{"id":126,"date":"2021-03-07T14:30:57","date_gmt":"2021-03-07T14:30:57","guid":{"rendered":"http:\/\/dummy.xtemos.com\/woodmart-elementor\/?p=126"},"modified":"2022-09-09T18:42:31","modified_gmt":"2022-09-09T08:42:31","slug":"the-illogic-of-global-finance","status":"publish","type":"post","link":"https:\/\/rationalemagazine.com\/index.php\/2021\/03\/07\/the-illogic-of-global-finance\/","title":{"rendered":"The illogic of global finance"},"content":{"rendered":"

There are two things that should be understood about the global financial markets as the world faces what is being called the Great Reset, or Bretton Woods 2. The first is that the US dollar rules the world (as distinct from the US nation). The second is that the system is insane. Sure, it may look rational with all those numbers, charts, ratios, algorithms and impressive sounding technical terms. But collectively the whole thing is mad. As the great British writer G.K. Chesterton wrote: “The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.” That nicely describes the global capital markets and it does not bode well either for an effective reset or the survival of the monetary system itself.<\/p>\n

The US dollar has dominated the global financial markets since 1945, when Franklin D Roosevelt did a deal with King Abdulaziz of Saudi Arabia to denominate oil trade in the American currency, leading to the creation of the petrodollar which then became the world’s reserve currency. The petrodollar has long since faded; more oil is actually denominated in Chinese yuan now than American dollars (although the yuan is fixed to the US dollar so it is not really separate). But the bulk of international trade and asset buying is still denominated in US dollars out of habit and the US dollar has been further entrenched because of the emergence of the global derivatives market. Derivatives are transactions derived\u00a0<\/i>from, or rather are gambles on, conventional financial assets such as currencies, interest rates and shares. The ‘value’ (whatever that means exactly) of these derivatives is $US500-1000 trillion, give or take the odd $US100 trillion.<\/p>\n

This intense financial activity, most\u00a0of which occurs in microseconds,\u00a0is like having a massive roulette wheel\u00a0spinning above the earth.\u00a0According to the\u00a0Bank for International Settlements\u00a0the\u00a0daily<\/i> cross border trades with the US dollar on one side equates to almost $US6 trillion. To give some idea of how big that notional ‘money’ is, the entire US Federal debt, built up over decades, is about $US27 trillion, or the equivalent of less than five days trading. It has entrenched the US dollar as the world’s reserve currency and allows America to do whatever it likes on its Federal budget, its military spending or whatever other financial excesses it can devise, such as the $US21 trillion hole in the defence budget exposed by Mark Skidmore, a Professor of Economics at Michigan State University. Whatever debt the US issues is swallowed up by the massive demand for dollars in the foreign exchange markets. No other country has that freedom.<\/p>\n

This intense financial activity, most\u00a0of which occurs in microseconds,\u00a0is like having a massive roulette wheel\u00a0spinning above the earth.\u00a0<\/strong><\/p><\/blockquote>\n

It has recently become popular to criticise so-called ‘fiat money’, money that is determined by government edict. The contention is that when President Richard Nixon took America off the gold standard in 1971 because the nation could not pay for the Vietnam War it ushered in an era of government-created money whose value has been progressively degraded.<\/p>\n

Though superficially persuasive,\u00a0the argument\u00a0is\u00a0entirely\u00a0misleading.\u00a0The\u00a0repeated\u00a0crises in the financial\u00a0markets\u00a0over the last four decades\u00a0have not been\u00a0because of\u00a0too much\u00a0government intrusion\u00a0but\u00a0the opposite:\u00a0a\u00a0refusal\u00a0by governments\u00a0to govern properly, which\u00a0allowed private players to run amok.<\/p>\n

It was a cleverly engineered scam.\u00a0In the 1980s and 1990s there was a world-wide push, prosecuted by\u00a0well funded\u00a0think tanks and lobbyists,\u00a0to \u2018deregulate\u2019 the financial markets. What nobody seemed to notice, or if they did\u00a0notice\u00a0they\u00a0conveniently\u00a0chose to ignore it,\u00a0is\u00a0that this\u00a0argument is, literally, nonsense. It is impossible to deregulate financial markets because they\u00a0consist<\/i>\u00a0of regulations.\u00a0As the sociologist\u00a0\u00c9mile\u00a0Durkheim noted\u00a0money\u00a0does not influence\u00a0the moral and intellectual life of peoples on\u00a0\u201cthe sole grounds of the abstract and symbolic character that is attributed to it\u201d. Rather,\u00a0\u201cwhat\u00a0matters is the presence or the absence of regulatory procedures by which it is controlled, and the nature of these rules and regulations.\u201d\u00a0Deregulating financial markets\u00a0is like trying to take\u00a0the\u00a0hydrogen, oxygen and wetness\u00a0out of water. Other\u00a0types of\u00a0markets can be deregulated because\u00a0regulations are external to the economic activity, but\u00a0in finance they are the same.<\/p>\n

Enter\u00a0insanity.\u00a0By convincing\u00a0Western\u00a0governments that deregulation was a fine thing (usually\u00a0using\u00a0water metaphors\u00a0to make it seem that\u00a0regulations somehow get in the way\u00a0of monetary \u2018flows\u2019) private\u00a0actors\u00a0were able to make\u00a0up their own rules,\u00a0triggering\u00a0\u2018financialisation\u2019, or\u00a0wealth extraction by the finance sector at the expense of\u00a0everyone\u00a0else.<\/p>\n

The\u00a0ridiculous\u00a0invention of rules\u00a0has been\u00a0most obvious in the derivatives markets, which are\u00a0a complete free for\u00a0all \u2013 think of a bet, any bet. It also occurred in the real economy, where unshackled banks\u00a0and financial institutions\u00a0invented different ways to\u00a0create\u00a0ludicrous\u00a0levels\u00a0of\u00a0global\u00a0debt\u00a0that\u00a0are\u00a0now,\u00a0in aggregate,\u00a0unpayable.\u00a0The only option for\u00a0central banks\u00a0in developed countries\u00a0has been\u00a0to drop interest rates to\u00a0almost\u00a0zero in\u00a0the hope of\u00a0kicking\u00a0the can down the street\u00a0and\u00a0printing money,\u00a0known as\u00a0\u2018quantitative easing\u2019,\u00a0on\u00a0what is laughably called their\u00a0\u2018balance sheets\u2019.<\/p>\n

There were plenty of warnings that ‘deregulation’ was dangerous. In 1998, a derivatives company, Long Term Capital Management, nearly brought down the Western banking system. Bizarrely, the chairman of the US Federal Reserve, Alan Greenspan, responded by aggressively increasing the number of derivatives traders in the belief that it would all, sort of, balance itself out.<\/p>\n

It didn’t. The 2007-2008 financial crisis revealed the insanity of allowing private players to invent their own rules when there was a near collapse of the entire system. It was only saved because the US Treasury head, Henry Paulson, decided to re-regulate instead of standing back and allowing ‘market forces’ to work.<\/p>\n

It was\u00a0a\u00a0close run\u00a0thing, though. On\u00a018 September\u00a02008\u00a0$US550 billion went out of the US money markets in\u00a0a\u00a0couple of hours.\u00a0Paulson\u00a0responded by closing\u00a0down all America\u2019s\u202fmoney accounts and announcing\u00a0a guarantee of $250,000\u00a0for\u00a0all\u00a0bank deposits.\u00a0That is, he issued a fiat. The Treasury later estimated that had he not done so\u00a0$US6 trillion would\u00a0have exited the US financial system\u00a0by the end of the day. Given that banks lend out\u00a0roughly\u00a020 times their capital base\u00a0this would have spelt the end of\u00a0the monetary system of the world.<\/p>\n

\"\"<\/a><\/p>\n

Like all good madmen, banks and financial traders, incapable of taking any responsibility for their own actions\u00a0and\u00a0faithfully adhering to\u00a0their\u00a0smug\u00a0anti-government\u00a0rhetoric,\u00a0outrageously blamed governments for a\u00a0crisis\u00a0that they had caused.\u00a0They\u00a0got away with it. Almost no financiers\u00a0went to jail\u00a0and they continued their debauch of the\u00a0system,\u00a0exploiting\u00a0lower interest rates to\u00a0increase debt\u00a0to\u00a0its\u00a0current\u00a0unsustainable levels.<\/p>\n

Can a genuine reset be achieved? Not with the current finance technocrats, who have probably never scrutinised an assumption in their lives. Compare these superficial thinkers with John Maynard Keynes, the person who led the British delegation to Bretton Woods 1 in 1944. A member of the Bloomsbury Group, Keynes thought deeply both about what money is and how it should function (he is associated with the economics of government spending but that is only a cartoonish version of his thought). Almost none of the current crop of central bankers, heads of global institutions or schemers in the World Economic Forum are capable of such reflection. Most did not even notice that ‘financial deregulation’ is a flat contradiction.<\/p>\n

What should be done? First, remove the central assumption behind the madness and recognise that money is a system of rules in which government has to be a central player, an umpire. The demonisation of ‘fiat money’ is rubbish. So is the idea of freeing up market forces by deregulating the finance system. The question is not whether governments should be involved, but how they should be involved \u2013 what constitutes good governance of the system.<\/p>\n

The question is not whether governments should be involved, but how they should be involved \u2013 what constitutes good governance of the system.\u00a0<\/strong><\/p><\/blockquote>\n

Second,\u00a0find ways\u00a0to reimpose some sort of control over the quantity of money. It will require\u00a0a jettisoning\u00a0of the circular arguments of neo-classical economics, which are exposed by Michael Hudson, professor of economics at the University of Missouri\u00a0and author of\u00a0J is for Junk Econom<\/i>i<\/i>cs<\/i>. Financial deregulation\u00a0meant\u00a0authorities\u00a0ceded\u00a0any\u00a0control\u00a0over\u00a0the amount of credit in the system. They can\u00a0only control the cost of\u00a0money, the interest rate.\u00a0With\u00a0interest rates\u00a0at\u00a0close to\u00a0zero that\u00a0remaining\u00a0tool has been rendered\u00a0useless.<\/p>\n

Critics of fiat money\u00a0find hope in\u00a0reintroducing the gold standard or buying Bitcoin. This\u00a0is because\u00a0both are finite; in theory\u00a0they introduce some control over the\u00a0quantity of money\u00a0and raise\u00a0the prospect\u00a0that it\u00a0might\u00a0once again\u00a0function as\u00a0a means of exchange rather than something to be debauched\u00a0in an endless regress.\u00a0But\u00a0it is a blind alley. Neither can be\u00a0realistically\u00a0used as a means of exchange\u00a0\u2013 at least not yet \u2013\u00a0and in any case they are\u00a0both\u00a0valued in fiat currency: US dollars.\u00a0They are just another type of financial asset for investors to play with.<\/p>\n

Third, the financial schemers should, even for their own sakes, shelve any ideas about a global central bank digital currency for cross-border transactions, no matter how seductive it might seem as a power grab. It would be a genuine threat to US dollar dominance, imperilling the US military’s ability to spend what it wants. The centralisation of power it implies also poses a threat to Chinese and Russian military autonomy.<\/p>\n

Financiers like to think that soldiers are just guns for hire, that money rules everything. A glance at history suggests otherwise. If the financiers go head-to-head with military\u00a0interests\u00a0they will get some nasty surprises and we will be no closer to a solution to the\u00a0monetary debauch.<\/p>\n

 <\/p>\n

This article was originally published in the March 2021 edition (vol. 120) of <\/em>Australian Rationalist.<\/strong><\/p>\n

Photo by Alexander Schimmeck on Unsplash<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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