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Monday, 19 December 2011

Globalism and Money

The impending admission to membership of the Russian Federation - the world's eleventh-biggest economy on the currently accepted statistical formulae - will bring over 95% of world trade under the auspices of the World Trade Organisation [WTO]. The eagerness of the emergent countries to be members of this organisation indicates that there are significant benefits that attach to membership; but a quick check on recent press coverage indicates that the WTO is a faltering set-up.It has never quite delivered the hopes that are routinely expressed by the member states' negotiators as they enter the conference room at the start of each of an endless series of 'rounds' of deliberation which have been intended to improve the openness and proper reporting of world business. Yet the WTO is nevertheless recognised that it is the best mechanism that is available for fostering relatively free trade around the whole world.

The predecessor of the WTO was established in parallel with two new institutions for managing the world's monetary system: technical devices which could support statesmen in their effort to establish an open world economy, starting at the end of the Second World War. The International Bank for Reconstruction and Development [commonly called the World Bank] was designed to raise capital in the relative rich areas of the world to lend to governments and agencies which could invest in damaged or underdeveloped regions and industries. The International Monetary Fund {IMF] was intended to serve as a Central Bank for the world economy.

To a limited extent, the World Bank has performed the role that was allocated to it; though from the very early days after its foundation the refusal of the then-USSR to participate in World Bank activities, or to allow its satellites to join, meant that between1948 and 1992 its loans were confined to the de-industrialising powers and the non-communist post-colonial countries. In many instances the political affiliations of undemocratic 'pro-western' regimes enabled them to get World Bank loans and technical support. The USA - including the 'military-industrial complex' - had the predominating influence over the Bank because the US was by far the greatest contributor as well as the host to its head office.

 The IMF was also barred to the communist world by Stalin's decree. Thus until the nineteen-eighties the IMF was an organisation of the 'capitalist' world; though most of that zone adopted the aspirations of the 'mixed economy'. Following the second world war the majority of democratic governments significantly increased the services and benefits that they provided for their citizens, at a rate far greater than the rate of growth of their economies. They were enabled to achieve this apparently impossible trick of stretching consumption ahead of production through adopting a bizarre combination of bowdlerised Keynesianism with massive financial manipulation by the state.The inevitable consequence of this self-deception was the great inflation of the nineteen-seventies; which was followed by the adoption of monetarism, under which regime state spending continued to run in excess of the taxation yielded by the economy in many countries. Alongside excessive state spending - which was matched by an increase in the public debt - private spending was also allowed to rise above earnings at the cost of increased individual and household indebtedness. The United States edged towards its own version of the welfare state in very small steps throughout the postwar years, increasing the pace when European and Australasian governments began to reduce and remove some elements of social provision as the impossibility of perpetually expanding the deficit became apparent. The cost of welfare and health care to the US authorities become a notable drag on the national economy only under the Clinton Administration. Thereafter it proved intractable under George W Bush as he accepted the necessity to keep social stresses at a minimum within the USA as it engaged in the overseas adventures by which the Administration responded to the attack of 11 September 2001.

 The Vietnam War had stirred huge protests in the US, where domestic socio-economic disasters - especially the racial divide - had created a huge segment of the population who were profoundly and personally disaffected, and the anti-war movement had provided them with an urgent moralistic focus for their dissent. There was no similar opposition to the Iraq or Afghan wars, though their cost to the US Treasury was colossal. The US government was able to sell all the debt it created, largely to China and to other emergent powers, while US consumers cheerfully bought imports that were cheaper than US-made products: which increased unemployment and welfare dependency in the USA and reduced the potential growth of the taxable capacity of the economy; while public and personal indebtedness increased. The Obama presidency heralded a massive expansion of spending on healthcare: offset only to a small degree by the termination of the Iraq war and a general cap on defence spending. A huge programme of public works, designed to slow that rate of growth of unemployment, was funded by selling yet more debt to the new industrial powers and to the oil exporters: whose investments in US stocks was so great that the US Administration was unafraid of the lenders ceasing to support the finances of the USA.

Since 1945 several governments have become incapable of perpetually convincing the holders of their debt certificates that they were safe assets: so the market in that state's debt collapsed. Countries including Argentina, Mexico and [in 1976] the United Kingdom needed the assistance of the IMF to stabilise their finances. It did not serve any good purpose for the rest of the capitalist world if a country was allowed to fail economically. In cases where default was iminent the IMF tried to strike a deal with the existing government if it was considered to be able to maintain law-and-order and to enforce austerity measures on the population. If the pre-existing regime could not meet that specification a government had to be set up in which the IMF had some confidence before a deal could be done, as has been seen in Italy and Greece in recent weeks. Greece and Italy are unusual among petitioners to the IMF in that they are parts of a common currency zone: their deals with the IMF had to be brokered and supported by the EU and the eurozone, which made the negotiations more complex and the issues involved less easy for outsiders to assess.

Nevertheless the essential components of every IMF 'rescue' have been the same: the country concerned is required to apply  strict controls to its spending and borrowing, to reduce its welfare state [and usually its defence spending as well], and in some cases it is encouraged to default on part of its debt. In that eventuality the government issues replacement debt certificates that are expressed in devalued currency units and/or for fewer units of currency. Such measures are justified by the assumption that the creditors should have recognised that the debt certificates that they were holding could not possibly be paid off in full by the debtor state. If banks, other businesses and individuals were holding debt certificates that had lost value, from greed, stupidity or inertia, they deserved to 'get a haircut'.

The IMF reconstruction loan came in the form of another currency - usually US Dollars - which boosted the reserves of the Central Bank of the state that was restructuring its economy and its debt. In exchange for giving 'assistance' the IMF was able to impose a degree of discipline on the defaulting state, and to check that the restrictive policy was more-or-less being followed by the government until the internal finances and external balances were in an acceptable condition. This last-resort enforcement role of the IMF was a far cry from what Lord Keynes had proposed during the second world war. He suggested that they way to avoid any repetition of the depression of the nineteen-thirties was to have an international monetary agency that issued its own money - bancor - that would be recognised by all states and controlled by global consensus. Countries would settle their debts with each other by making transfers of bancor at the IMF, and if a state had a good reason to run a deficit for a period  - usually to finance a promising major investment - it would borrow bancor to make the necessary settlement: and duly repay the debt to the IMF in bancor over an agreed timescale.

As the major contributor to financing the war that was coming to its conclusion, and in the expectation of gaining massively by trade with war-torn countries, the US did not agree to Keynes's model. Its negotiators insisted that the US Dollar must remain unconditionally under US sovereign control, and should maintain its 'real' value as being exchangeable for one thirty-second of an ounce of gold [i.e. one ounce of gold was - notionally - exchanged for $32]. Hence the IMF was set up with the dollar as its unit of account and all the other member countries had to fix their currency at so-many dollars and cents per unit. The British pound sterling entered the system at $4.

Under the original rules of the IMF, when a country ran up an excessive balance-of-payments deficit it was compelled either to impose financial discipline that brought payments and receipts into balance and instituted a plan to pay down the accumulated deficit, or it had to obtain the consent of the IMF to devalue its currency formally; which resulted in the cost of the debt being reduced in terms of foreign currencies. As Britain's welfare state repeatedly led to excessive consumption vis-a-vis economic output, the pound was devalued from $4 to $2.8 after only three years, and was devalued to $2.4 in the 'sixties. Then in 1973 the USA was not able to maintain the parity of the dollar: Richard Nixon abrogated the gold valuation of the dollar and since then countries have engaged in a process of devaluations by default: they have allowed inflation to take place, enabled borrowing to run ahead, and granted the masses living standards that were not sustainable in the long term. Commentators with limited historical understanding have expressed concern that countries and currency zones could now engage in devaluation competitively with other countries, in the hope of exporting economic stress; as was tried with disastrous consequences in the early nineteen thirties. Such expressions of concern miss the simple truth, that competitive devaluations have been taking place since 1973. If there is an intensification of the process in the near future this will exacerbate the already-obvious danger that world trade could grind to a halt.

None of the weak eurozone countries can devalue the euro unilaterally and the IMF is keen to keep the eurozone in being to serve as a co-disciplinarian over the member countries that are at-risk of default. A common argument being voiced in Britain is that the IMF is constituted to help countries, not currency zones; so the UK should not provide extra funding for the IMF to support the euro even though the lack of such support might destroy the common currency. Despite British hesitation it appears that China and the USA are willing for the IMF to take a punt on the euro, in the interests of stabilising global trade and employment and business: so it is likely to continue with its efforts. The eventual outcome is unpredictable; but the extent of the disaster that would follow a failure of the euro will increasingly be emphasised.

How different things would have been over the past helf-century if Keyenes's version of the IMF had been operational since 1945! Bowdlerised Keynesianism would have been impossible to apply within any country; so in the absence of rampanty inflation monetarism would never have arisen. Living standards and benefits systems would have remained more modest and affordable, de-industrialisation would have been dismissed as an absurd  notion and industrial innovation would have been encouraged in the absence of casino banking. It is highly desirable that the International Monetary Fund should look at options for fundamental reform of its structure and its policies, which could enhance its role as a global economic provider and - when necessary - as a monetary and fiscal police force. It should begin by dusting-down Keynes's propositions from 1944 and assessing how much a modern version of them could serve the world far better than the current arrangements.

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