The recent discussions about MMT and the Dollar Regime showed clearly that (1) we are all deeply opposed to US imperialism and wish to break its stranglehold on the global economy; (2) we all agree that finance capital uses its present domination at the IMF to retain US dollar dominance in the world’s financial affairs and to impose sanctions on those that resist this domination; (3) we all favor deep cuts in US military spending, an end to the US-imposed sanctions regime and, alternatively, development of international collaboration (climate change, etc.) and peaceful conflict resolution; and (4) we all want higher taxes on billionaires and corporations to constrain their private hoarding and political influence.
We differ on a number of interconnected monetary issues including (1) the nature and cause of inflation and what recent price increases indicate about potential for runaway inflation; (2) how interest rates come to be what they are (how they are set), their impact on the economy, and whether falling rates are a problem; and (3) whether rising deficit spending relative to GDP is a barometer of a nation’s financial fragility.
In our minds, the matters of unity are crucial for working together and uniting with other segments of the progressive movement. In contrast, the issues in struggle are less crucial and can be worked on (and worked out) in the course of today’s practical fight for progressive political power.
One meaningful two-line struggle clearly came out in these discussions. After Steve offered the view that progressives gained a significant measure of dual power in the 2020 elections and the key political task, now, is expanding our base in 2022 and 2024, this participant said (we paraphrase) that a peaceful path to socialism is near-fantasy and the overthrow of corporate power by force is the only real path to socialism in this country. No one overtly agreed with him so, presumably, he is alone on this point. Apparently, we others share unity that, currently, progressives are in pursuit of a socialist USA via non-violent struggle and the election box.
Another important two-line struggle may exist but needs more clarification. While we — Tom and Steve, representing the MMT perspective — say Biden’s agenda is fully affordable and should be enacted forthwith, it’s not entirely clear (to us) whether Dennis Torigoe (who wrote — again, we paraphrase — swords must be beat into plowshares because we can’t do both) supports its passage, given Biden’s on-going failure to restrict military spending and his anti-China adventurism. In our view, progressives should continue criticism of Biden’s imperialist agenda while fully affirming his effort to put domestic spending on a new foundation.
Certainly, the results in 2022 will turn on the voters’ perception of the Biden Administration’s efforts to pass its domestic agenda, as well as its approach to certain international issues (like immigration and climate change).
Yet, the Biden agenda is being sabotaged by conservative (corporate) Democrats who reject it for corrupt (bought-off) reasons while offering the public rationale that it is too expensive and can’t be paid for. In the context of such obstruction, MMT stresses that Uncle Sam is the monopoly supplier of US dollars and can always create as many as are necessary to fund Congressionally-mandated objectives. A decision not to fully fund Build Back Better agenda is politically, not financially, motivated.
We appreciate the views that were shared in the forums. Our discussion about the nature of contemporary public finance (aka, modern money) must continue, and the on-going struggle for social justice and ecological salvation, worldwide, will provide plenty of context for resolution of our current differences.
Colonialist Northern nations utilize the IMF, the World Bank, legal frameworks, imposition of fiscal austerity, tax rules and privatization to deprive African cultures and countries of their own resources and to ensure such resources flow to the imperialistic nations and international corporate benefit.
After World War II, France was economically devastated and its currency was weak. France wanted the resources and wealth of African peoples and lands, and to extract it on exploitive terms. In the late 1950’s and early 1960’s after the independent movements and struggles of African peoples ( often met with brutal violence by Europe), Charles de Gaulle’s neo- colonization conditioned political independence of new West and Central African nations to maintaining economic ties to France to France’s advantage. As Franz Fanon stated, “Colonialism never gives away something for nothing.” Currency arrangements have in the past and continues under Macron to be a critical tool in transferring wealth and resources from Africa to France.
CFA stands for Communauté Financière Africaine (African Financial Community). The CFA is a colonial currency created December 26, 1945 by General De Gaulle and his finance minister. This was the same day that France ratified the Breton Woods agreement and the new parity of the french franc was presented to the newly born IMF. Fixed exchange rates trace back to the Bretton Woods period when 63% of Southern countries had their currency pegged to that of an imperialist country.
The CFA was originally translated as “Franc of the French Colonies in Africa” The CFA is still used in West and Central Africa by 14 countries and split into two monetary zones. The eight countries of West Africa using the CFA, with an ISO currency code of XOF are Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo. They represent the West African Economic and Monetary Union, or WAEMU, founded in 1994 to build on the foundation of the West African Monetary Union, founded in 1973. The six countries of Central Africa using the CFA, ISO currency code of XAF are Cameroon, Chad, Central African Republic, Congo Republic, Equatorial Guinea and Gabon. They comprise the Central African Economic and Monetary Union, or CAEMC.
Although separate, the two CFA franc currencies have always been at parity and are effectively interchangeable. All were former colonies of France except Guinea-Bissau and Equatorial Guinea. All maintain French as an official language except Guinea Bisseau. Comoros also has its own central bank tied to France and is considered part of the CFA system.
In 1960, France actually had a larger population — around 40 million people than the 30 million inhabitants of what are now the 15 CFA nations.( including Comoros). In 2021, 67 million people live in France and 183 million in the CFA zone.According to UN projections, by the year 2100, France will have 74 million, and the CFA nations more than 800 million.
Given that France still controls their financial destiny, through the CFA, the situation is increasingly a monetary apartheid. The CFA is issued by three separate central banks, Banque Central des Etats de l’Afrique de l’Ouest ( BCEAO) and the Banque des Etats de l’Afrique Central( BEAC). Comoros has a separate bank, (BCC). It is mandatory that French officials sit on the boards of all of the CFA franc central banks and the French government has the authority to monitor all financial transactions of these 15 nations. The French people were permitted to vote on whether or not to adopt the Euro through a referendum. The African peoples of the CFA nations were denied any such right, and were excluded from the negotiations that would peg their money to a new currency. The French government can veto the decisions of the BCEAO and the BEAC. The monetary policy favoring European priorities is set by the European Central Bank ( ECB), previously set by the Banque de France. France is acting similar to an IMF for these West & Central African nations. The World Bank and the International Monetary Fund have historically worked in concert with France to enforce the CFA system, and rarely, if ever, criticize its exploitative nature.
French colonialism goes beyond money. It also affects education and culture. For example, Farida, a Togolese activist said, the World Bank gives $130 million per year to support Francophone countries pay for their books for public schools. Farida says 90% of these books are printed in France. The money goes directly from the World Bank to Paris, not to Togo or to any other African nation. The books are brainwashing tools, Farida said. She points out, that “They focus on the glory of French culture, and undermine the achievements of other nations, whether they be American, Asian or African.” French language is promoted heavily by France to ensure the colonial system of keeping the monetary and economic system bound to France. There are more French speaking people in Africa than France. Based on my personal observations of over twelve years of spending time in Senegal, most of the French who visit or reside in Senegal refuse to learn a word of Wolof. They expect all West & Central African people to speak French. The French are shocked or laugh in a condescending manner when they hear me converse without French, in Wolof (albeit simply).
Of course France has a long-standing pattern of subverting democracy and elections to maintain monetary and economic exploitation. An important part of the CFA system is French support for dictatorship. With the exception of Senegal, not a single CFA bloc country has ever had meaningful democratization. As Farida points out, “Every single successful tyrant in Francophone Africa, has had the full backing of the French government” as long as an African colonial elite will favor France. The French Treasury guarantees the convertibility of the CFA into the French Franc, and now the Euro. Independent economic and financial planning is impossible for these West and Central African nations.
The CFA system confers five major benefits to the French government: bonus reserves to use at its discretion; big markets for expensive exports and cheap imports; the ability to purchase strategic minerals in its domestic currency without running down its reserves; favorable loans when CFA nations are in credit; and favorable interest rates when they are in debt.
As Senegalese economist, Ndongo Samba Sally points out,
“By pegging the CFA franc to the Euro, now the African countries and their central banks are more or less submitted to the same restrictive rules in terms of inflation, public debt and public deficit.
The CFA guaranteed France’s chokehold on African economies and ensured wealth drainage to France. When the CFA was created, it served France’s interest by being born and maintained overvalued. It stopped the African nations selling competitively to Asian and Latin American nations and to trade exclusively with France. The overvaluation of the CFA kept France from having to use US dollars as the Breton Woods required which would have been very costly against the weak French franc. Controlling the monetary policies of 14 African nations (15 with Comoros) justified giving France a seat and vote at the UN Security Council.
In addition, the value of the CFA franc has been widely criticized as being too high, which many economists believe favours the urban elite of the African countries, who can buy imported manufactured goods cheaply at the expense of farmers who cannot easily export. The CFA permitted France to obtain raw materials and products from its former colonies by issuing a credit to the CFA nations.”
Ndongo states, “If you take also the level of competitiveness of African countries of the franc zone they fare the worst in the world. In West Africa, except Côte d’Ivoire all of the remaining countries are chronically in a state of trade deficit. Countries like Benin, Niger, Mali, Burkina Faso, they never recorded one year of trade surplus. They are structurally in a situation where they have to be indebted in foreign currencies. They will never be able to develop because the mechanism of the CFA franc will never allow them to be developed.”
Ndongo explains, “Because you have no monetary sovereignty. So this is the case of the CFA franc zone and that’s why there is no economic dynamism at all. Economic growth in the CFA franc zone is never triggered by internal dynamics, but just by external dynamics. For example, good terms of trade and cheaper interest rates … on international financial markets. So this is the sad story of the CFA franc. Somehow owing to these mechanisms when there are economic crises it’s much more difficult for CFA franc countries than others because the exchange rate cannot be used as a policy variable. As they follow the neoliberal rules, so public deficits are not really encouraged and the central banks generally in those circumstances follow an orthodox monetary policy, and that means that whenever there are economic crises, the main way of adjusting economically is what is called internal devaluation. That means lowering internal prices and limiting public deficits and letting the private sector enterprises go bankrupt. That is the main mechanism of adjustment in the CFA franc.”
As Landry Signe concludes, “The CFA franc zone as a whole has thus resulted in:
Limited intra-regional trade, especially in Central Africa.
High dependence on producing and exporting a limited number of primary commodities.
A narrow industrial base.
A high vulnerability to external shocks.
For example, In 1994, France devalued the CFA franc, raising the parity rate from 50 CFA francs per French franc to 100 CFA francs per French franc. CFA member countries’ governments imposed wage freezes and layoffs in the wake of the CFA devaluation, leading to widespread unrest over inaccessible goods for consumers and unmanageable price controls for suppliers.” African families lost of half their monetary savings.
Many African economists, including Senegalese economist, Demba Moussa Dembele and Togolese economist Kako Nubukpo explain that dependency on European monetary policies is a restriction to growth due to a hyper-fixation on inflation.
Protests against the secrecy, repression and use of the CFA and for its abolition has historically existed and is growing since 2015/2016. In 2018, seven artists from 10 countries released the rap song “7 minutes against the CFA franc” to drum up popular support for dumping the currency.
As Landry reports, “Large numbers of unemployed youth throughout sub-Saharan Africa—which may reach over 350 million over the next two decades—are often the loudest opponents of the CFA zone. Other pro-democracy movements, like Y’en a Marre in Senegal and Le Balai Citoyen in Burkina Faso, consider the dismantling of the CFA zone as essential to their campaigns to reform their countries’ respective governments. Other protests have included Kemi Seba, the Benin-born French activist who was charged with burning CFA notes in Senegal before being deported.”
In 2020, 66% of the Togolese people polled believed the CFA existed to benefit French interests and should be abolished. The Senegalese slogan “France Dégage” became a West African rallying cry for the French to be transparent and to withdraw, “walk” away from the West and Central African monetary system they enforced. Resentment has also been fueled by the presence of French military troops in the Sahel desert.
Chad’s President Idriss Debby said back in 2015 that the CFA was pulling African economies down and that the “time has come to cut the cordon that prevent Africa to develop.” He called for a restructuring of the currency in order to “enable African countries which are still using it to develop.”
Nigerian President, Muhammadu Buhari has been demanding, since 2017, a divorce plan from the French treasury of the eight West African countries that use the CFA franc. The recent protests are Pan-African and popular.
It is important to note that for five decades Senegalese & other Africans resisted the use of French currency and previously had mixed currencies including cowries from the Indian Ocean. The French utilized the military to force the use of the French currency only. They also imposed taxes to be paid in French currency which also forced the use of French currency.
Two years after independence, Guinea refused the French currency and produced their own currency. France launched a military operation, and the French secret service sabotaged the economy by flooding the market with counterfeit notes. Guinea still has not economically recovered since then.
Togo in the 60’s had a leader trained at the London School of Economics, Sylvanus Olympio, who was about to launch the country’s own currency and diversify trade partners when he was assassinated.
In 2011, France used the Central West African Bank to place a financial embargo against Ivory Coast and bombed the Presidential palace to install its candidate.There were also attempts to challenge France in the 1970’s and the 1990’s. France has engaged in over forty interventions in the CFA countries since “political independence”.
Solutions for change in currency
On December 22nd, 2019, due to political and grassroots pressure, it was announced jointly by France and the Ivory Coast that the CFA in West Africa , not Central Africa would be replaced by a currency to be called Eco.
The Eco has not been implemented due to legal, technical and political problems. It is tracked for implementation in 2027. The Eco would still be pegged to the Euro, and require European fiscal restraints. It would not require 50% of the reserves be kept with the French Treasury but France would keep its role as guarantor of convertibility of the Eco like the CFA. An indirect form of control by the Banque of France and the French treasury would exist with France requiring information about the management of reserves and if French government debt securities were purchased. MMT economists, like Djongo correctly point put that this “reform” or mutation does not represent significant social change to serve African people. It has been described as “window dressing”.
In 2019, the French Minister of Affairs issued a report that 49% of french companies operating in the CFA zone consider it a favorable place for profits now and in the future; and the same report predicted that even 60 years from now the CFA should not be abandoned but just reformed even under a different name.It should be noted that the announcement of the Eco was made after Italy criticized France for its monetary policies in Africa. Luigi Di Maio, Italy’s former deputy prime minister and minister of foreign affairs at the time, revived the controversy about the role of the CFA franc on Africa’s development with a statement, “France is one of those countries that by printing money for 14 African states prevents their economic development and contributes to the fact that the refugees leave and then die in the sea or arrive on our coasts.” In response, France expelled the Italian ambassador.
There are two macroeconomic proposals for change. The national exit and the pan-African exit. African nations as Ndongo clarifies, “could exit the CFA franc on a national basis. That means Senegal would say, ‘I want my own national currency’ and so I’m exiting the CFA franc. This is the path followed by Guinea, Mauritania, and Madagascar. And legally speaking, it [would be] very easy. The Senegalese government would just have to notify the West African monetary union of this decision, and in six months they could have their own national currency.”
But it’s difficult because if you go alone, you don’t know what consequences you could face from France. French sanctions, embargos, political isolation, military operations and assassinations have caused great disruptions and poverty to places like Guinea and Mali. Mali rejoined after exiting.
The Pan – African exit means “instead of African countries trying to initially have their own currency, they say, ‘we no longer need France’ France could [then leave] the CFA franc system.”
Ndongo continues, “With regard to the issue of how to get out of the monetary status quo, there are in my opinion, four different points of view. First, there is the perspective I call symbolic reformism, which consists [of] touching only the visible systems of monetary coloniality without touching the fundamentals of the CFA franc system. This includes proposals such as changing the name of the CFA franc, having banknotes and coins manufactured outside of France, and even further reducing the deposit rate of foreign exchange reserves at the French treasury. Emmanuel Macron, for example, made this type of proposal, and he even suggested that he was open to expanding the CFA franc zone to a country like Ghana.”
In other words, France is seeking to expand its empire by adding African countries not currently utilizing the CFA.
The approach most favored by Ndongo is: “sovereign abolitionism that is an exit from the CFA franc that breaks with the neoliberal model of economic integration and that strengthens the sovereignty of individual countries and also the sovereignty of [countries] collectively. If we put aside the political criticism of the CFA franc, the real economic criticism is that the CFA zone must not exist because it has no economic justification. It is not a so called ‘optimal monetary zone.’ Each country must have its own national currency because economic fundamentals, levels of development and productive dynamisms are not the same. But saying that does not mean that we cannot have systems of solidarity between African countries.”
Ndongo perceptively speaks of “solidarity national currencies. Concretely, that means that each country has its own national currency with its national central bank. The exchange rate parity is determined according to the fundamentals of each country, and countries have a common payment system. Their currencies are linked by a fixed but adjustable parity to a common unit of account, and also there is solidarity in the management of foreign currency reserves. Finally, there are common policies to ensure energy and food self-sufficiency, because in the ECOWAS zone energy and food products represent between 25-60% of the value of imports, depending on the country.”
Ndongo explains, “The advantage of this option… is that it makes it possible to reconcile macroeconomic flexibility at the national level, that means the possibility to use the exchange rate as an instrument of adjustment, and at the same time to have solidarity [between] African countries. This option also helps break the Anglophone, Francophone, and Lusophone divide, [which] is a legacy of colonialism. “
The other two viewpoints criticized by Ndongo include, a “proposal of [basing] the exchange rate of the CFA zone on a basket of currencies, but the problem with this perspective is that it is simply unrealistic because it ignores the functioning of the CFA zone. Exchange rate flexibility is not an option in the CFA system because the convertibility guarantee is offered at a fixed exchange rate and in the currency of the guaranteeing authority. Many people who claim to be experts and moderate [still don’t] understand that the demand for flexibility is incompatible with the maintenance of French guardianship; it is one or the other.”
“Neoliberalism abolitionism is an exit from the CFA franc that follows the neoliberal monetary integration model. It is a ‘eurozone model.’ There are countries in West Africa who want to be part of the single currency project of the ECOWAS (Economic Community of West African States), a single currency project for WestAfrica. Sharing the same currency is not justified among ECOWAS countries, owing to a number of factors, like for example Nigeria’s disproportionate weight. Nigeria accounts for at least 70% of West African GDP. [As well], there are differences in economic specialization. Nigeria is an oil producer and exporter, whereas, you will find in West Africa at least nine countries which are net oil importers. There is also the fact that economic cycles are not synchronous in West Africa and the level of inter-ECOWAS trade is very low. All of these elements point to the fact that a single currency is premature and not justified economically in West Africa. We have to also say that there is no planned federal fiscal mechanism, but rather, limitations on public debt and deficits… That means, in case of economic crisis, countries in this currency union would only have the option of so called internal devaluation [via] the lowering of internal prices, which often comes to austerity policies and the growth of unemployment.”
Digital currencies and the role of China are also two factors that may impact the future of the CFA zones. As reported by MERIC:
“China’s presence in countries like Senegal and Côte d’Ivoire is growing rapidly. …Where in 2000 France was the number one exporter to all of its African former colonies, by 2017 it retained this status in only three…Chinese lending to these countries increased 332 percent in 2010 – 2017 compared to 2000 – 2009, and contracts awarded to Chinese firms trebled in value in the same period – with Chinese contractors taking on high-profile projects like the Soubré dam in Côte d’Ivoire…This economic emergence is backed by a concerted Beijing push to deepen China’s footprint in Francophone West Africa, centring on Senegal as ‘the gateway to West Africa’ (西非门户). Xi visited the country in 2018, baptising it a Comprehensive Strategic Partner and the first West African state to join the BRI (all bar Benin have followed suit). Beijing has cultivated Senegal with gifts – including an arena for the national sport and a Museum of Black Civilisations – and selected it as the first Francophone and West African country to host the FOCAC Summit (to be held in Dakar in 2021). Chinese analysts expect this to pave the way for a deeper penetration of Francophone West Africa. Indeed, an important development is the number of Chinese migrants bypassing French altogether to conduct their business in Bambara, Wolof, and other African languages. With the Beijing Foreign Studies University expanding its range of African languages, this trend is not limited to the informal level – and may emerge as a valuable soft power tool…China’s emergence in West Africa directly challenges French economic interests. Chinese companies have moved into sectors long dominated by French players: civil engineering, extractives, telecoms, ports. French national champions – Vinci, Eiffage, Orange, Bouygues, Total, Areva, Alstom – must now go toe-to-toe with Beijing’s giants…”
As researched by doctorate Che, “In 2013, China launched the ‘One Belt One Road’ (also known as the ‘Belt and Road’ or ‘New Silk Road’) Initiative, the most ambitious infrastructure investment project in history, which is designed to facilitate ‘going global’ by connecting Asia, Europe, and Africa. Since the adoption of the ‘go out’ policy, even France’s historical sphere of influence in Africa, particularly the Franc Zone, has experienced a surge in Chinese trade, grants, loans, and investments. As of 2017, according to UN international trade data for goods (see table below), China had overtaken France as the number one source of imports for a number of Franc Zone countries, namely Burkina Faso, Cameroon, Côte d’Ivoire, and Togo, and occupied second spot behind France in Mali and Senegal.”
Fanny Pigeaud and Ndongo Samba Sylla conclude that, “in all of the countries where the CFA and Comoros francs circulate, the underdevelopment of human potential and productivities is the norm.” As understood by former President of Ghana, Kwame Nkrumah, assassinated former President of Burkina Faso, Thomas Sankara, and assasinated first Prime minister of the Republic of the Congo, Patrice Lumumba, independent financing and development can not take place without an independent currency.
Under US capitalism, policies pushed by MMT can help with partial solutions to some of the country’s problems. However, in practice, the continual debt-driven printing of money drives economic polarization and the country down the wrong path to the future. Under what we call the US dollar regime, the rich are getting much richer while structural unemployment, as shown in the labor participation rate and deindustrialization, is worsening. While the prevailing narrative of unemployment is that the Chinese are taking our jobs away, this story is increasingly being contradicted by acknowledging that we can simply print money and get their manufacturing products. Why should we then bother to do the dirty work of investing and manufacturing at home in the first place?
Under the Fed’s huge printing of money the assets of the rich, like stocks and desirable real estate, have been skyrocketing. Wages and salaries for most workers are stagnant. While it shields the middle class, who own their homes in the right places and stocks in retirement funds, from the ravages of inflation, the super-rich are getting richer and the poor are getting a lot poorer. The paradox is that economic polarization gets worse as more money is printed. Alongside that, the US has always used its ability to print money — a de facto use of what is described in MMT — to fund wars of aggression and expand its military dominance around the world.
Printing money to fund spending on infrastructure and human needs makes sense because they are a direct investment in our postindustrial future. Large budgetary spending on programs such as early childhood education, cleantech, and communications make sense because they will propel us into a highly productive, more equal and democratic postindustrial future. Federal support of research and development — whether through universities, national labs or private enterprises engaging in activities such as semiconductor chip development — is decades behind and should be vastly increased. Printing money for use in these endeavors enhances the sciences and productivity and will be paid back in time. Even when a direct payback is absent, such as for Covid vaccination and climate adaptation in developing economies (provided these are offered free of conditions and imperialist designs), these types of expenditures are essential to further a just and fair society.
We are not against the dollar as a reserve currency in principle if it was a result of superior US productivity and innovation or the use of deficit spending by the government to carry out crucial infrastructure, for human needs and in developing human capital that will propel us into a highly productive, more equal and democratic postindustrial future. What we are against is the dollar as a reserve currency used as a weapon of the US to rip off other countries and vastly overfund the US military to carry out wars of aggression and threaten other countries with economic sanctions. We are against the use of the US dollar regime as a means to push the US into gutting its real industries, creating greater structural unemployment and extreme polarization in society.
Turn Swords into Plowshares
Military spending and adventures that serve and enrich a narrow part of US society and special interest groups, to further empower the US military industrial and intelligence complex, are the opposite of the positive expenditures enabled by printing money. They take away useful, value-added productivity and turn it into death, destruction, waste and decay.
Thus, as part of a progressive program, we call for swords to be beaten into plowshares.
All of us agree that spending money on wars of aggression and huge military budgets are wrong. We also agree that spending on domestic programs to increase productive activities that increase social wealth and equality are positives.
Here is where we disagree. We cannot do both: there has to be a choice between plowshares and swords. Swords have to be turned into plowshares. That’s an essential programmatic element for any progressive agenda. As Signe has said, there is a challenge to our view of economics and ethics.
By saying that we can do both, we are following the narrative of neoliberal US imperialism, which indeed, always attempts to do both guns and butter, of war, with reform and repression. But their neoliberal narrative does not acknowledge that spending at least 750 billion dollars every year on war and the military, with its hundreds of bases in foreign countries, is the amount not spent creating the conditions for postindustrial development.
Even from a perspective of national self- defense, should such an unlikely eventuality become a necessity, a vast and rigorous R&D culture and network with the aim to better humankind will form a strong scientific and technological basis for a new and innovative national defense.
Moreover, the cost of sustaining the current vast war machine is not just reflected in the annual Federal budget. It is reflected in the oppression of people in other countries who are victims of that war machine and US imperialism and the lost opportunities to implement real positive change in the conditions of the American people and the world.
The Nature of Fiat Currency
We would like to address Tom’s point on fiat currency. All currency serves two basic purposes: first as a unit of account and as a store of value within a legal jurisdiction (normally within a country). Secondly, it is a medium of exchange. Gold and silver have often been used historically for these purposes. However due to the expansion of human production and civilization (roads, cities, productive tools, cultural products and services) both in scale and quality, there is no longer an adequate amount of these precious metals to perform these two functions.
Store of Value
However, to understand the US dollar regime, we must study a national currency used in more than one jurisdiction, that is, internationally. The rise of mercantile capitalism, colonialism and imperialism meant that a dominant currency was used in multiple jurisdictions. So a fiat currency of a particular nation, say in the case of the British Pound, particularly one that’s powerful militarily and, like the Bank of England, has a long tradition of honoring its currency and establishing its global value. It built trust in maintaining its currency’s value or for goods and services. The replacement of Great Britain by the US as the premier international power, allowed the US dollar to have a greater value as a fiat currency with global dominance.
Medium of Exchange
The other principal reason for the dominance of a currency is its value for the exchange of goods. The US dollar through its redeemability in gold and silver and even before OPEC became the ONLY currency permitted in buying oil. Since the value of the global oil trade at oil’s high points could constitute up to 60-70% of the total value of global trade, the US dollar became more valuable and desirable as a result of this linkage,( which by the way seems voluntary but is not. It’s decidedly by force or the threat of force). Almost all globally-traded commodities are priced in US dollars, including energy, precious metals, base metals, and agricultural commodities.
The US dollar is the dominant global currency. As such, it is used as a reserve currency by other countries. Today the US dollar is about 50-69% of all currencies kept by other countries for trading and other reserve purposes, though this has declined since the 1990s, before the US invasion of Iraq. To show the relative strength of the US dollar, only 2% of the world’s reserve currency is in China’s renminbi, even though it is a dominant trading nation. The Euro is in the ballpark with 20-30% while the Japanese Yen is about 10%.The US dollar is dominant not just in trade. It is also used as the basis for other pegged currencies such as the Hong Kong dollar and other currencies around the world including China which has printed its RMB from 1980 to the present, but particularly in the early years, based on the amount of US dollar they owned.
Why Has US Inflation Been So Low Since the 1990s?
The US became a world reserve currency and relatively free from inflation, even though a much larger amount is printed beyond its domestic economic needs, because a large amount of printed currency gets absorbed by other countries, free from US domestic circulation, which would be highly inflationary. MMT and some mainstream economists contend that we can print as much as we need since there is no inflation. For example, they set up a 2% inflation goal (which justifies printing 2% more US dollars as a neutral, non-inflationary act). Since this 2% US dollar inflation was never reached in recent years, they say that it shows that it’s okay to print even more.
What they didn’t say is that this is only a temporary phenomenon. Many formerly colonial and developing countries have embarked on economic development and created a lot of savings in the last two or three decades. Their savings were saved in US dollars due to the weakness of their own currencies. Absorption of this large pool of global savings enabled the US dollar to be printed without inflation.
But will this continue indefinitely? We don’t think so. There are no free lunches in the world. These developing world savings are finite and have been exhausted. There is no more coming. Furthermore, will manufacturing countries continue to accept the US dollar as good IOUs as the Federal Reserve engages in quantitative easing, again and again into infinity?
The recent commodity inflation (PPI) index has reached 10% and the consumer price (CPI) index over 5% indicating a pivotal change in inflation. Many mainstream leaders in finance such as Jamie Dimon and Larry Summers challenge the Federal Reserve’s view that inflation is only temporary. They both said that we will be surprised by the persistence of this inflation.
The Nature of the Federal Reserve’s Interest Rate Cycles
As Prof. Salas stated in his recent immigration forum, the Mexico border issue is not just a Mexico-US problem. It’s a North-South or developing world-US problem as a result of the US neoliberal imperialist system. US neoliberal imperialism is an economic-industrial-military political order which reaps world wide profit from the massive expansion of low-interest debt. As the US raises interest rates in due time, it bankrupts those that borrowed massively for economic development. This interest rate cycle, often depicted as a boom and bust cycle, or a Federal Reserve interest rate cycle are global and omnipotent. It sweeps the world first with hope and then certain despair. The finest assets such as Korea’s Samsung were once almost taken over (which would be like taking over a country without firing a shot) by the same group of hedge funds such as Elliot Management, the same group that attacked the Thai Baht, the Malaysian and HK dollars in the Asian Financial Crisis. The force of US-led global capital pushed Latin American countries and Russia into bankruptcies or debt traps like the Brady Bonds. This spreading of the fishing net and reaping by pulling it in is predictable in almost 10-12 year cycles.
The Federal Reserve’s Interest Rate Cycle is the US Dollar Regime
The key point is that the Federal Reserve’s MMT-like currency cycle is the US dollar regime. It doesn’t separate military spending from lending to poorer nations. If the set up does not guarantee “reaping,” that is, the ability to enforce measures on those who default on loans or the military capacity to enforce isolation of countries like Iran or Venezuela when they get out of line (which is the post World War II practice) they won’t lend their money until the country targeted capitulates or there is regime change. In the first place, the US dollar regime is a regime — an established system of monetary, political, military and organizational orders that doesn’t separate where the money goes. It prints because it’s set up. It is set up to reap.
When we say Keynesian spending on human capital and needs is good, we are not saying that as a part of that system. We are against the US dollar regime as a system. We are just saying there is nothing wrong to borrow through legitimate commercial channels or even by government spending but without military, SWIFT and hedge fund enforcement — the way it is done today.
The Counter-Cyclical Nature of Interest Rate Cycles of the Former Victims of the US Dollar Regime
The US Fed has lowered the interest rate to almost zero as Covid-19 hits. Now they are tapering and ready to raise the rate to reap. However, this time things may be different. Many countries learned this game and have raised their rate before the US raises its rate. They do so to be countercyclical to preempt US reaping by minimizing potential damage, by trying to get out of or lowering debt before the nets are pulled in. Countries from North to South, Turkey to Korea, China to Vietnam are all trying to raise interest rates and lighten their debt owed before it’s too late. This actually has forced Federal Reserve Chairman Powell to taper ahead of schedule! This is another reason that this round of US monetization of debt and QEs may not hurt others as much it hurts itself.
After the wakeup call from China reversing its buying of US Treasuries, this round of the interest rate cycle may be a reset for the US. The amount of US government debt of $29 trillion along with $5.6 trillion of Federal Reserve debt on its balance sheet is scaring the rest of the world and they are buying fewer US Treasuries fearing inflation. This is part of the counter-cyclical interest rate game to minimize their losses.
This makes the latest round of Fed Chairman Powell’s moves questionable. Inflation is widening from commodities to everyday consumer products, a rare global occurrence that may foreshadow the beginning of the end of the US dollar regime. Stanley Druckenmiller has stated that the US dollar regime could end in 15 years if we keep printing money like this. And, he says, that could be the end of the American way of life as we know it.
Massive Deficits a Burden?
Tom states: “As Godley showed, this accounting is a fact, not a theory, and decisively exposes the myth that the national debt is somehow a burden to our descendants, any more than the massive deficits from WWII were a burden to us.”
While it is not necessarily true that national debt is a burden, there are limits to a sovereign currency. One is that the fiat money supply (printing money) must not continually vastly outstrip the amount of goods produced, services available or savings or the currency will devalue. This devaluation most often will show itself as inflation, where prices paid in that currency rise on goods and services, which will lower people’s buying power and if it grows higher and uncontrolled will devastate the economy. This happened, for instance, in the 1970s in the US during and after the Vietnam War and in Latin America during the 1980s and early 90s and most infamously in Weimar Germany in the 1920s. In fact, Modern Monetary Theory recognizes that the limit of currency creation by a sovereign country is the ability to keep inflation at a tolerable level. Thus, sovereign currency debt creation is in fact not unlimited, but constrained by the real economic conditions in which it functions.
The other limit is that the government has to service debt created by deficit financing, for instance the servicing of bond interest. As the US government continues to deficit finance its budgets, it has to be able to pay bondholders the promised interest on the bonds. Right now, the US government allocates about 7.9% of its budget to interest payments ($325 billion) and the 2021 Federal Budget Proposal projects this by 2030 to become 10% of the budget, or $665 billion. The Congressional Budget Office projects that federal debt payments could reach 27% of GDP (GDP, not the Federal Budget !) by 2050 from around 8% in 2021. No amount of raising taxes could save the day. Moreover, any problem that arises from this debt servicing, such as the Tea Party Republicans threatening to default on US interest payments in 2011 and 2013, or like the Republicans in the Senate are doing today, will cause US treasuries interest rates to rise because of perceived risk, slows economic growth and weakens the dollar’s value, increasing import costs.
This growing federal debt service eating up more of the federal budget is also both a lost opportunity to fully fund more productive postindustrial programs and an increase to the inflationary threat. As more dollars are printed to cover this debt service, more dollars are released into the economy, causing inflationary pressure. It can also cause asset bubbles as investors chase higher returns than near 0% interest Treasuries, bubbles which burst and cripple the economy as happened in the 1970s, the dotcom stock market bust in the 1990s and the Great Recession in 2009-2014. Today, leading investors like Stanley Druckenmiller (who along with George Soros broke the Bank of England by shorting the English pound in support of the US dollar as the rising reserve currency) see that as a real risk in the next year or two. As stated before, he also predicted that the US dollar reserve regime may end in 15 years, fundamentally changing the American way of life as we know it.
On the question of the US’s massive deficits after WWII, I think we have to look at the global economic picture after the war. While the US was not invaded or devastated, the countries of Europe and Asia were. The fact is that the US won the war. The statement that the US didn’t feel the effects of its debt fails to take into account the widespread economic destruction in China, SE Asia, the Soviet Union and Europe. The outcome was that America felt it in lives lost in war but in fact profited economically. By taking the mantle of global superpower and imposing the post war international order on the non-socialist world, through means of the Marshall Plan, the reconstruction of Occupied Japan and the crushing of Communist-led rebellions in Greece, the Philippines, Vietnam and Malaya, the US enriched itself by reconstruction contracts, the control of third world commodities, the domination of global trade and commerce producing major profits for its capitalist class. With the Bretton Woods dollar regime, the US lorded over the rest of the world economically and militarily.
In fact, North America enjoyed the longest rise in the standard of living in history during the post WWII period, until we hit Vietnam, Iraq and the Middle East. The Vietnam War ended in 1975 with 55,000 American lives lost but millions of lives lost in SE Asia. The war cost a little less than $1 trillion then. But combined with the rebellion pacification money of the Great Society and Urban Renewal (the last big printing of money by the US government) it was less than 20% of what we spent in wars in the Middle East and Afghanistan. Even then the Volcker recession drove the US economy way down in the 1980s (see The Myth of American Deindustrialization) until we revived it through the digital revolution that went from the mid 1980s until it went bust in the stock market’s internet debacle in 2000.
Is US Dollar Hegemony a Product of, or Integral to US Imperialism?
Tom states that the “dollar’s status as reserve currency is a result, not a cause, of US imperialism.” That is untrue. The key fact is that US dollar hegemony is an integral part of US imperialism, and is part and parcel of US domination of other countries. Iraq was invaded and Saddam Hussein was ousted mainly because of his attempt to decouple Iraqi oil from petrodollars (oil could only be bought and sold by using US dollars). This agreement was imposed by the US and OPEC. It was not only due to his invasion of Kuwait, as the US claimed.
The forging of the petrodollar and other US dollar-denominated commodities took arm-twisting, and were a huge part of what formed the post Vietnam War US-led world order in the first place. The agreement to back Saudi Arabia with US weapons and the stationing of troops there was in exchange for the Saudis and OPEC’s willingness to couple oil transactions with the US dollar to the exclusion of all other currencies.
The Brady Bond Debt Trap
Another example is the imposing of the Brady Bond solution to the massive debt crisis in Latin America of the 1970s and 1980s that became shackles on many Latin American countries. The Latin American debt crisis was in large part due to the large loans to third world countries by US and European banks when interest rates were low, and this became a crisis caused by the increased debt service on loans because of the huge increase in oil prices in the 1970s and 1980s. Because all oil had to be paid for in dollars, those countries had to further borrow huge amounts of US dollars from US and European banks (who were getting petrodollars invested from OPEC) to pay for imported oil. Latin American countries, beginning with Mexico in 1982 started to default on US dollar loans. The results were catastrophic. According to Wikipedia, “A massive process of capital outflow, particularly to the United States, served to depreciate the exchange rates, thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back US$108 billion.”
The Brady Bonds were a way to restructure the Latin American loans to make it easier for them to be repaid, but also to recover as much as possible for US and European banks and investors, rather than lose all in defaults. Even then, defaults occurred in Brady Bonds. Ecuador, for instance, defaulted on interest payments and faced immediate repayment demands. It ended up cut off from the world financial markets and suffered through years of deprivation, social and political unrest.
The US Dollar Regime is the Most Effective Part of US Imperialism
The use of sanctions against Cuba, Venezuela, Russia and Iran, were direct acts of imperialism through the control of the dollar regime. The US SWIFT sanctions became in fact far more effective than the US military, as US military ventures often stalled and became ineffective, costly and unpopular in the US. There are no protests against US economic sanctions since there are no American soldiers brought home in body-bags by such acts.
In fact, today US dollar hegemony is the most effective part of US imperialism. It allows the US to conquer and dominate countries without firing a shot. The US dollar regime is the highest development of Western imperialism, and represents the furthest development of Lenin’s thesis of imperialism and the export of capital.
Weakening of the SWIFT system Weakens the US Dollar Regime
The excessive use of economic sanctions by the US against Iran, Russia, Cuba, Venezuela and many others and even European countries that use the SWIFT currency settlement information system forced many countries into developing alternative currency systems such as the Chinese Union Pay or the European Interdex systems. Some stopped using the US dollar as a reserve currency, period — like Russia. Furthermore China has signed a 25- year agreement with Iran in trade and economic cooperation to bypass the US dollar based SWIFT system.
The development of sovereign digital currencies that don’t require SWIFT or any settlement systems at all also weaken the US dollar as the required reserve currency. MMT accepts the logic of the US dollar as a reserve currency. But this logic is failing.
The money printing policies of the US dollar regime is an integral part of modern US imperialism. On the domestic front, it can partially finance needed postindustrial development and necessary social needs, but as practiced in the US over the last decades, overall it has caused deindustrialization and devastating economic polarization.
Internationally, the policies call for indiscriminate printing of money and lending it out at low interest rates around the globe as the beginning of the “seeding” cycle. For the US to reap the maximum profits from the world, they must inject or “seed” the largest amount of capital to the most vulnerable or greedy developing countries, who most need economic development. This first cycle is justified by MMT. Then interest rates are gradually raised and liquidity is withdrawn around the world. This reaping process leads to destruction of the seeded and a profit festival for the global banks and hedge funds. This repeated seeding and reaping process, along with economic sanctions, the use of military force and the control through the SWIFT system is the reign of neoliberal imperialism.
In order for the US dollar regime to survive it must keep on reaping profits either through outright military victories or continuous reaping from other countries. The actual human toll of the US dollar regime’s repeated seedings and reapings around the world can be seen in deforestation, waves of refugees, overcrowding of urban centers and the gutting of American industries and urban decay. We now have the unprecedented divergence of extreme wealth and hopeless poverty driven by extreme financial crises like the Asian Financial Crisis in the 1990s and the Great Recession, sparked by the Lehman Brothers collapse in 2008.
In response, we must work to end this destructive, imperialist US dollar regime. We must turn swords into plowshares, resist US imperialist wars and economic aggression while fighting for the desperate need of the American people to build a highly productive, more equal and just postindustrial future for the nation and the world.
In advance of our upcoming forum on Modern Monetary Theory (MMT) this Sunday, October 3rd, our panelists have assembled a helpful list of background materials to ground your understanding of MMT before our discussion. While Voices for New Democracy has published a number of pieces relating to MMT (here, here, here, and here), these additional resources offer further insight and breadth.
One week after our MMT forum, we will also host a follow-up discussion on Sunday, October 10th at 7pm ET / 4pm PT. Use this link to join the conversation.
Join Voices for New Democracy on October 3 for our next forum discussing Modern Monetary Theory (MMT). Our panel will explore how governments pay for our needs; whether (and how) federal deficits and national debt matter; how the U.S. dollar affects the global economy. Ultimately, we will seek to answer whether MMT offers a path fo build a people’s economy, or if its insights represent a new form of imperialism.
Join us on Sunday, October 3, at 4pm PT / 7pm ET by clicking this link.
Hidden too often in the mainstream’s version of history in this country are the many collective efforts that have created economic and political models of systemic structural change — models nationally and globally which have sought to create structural changes in Capitalism.
We have the commonality that there is a need to advance a dialogue on the contradictions inherent in the system of capitalism, deepen research on the new local and global economic models that are emerging, and promote the growth of a movement based on the creation of transformative structural models of equity.
With the inability of traditional politics and politicians internationally not being able to come up with viable solutions to a growing economic crisis, there is a growing movement to advance theories and practices for a new economy.
This movement is one that is based on rethinking the nature of ownership and rethinking the definition of “growth” as a basis for gauging whether there is progress. This is a movement advancing a transformation of the economy so that the public, rather than a small elite, little by little come to control the productive assets in the society.
At the base of this rethinking is the turning around of a system that survives on the existence of an unequal stratification system and the divisions it creates on the basis of wages, wealth, and opportunity.
An emphasis on the quantity of profit over quality of life has led to the rise of a right-wing movement to make sure that our potential power is scattered and decapitated through: deregulating and allowing corporations to spew chemicals in the air that result in more of us dying (particularly in people of color and low-income communities); through the cutting of our cutting health care; through incarcerating us (we have more African Americans in jail now than we had in slavery); through keeping us from voting by gutting the voting rights act and unjust gerrymandering; and through increased enforcement, deportation, and limits on asylum of our immigrant young people, families, and refugees. This movement, particularly evident in the policies of the past Trump administration, continues to rear its head by waging a war against our communities (and particularly those who have been in the forefront of any gains made in civil, human, and environmental rights in the last decades).
We have the Alt-Right, the Bannons, the Rockford Institute, the neo-conservative movements in this country who promote white supremacist, racial-nationalist and neo-fascist ideologies, who push a deregulated free enterprise system, more funding for the military, and stand against anything that promotes a system based on equality. These are movements that continue to defend and promote the privatization of our economy and that, rather than advancing spaces and places of a more just and equal world, are seeking to foment a politics of individualism and ignorance about global warming and the economy.
This trend promotes an unregulated economic system where corporations rule, where the needs of our communities are put aside for the priorities of profit-making interests, and that advances a form of neoliberalism that places emphasis on privatization and consumerism with the outcome of destroying any ideology that truly advances practices for the collective good.
To combat this right-wing conservative trend, we need a program that: transforms power at the top; abolishes a structure that allows the wealthy, the corporations, and businesses to manipulate the tax system in their favor; reverses banking concentration and supports a system of decentralized community accountable banks and credit unions; combats unjust gerrymandering; abolishes the electoral college; moves toward a form of proportional representation and builds a social movement in support of a living wage; health care with universal coverage; accessibility for everyone to a quality education; a guaranteed basic income; investment in pre-school, K-12, and higher education; public financing of elections; and trade agreements that ensure environmental and labor standards.
At the local level, we need a social movement to create transitional forms of a new structure or a new system that is based on the collective and not just the interests of the individual. Some of these transitional forms include employee-owned enterprises; cooperatives; and businesses that are used in the interests of the community.
About 130 million people in the country are members of various urban, agricultural, and credit union cooperatives. In Cleveland, Ohio, a group of worker-owned companies has been developed that is supported in part by the purchasing power of large hospitals and universities. The cooperatives include a solar installation and weatherization company, an ecologically advanced laundry, and a greenhouse capable of producing over three million heads of lettuce a year. The Cleveland model is not simply about worker ownership but the democratization of wealth and building community particularly in the low-income areas. They are doing this through the creation of community-serving non-profit corporations, a revolving fund, agreements that the companies cannot be sold outside the network and that they must return ten percent of profits to help develop additional worker-owned firms in the area. Further, an important element are the agreements with local hospitals and universities who, until recently, spent their $3 billion on goods and services per year, outside the immediate neighborhoods. The “Cleveland model” has now won over these entities to be responsible as publicly-financed institutions and to allocate part of their spending and assets to the worker co-ops in support of a larger community-building vision. There are other cities now creating similar models (Atlanta, Pittsburgh, Amarillo, Texas, and Washington, D. C.) and there are unions, such as the United Steelworkers, that are developing co-op union models of ownership.
This is about an alternative form of municipal development and land use. In some cities, such as Washington, D. C. and Atlanta, cities bring in millions by capturing the increased land values that their transit investments create. The town of Riverview, Michigan has been a national leader in trapping methane from its landfills and used it to fuel electricity generation (providing both revenues and jobs). There are 500 such projects nationwide. Many cities have established municipally-owned hotels. There are nearly 2,000 publicly-owned utilities that provide power and broadband services to more than 45 million people — generating $50 billion in annual revenue. In Alaska, state oil revenues provide each person living in the state, dividends from public investment strategies.
Related to this is the creativity of Community development Banks, like the Bank of North Dakota (a state-owned bank founded in 1919) that are designed to facilitate economic revitalization of poor communities. In recent years, the bank returned $340 million in profits to the state. In Oregon, there are efforts to develop a similar bank, a “virtual state bank,” with no storefront. The South Shore Bank in Chicago is another example (developed in 1973) that provides real estate management, technical assistance, job training, equity investment, and economic consulting. It has assets exceeding $1 billion with $150 million invested in low-income communities.
This direction, in the contemporary period, includes some contemporary writers and thinkers that are thinking along the lines of the need for a new economy. Some of the ideas that relate to the post-industrial thinking advocated in the 1980’s by the New Democratic Movement are now being promoted by such economists as Richard Wolff, Emeritus in Economics at the University of Massachusetts; Gar Alperovitz, historian and political economist; Marjorie Kelly and Ted Howard of the Democracy Collaborative; and Joe Guinan, Executive Director of the Next System Project and Martin O’Neill, Political Philosophy at the University of York. There are many names being given to these models that, in addition, to post-industrial a post-industrial economy, include: stakeholder capitalism, the solidarity economy, new economy, sharing economy, regenerative economy, and the living economy.
In connecting with some of these themes, in the contemporary period, economist Richard Wolff, proposes systemic change “where the nature of work is transformed;” where people “once again control production;” where the creativity of workers is valued, and where they are in “control of the entire product.” Agreeing with Marx’s notion of surplus value, Richard Wolff proposes “workers self-directed enterprises where workers, who produce the surplus capital, are in charge of the profit (and not the managers or executives). Similar to aspects of the post-industrial article, Wolff proposes that production works best “when performed by a community that collectively and democratically designs and carries out shared labor.” The transformative element for Wolff is the “reorganization of all workplace enterprises to eliminate exploitation … where the workers become collectively self-directed at their work sites.”
In his book Democracy at Work: A Cure for Capitalism, Richard Wolff proposes that these models are fine but that what needs to change is the class structure of production and that many of the systemic models, including private and state capitalism have had the commonality of advancing state-capitalist class structures of top-down production that exclude the workers from production decisions and the distribution of their production. He proposes that even in the transitions from capitalist to socialist economic systems in various countries, there was a lack of prioritization or did not “explicitly include, or if they came to power, institute an economic system in which the production and distribution of surplus was carried out by those who produced it.” Overall, he argues that even in those countries categorized as “socialist,” there was a lack of prioritizing what he proposes as workers’ self-directed enterprises (where the workers who produce the surplus generated inside the enterprise function collectively to appropriate and distribute it). His solution of “workers’ self-directed enterprises” emphasizes that workers must partly or completely own the enterprises where they work and have a decision-making voice in the surpluses they produce. Such a transformation, from his outlook, will also advance the abilities of “workers to become informed, competent, and full participants in the democratic governance of the communities in which they reside.”
Similarly, Joe Guinan and Martin O’Neill in The Case for Community Wealth Building propose that organizing at the local level, in what they call “local justice,” can be a means of developing models (such as the ones that have been presented here as examples) that both take on the power of corporations and “build a more equal and democratic economy.”
Gar Alperovitz, in What Then Must We Do, proposes a direction that builds models of democratizing wealth and the building of a cooperative and community-based economy from the ground up. Like aspects of the post-industrial article, Alperovitz proposes cooperative models that include community land trusts, worker-owned businesses, and employee stock ownership plans.
In this vein, Marjorie Kelly and Ted Howard, in The Making of a Democratic Economy, present models that are “making what was once radical seem more like common sense.” These models include: “cooperatively-owned work places; of cities committed to economic policies rooted in racial justice; of ethical financing and investing; of communities on the frontline of crisis-building” to show us that “a different economy is not just a theoretical possibility but that it is something happening in right now in the real world.” The models include policies such as that of the Green New Deal (proposed by Congresswoman Alexandria Ocasio-Cortez) to shift to 100% renewable energy in 10 years, to create tens of thousands of new jobs, and to advance the implementation of publicly-owned banks like the North Dakota Bank. Already, New Jersey Governor Phil Murphy and California Governor Gavin Newsom have committed to establishing state public banks. This follows with the thinking of Gar Alperovitz that a whole new economic system is emerging that already include models of economic development with racial justice at the forefront, employee-owned companies, and local purchasing by anchor institutions. Agreeing with other economists, Alperovitz presents “anchor” models that are not just about theory but are “real models” that have taken the example in Cleveland (the Cleveland Model) and are now being constructed in other places ranging from St. Paul, Minnesota, to Milwaukee, Wisconsin, to Albuquerque, New Mexico, to Rochester, New York, and to Richmond, Virginia.
The rise of this new economy include worker-owned cooperatives ranging from the “Si Se Puede” cooperative (a Brooklyn house-cleaning enterprise owned primarily by Latinas) to union cooperatives (such as the Communications Workers of America Local 7777 in Denver (Green Taxi) where the leadership and board is made up entirely of immigrant drivers from East Africa and Morocco). Further, worker coops are being implemented now in New York City, Newark, Oakland, Rochester, and Madison. There are more than 6,600 employee stock ownership plans (ESOPs) throughout the country with $1.4 trillion in assets and “businesses owned by the people they serve” (that include credit unions, agricultural cooperatives, and consumer cooperatives) that represent $500 billion in revenue and employ more than 2 million people.
There are four principles that involve moving in this direction:
Thinking of new ways to democratize wealth
Placing the building of community and what is in the interests of community in the forefront in all development
Decentralizing power in general – so that there is community input
Planning in the interests of quality of life
The character of capital and corporations is that they have the highest level of planning in individual corporations that do everything competitively to reap the most profits with a culture of greed and selfishness in the forefront. However, there is the capacity for a new kind of planning, with a culture of collectivity in the forefront, to use the earth’s resources to solve the many problems threatening our survival.
A bifurcated agenda (MMT at home and financial imperialism abroad) would be inconsistent and morally reprehensible for any progressive, and I don’t think anyone in or around MMT takes such a position. Rather, at worst — and like Dennis (and most of us) — MMT advocates don’t have a clearly articulated plan for remaking the international financial order. They know how it works, but they don’t know how to assert popular control at that scale (currently, their focus is on gaining effective influence in sovereign states and, someday, “going global” from such new-found power bases). Rather than criticize MMT for the same shortcoming that we all share, we need to put our MMT thinking caps on, figure out the necessary “next steps,” and advocate for consistent financial restructuring across our both domestic and global economies. This might require a think tank and a legal corps, but that could set us in the right direction.
It seems to me that when our nation’s progressive wing overcomes dual power (defeats neoliberalism) in the US (that is, for now, in the Biden Administration and the Congress), all nations and people stand to benefit because the world does, in fact, have an integrated, global, financial system (and I think Dennis would agree) in which the US dollar and the US central bank (the Fed) dominate decision-making and financial power (at the IMF/BIS/SWIFT/IIF etc.).
Given this institutional domination, if/when American progressives gain the power necessary to implement a true, worker-oriented, social investment agenda in the US, we also will gain (or will be on the verge of gaining) the power to pursue a similar agenda at global scale (via the IMF, where we progressives will have just acquired dominant power, or via some new authority that we and the world create to replace the IMF).
Further, given the scale and breadth of today’s crisis, when American progressives finally break the power of finance capital in the US (winning majority control of our government), the rest of the world’s progressives (in countries everywhere) will demand we immediately break that same financial power globally as well. Having gained control of the US votes at the IMF, we will have no choice but to comply (twist my arm!).
Few American progressives have given much thought to how this “next system” of finance must operate to meet the needs of the whole world, including its impoverished nations. Obviously, “trickle down” from the US to the world doesn’t work, but, for sure, there’s no way some kind of global planned economy will be imposed. Rather, the next system — which has to carry civilization through the era of climate change impact and mitigation ahead — will be some kind of global mixed economy in which private entities and markets operate alongside public investment entities and non-market allocations, both within the world’s many nations and in transnational forms as well (corporations, global NGOs, UN-determined public investments(?), etc.).
However this next system shapes up, the world is never going back to the gold standard. It will remain on fiat currencies because that is the actual and only way, now, that nation-states and their markets can operate (if anyone can see beyond the era of fiat currencies, please let us know what that might look like!). When US progressives quash dual power and take general control of our government (sometime over the next few election cycles), the dollar will become our currency (the public’s currency!), and we can directly and forthrightly engage China, Europe, Japan, Britain — the other four IMF-approved-for-trade currencies — the Global South, and all other sovereign nations on the matter of how best to reconstruct and democratize global finance for the challenging crisis-mitigation era ahead (including, possibly, setting a new Special Drawing Rights (SDR) currency to replace the dollar as the global reserve… MMT suggests how that might be done).
I think that forging a new system of global finance is a necessary piece of this era’s struggle, an issue to be resolved sooner rather than later. MMT is empowering because it explains not only how the system works (and, as a corollary, how finance capital exploits the system for its own ends) but, also, how our nation’s democratic majority can impose its will on the system, reprioritize its investment agenda, move on to global financial reform, and, thereby, tackle all the vital problems of our time.
To me, a crucial task, now, is raising the financial consciousness of voters so elected politicians fight for popular oversight of finance in the public interest. That’s how we overcome dual power (defeat neoliberalism) and win progressive legislative majorities over the next few election cycles. Right now, the MMT folks are leading this project, but they need allies as well as broadened popular grounding and intersectional collaboration. I hope we Leftists will walk towards them, learn from them and help them see and link more effectively, beyond the financial realm.
So it is with all due respect that I say that I found Dennis’ explanation of Modern Monetary Theory (MMT) to be vague and unsubstantial, and his conclusion about reserve currencies misplaced.
In his article, he mentions the name Wynne Godley. What he didn’t mention, and might have, is the substance of what that economist’s work is about. As laid out in Chapter 2 of The Deficit Myth, Godley demonstrated the principle of ‘sectoral balances.’ Simply put, as author Kelton does, the government’s red ink (the deficit) is the non-government’s black ink (a surplus). Or, more precisely, there is a ‘penny-to-penny’ relationship between the amount of the government’s ‘debt,’ as we so misleadingly call it, and the amount of the surplus held by the non-government sector (what you, me, the business community, the Chinese etc., hold onto in our wallets, bank accounts, 401(k)s etc.) as assets, and didn’t pay in taxes. As Godley showed, this accounting is a fact, not a theory, and decisively exposes the myth that the national debt is somehow a burden to our descendants, any more than the massive deficits from WWII were a burden to us.
In fact, there was a recent Twitter exchange where someone asked about exactly what [Signe Waller Foxworth] wrote here and what was in Dennis’ article: Doesn’t MMT get used to maintain US hegemony over the world financial system? The answer is that framing it that way is backwards: The dollar acts as the world’s reserve currency because the US is an imperialist power and has the military and political clout to enforce its culture onto other players. In other words, the dollar’s status as reserve currency is a result, not a cause, of US imperialism. Of course they use monetary operations (the accurate description of which is the basis for MMT) to further their domination; it’s what we used to call ‘cultural hegemony,’ and part of the ‘code of capital,’ as we have called it more recently. But the work of Fahdel Kaboub, Lua Kamal Yuille, Ndongo Samba Sylla and many others demonstrate how the MMT lens and the concept of monetary sovereignty can be used by progressive/revolutionary movements to improve the lives of their constituents as well as further expose the aggressive, oppressive roles played by the US and their neoliberal allies.
To say one more thing, since you mention military spending. As we all know the US military budget is nearly 3 quarters of a trillion dollars per year. But notice that the Dems infrastructure and rescue proposals are for $6T total over 10 years, in other words about $.6T/year, comparable to the military expense. What the MMT folk say is that we have enough room to do both, at least for a while. The MMT proposition is that there is no need to ‘pay for’ the Green New Deal, Medicare for All, education, childcare, reparations etc. by cutting the military budget or anything else. Of course doing both seems wasteful and leaves in place an aggressive, damaging institution that we all hate. (I say we can work on that problem as we go.) But isn’t it worth it to get the good stuff that we really have to have and to highlight that possibility to those we work with? I think so.
The point is that believing that we must first cut things like military spending to ‘pay for’ the social programs we know are so acutely necessary, is to swallow the ‘Deficit Myth,’ to accept that the US government has to ‘find’ the money it spends just like households, businesses and local governments must. It’s just not so. So the question is larger than, ‘how do we stop so much military spending?’ It’s ‘how do we get people the things they need?’ The MMT lens says we do that by writing and passing budgets that fund the programs we want, at least initially no matter what happens with the military budget. Let’s do that and then the democratic will of the people we have established by working with everyone who will — what I think Steve means by ‘dual power’ — can decide later what best to fund for the long term, guns or butter, to use the old phrase. The issue is getting our (small-d) democratic foot further in the door of this appropriations/spending process, using what ‘dual-power’ we can muster, not slaying old dragons no matter how righteous and right we are about how monstrous they are.
Agree or disagree, I hope this is useful. Again, thanks for your response to my vids about the ongoing mainstreaming of MMT.
Thanks to Dennis Torigoe for a very informative piece in Voices for New Democracy about the privileged position the U.S. has in global finance due to the acceptance of the dollar as the world’s reserve currency. I am wondering about the relationship between Modern Monetary Theory (MMT), that has captured the enthusiasm of many of us, and the sovereign role of the dollar in global finance.
We are excited about MMT because it exposes the myth of deficit spending and describes the actual working of the economy. MMT shows the deceitfulness of rationalizing the government’s failure to provide for the basic needs of the people with excuses like we don’t have the money for this or we would have to raise taxes to pay for that. These rationalizations are false because the U.S. Government is the sole currency issuer and creates fiat money by spending it into existence, a feat none of us can accomplish, at least legally. It is no more difficult to find the money for universal health care, housing, living wages, education, immigration reform and addressing environmental destruction and climate catastrophe than it is to find the money for bombs, drones, guns, corporate bailouts and aid to foreign countries that are human rights abusers. The failure to provide a decent living standard for its population is exposed as due to a failure of political will and moral values, not a shortage of money. MMT opens the door to a more democratic process of managing the U.S. economy.
What I find challenging is what is precisely the relationship between MMT and the international financial arrangements that lead to U.S. dominance over other nations. The sovereign dollar plays a major, if not decisive, role in promoting U.S. imperialism. Could we, or would we even want to, create a paradise in the U.S. by trampling the rest of the world to death with imperialistic and financial action afforded by our privileged position in the global financial system? The relationship between MMT, with its potential benefits toward democratizing our national life, and the global financial system that fosters U.S. imperialism challenges our thinking in the fields of Economics and Ethics. Could we (is it even economically feasible) or would we want to (is it even ethically justifiable to) utilize the tools of MMT domestically to fund education, housing, living wages, immigration reform, universal health care and avoiding the worst climate catastrophes if the US sovereign position in global finance continues to allow us the latitude to address Americans’ needs by immiserating other peoples?
The US dollar is in a privileged position in the world as the global reserve currency which dominates international trade and commerce. As the world’s reserve currency, the US can continue to print as many dollars as it needs, run massive balance of trade deficits and use it to buy the world’s goods, basically swapping our paper for their raw materials and labor. The US can continue to increase its internal and trade deficits as long as it retains this world reserve currency status.
The bottom line: The dollar as the world’s reserve currency has been both an economic blessing and a curse on the workers and people of color in the US. The US dollar’s role as the hegemonic reserve currency allows the US to deficit spend massively on the military and wars of aggression, while funding certain reforms to quell domestic resistance through targeted programs paid for by massive deficit spending. At the same time the US dollar is used to plunder developing countries through high interest loans( by its de facto control of the IMF and the World Bank), to attack other countries’ sovereign currencies and engage in unequal trade with developing countries.
The dollar as the world’s reserve currency has led to the gutting of domestic industry as US corporations, riding on the massive amounts of dollars printed by the US, drive for higher profits through outsourcing manufacturing and with them factory jobs to cheaper producers in Asia and elsewhere. This has directly contributed to deindustrialization, structural unemployment and widespread suffering for a large swath of the American people.
Not only does the US control the creation of the dollar as the world’s reserve currency, it also controls the mechanism which allows another country to use the US dollar in trade or finance, the SWIFT trade clearing system. Through it, it has attacked countries like Iran and Venezuela though enforcing trade sanctions and caused untold suffering to the people of those countries,
The reserve currency status of the dollar allows the US to import cheap manufactured goods from other countries, particularly China, while paying for it in dollar-denominated paper or bonds. The US balance of trade deficit has soared, especially since the 1990s, as they give us real goods and we give them paper.
This cheap goods vs. paper payment has contributed to inflation being almost nonexistent, till now, from the 1990s to 2020.
Given the history of the imperialist wars, the plunder through unequal trade and economic and political aggression against the developing countries, the US owes reparations to much of the developing world which have to be repaid over time. In our view, the only way to repay these historic debts and to raise the standard of living within the US is through unleashing massive postindustrial gains in productivity through a top to bottom reform of the present economic system.
However, we do recognize that replacing the US dollar as a reserve currency will perhaps take decades. In the interim, a Green New Deal-like program could be pivotal in accelerating the fight against climate change and the US’s advance in a post-industrial world. However, the feasibility of such massive spending assumes the reserve currency status of the US dollar and the US’s own easy access to capital markets. Do the benefits that accrue to American workers from giant government programs come at the expense of people around the world? The answer is yes, thus the US bears a special responsibility to the rest of the world to fight climate change, inequality and injustice. As starters, the US needs to join or rejoin initiatives like the 2015 Paris Agreement, COVAX, the World Health Organization and revolutionize the character of international institutions like the IMF, World Bank, Bank for International Settlements, and the UN.
At the same time, we should seek first to promote alternatives to the US dollar’s reserve currency status and more equitable control of the world’s financial, trading and banking networks.
The US Dollar as the Global Reserve Currency: Is Modern Monetary Theory Only Good for Modern Imperialism?
When Representative Alexandria Ocasio-Cortez was asked how the potentially multi-trillion dollar Green New Deal was going to be paid for, she mentioned Modern Monetary Theory (MMT). Coming into wider public view since then, it has become the answer for some on the political left to the question of how to pay for any major program proposed, from Medicare for All to Guaranteed Annual Income.
So what is this theory and how does it work, who benefits and who actually pays for what it promises? We think it is usable by a superpower with hegemonic financial power through the use of the US dollar as the world reserve currency, benefiting the ruling class financially and politically. It is paid for by the developing countries and their citizens forced to use the US dollar in trade and finance. And while it may give short term benefits to US workers, it creates an unsustainable global economy and prolongs the rule of the monopoly capitalists.
The bottom line: the US dollar’s role as the hegemonic reserve currency allows the US to spend massively on the military and wars of aggression, while funding certain reforms to quell domestic resistance through targeted programs and to continue to use the US dollar to plunder third world countries and engage in unequal trade.
It is one currency, one system. They are interconnected. Given the history of the imperialist wars, the plunder through unequal trade and economic and political aggression against the developing countries, the US owes reparations to much of the developing world which have to be repaid over time. In our view, the only way to repay these historic debts and to raise the standard of living within the US is through unleashing massive postindustrial gains in productivity through a top to bottom reform of the present economic system.
However, we do recognize that replacing the US dollar as a reserve currency will perhaps take decades. In the interim, a Green New Deal-like program could be pivotal in accelerating the fight against climate change and the US’s advance in a post-industrial world. However, the feasibility of such massive spending assumes the reserve currency status of the US dollar and the US’s own easy access to capital markets. Do the benefits that accrue to American workers from giant government programs come at the expense of people around the world? As we show below, the answer is yes, and if so then the US bears a special responsibility to the rest of the world to fight climate change, inequality and injustice. As starters, the US needs to join or rejoin initiatives like the 2015 Paris Agreement, COVAX, the World Health Organization and revolutionize the character of international institutions like the IMF, World Bank, Bank for International Settlements, and the UN.
At the same time, we should seek and promote alternatives to the US dollar’s reserve currency status and more equitable control of the world’s banking networks.
Secular Stagnation Takes Hold in the US Economy
We believe that the US economy is in a period of what Lawrence Summers, the Harvard economist, calls secular stagnation. He cites a number of factors pointing in this direction.
First of all, there has been a decrease in market-based investment demand overall, driven by a shrinking working age population which drives down investment in housing, consumer demand and production equipment. Also driving down investment has been the lower cost and higher productivity afforded by the technology revolution. He also argues that increased monopoly power in the US has stifled investment, as well as the refusal of the politicians to fund major infrastructure projects. The net result has been that infrastructure spending is now one half of what it once was,
The other aspect driving secular stagnation has been the increased savings taking place in the economy. Much more of the country’s income and wealth is going to the top economic earners, driving up the prices of assets like stocks and real estate, not into productive investments. Moreover, because of the traumatic experience of the Great Recession of the 2009, people are themselves saving more as a cushion and banks have tightened lending rules, excluding many from purchasing homes and opening businesses. Of course, the coronavirus pandemic has greatly increased all these factors.
What Is Modern Monetary Theory?
Modern Monetary Theory has been around for a while. In her recent book The Deficit Myth, Stephanie Kelton, a leading proponent, cites her colleague Wynne Godley who in the late1990’s as a major inspiration for her thinking. Basically, MMT argues that the government (in the US case, the Federal Reserve) can issue as much money to enable the Federal Government to spend as much money as it wants up to the point where economic demand in the economy outstrips the available supply of goods and services, at which point inflation and higher interest rates set in. For a country with a sovereign currency, meaning it issues and controls its own currency, MMT believes that it can create money and the government can spend money as long as the goods and services exist for it to buy in its specific currency.
One of the major distinctions made by MMT is that unlike households and private businesses, a government with a sovereign currency does not need to balance its expenses with its revenues. The government, as the creator and controller of the currency, can print as much money as it wants to pay off its bills. But this means that governments without control over the currency with which they borrow or trade must use the US dollar to trade or pay off debts denominated in dollars or held by US-controlled institutions. They are like households. They need to get US dollars to pay off these bills.
How Does the US Ruling Class Use the Dollar as the Global Reserve Currency to Plunder the Rest of the World?
The countries that have the ability to follow MMT’s policies are the advanced capitalist countries of the world, with the US by far the most powerful. Like households and businesses, the rest of the world has to get (through trade or borrowing) and use the major currencies of the West, mainly the US dollar but also the euro, the yen, the pound, and to a smaller extent China’s yuan, to engage in trade and finance with the US and major trading nations of Europe, Japan and China. As we shall see, not only does the US control the creation of the dollar as the world’s reserve currency, it also controls the mechanism which allows another country to use the US dollar in trade or finance. (Unlike the US, the European countries that share the euro are a work in progress. While they share a single currency and a central bank that issues that currency, spending decisions are still made, within limits, by their individual governments.)
The US dollar is in a privileged position in the world as the global reserve currency. After World War II, the US was the world’s most powerful military and economic power. At the post war Bretton Woods Conference, the major allied powers and other signers agreed to the US dollar as the world’s reserve currency, then pegged at US$35 to an ounce of gold.
The Conference also created the International Monetary Fund, which was to stabilize currencies vis-a-vis the US dollar through loans and the World Bank which was to help develop international trade and finance. Both were de facto controlled by the United States in its position as the biggest contributor of financial support, with US dollars, a currency that it created and distributed as its sovereign currency.
The US Dollar as the World’s Currency for Buying Oil Shores Up its Dominance
In the 1950s and 1960s, as the world’s economic and military superpower, the US dominated the world economy in trade, finance and manufacturing. Importantly, it also dominated the trade in the world’s most traded commodity – oil. As the US dollar was the reserve currency in the world, almost all oil produced and exported had to be bought with US dollars. This worked until the US stagflation crisis (economic stagnation AND inflation at the same time) in the early 1970s when the US unilaterally pulled out of the gold standard of US$35 being exchangeable for one ounce of gold. With US inflation and the dollar’s devaluation — its value “floating” depending on supply and demand — the oil-exporting countries of the Middle East lost purchasing power. They rebelled with the 1979 OPEC boycott by oil producing countries, refusing to ship oil to the West, which made the price of oil quadruple, from a fixed price of US$4 a barrel to US$12 a barrel in a matter of months. With US dollars now gushing out of the US and Europe to the oil producers in OPEC, a new agreement was signed. In 1979, the US-Saudi Arabia Joint Agreement on Economic Cooperation, in which Saudi Arabia, the biggest oil exporter, agreed to take only US dollars for its oil and to funnel them back into the US. This again strengthened the US dollar’s hegemony on the world economic, trade and financial scene.
Since then, the US dollar has kept its position as the only truly world currency, though it is being potentially challenged by the euro and less so by China’s yuan. (On a secular basis, the shift away from fossil fuels, including oil, and the rise of digital currencies, especially sovereign-state-supported ones, pose challenges to the US dollar’s dominance in world trade and finance.)
The US Dollar Hegemony Helps Keep Wages Down Here and Oppress Low Wage Labor Overseas
The new millennium has brought historically low inflation to the United States, especially compared with the decades since the 1970s, as can be seen by the chart below.
At the same time, the US balance of trade deficit soared, especially since the 1990s, or as MMT author Kelton says, they give us goods and we give them paper. What happened in that period? The US started importing massive amounts of goods from the rest of the world, particularly China. While the US has historically exploited cheap overseas labor and raw materials, from the banana plantations of Central and South America to the sewing factories in the Caribbean and Asia, now the US was buying manufactured goods from a fast-growing Chinese economy. At least one study shows that this had the effect of dampening price inflation. This was especially true after the period of the Great Recession of 2008-2010, when the US economy was recovering. According to A New York Federal Reserve staff report showing the impact on trade on US prices:
Lower Chinese export prices due to WTO entry reduce the U.S. manufacturing price index by 4.9 percent, while greater Chinese export variety reduce the index by 2.6 percent. The sum of these two values indicates that the total WTO effect on the U.S. price index is 0.076, that is the U.S. manufacturing price index was 7.6 percent lower in 2006 relative to 2000 due to China joining the WTO. Note that this fall is after correcting for any overall inflation in domestic and import prices that is common across industries in the constructed U.S. price index, sincecommon trends would be absorbed by the constant term in (33).
So we interpret this 7.6 percent fall in prices as the real impact on U.S. manufacturing prices relative to inflation. Since manufacturing is only a fraction of the U.S. economy, this seemingly large effect is notably smaller than the aggregate 6.7 percent long-run U.S. welfare increase that Caliendo et al. (2015) estimate from the 2000-2007 China trade shock.
In a period of increasing impoverishment of US workers, this meant that their real wages were buffered by this lowered inflation and thus kept their standard of living from declining even more. The fact that most of the imports from China are consumer goods and consumer spending makes up 2/3 of our economy means that the standard of living of people in the US is increasingly dependent on the continuation of US dollar hegemony. We are using massive amounts of printed dollars to keep the goods coming. If there ever was a sudden stop to this, our living standards could fall precipitously. As quoted by Siddiqui, Paul Samuelson expressed his deep concern about this:
More than a decade ago, Krugman (2007: 437) noted, “The United States has a remarkably large current account deficit, both in absolute terms and as a share of GDP. At the moment the country is not having any difficulty attracting capital inflows sufficient to finance this deficit, but many observers nonetheless find that deficit worrisome. This worriers see an ominous resemblance between the current U.S. situation and that of developing countries that also went through periods during which capital flows easily financed large current deficits, then experienced ‘sudden stops’ in which capital inflows abruptly ceased, the currency plunged, and the economy experienced a major setback.”
The Walmart’s and Amazons depend on the much lower paid labor making manufactured goods from China and the developing countries as an inherent part of their business models. This was another way that the ruling class kept pressure for wage increases down and capitalist profits higher. The other way was US companies offshoring production of things like sophisticated electronics at a fraction of the cost of what it would be to produce in the US. The Apple iPhone is a prime example of this,
And how does the United States pay for this massive trade deficit? As MMT says, we get real goods, we send them paper. Basically by printing money that the world is obliged to take as payment. China now has over a trillion dollars of US Treasury notes that it has accumulated in trade with the US, about 7% of the total foreign-held US government debt.
Thus the US ruling class continues to reap the profits of exploiting cheap labor from the developing countries in both raw materials and in manufactured goods because of its position as the creator of the world reserve currency.
The Cycle of US Interest Rates and Currency Attacks on Developing Countries
In 2007 Joseph Stiglitz wrote an article titled “The Asian Crisis 10 Years Later” in The Guardian, explaining the Asian Financial Crisis which began in 1997. In it, he laid out the timeline of the crisis:
In July 1997, the Thai Baht plummeted. Soon after, the crisis spread to Indonesia and Korea, then to Malaysia. In a little more than a year, the Asian crisis had become a global financial crisis, with the crash of Russia’s ruble and Brazil’s real.
In that year, George Soros’ hedge fund, the Quantum Fund, bet heavily against the Thai baht, which had recently dissolved its peg to the US dollar. Thailand did this after the dollar strengthened, and Thailand was caught in deteriorating terms of trade and thus an inability to pay the massive loans it had denominated in dollars. That was like blood in the water to the hedge fund sharks and other currency speculators to attack the Thai baht, betting that it would quickly devalue against the dollar. George Soros’ fund’s $1 billion bet, in fact, wasn’t the biggest of the attackers. Julian Roberts’ Tiger Fund hedge fund bet $3 billion against it. The attacks continued through the next two years.
What were the general conditions causing this financial crisis? As Stiglitz puts it, “[B]efore the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries – a six-fold increase in six years. Afterwards, capital flows to developing countries stagnated.” He went on to say, “Indeed, the two most important lessons of the crisis have not been absorbed. The first is that capital market liberalisation – opening up developing countries’ financial markets to surges in short-term ‘hot’ money – is dangerous. The only two major developing countries to be spared a crisis were India and China, both of which had resisted capital market liberalisation. Yet today, both are under pressure to liberalise.”
We think that the cycles of interest rates play a major part in the recurring financial crises. When US interest rates decline and a weaker dollar follows, US companies use the cheap money to buy up assets in these countries and US banks push dollar-denominated loans to them. Then the crisis hits and the foreign investments become “hot money” and flows out of the country. At the same time, Western banks stop lending and the economic crisis intensifies in developing countries.
Korea’s experience with the 1997 Asian financial crisis is an example of Western predatory attacks against a weakening currency leading to the attempts at an economic takeover of its most valuable assets. Korea was forced to borrow from the IMF to cover foreign loan repayments for its major industrial companies, the Chaebol. Among other demands, the IMF demanded that Korea “open up” its financial markets to foreign investment, allowing 55% foreign ownership of its companies (Korea dropped limits altogether), which would mean foreign, primarily U.S., control of Korea’s companies.
As one report in 2009 stated in Korea’s attempt to instill anti-takeover poison pill measures:
Domestic M&A laws have been loosened since the 1997-98 Asian financial crisis, and in 2006 activist investor Carl Icahn and hedge fund Steel Partners floated the idea of buying tobacco monopoly KT&G…in what would have been South Korea’s first unsolicited foreign takeover bid, but no official tender offer was filed.
In 2003, SK Group, parent of top mobile carrier SK Telecom…and refiner SK Energy…, clashed with Sovereign Asset Management, which unsuccessfully sought to remove its chairman.
Those cases raised a red flag to unfriendly takeover attempts and led listed companies, including Samsung and POSCO, to spend $55 billion defending their management as of end-January.
“Our country has made hostile M&A attacks easy by removing a ceiling on foreign stock investments, but it has not had any means to prevent hostile M&A,” the justice ministry said in a statement on Monday.
The US Dollar and the SWIFT International Settlement System: Weaponizing the Dollar
On November 5, 2018 Al Jazeera ran the following headline: US Treasury Secretary Steven Mnuchin told reporters that SWIFT could get slapped with sanctions if it provides services to Iranian banks blacklisted by Washington.
The article continued:
The Belgium-based Society for Worldwide Interbank Financial Communications (SWIFT) financial messaging service announced on Wednesday it was suspending access for some Iranian banks “in the interest of the stability and integrity of the wider global financial system.”
What was this about? Another way the US uses its hegemonic position as the world’s reserve currency is its weaponization of the currency clearing system used in global trade. Today SWIFT (the Belgium-based Society for Worldwide Interbank Financial Communications) system dominates the international trade payments system, which of course is heavily based on the US dollar,
As a whole, the US dollar is by far the currency of world trade transactions. As Kalim Siddiqui wrote in his 2018 article “The U.S. Dollar and the World Economy: A Critical Review”:
the U.S. dollar makes up nearly 63% of central banks’ reserve currency holdings,against 17% for the euro and 2% for the yen (Siddiqui 2018a, World Bank 2017).
In the foreign exchange market, 90% of forex trading involves the U.S. dollar. At present, nearly 40% of the world’s debt is issued in the U.S.dollars (World Bank 2017, Willett and Chiu 2012).
SWIFT is basically a financial messaging system that allows its member banks to conduct payment settlements between international trade buyers and sellers, According to Al Jazeera, the member-owned cooperative connects more than 11,000 banks, financial institutions and corporations in more than 200 countries and territories around the world. It continues:
Think of SWIFT as the central nervous system of international financial transactions. The messaging platform enables financial institutions to send, receive and track information about financial transactions in a secure and standardised way that facilitates the smooth flow of funds across borders.
When the Trump administration wanted to punish Iran with sanctions, it used the US’ role as the world’s issuer of reserve currency as one of the ways to enforce it. Al Jazeera states,
Countries cut off from SWIFT can be crippled financially because money transfer information can’t be forwarded to its banks. When a country’s banks are cut off from SWIFT, it can’t pay for imports and can’t receive payment for exports… In March 2012, SWIFT agreed to not forward messages to any Iranian bank or individual that had been blacklisted by the EU. As a result, Iran’s oil exports plunged from around 2.5 million bpd in 2011 to around one million bpd by 2014. The 2012 SWIFT ban was widely seen as instrumental in bringing Iran to the negotiating table which led to the 2015 Iran-nuclear deal. When Iranian banks were reconnected to SWIFT following the 2015 Iran-nuclear deal, oil exports increased again.
While SWIFT is not owned by the US, it defies the wishes of the superpower at its own peril. Al Jazeera states:
…There could be consequences if it resists US pressure to cut off Iran again. Richard Goldberg, senior adviser at the Foundation for Defense of Democracies, a think-tank, argued in this blog that in 2012, Congress authorised any president to impose sanctions on SWIFT’s board of directors (which includes executives from some of the world’s biggest banks) if it refused to disconnect Iranian banks blacklisted by Washington.
As can be seen, the US can impose its will on SWIFT and use it as a financial weapon against its intended targets.
Europe Countering US Move on SWIFT
The US campaign against Iran and pulling out of the 2015 nuclear deal, however, has not been supported by the major countries of Europe, who rely on trade and imported oil from the Middle East and want the best deal they can get in buying it, To have Iran cut off from supplying oil to them and trading with them is a major problem for them, To counter the US move against SWIFT by banning Iran from it, the Europeans have attempted to set up a separate shadow trade settlement system.
On December 1, 2019, six European countries joined a barter system for the Iran trade. As reported by TRT World, the Paris-based INSTEX, which has yet to enable transactions, functions as a clearing house allowing Iran to continue to sell oil and import other products or services in exchange, to avoid US sanctions. Paris, London and Berlin on Saturday welcomed six new European countries to the INSTEX barter mechanism, which is designed to circumvent US sanctions against trade with Iran by avoiding use of the dollar.
As founding shareholders of the Instrument in Support of Trade Exchanges (INSTEX), France, Germany and the United Kingdom warmly welcome the decision taken by the governments of Belgium, Denmark, Finland, the Netherlands, Norway and Sweden, to join INSTEX as shareholders,” the three said in a joint statement. The Paris-based INSTEX functions as a clearing house allowing Iran to continue to sell oil and import other products or services in exchange.
This, in itself, is a step toward freeing the world from the US dollar hegemony that has lasted over 85 years.