic generalisations instead of deriving them from a bit of irrelevant mathematics. The self-balancing free market school that first neutered and then buried Keynes, was a distinctly American invention. What has come to be known as the Washington Consensus has - through its control of the international organisations - gobbled up not only these diverse national schools but the very memory of them.
After my paper appeared in France I even received a proposal from a leading French publisher, Calmann-Levy, would I do a book on the subject? I spent a year enlarging my published paper into a book and sent them the manuscript. To this date I have not received an acknowledgement. During that year a militant free-market orthodoxy was being imposed throughout the world. It singled out inflation as the one menace and high interest rates as the one cure.
The more experience disproved that dogma, the more sweeping the campaign grew to impose it. The phenomenon was explained by Francois Perroux, the leading figure of the French school of economics. He held that in every historic period the revenue of a particular group is taken to be the " dominant revenue." By its rate and volume, this is seen as the measure of society's health. Before the industrial revolution, the dominant revenue was land rent. Then it became the profit of industrialists. After the depression of the thirties crucial investment was seen arising from the cooperation of the state and private industrial capital. Trade unions were regarded as junior partners in that alliance.
Wall St. and the banks, however, were in the doghouse because of their major responsibility in bringing on the Great Depression. As the price for their bailout, Roosevelt had put ceilings on the interest banks could charge or pay, and on what they could do with other people's money. On this spartan regime they recovered, and came to lust after the old flesh-pots. By 1951 the Fed-Treasury Accord in the US weakened the ceilings on interest rates, and launched the banks of the world on the comeback trail.
In Canada, by the sixties our banks had been allowed to enter non-banking fields and mortgages. The removal of ceilings on interest rates had opened the door to their taking equity positions and accepting risky junk bonds as security. Until 1955 the banks had been required to hold reserves - primary and secondary up to 15% of their deposits. The primary reserves were in cash and earned them no interest, the secondary reserves were in interest-bearing securities. In 1980 the secondary reserves were wholly abolished and the primary reserves brought down to 4%, and in Canada phased out altogether by 1994.
That deregulation went on getting the banks into ever deeper trouble. Time after time they had to be bailed out - almost invariably this happened with still more deregulation. Every alternative to high interest rates for dealing with real inflation was suppressed. Previously it had been possible to deal with an overheated by raising the reserve requirement. That forced the banks to lend less but at rates no higher than 6%. To defend the currency, exchange controls had been resorted to from time to time. Today for that purpose we push up our interest rates to attract hot foreign money.
If you consider economic theory as a simple quest after truth, there is no way of understanding what happened to the body of economic knowledge from the latter sixties on. But Perroux's theory of the "dominant" revenue provides the key. Interest rates are the revenue of an economic group not devoid of appetite. That raises an obvious conflict of interest that was never addressed. If you rule out all other ways of handling monetary problems and proclaim interest rates the one blunt tool in your kit, what you are setting up is not a free market, but the monopolist power of a single revenue.
But the people who ran this show were not out to win academic brownie points. The more disastrous the policies, the more they tightened their grip on what was taught or published. If you plot side by side the major disasters of the "zero inflation" policy and the stepping up of the dosages of that policy a clear correlation emerges.
By the late seventies interest rates, feeding into costs and prices, rose ever more quickly. So the remedy chosen was to push up rates still higher. But to hide what it was up to, the US Fed announced that it was no longer concerned with interest rates. It would rein in the money supply and let the interest chips fall where they may.
Because of the deregulation already achieved, however, no one could say what the money supply might be. The money supply was defined as money held for transactions. This consisted of cash and non-interest bearing chequing deposits. But the Fed had recently introduced chequing accounts that did earn interest. Naturally, with high interest rates spreading uncertainty, a lot money was parked in these hybrid accounts. The Fed chairman, Paul Volcker, suddenly noticed that the deposits in them had jumped sensationally. At a loss what to do about it, he panicked. And when a banker panics his knee-jerk reaction is a to raise interest rates. So prime rates were pushed up towards the mid-twenties.. Those rates ransacked government treasuries and bankrupted businesses. This brought on the S&L crisis in the US that eventually cost the taxpayers an estimated quarter of a trillion dollars. In Canada we had bankruptcy of several trust companies and a couple of Western banks. And once again the cure was more deregulation and hidden subsidies to the banks.
The new Governor of the Bank of Canada, John Crow, chose this very time to announce zero inflation as the one purpose of the central bank. He claimed that anything less, whether the economy was booming or in the gutter, would lead to a replay of the German superinflation of 1923. Of course, Crow was aware that was nonsense. Germany had lost a war; the Allies had tried extracting unrealistic reparations in foreign currency. When Germany fell into arrears, the French occupied the key Ruhr industrial basin. The Germans, left and right, responded with a general strike. Virtual civil war broke out. Raising the German hyperinflation of 1923 as an argument in the Canadian debate, implied that if interest rates had been pushed up high enough, there would have been no lost war, no reparations, no occupation, no civil war.
Before coming to the Bank of Canada, Governor Crow had spent his entire career with the International Monetary Fund, mostly in Latin America. He brought to the BoC an imperial manner up to then reserved for wretched Third World countries. The fact is that when statutory reserves were done away with in Canada, only the UK and Switzerland among major countries had also done so. That is if we except the offshore shelter havens. Since then any Third World country thrown on the mercies of the IMF has had imposed on it the independence of its central bank from the government and the end of bank reserves. But there was not the remotest reason for Canada to have ended reserves except John Crow's ambitions as superachiever. And it had become urgent once again to bail out our banks.
That rescue came from two different directions. In the late 1980s the Bank for International Settlements published its guidelines for Risk-Based Capital Requirements. These declared the debt of developed countries risk-free. It could therefore be accumulated by banks without tying up any of their capital. Business loans on the other hand required 8% of their own capital. That enthroned money-lending as the dominant revenue. In Canada that was accompanied by the phasing out of the non-interest-earning reserves that banks had to put up with the central bank as a proportion of the deposits they held. Between the two measures banks were able load up with another $60 billion of government debt without coming up with a penny of cash of their own. To make room for that, the Bank of Canada obligingly reduced its own holdings of government bonds by well over 40% even in absolute terms.
This amounted to an annual entitlement for the banks of from $5-7 billion. That was how the banks were bailed out from their huge losses in financing Robert Campeau's shopping spree for department store chains in the US, and the Reichmanns' folding real estate empire in New York, London, Mexico, and dozens of other hare-brained speculative schemes.
The gimmick behind the bailout was a simple one. When the central bank holds government the interest paid on it finds its way back to the government as the sole shareholder of the bank in the form of dividends. When the chartered banks hold the same debt that interest stays with them.
By 1992 the zero inflation policy had clearly become one huge disaster. But did the government and the Bank of Canada soften their position? On the contrary. In defence of the "dominant revenue," they behaved exactly like a garrison. They moved to put zero inflation into the constitution and the Bank of Canada Act, as well as the independence of the central bank from the government. Consultations across the country blocked that. All three caucuses of the Banking subcommittee of the Commons turned down the proposal, but that was not even reported by the media.
Deregulation and the two measures I have just described, changed the food chain of our banks. They were allowed to take over brokerage houses, underwriting firms, derivative boutiques. From being interest-driven, our banks have become stock-market-dependent. Imperceptibly, the dominant revenue has shifted from interest to speculative profits. If you don't make use of the dominant revenue concept, it would be hard to pick up that crucial shift.
There is a vast difference between the interest rates and speculative profits as dominant revenues. High interest rates are poison to stock markets. And with deregulation on all fronts the American stock markets have been behaving like an air ship without landing gear. The private institutions that have taken over money creation are not just in control of the gambling joints but are amongst their own biggest customers. They have acquired command of the public treasury very much in the way in which they financed the Leveraged Buyouts of private corporations. First they loaded it with high interest debt, and then downsized government services. When the deficit has been pushed high enough it took over from inflation as the driving bugbear.
That set the stage for the privatisation of government assets at fire sale prices. Indeed the bizarre accountancy of our government makes it impossible to say what a public asset is worth. When a physical capital asset is acquired by Ottawa (unless it is through a crown corporation) it is written off in a single year and entered on the balance sheet at a token $1. Because of that the government could sell the St. Lawrence Seaway or the Parliament Buildings for one thousand dollars, and book a profit of $999. Then that could patriotically applied to reducing the debt. And then the buyers can lease the asset back to the government at a fair market rate and list it on the stock exchange to make a further killing.
COMER's newsletter, Economic Reform, has tracked a statistic that we compiled from data in the Bank of Canada Review - the proportion of the chartered banks' assets to the cash held by them. That basically continues the credit-creation multiplier from the period when reserves still existed. With a difference. Until two or three decades ago there were strict limitations on what the banks could do with the credit they created. Today they can invest it in just about anything they set their heart on - gamble on the stock market, in derivatives, in foreign junk bonds, buy up chunks of foreign banks and other concerns. That ratio has increased from 11:1 in 1946 to 404.7:1 as of September, 1998.
But even that doesn't tell the whole story. The assets for the most part are evaluated at their historic cost - i.e. what they paid for them, not their present market value. The denominator of the proportion on the other hand is not a reserve against their deposits, but strictly what they require to meet their daily cheque clearance with other banks, and provide for their customers' cash needs. Take that away and the banks would be out of business.
If the assets - that may include Indonesian bonds, chunks of Thai, Mexican and Venezuelan banks - were to shrink across the board by a bit over 4%, our banks would have lost all their capital. That is exactly the position of several of the largest Japanese banks that our banks have been so determined to emulate.
I would like to make an important point. Whatever is not integrated into the policy-making core of economic theory, might as well be written in fading ink. For policy-making purposes it is only what serves the dominant revenue of the moment that counts. Thus the key monetarist notion that the money supply determines the price level has long since been shot out of the skies. Alan Greenspan does nothing to cool down the stock market that contributes massively to the credit supply. Instead, Mr. Greenspan finds his bearings by consulting a miscellany of data, many of them in the real economy.
On the other hand, many of the points that critics of official economic policy have made, have even been recognised by various official agencies, and reference to them have appeared in the Bank of Canada Review itself. Thus the "inflationary bias" of the official Consumer Price Index is recognised to be around one percent, even though major factors in that bias - the absence of capital budgeting in federal accounts, and the impossibility of any price index picking up the benefits of non-priced public services - have still eluded official recognition. Since the real economy of the world appears to be slipping into a period of deflation, this distortion is particularly dangerous.
Let us take the matter of privatisations of government assets carried on the government books at a token dollar. No matter what they are sold at, they help reduce the government deficit, but, once privatised, their services will be priced to show a return on their Initial Public Offering, and eventually that will show up in a higher price level, which our central bank still regards as the one menace.
What we have then is a troubling asymmetry in our policy-making. The repeated disproof of monetarist dogma by reality is ignored. So too is the confirmation of basic points made by the critics of monetarism that have been acknowledged by the central bank itself.1
All this makes it probable that our banks will be back for the next bailout before too long. But what form can that bailout take now that the reserves have been done away with?
Trial balloons have already been launched that may provide the answer to this question. In Mexico legislation has actually been passed providing for the restoration of reserves up to a certain amount, but on these reserves the central bank will pay the banks the going rate of interest. Something of the sort has been broached by certain of the central banks of the constituent countries of the Euro union.
If that is allowed to happen the following cycle will have been completed. The non-interest bearing reserves put up by the banks with their central bank were whittled down and eventually in Canada even abolished. And with little room for reinflating the banks' capital by moving further along this line, the path will be retraced, but with the central bank now paying interest to the banks for reserves put up with them. Negative seigniorage will flow to the banks from the government for having assigned to them its powers of money creation.
Of course, this would increase government deficits and usher in a new period of slashing public services and imposing user taxes.
When the banks come to the government for the next bailout, we propose a quite contrary course. Non-interest-bearing reserve requirements must be restored. High interest rates must be abandoned as a means of controlling inflation even where it really exists. Instead the restored reserve requirement can be raised to cool the economy and or lowered to make more credit available in the event of a recession. Currency crises can be defused with temporary exchange controls. Barriers must be set up to brake the flow of hot money across frontiers.
The funds for bailing out what banks merit being bailed out must take the form of loans by the central bank, repayable with interest. All this must be perfectly visible to the public. Banks who get themselves into trouble after the next bailout should be required to put up a higher than the current reserve requirement for a number of years. This would enforce more responsible use of the credit-creating powers assigned to them.
For some decades now the economies of the world have been run by isolated statistics picked out of their context like the cherries off a birthday cake - the consumer price index, and the government deficit. The price index was misleading for a variety of reasons but the main ones were ignored - the layer of taxation in prices paid for essential unpriced public services whose benefits the any unadjusted price index would necessarily fail to pick up. It also ignored the damage inflicted on society and the environment during the production of marketed goods - the so-called externalities, for example, degradation of the environment, the lack of adequate care to children whose mothers go out to work. Our government, moreover, treat their investments in human and physical infrastructures as a current expense and write them off in a single year. This strange accountancy exaggerated the amount of real inflation.
So in time the panic button of runaway inflation was taken over by the panic button of the runaway deficit. The remedy, however, remained the same - high interest rates. This made it possible to push through the agenda of slashing social programs and bringing the world back towards the twenties.
And yet there was a whole menu of alternative courses to deal with both rising prices and government deficits. But to recognise these you would have bring the other sectors of our economy into your policy-design : the public sector, the household economy, the ecology.
But for that, economists must learn what high school students are taught in their first year physics courses - the difference between scalar and vector quantities.
A scalar is an absolute quantity with no sense of direction. A vector is a quantity with a sense of direction, from the Latin for carrier or traveller.
Economists have been trained to think only in scalar terms. They must be taught to ask what the effects of policies will be when they cross the boundaries of the market and move on to the ecology, the household economy, and other non-market subsystems of our mixed economy. When that happens, you are in for some surprises. What can be a saving for the private firm when it pollutes the environment, suddenly appears as a threat to human survival when viewed from the ecology. Debt may be a dangerous thing in personal finances, but if you extend that maxim to government, paying off the debt does not make sense if there are still idle workers and resources around. Pay off the government debt? You must ask what are you going to use for money if you indeed paid off the public debt. Sea shells? Our base money today is government debt. There is no other.
Let me give you an example of the unsuspected policy options that would open up if we retrained economists to think in vector terms. For a quarter of a century, inflation and budgetary deficits have been the very pivot of policy-making. Perceived inflation, however was fuelled by a growing tax-burden that denatured our price signals. And high interest rates, imposed to suppress inflation, were responsible for much of the government's deficits and debt. If you really are concerned about inflation and deficits, balancing one of these against the other in a downward direction should be the point of departure of policy design. A quarter of a century ago in this sense I proposed the idea of special tax-bonds with an interest rate well below market. To compensate for the lower interest rate, any earnings invested in such bonds and the interest paid on such bonds would be tax-free.
There would be a powerful hedging feature in the arrangement. Even by the initial trade of government revenue for a lesser interest burden the structural price climb would be lessened. Structural price rise is price increase due not to excessive market demand but to the fact that the market makes up a shrinking part of our mixed economy. By trading lower taxes for lower interest rates such structural price rise would be lessened. To the extent that tax bonds disappointed expectations in this respect, the state would profit by a greater capital gain when the principal fell due. The real value of that principal would have been eroded. On the other hand, to the degree to which such structural price climb was decreased, the state's capital gain would be less but the price climb would have been reined in without wrecking the economy.
Moreover, insurance features could be incorporated. The tax-free feature would apply only to the original bondholder, so that if the bonds were sold before maturity it would be at a discount because of the lower-than-market interest rate. However, in the event of the death of a breadwinner, extended illness in the family, or lengthy involuntary unemployment they could be made redeemable at par - i.e. at an effective bonus, equal to the discount the state would forgo. It would thus incorporate an insurance feature that would be very timely today.
In ER of September 1995, I wrote: "Recently somebody sent me a copy of a paper originating in or close to our government, with the title Options for Eliminating Deficits and Reducing Debt. In it was the statement: "The government could reduce the interest rate it pays on outstanding debt by making such interest tax-free. But what it gains in lower interest rates it would lose in lower revenues." In other words the government would give up a scalar and receive a scalar in return, and the result would be a wash. What is missing is a vector sense that would look into possible advantages of the lower interest rate and lower taxation when the effects crossed the boundaries separating the public sector from other areas of the economy.
Let us dwell on this example, because it discloses how crippling scalar thinking that never crosses subsystem line must be to policy-planning. In this instance the scalars are confined to the public sector, although the sympathies of any conventional economist close or in government these days would likely be with the market sector. Nevertheless he has completely overlooked how useful downward turned taxes and interest rates would be to the market sector. The current American boom in fact is largely fuelled by this combination - the lower interest come large from the flight of capital into the US from the afflicted capital markets of Asia, Latin America and Europe; the lower taxation from the revenues increased by a flourishing capital market and increased government revenues. The effects of a balanced reduction of these two key parameters would be equally helpful in financing environmental and social projects. But the all these useful policy options that would be revealed by thinking in vector terms is a closed book to most economists.
Their thinking is restricted to trade-offs in scalars within a single subsystem. You could turn out no end of useful schemes once economists were taught to think in vector terms.
There is an important key step towards making economic policy-making people-friendly once more. The central bank must be brought back to its original purpose which is still to be found intact in the Bank of Canada Act. A revision of the Bank Act, on the other hand, is necessary to restore the reserve requirement. Internationally, our central bank must press for the repeal of the Risk-free Capital Requirements introduced by the Bank for International Settlements which requires no additional capital for private banks to hold debt of our government. There is a simple way of adjusting the price index to pick up the benefits instead of just the costs of such non-marketed items.
The benefits (or losses) enjoyed from non-priced items are entered in the sample basket of goods and services at price zero, since they are unpriced. Their cost, however, will have been substantially incorporated into the price index through the layer of taxation in the prices of marketed items. Their weighting will be determined by their costs expressed as a percentage of the GDP in the denominator of the index normalised to be expressed as a percentage.
Society has been run over globally by the most meticulously planned ideological campaign of modern times. It was an illusion to believe that this could be countered with a few time-proven policy gimmicks and the sort of catchy slogans readily accessible to the broad public. That might serve to win an election. But electoral successes with such skimpy preparation invariably turn out Pyrrhic victories. Well-intentioned governments find the treasury syphoned to emptiness, and key statistics and the very language twisted like the girders of a bombed building. We must begin by understand what hit us, and study the vulnerabilities of our formidable foe. That calls for a rethinking of economic theory to make sure that what are presented as the constraints of reality are not in fact booby-traps planted by our opponents.2
1 Minutes of the Federal Open Market Committee Meeting 22/12/1998, Federal Reserve Bulletin, 3/99, p. 202: "The Committee also discussed deleting the last sentence in the operating paragraph relating to the outlook for the growth of money; another paragraph in the directive would continue to report the long-range ranges for such growth that the Federal Reserve Act requires the Committee to establish. With regard to the proposed deletion, some felt it was desirable for the central bank to retain a reference to money in the operating paragraph; more members supported the deletion on the ground that, as had been explained to the Congress, money growth had not had any special significance for some time in the formulation of monetary policy owing to the often unexplained and unexpected changes in velocity."
2 ‘Failing to Take Aim at our Opponents' Vulnerabilities,' Economic Reform, March, 1999, p. 13
William Krehm Chairman, COMER Editor-Publisher, Economic Reform mailto:wkrehm@ibm.net
Copyright (C) 1999 COMER. May be reproduced with proper acknowledgement.
"Economic Reform" is the monthly journal of the Committee on Monetary and Economic Reform (COMER), a Canada-based publishing think-tank.
COMER Publications Suite 107 245 Carlaw Avenue Toronto ON M4M 2S6 Telephone (416) 466-2642 Fax 466-5827
mailto:comer@comer.org
BANGKOK, March 28 (AFP) - An anti-IMF movement gathered last week in Thailand, where the regional financial crisis first erupted in July 1997, to denounce the effects of increasing economic globalisation.
"We are seeing the emergence of a coordinated and organised global movement against speculative capital and the IMF," said Philippines University Professor Walden Bello.
The three-day conference gathered more than 300 sociologists, economists and militants from 40 countries who called for greater democracy within the international finance system.
The activists and academics Friday also demanded the resignation of the entire senior staff of International Monetary Fund including its head Michel Camdessus in a final communique at the "Economic Sovereignty in a Globalising World" conference.
Bello said the IMF and the World Bank had become part of the problem rather than a solution. He said the conference had agreed to fight for a restructuring of the global financial architecture.
"We shall work towards a world not of globalisation but of true internationalism based on mutual respect and democratic interaction between free and diverse peoples," Bello added.
There were tough words too from the head of the Globalisation Observatory, Susan George.
"The global financial system is heading straight forward to the destruction of societies," she said.
Participants denounced "casino capitalism" in which "the capital volatility at the heart of the global finance system has become the driving force of the whole system."
And they defended a country's right to step in to impose national controls to protect its own economies and people -- such as Malaysian Prime Minister Mahathir Mohamad who imposed strict capital controls in September.
"A rise in nationalism in these countries is rather a healthy thing," George told AFP. "Financial institutions can no longer ignore the feelings being expressed here."
IMF representative Gita Bhatt, who made a surprise appearance at the conference, said the Fund was improving its methods in a bid to prevent a repeat of economic crises.
"There is now a move to include the civil society in the dialogue," she said, adding the IMF was listening to criticism.
After imposing rigorous reform programmes on Thailand and South Korea in return for massive bailouts, the IMF changed course and returned to such Keynesian methods as reflation to try to drag the countries out of their economic woes.
CAP Proposes New World Financial
Order – Mar/99- Paul Hellyer, leader of the Canadian Action
Party, is calling for the elimination of the external debts of developing
countries, qualifying the actions of the International Monetary Fund as
"criminal".
Toronto the 12 of March, 1999. In his most recent book,
"STOP:THINK", Paul Hellyer says that only radical action will prevent another
economic Depression. The well-known former Minister of State, author, and
former journalist suggests that the year 2000 will be the ideal year for
the renewal of the world financial system. Radical change is necessary
for those developing countries, which suffer a burden of debt far surpassing
their capacity to pay it off. Without a massive writing off of these debts,
those countries will be condemned to perpetual poverty. Developing countries
require new economic policies if they are to promote some semblance of
justice and equal opportunity for their citizens. Laissez-faire policies
will not create the necessary jobs for those who have been marginalized
due to automation and the displacement of capital to sources of cheap labor.
It is therefore necessary for government to assume the role of social arbiter
in order to assure its citizens a proper standard of living. For government
not to assume this role will mean the permanent impoverishment of large
sectors of society.
Paul Hellyer views "mainstream" economists with a critical
eye, accusing them of being locked in to the "religion" of laissez-faire
ideology and so, unable to learn from the lessons of the past. Since laissez-faire
is a step backward toward those policies which helped cause the Great Depression,
it should be called retro-classical" economics instead of "neo-classical"
economics. The IMF"s insistence in imposing this model on developing countries
is nothing short of "criminal". The harm that has been caused to the populations
of developing countries is incalculable. It is why Paul Hellyer states
that only a massive write-off of external debt will allow these countries
to once again take their future into their own hands.
The long list of changes proposed by Paul Hellyer include the
abolition of the IMF and the World Bank; that the banks be obliged to increase
their reserves to 50% of actual deposits over a period of fifty months;that
the money created by such actions be used to eliminate most of the debt
of developing nations.
CANADIAN ACTION PARTY
PARTI ACTION CANADIENNE
99, Atlantic Ave. Suite 302
Toronto (Ontario) M6K 3J8
Tel : (416) 535-4144
Fax : (416) 535 -6325
cap-pac@istar.ca
www.canadianactionparty.ca
--------
“Meltdown” Launch at the
National Interest Forum - Toronto Jan/27/99
Report from Gary Morton
William Krehm, former Time reporter and co-founder of the Committee on Monetary and Economic Reform (COMER) spoke at OISE tonight. Mr. Krehm has edited a new COMER book -- a compilation of articles from the previous 10 years of Economic Reform magazine – titled “Meltdown : Money, Debt and the Wealth of Nations”. The book traces a decade of zero inflation and monetary policy, and bank and financial deregulation that have contributed to the current economic collapses in Asia, Russia and Brasil.
Krehm traced world financial problems in a concise speech peppered with rich highlights and insight. He began by noting that in this century it has been proven that the economy can be run without periods of devastating depression. We set up our health and social security during a good period. Krehm said that health and social benefits, paid out of taxes, are not picked up by the price index. The index is blind to benefits that are not price. Panic about inflation that was created by those in whose interest it was to whip up panic started us on the downhill journey. The policies of high interest rates brought down prices but they also brought down the economy. This was the self-defeating dogma of the free market school and the Washington Consensus that came to the forefront and gobbled up and even obscured the memory of other schools of thought.
Going back in history Krehm noted that Roosevelt put ceilings on the interest banks could charge, but over time the ceilings were weakened and banks moved into the risk business. As things moved on further secondary and primary reserves banks held were either abolished or phased out. Deregulation led to more deregulation, the banks were bailed out, and it was done in way where they were like addicts prescribing their own treatment.
At present Krehm says were are not in a free market system but under the monopoly of an economic group. Interest rates, a money supply that can’t be defined due to deregulation, and more deregulation. At one point interest rates of 20 percent ransacked government treasuries of half a trillion dollars. Then there are hidden subsidies and the five billion a year gift the Canadian private banks get for creating the money the central bank used to create.
William Lyon Mackenzie King nationalized the banks in 1838. A key here according to Krehm is that when you borrow from the central bank the interest paid on government bonds finds its way back. When chartered banks hold debt the interest stays with them, and that gives us much of our deficit problem and the resulting cuts to social programs.
Banks are now stock market driven and the dominant revenue has shifted from interest to speculative profits. The market they run is like a casino where they are also the biggest customers.
The policy of our world financial institutions in recent years has been to overload governments with public debt, downsize public services, create the deficit as a bugbear, and cure that with more downsizing and a fire sale of public assets in the privatization of government services.
This whole system is an invitation to scams and a rip-off of the public.
Krehm wonders what form the next bailout of the banks will take as there are no reserves to reduce. His guess is that we’ll start paying the private banks for money creation.
Part of Krehm’s cure is a return to reserves and more reserve requirements for banks that return with their begging bowls. He also wants to do away with using interest rates as a way of fighting inflation.
If the bankers, their institutions and our leaders fail us again, social programs will be cut from where they already have been slashed. And Krehm feels this is not necessary, as there is a whole menu of alternate courses. The problem is that to recognize them we have to bring others into the formula – the public sector, ecology, household economy and so on. Economists at present think in scalar terms, looking at certain select figures/indexes in isolation. Krehm favours a new vector approach that takes the whole picture of society into account.
He also took a moment to ridicule the false preachers of deficit and debt, and ask what we would use for money if we paid off all of the public debt. Seashells perhaps. The only tender is government debt, it is our money, there is no other and anyone who says different is trying to hoodwink the public.
Krehm concludes that any number of sound economic schemes
could be devised if economists would include the public and consider value
and not just price. He notes that the bad world situation we are in is
one that was systematically planned. Society has been run over globally
by a well-oiled machine that has captured nearly every lever of power.
And electoral politics will not get us out of this situation. We must understand
what hit us because we don’t have a chance unless we match our opponents
in details and thoroughness of response and get that message out.
--------------------
For more information contact CNIC, 416-340-1
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THE PROSPECTS OF THE EURO
by William Krehm
A fanfare of articles and analyses
has celebrated the introduction of the Euro as the common currency
of the 11 countries already in the European Union. Initially the Euro is
to be only an accountancy unit into which prices of the old national currencies
will be translated at the exchange rate that existed at the end of 1998.
Commentarists stress the advantages of the Euro — all the energy, cunning
and commissions that will become unnecessary in trading between any of
the EU countries. That is undoubtedly true, but in the whole picture is
hardly the most important aspect. The fact that the late Soviet Union made
it possibleto deal in rouble prices over one sixth of the earth's surface
— an area that has since broken up into considerably more than eleven successor
states — fell short of making the arrangement a blessing. The same may
be said of the Euro system.
What is essentially left
out is the cost to the individual states of surrendering their money-creating
powers to the central bank of the Union in Frankfurt, an institution with
a single clear mandate: price stability. The central banks of the constituent
states will be the lenders of last resort to the commercial banks in trouble.
Since those constituent economies vary all the way from a developing country
like Portugal to Germany, and the tradition of central banking in Germany
has been uncompromisingly deflationary since WWII, we will be treated to
the nerve-wracking spectacle of the Frankfurt EU bank applying monetary
policy that has yielded 12% unemployment in West Germany and as much as
25% in portions of East Germany to already weak and wobbly economies.
And this in the context of a planet just beginning its plunge into
a deflationary bath.
That is why the Oped article
of Anna J. Schwartz in The Wall Street Journal (31/12) is significant.
Ms. Schwartz, a research associate of the National Bureau of Economic Research,
coauthored A Monetary History of the United States 1867 to 1960 with Milton
Friedman. Friedman is the father of the monetarist dogma that has taken
over our central banks to an extent that even Friedman has on occasion
repudiated. It is not so much that Schwartz really deals with the kernel
of the European monetary union's problems, but she at least uses concepts
and language that make it possible to do so. For example, she employs the
expression "money creation" that has been banished from the speech of central
bankers for decades. Significantly, The Globe & Mail, which reproduces
much from the WSJ did not publish this article.
Here is undoubtedly what
stuck in its editorial throat: "The key lever of the Fed and of the European
Central Bank (ECB) is the ability to create and destroy high-powered money
— loosely, currency plus bank reserves. Central banks create money by purchasing
assets — the Fed government securities; the ECB, euro-denominated securities.
They destroy money by selling these assets." There you have it from one
of the authors of the very bible of monetarism definitions currently used
almost exclusively by "off-the-wall" heretics like COMER.
Schwartz goes on ask "what
can the ECB learn from Fed history to guide it?" She proceeds to skirt
the perilous brink of revelation but stops before falling in. "The Fed
and other central banks have been prone to misinterpret movements in interest
rates. They have regarded a decline in nominal interest rates as indicating
monetary ease when in fact it reflects lower price expectations, and have
viewed a rise in nominal interest rates as indicating monetary tightening,
when in fact it reflects accelerating price expectations. Throughout the
Great Depression, the Fed cited the low level of market interest rates
to justify its failure to create adequate increase in high-powered money.
"Currently, the Bank of
Japan cites the low level of market interest rates as a sign of monetary
easing. In 1932 prices were declining at an annual rate of 10%. The prevailing
nominal short-term rate of 2.7% was a crippling real interest rate of 12.7%."
That is a good beginning
but it doesn't take us very far. Like most economists, including critics
of our central banks, Schwartz fails to distinguish price increases that
might signify not an excess of demand but the inevitable result of moves
to conserve the ecology, the household economy, or lessening the discrimination
in the marketplace on the basis of gender or race. Until we make this distinction,
we will block such measures by delivering resources that should pay for
them to the money-lending institutions. Until economists learn to disaggregate
price movements according to their very distinct causes, we will go on
marching into the jaws of disaster.
Backward regions are not
only to be found in countries like Portugal, but in the developed countries
— East Germany, the Italian Mezzogiorno, and southern Spain. Inevitably
union will stimulate pressures for greater social equality. That means
more spending for infrastructures, both physical and human. With the present
division of functions the ECB will move to preserve price stability by
restricting credit. A disproportionate number of the resulting bankruptcies
and unemployment will occur in the economically weaker regions. All that
will be lacking is a EU version of the International Monetary Fund to move
in to bail out the bailers-out on exorbitant terms.
Another likely by-product
of the event is that the three or four-trillion dollar sinecure of the
US arising from the use of its currency as reserves by other countries
will be cut into by the euro. This is tantamount to an interest-free loan
to the US, and understandably the US has been diligent in promoting arrangements
whereby countries like the Argentine currency board that cannot issue a
unit of its own currency without adding the equivalent in US dollars to
its reserves. Part of this bonanza will inevitably be lost to the euro
— just how much will depend on the relative strength of the two unions
in trade and financial clout, and also on the relative stability of their
currencies.
William Krehm
===============
Copyright (C) 1999 COMER. May be reproduced with
proper acknowledgement.
"Economic Reform" is the monthly journal of the
Committee on Monetary and Economic Reform (COMER), a Canada-based publishing
think-tank.
COMER Publications 3284 Yonge Street Suite 500
Toronto ON M4N 3M7 (416) 486- 686 Fax 486-4674
mailto:wkrehm@ibm.net
DEMOCRACY FOR SALE,
Korten 17 Oct, 1998
"democracy is now for sale to the highest bidder"
"The first positive step would be to dismantle
the World Trade Organisation"
Your Mortal Enemy
Faceless bankers now move two trillion dollars around the world every day, searching for quick profits, breaking national economies and putting ever more pressure on natural wealth. What's to be done? Slay the beast of capitalism, says David C Korten, and return money to its proper role.
An edited and ammended extract of David Korten's Schumacher Lecture
in
Bristol on October 17 1998.
Published in The Guardian, October 21, 1998.
....................
For those of us who grew up believing capitalism is the foundation
of democracy, market freedom, and the good life it has been a rude awakening
to realise that under capitalism, democracy is now for sale to the highest
bidder, the market is centrally planned by global mega-corporations larger
than most countries, denying one's brothers and sisters a source of livelihood
is now rewarded as an economic virtue, and the destruction of nature and
life to make money for the already rich is treated as progress.
The world is now ruled by a global financial casino staffed by faceless bankers and hedge fund speculators who operate with a herd mentality in the shadowy world of global finance. Each day they move more than two trillion dollars around the world in search of quick profits and safe havens sending exchange rates and stock markets into wild gyrations wholly unrelated to any underlying economic reality.
With abandon they make and break national economies, buy and sell corporations, and hold the most powerful politicians hostage to their interests. When their bets pay off they claim the winnings as their own. When they lose, they run to governments and public institutions to protect them against loss with pronouncements about how the poor must tighten their belts and become more fiscally prudent.
In the United States, the media keep the public preoccupied with the details of our president's sex life and calls for his impeachment for lying about an inconsequential affair. Meanwhile, Congress and the president are working out of view to push through funding increases for the IMF to bail out the banks who put the entire global financial system at risk with reckless lending.
They are advancing financial deregulation to encourage even more reckless financial speculation. And they are negotiating international agreements such as the Multilateral Agreement on Investment intended to make the world safe for financial speculators by preventing governments from intervening to regulate their activities.
To understand what is happening we must educate ourselves about the nature of money and the ways of those who decide who will have access to it and who will not.
As a medium of exchange, money is one of the most useful of human inventions. But as we become ever more dependent on it to acquire the basic means of our sustenance, we give to the institutions and people who control its creation and allocation the power to decide whether we shall live in prosperity or destitution.
With the increasing breakdown of community and governmental social safety nets, our money system has become the most effective instrument of social control and extraction ever devised. The fact that few of us think of the money system as an instrument of control makes it more powerful and efficient as an instrument of wealth extraction.
What of capitalism, the self-proclaimed champion of democracy, market freedom, peace and prosperity? Modern capitalism involves a concentration of wealth by the few to the exclusion of the many; it is more than a system of human elites. It has evolved into a system of autonomous rule by money and for money that functions on autopilot beyond the control of any human actor or responsiveness to any human sensibility.
Contrary to its claims, capitalism is showing itself to be the mortal enemy of democracy and the market. Its relationship to democracy and the market economy is now much the same as the relationship of a cancer to the body whose life energy it expropriates.
Cancer is a pathology that occurs when an otherwise healthy cell forgets that it is a part of the body and begins to pursue its own unlimited growth without regard to the consequences for the whole. The growth of the cancerous cell deprives the healthy cells of nourishment and ultimately kills both the body and itself. Capitalism does much the same to the societies it infests.
One reason we fail to recognise the seriousness of our predicament is because we fail to see how capitalism is destroying the world's real wealth. It destroys social capital when it breaks up unions, bids down wages, and treats workers as expendable commodities, leaving society to absorb the family and community breakdown and violence that are inevitable consequences. It destroys institutional capital when it undermines the function of governments and democracy by weakening environmental health and labour standards, and extracting public subsidies, bailouts and tax exemptions which inflate corporate profits while passing the burdens of risk to governments and the working poor.
We arejust beginning to wake up to the fact that the industrial era has in a mere century consumed a consequential portion of the natural capital it took evolution millions of years to create. It is now drawing down our social, institutional and human capital as well.
Democracy and markets are wonderful ways of organising the political and economic life of a society to allocate resources fairly and efficiently while securing the freedom and sovereignty of the individual. But modern capitalism is about using money to make money for people who already have more of it than they need. Its institutions breed inequality, exclusion, environmental destruction, social irresponsibility and economic instability while homogenizing cultures, weakening institutions of democracy and eroding the moral and social fabric of society.
Though capitalism cloaks itself in the rhetoric of democracy and the market, it is dedicated to the principle that sovereignty properly resides not in the person, but rather in money and property. Under democracy and the market, the people rule. Under capitalism, money rules.
The challenge is to replace the global capitalist economy with a properly regulated and locally rooted market economy that invests in the regeneration of living capital, increases net beneficial economic output, distributes that output justly and equitably to meet the basic needs of everyone, strengthens the institutions of democracy and the market, and returns money to its proper role as the servant of productive activity.
It should favour smaller local enterprise over global corporations, encourage local ownership, penalise financial speculation, and give priority to meeting the basic needs of the many over providing luxuries and diversions for the wealthy few. In most aspects it should do exactly the opposite of what the global capitalist economy is doing.
Most of the responsibility and initiative must come from local and national levels. Supporting nations and localities in this task shouldbecome the core agenda of the United Nations, as the protection of people and communities from predatory global corporations and finance is arguably the central security issue of our time.
The first positive step would be to dismantle the World Trade Organisation on the ground that there is no legitimate need for a global police force to protect global corporations from the actions of democratically-elected national and local governments so that the richest one per cent of humanity can become even richer at the expense of the rest.
The WTO is a powerful, but illegitimate and democratically unaccountable institution put in place through largely secret negotiations with little or no public debate to serve purposes largely contrary to the public interest. The 99 percent of the world's people whose interests it does not serve have every right to eliminate it.
Addressing the real need to police the global economy requires an organisation very different from the WTO - an open and democratic organisation with the mandate and power to set and enforce rules holding those corporations that operate across national borders democratically accountable to the people and priorities of the nations where they operate.
It should as well have the power to regulate and tax international financial flows and institutions. And it should have a mandate to make speculation unprofitable and to help protect the integrity of domestic financial institutions from the financial markets and the predatory practices of international financial speculators.
There are obvious questions as to whether such proposals are politically feasible given the stranglehold of corporations and big money over our political processes. Yet we could use this same reasoning to conclude that human survival itself is not politically feasible.
Global corporations and financial institutions are our collective creations.
And we have both the right and the means to change or replace them if they
do not serve.
....................
Dr David Korten is president of the People-Centered Development Forum
in Washington State, USA http://iisd1.iisd.ca/pcdf and the author of 'When
Corporations Rule the World' and the forthcoming 'The Post-Corporate World:
Life After Capitalism'.
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