SUMMARY: We’ve hit on some big economic themes from capitalism and socialism to deregulation, privatization and Modern Monetary Theory. And we’re typically focused on results and outcomes of policies related to these theories. Today we’re taking a step back to examine the nature of capital and examining the nature of currency, trade and debt. Money is great, but who prints it? Who decides how much to print and what it’s worth? Who creates the rules of engagement for international trade? Big picture stuff only today, Unf*ckers but we do raise some even bigger questions at the end of the show. With that, let’s unf*ck The Global Order of Money.
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As individuals, as workers, as people with responsibilities, we have our own relationship with money. But a purely transactional one. You make it, you spend it. You buy shit, you sell shit. Maybe you’ve got some crypto in a virtual wallet that was mined on a server or some bills in your mattress, a 401(k) or pension plan. You've got a debit card, a credit card or maybe five. Use Venmo to pay the babysitter or do wire transfers with account numbers and ABA routing numbers to offshore accounts through the shell corporation you set up to hide money from the government.
No matter the situation, the fact remains that at no point were you involved in the creation of this money or determining its value in the world.
Money keeps pumping through the global economy, the stock market seems to be in a never ending bull cycle, just up and up and up and yet, down here on planet everyone else, it’s the same old song. The explanations we’ve covered of monetary and fiscal policy, taxation, fraud, corporatism or inverted totalitarianism as we covered in our ISMs episode go a long way to understanding how we here in America have deployed our capital and demonstrated our priorities. But it’s a big world and we’re not the only ones in the game.
I wanted to cover this now to help set the stage for the coming months by going big. This is actually the first of a two-parter with next week being the Global Order of Power. Hopefully, after these two episodes we’ll share a broader understanding of the global levers of capital, how money is made, how it moves and who is actually in control.
The beginning of our tale today is 1944. The birth of the new world economic order in New Hampshire, right here in the good old US of A. Then we’ll address the global institutions that followed, some from that year and others since. Talk about who actually controls the flow of funds within nations and among them. And we’ll finish talking about the confluence of current events that should make us all really, really nervous.
You see, right now we’ve got some really big stuff happening on the world stage. COP26, China trying to enter the CPTPP, economic alliances shifting in the wake of the U.S. power vacuum created by Trump’s destructive behavior to the WTO, the Iran nuclear agreement, the WHO and NATO. And we have a very weak democratic president trying to glue these relations back together with bubble gum and tape while not being able to get consensus among his own fucking party members at home.
Another mess is brewing and there are extremely complicated factors at play that require our understanding and attention.
Chapter 1 | In the beginning there was Bretton Woods.
The war wasn’t over yet. But the Allied powers were confident enough in the outcome that they began turning their attention to the new world order. A post war economic order that would lay the groundwork for recovery, growth and - as all of the attendees hoped - world peace.
World peace might have seemed a rather lofty if not ironic goal considering we were still in the throes of the Second World War, but for those gathered in New Hampshire in 1944, it was the main imperative. Many of the assembled economic diplomats had experienced both great wars, in particular, the chief architect of the Bretton Woods plan, John Maynard Keynes.
In the first half of our #FMF episode, we covered Keynes at length and spoke of his desire to create a more stable and equitable world based on strict economic principles and personal observations of the worst instincts of humankind. Most of what was ultimately adopted at Bretton Woods had Keynes’ fingerprints all over it, though he didn’t get everything he wanted.
His plan would have put more power in the hands of central monetary authorities and have a central global currency to prevent countries from falling too far into recessions or depressions. In fact, one of his broad assumptions was that the new alpha economy of the United States would itself experience another Great Depression at some point in its existence. And if it was in too much control of the financial levers of the world, its indebtedness would pressure the reserves of the other countries and drag them down as well.
But Keynes was in failing health. He was no longer the robust and towering figure that had aggravated monarchs, presidents and prime ministers in his youth. But he was still a revered economist and thinker and so his basic framework was adopted. To address the global order of money prior to Bretton Woods is almost like delving into ancient history. It’s almost impossible today to describe how profound this conference was and how much foresight the participants had.
In terms of money supply, the Bretton attendees were dealing with one particular circumstance that would evolve in relatively short order: the gold standard. At the time, the world was still operating under the gold standard whereby every nation had to maintain a strategic reserve in actual gold. It was a rigid structure that relied on coordination but could easily be blown apart when one country or another ran into trouble and ran huge deficits, much like most of the European countries had in the first part of the century and then the United States during the Depression.
Keynes’ idea was to maintain stability by having one central clearinghouse for international funds. Everyone would pay into it. Deficit nations would have the ability to borrow and surplus nations would remit the surplus in order to maintain balance through the issuance of a new global currency designed to settle imbalances. This wasn’t about trade, it was about currency and making sure no one ran too low, ran too hot or just ran out.
Ultimately, this measure wasn’t adopted and a compromise was achieved to create a reserve fund that could be used as a lifeline for struggling economies in the form of a credit line.
The key here is that a central authority was indeed established for the purpose of managing a global currency exchange and mechanisms were put in place to assist struggling countries, especially in the aftermath of the war.
What did come to pass out of Bretton was the formation of two organizations that endure to this day. We’ll talk about them more in the upcoming section, but they were the International Monetary Fund and the World Bank. The former was established to monitor currency exchange and lend money to deficit nations. Each participating country essentially forks over a share of funds every year to maintain this reserve based upon their relative economic size. The latter was established to help countries recover from the war and to seed developing nations with desperately needed capital so they could enter the world economy. Many dispute the effectiveness of these bodies and, in fact, some argue that they are responsible for keeping poorer countries in poverty. We’ll discuss this, but there are three key takeaways from Chapter One.
The first is to simply acknowledge how big this conference was and how much was accomplished. I love this shit so much. Think about it. The conference lasted only 22 days in July of 1944. Brilliant minds from around the world descended upon a little town in New Hampshire to create a blueprint for how the world would operate for the next several decades. And it stuck. For better or worse, and we can debate the outcome or how it was manipulated, it’s important to appreciate the sheer magnitude of this accomplishment.
The second is to appreciate just how much of a divergence this framework was from the order of things before. Before Bretton Woods, it was every nation for itself. In World War One remember that it wasn’t the United States that bailed out Britain at the 11th hour to fund their ongoing war efforts, it was J.P. Morgan and Henry P. Davison. Prior to Bretton Woods a country could literally run out of currency. Just go broke. What Keynes and others envisaged at Bretton Woods was a system of interchange and balance that would prevent such collapses of nation states and the inevitable spread of defaults like dominoes among creditor nations.
The third observation is more personal. When you spend time in history and soak up the atmosphere and dissect what was on the minds of these figures as they were living in the moment, it’s really striking and powerful. Here was a group of intellectuals straining and stretching their imaginations at the peak of catastrophe, with literally the fate of the world in their hands. Each bringing personal and national bias to the table but checking their egos in service of a higher purpose. And in doing so, they were able to architect a new global order of money in just three weeks. A system that endures to this day.
My observation is less about this period and more about the intransigence of the global bureaucracy today. The big thinkers such as Thomas Piketty aren’t being called upon to adopt new thinking and create new bodies to foster equity, financial stability and battle climate change. It’s all done within this now legacy framework that has been awfully good for a handful of nations and pretty terrible for others.
13 years after the Bretton Woods agreement was adopted, the gold standard was eased and currencies were then convertible into U.S. dollars at a fixed exchange rate to gold. But then, 13 years after the convertibility to dollars, Nixon formally exited from the agreement by ending the peg to gold and allowing currency to float. With no restrictions on money flow, the global economy was unshackled and imbalances would become a way of life. But for an ever so brief moment in time, Keynes and company showed the world how a properly functioning and regulated system of currency and trade could help the entire world grow together instead of the asymmetrical development we have today.
Chapter 2 | Brief History of Money.
Money is a big, broad term. Net worth, cash in hand, fungible commodities, leverage, debt and credit. Clams. Scratch. ‘Scarole. Bank. Moolah. Duckets. If there’s too much of it in a given sector, it’s worth less. If it’s not backed by something tangible, it could even be worthless. The phrase “money goes to money” is more than the law of attraction. It’s how the world truly revolves. Those with capital are able to accumulate more of it because they have capital to pledge. Pretty simple.
But where does it come from, who decides how much to make of it and how much it’s worth?
For much of human history, money was a fairly simple concept. The market or the market forces like supply and demand determine how much a thing is worth and the form of money you possess allows you to acquire it. Again that could be a paper dollar for a good or service or an equal trade of a commodity for a good, good for a service and so on. That’s a true “free market” definition in the strictest sense.
Beneath it all, however, there has to be an intrinsic value of money. Prior to the Enlightenment era when the major powers of the world began trading in a more sophisticated and consistent manner, the value of money was largely an internal matter. When it came to trading between nations, it was an arduous task to determine the value of a good or service. Rough sets of ledgers on ships and ports and held in kingdoms across the globe held approximations of trade and values, but it was rough. And outdated. Always old information.
In 1821, the Brits, cheeky buggers that they are, decided to adopt a standard based on physical stores of gold and silver. For the next 50 years or so, stores of gold and silver were the baseline value of currency and trade. These were tangible and - so they thought - finite sources that could carry a fixed value. In the 1870s the UK moved to a strict gold standard, which is where this concept comes from. Discoveries of gold in the New World helped expand the quantity of gold reserves essentially giving these governments more purchasing power, but it was still an imperfect system because of the finite nature.
Currency would boom and bust through the First World War with nations responding by allowing paper convertible notes to stand in for actual gold transfers. It crashed again and again leading into the Great Depression, at which point the United States created a currency innovation called “pegging,” which established a minimum dollar value of gold that opened the minds of economists around the world to the possibility of a more expansive currency.
So these were the circumstances the Bretton Woods crew were dealing with. The world was getting bigger in terms of trade and opportunity, but nations were getting ever more insular and protectionist. China wasn’t yet an economic factor, the tepid alliance between western powers and Russia was most certainly going to break after the war, and the United States was ascendant on the world stage. But with the Depression so fresh in their minds and the brutal human toll of the war still very much present, the Bretton Woods negotiators fought to establish order under a theory that we’ll return to in our conclusion. The idea was that global interdependence in terms of trade would dictate the terms of peace in the future. Essentially, if our economies were so intertwined, it would be economic suicide to war with one another. Again, remember that for later.
A few years after Bretton Woods, economists from the developed world gathered once again to form the General Agreement on Tariffs and Trade in 1947. The GATT, as it was known, was the precursor to today’s World Trade Organization, which we’ll also discuss below.
It was one thing to determine the rules of engagement where currency was concerned and wholly another to actually facilitate trade among nations who had literally just shed one another’s blood for the second time in the past three decades. The GATT negotiators were tasked with determining a framework for trade that would reduce barriers between nations, i.e. eliminate tariffs to the greatest extent possible.
The United States, with the hot hand and economy coming out of the war, insisted on something called Most Favored Nation status, which essentially meant that the best prevailing deal between two nations must extend to all participating nations. Ironically, the biggest obstacle to achieving this was our staunchest ally, the United Kingdom. As one delegate named Winthrop Brown wrote of the negotiations:
“It is an absolutely beautiful day. The lake is very blue, the hills look like a picture postcard, and the only blots on the landscape are British preferences about which I spend most of the night dreaming.”
Ultimately a rough set of rules that would become GATT were adopted, mainly because of a diplomatic backchannel effort known today as the Marshall Plan. Basically a carrot instead of a stick that offered direct post-war recovery assistance from the United States to any nation that adopted GATT. This measure, along with the increasing fear surrounding the intentions of Stalin who had already lowered the Iron Curtain by this time and was consolidating power in Eastern Europe, was enough to draw the U.S. and mostly European nations to the table. This set of guidelines was largely unenforceable, but it was enough to set the course of global trade even if it was mostly on the honor system. Years later, the GATT would be formalized and streamlined into the World Trade Organization.
For the next couple of decades, Europe, the United States and to some extent Japan and parts of South America developed asymmetrically compared to most other nations. Though we couldn’t see it clearly at the time, the Soviet Union was building an economy that gave a lot of false signals. It was like a Mercedes body with a Yugo engine and a howitzer gun attached. Looked sharp, scared the shit out of everyone but had little under the hood.
The Soviets were stuck with a series of bilateral agreements, one to one relationships between nations like Cuba. Sugar for oil was the whole basis of their arrangement as an example. This was only efficient when there was total parity between nations, meaning an equal understanding of the value of what each had to offer. Any variation like a drought, supply chain disruption or some other external event created imbalance in bilateral agreements that felt far worse than imbalances in multilateral agreements that had size and diversity on their side.
So this period was incredible for the United States in particular. We were having our way with the world and the economy here was pumping on all eight cylinders. The period between Bretton Woods and Nixon was extraordinary on two levels. One, our economy was like a rocket. In just a couple of decades we found ourselves alone at the top of the mountain. And, two, because most workers in America came along for the ride.
But, nothing lasts forever.
Chapter 3 | Who Runs The World?
Psyche. Listen, I wish. But it’s actually mostly dudes. Dudes who run organizations and countries that have control of the levers of currency and power.
So we spent all that time at war, battling recessions and depressions in the first half of the 20th Century to finally arrive at our moment. I’m speaking to the core of American Unf*ckers here. We were running away as the global superpower economy for 25 years. Of course, we weren’t the only ones paying attention and we wouldn’t have it our way exclusively for long. So let’s bring in some other players on the world stage and some key dates.
As we mentioned briefly in the beginning, money is more than just bills or precious metals. It also comes in the form of commodities and the biggest one of the bunch is oil. I’m actually really excited to finally introduce the subject of oil because it’s literally one of my favorite topics. Coming out of the first great war, the British, French and United States understood what was under the desert in the Middle East and how important it would be. As European powers blithely carved out artificial boundaries, eventually these nation states began to take on nationalistic identities and government structures that leveraged their newfound wealth.
So one of the first important developments after World War II was the formation of OPEC, the Organization of Petroleum Exporting Countries. In their book The World For Sale by Javier Blas and Jack Farchy, the authors describe the post war economic growth saying, “In dollar terms, the world’s trade in manufactured goods and natural resources rose from less than $60 billion just after the Second World War to more than $17 trillion in 2017, a quarter of which was made up by commodities.” This is another great read that we’ll put in our bookstore by the way. The authors describe OPEC’s formation in the momentous terms it deserves.
“The change marked the beginning of an era in which OPEC would turn the oil market and the world economy on its head, ending the dominance of the Seven Sisters for good and handing huge power to the commodity traders.”
When we get to our oil episode we’ll talk a lot about these fucking cowboys.
The Seven Sisters, by the way, were the big private oil companies before OPEC changed the game and nationalized fossil fuel operations. OPEC was important because it added another layer to the money onion. The hyper growth and expansion of the U.S. economy was spreading around the world and it required a shit ton of oil from input to finished product. There was a real fear that we were going to reach what economists termed “Peak Oil” sometime in the late ‘70s so there was serious pressure on pricing because of the high demand and concern that supply would eventually dissipate.
With OPEC exercising price controls and playing funny business with supply, and demand continuing to increase from the United States consumer, things were heating up and inflation became a growing concern. Then in 1971, as we’ve covered before, Nixon took us off the gold standard and allowed currency to float, which let loose monetary policy first in the United States and then around the world as other nations struggled to keep pace. Nixon also thumbed his nose at the GATT and started applying tariffs to several imports, which created even more chaos on the global exchanges.
In 1978, someone else decided it was time to grab a mitt and get into the game. Deng Xiaoping, a successor to Chairman Mao, decided it was time to transform the Chinese economy. From that period until China’s acceptance into the World Trade Organization, China’s growth was very steady and deliberate, but it was its entry into the WTO that supercharged their economy. Again, from The World For Sale:
“The Chinese economy, which had grown 50% between 1980 and 1989, and 175% the following decade, now expanded by more than 400% in the decade after its accession to the WTO.”
A couple more huge events to set the stage for current times are worth mentioning here. If you’re of a certain age you’ll remember the hysteria in the early 1980s that the United States was going to be taken over by Japan.
They were buying everything. They owned Manhattan. Their auto plants were crushing us. They were the model of efficiency. Then in 1985, the U.S. forced the Japanese to the table along with several of our allies to deflate the Japanese currency, which effectively consigned them to decades of low growth and near zero interest rates to stave off inflation.
Point being, whenever competition flared up around the world, the United States would use economic policy mechanisms to beat them back and when that didn’t work, we used the measures we’ll cover in next week’s episode, the Global Order of Power.
Now, quickly, before we move into discussing what happens next and talking about what’s at stake in the Biden years and beyond, let’s do a quick rundown of the global organizations that still exist and participate in the intricate dance of global trade and finance.
The International Monetary Fund (IMF)
There are 189 member countries of the IMF, one of the functioning remnants of the Bretton Woods agreement, designed to foster economic growth of member nations on the one hand and prevent catastrophe in times of crisis on the other. Notable attempts on the latter include recent history crises in places like Cyprus, Greece, Ireland, Portugal and Venezuela among others.
In these circumstances, the IMF is called upon to resolve a financial crisis of sorts by offering financing from its coffers, filled by member nations in accordance with their respective economic size. It can also be an intermediary by arranging financing between member nations as well.
Critics of the IMF have blasted it for the strings it attaches to these funds, however. Often, the IMF will impose either strict usage of the funds, or worse, require internal economic austerity provisions in order to qualify for the funds. We saw this repeatedly in its attempts to help struggling Latin American economies through the 1980s and 1990s, for example. The IMF went so far as to mandate the closure of certain social welfare programs and infrastructure and to open their borders to allow foreign investors to come in. You can only imagine who was dictating these types of policies.
The World Bank
The World Bank is aptly named in that it is a globally chartered institution that exists to lend money to less wealthy and developing nations. It’s another legacy institution from the Bretton Woods agreement that was established to help bring poor countries out of poverty, as opposed to the IMF’s role of financing nations in crisis.
It runs in a few different ways. The first is by offering low interest loans to smaller governments it considers “credit-worthy.” For the poorest nations it has a program to extend interest-free loans, but they’re still loans. Then it has coordinating bodies that advise and coordinate external financing sources for projects and plans or helps promote significant projects by encouraging foreign direct investment. It also performs an arbitration function whenever there are disputes over debt and investments.
The World Bank president is always appointed by the United States because the U.S. is the largest shareholder of the institution. The U.S. gets the World Bank head and Europe gets to appoint the IMF head. It’s unclear whether this is a formal written agreement or the longest standing handshake arrangement in the world. (I actually couldn’t find out which. Any Subf*ckers know? Because I’ve seen it written both ways.)
Anyhoo, as The Intercept recently reported, before Donald Trump appointed current president David Malpass to head the World Bank, it was almost his daughter Ivanka. But apparently, Steve Mnuchin stepped in to make sure this did not happen. This would have been hilariously Trump-like to give the poor countries of the world a gigantic fuck you by appointing his wealthy daughter who somehow purportedly earned hundreds of millions of dollars while serving in the White House.
Today the World Bank has a bit of a mess on its hands. It too suffers from an integrity issue with many claiming that their funds often come with unreasonable strings attached or unsavory investment characters behind the curtain. But it also has a problem as COVID-19 has disproportionately punished underdeveloped economies with the World Bank itself projecting that it will take years for most of them to recover.
It also has a climate change problem on its hands as recently reported by The Guardian in advance of COP26. The World Bank has come under scrutiny for talking out of both sides of its mouth. It professes a desire to fund carbon neutral projects and help guide developing nations on a sustainable path, while funding direct or indirect fossil fuel investments in some of the worst polluting countries in the world.
The World Trade Organization (WTO)
Ah, the WTO. We talked before about how admission to the WTO was like rocket fuel to the Chinese economy. That’s what happens when you move from bilateral to multilateral trade agreements and open up the world to investment opportunities, from capital inflow to import/export. Similar to the IMF and World Bank, the WTO is funded by the member countries but it doesn’t provide financing or support.
It’s designed to provide the legal and structural framework for international trade and to settle any disputes that might arise from said trade.
That said, China had to eliminate literally thousands of regulations in order to qualify for admission to the WTO as it built its economy on internal subsidies and centrally planned growth for decades leading up to it. Their reliance on subsidies remains a sticking point with U.S. officials who consistently take Chinese leaders to task for manipulating markets, and they’re not necessarily wrong. Of course, the United States is certainly guilty of many of the same issues, especially in the agricultural sector, and the fact that we maintain our own forms of bilateral or quasi-multilateral agreements like NAFTA. But as the number one economy and the largest voice in all of the organizations we’ve covered, we typically operate under the “do as I say, not as I do” mantra.
You might recall how dismal our relationship with the WTO was during the Trump years and how he threatened to pull out of it. He didn’t pull out but effectively neutered it in the short-term.
The WTO as an organization was formally established in 1995 from the guidelines that were GATT from Bretton Woods. To the extent the organization has any teeth it’s on the front end of admitting participating nations and on the back end when settling disputes. In the middle, they have little in the way of power but as evidenced by the surge in growth China experienced, its power comes in its ability to compel countries to eliminate barriers to trade and level the playing field. Maintaining a level playing field implies a robust regulatory and settlement body, which is where the Trump administration focused its attack.
Disputes among nations arise all the time. The WTO will try to settle the disputes with a ruling at the administrative level but every nation has the right to appeal any decision. The appellate body is nominated and filled by the United States. Aaaand Trump got rid of them all. Aaaaand Biden for some reason hasn’t replaced them. Because he’s asleep.
This brings us to the central banks. Let’s ask resident badass and former Greek Finance Minister Yanis Varoufakis about the importance of central banks.
“Since 2008, the great financial crash, capitalism is on a drip feed. It’s being kept alive through constant injections of money from central banks. That has never happened before. It started in 2008. In 1929 it didn’t happen, which is why all the banks closed down. So the banking system and the stock exchange had 12 years of getting used to, becoming addicted to, central bank money being pumped their way during difficult moments.”
Central banks are the object of so much hate from leftists opposed to corporate welfare and libertarians on the right who oppose interventionism of any kind. (In fact, do you know the formal Libertarian Party was established in response to Nixon taking us off the gold standard?) Anyway, the big international organizations we just covered manage the flow of currency and trade across borders, settle disputes, provide financing from member nations, etc. but that still doesn’t explain where money comes from. Enter the central banking system.
Every so-called developed nation has a central bank. In the U.S. it’s the Federal Reserve. There are other big ones like the Bank of Canada, Central Bank of Brazil, Bank of England, Central Bank of Russia, People’s Bank of China, Bank of Japan, Reserve Bank of Australia, and more. But these are the big ones.
Then there’s a super central bank in Europe called the European Central Bank or ECB. We’ll get there in a second.
These banks are responsible broadly for generating a nation’s currency. The authority that prints, circulates and keeps track of funds. But they also have management authority over economic matters such as setting interest rates (ooh libertarians hate this), and controlling market interest rates and inflation by alternately buying government notes or selling them, depending upon the objective.
So let’s go back for a second to tie in Bretton Woods. Prior to Bretton Woods a central bank could print currency but only insofar as it represented the amount of gold reserves a nation held. That’s how a country could literally run out of money. What Keynes and others designed was a system where nations could print currency with a baseline value of gold but it could multiply in excess of the gold value in the form of debt. But the policy makers wanted to ensure that this excess supply still maintained a relative value.
So when Nixon ripped off the bandaid to let currency float, he was basically removing the underlying value of the currency and letting the market forces drive it instead. If you’re a wealthy nation with extraordinary creditworthiness, you can afford to do this more easily than other nations that still have to settle international transactions in dollars. So if we print a shit ton of money, we suddenly impact the value of all other currencies, which is why the Bretton standards fell apart within just a couple of years from this move.
Central banks like the Federal Reserve also have policy mechanisms that influence money supply. For example, they mandate the amount of reserve capital commercial banks are required to hold, to either free up money to lend or to constrict it. It can also act as the banker to the banks, or as they like to frame it, be the “lender of last resort” when an institution is in trouble. This was the part of the economic recovery in 2009 and again during COVID that drove leftists mad. Always money to save the banks, rarely for the people. This is what Varoufakis was referring to as the steady drip that undergirds the so-called free markets.
All of these central banks feed up to the bank of central banks, which is called the Bank for International Settlements or BIS. The BIS facilitates international exchange, helps create policy and can even issue credit in the form of funds or gold. It’s far less important to the likes of the Federal Reserve or Bank of England, but it is a touchstone for the smaller central bank operations.
I mentioned the ECB before as an outlier because it is. Europe is an interesting scenario and experiment that might be the last innovative act of international finance. What makes it special is that it has the same powers as the other central banks but among member nations in the EU and not just a single nation and it’s a currency issuer as well. Not all EU member countries use the Euro as currency, however. Countries like Sweden, Denmark, Croatia and Poland maintain sovereign currency but are part of the Eurozone. It’s complicated. And dicey, as not all member nations are similarly disposed to function within this system.
Go back to our MMT episode and things really begin to fall into place. Recall the argument that sovereign currency nations like the United States, UK and Canada have the ability to print money when necessary as opposed to the EU for example. Because our currencies are sovereign and our balance sheets - and therefore creditworthiness - are enormous, our governments have the ability to print money to fund things like a banking crisis or a war. Things that don’t impact our daily lives as consumers, thereby eliminating the risk of inflation relative to the excess capital in the system.
The point that Varoufakis and others have made is that the developed nations in this position have been artificially juicing our own systems with this monetary design but only as it relates to the investor class. Now go back to Jon Stewart’s recent discussion with Jamie Dimon about how our economic policies have only been for the benefit of the investor class and this is the central reason why.
The MMT policymakers have argued that if you can pump money into the banks through bond purchases, direct cash infusions and low-to-no interest loans, then you can just as easily drive revenue through non-consumer inflationary channels in the economy to assist the poorest among us. But when confronted with this option, the political class - backed fully by the investor class - balks at this saying it will drive inflation and give money away to people that don’t deserve it.
And on the international end, when we flood the system with money, prop up our banks and allow them to pour money back into the equity markets to increase the value of our companies, whether they deserve it or not, we’re effectively creating a value bubble. But when developing nations look to borrow money to expand their capital base and invest in themselves, we use our leverage through these giant organizations and force them to implement social austerity measures and open their markets to foreign investors.
I… Drink… Your…. MILKSHAKE!
Chapter 4 | The Gathering Storm.
So what are we doing here really? Personally, I find it cathartic to learn how the world works. I think that’s a characteristic that Unf*ckers and SubF*ckers share because we always get a ton of great feedback on explanatory episodes like these. And I think it’s good to zoom out every once in a while to look at all of these puzzle pieces from above to see if we can make out any patterns.
So I wanted to go through this exercise together to, again, create a shared language and a set of established concepts, but to also look for looming issues that might be in our collective blind spots. It’s one thing to take a shit on capitalism and the way the world works because we don’t like the outcomes they produce. But it’s always better to understand what exactly isn’t working and why.
The totality and complexity of the structure can be daunting. And there’s an obvious sense of inequity if not downright foul play. But within these organizations, from the Fed and the ECB to the WTO, World Bank and IMF, there are real human beings operating under the belief that they’re the ones holding this all together and that a better world is possible. But it’s also possible to be so deep into a flawed system that you can no longer see it for the rigged system it has become.
When you think about the so-called golden age between 1944 and 1971, it really resonates when you consider that real wages in the United States haven’t grown since this period, the gap between the ultra wealthy and the extremely poor has widened and we’re pillaging the resources of the planet in the pursuit of this imbalanced equation.
Let’s look at the warning signs that are all around.
Here at home we can’t get a ten year, $3 trillion infrastructure and “Build Back Better” bill, which was $6 trillion but actually started at $10 trillion, passed by a government controlled by one party. And yet, our military budget over the same period of time is about $9 trillion. Almost $1 trillion a year on a military with no one to murder is a really bad sign.
There’s a growing sense that China will soon overtake the United States on the world stage as the dominant economic power. Some think this is hyperbole and others look at the data and conclude that it is indeed just a matter of time. I’m removing the severe economic impact of climate change in this assertion as we covered in our climate industrial complex episode just to illustrate a pure economic point, by the way.
If we look at this through the current lens of the authorities that we covered so far in this episode, it’s almost as if we’re resigned to this fact and handing it over to China. To wit, remember the Trans Pacific Partnership that Obama was negotiating in secret? The one that Trump used against Hillary Clinton who had to say she was for it before she was against it, to quote John Kerry’s budget support for the Iraq War? To be clear, it was disastrous for workers in developing nations. It took away all their protections, which hopefully makes more sense having gone through the downside of these bilateral and multilateral agreements.
The biggest upside, in my opinion, was some clarity around intellectual property, which would have been used to protect drug companies mostly - not a great thing - but it did also protect American interests from Chinese appropriation of our technology. At any rate, just because we pulled out doesn’t mean it died.
That’s right, the dreaded TPP, initially designed to back China into a corner by co-opting their biggest partnerships, is alive and well with China poised to become the anchor player in something now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. Although it’s unclear whether China and its partner Taiwan will be able to clear the bar set by other nations, which include Canada, Australia, Japan and possibly the UK, it would be a massive win for the Chinese government.
They would effectively replace the United States as the dominant trading partner with the ability to direct rules around IP, tariffs and more.
Again, I’m not signaling support nor am I decrying this development. I’m merely pointing out something that should be of grave concern to the establishment players in Washington who are hellbent on maintaining a global order that we’re losing a grip on because we’re asleep at the switch. Trump pulled out of the TPP because he pulled out of everything and no one around him understood the consequences from global trade to climate. And now, as our Commander In Sleep makes his way around the world asking to be included, he’s not getting the greatest reception, partly because no one here or anywhere else in the world thinks he’s going to be in this position in three years.
An asymmetrical recovery that has punished the working poor in every nation on earth and a fractured supply chain that is wreaking havoc on trade isn’t helping the situation either. And we can’t muster the domestic support for a no-brainer initiative to fix our infrastructure, provide a living wage, make prescription drugs affordable and offer child care to every citizen. It’s fucking bonkers.
Maybe, just maybe it would be understandable if we were paying more attention to the big picture. But here again, we won’t replace the appellate board at the WTO. We’ve allowed Iran to enrich uranium the furthest it ever has, which is creating panic in the Middle East. We’re letting China get the better of us at our own trade game and responding the only way we know how, by playing war games in the ocean.
I sincerely applaud the worker bees at the organizations we covered today because they’ve succeeded thus far in ventilating the corpse of a flawed system that was designed to create billionaires and soon, trillionaires. They’re using the policy mechanisms and frameworks that have benefitted the corporate and investor class of the world to the best of their ability. And when all hell breaks loose, they have the wealth of the sovereign currency nations to mask the cracks in the system, even if millions of people are falling through them at the same time. But it can’t go on like this forever.
Everything breaks at some point and given the current vacuum of real leadership in Washington and Europe, I’m afraid we’re in for a wild ride and painful wake up call.
New, big thinking is required but as we’ve seen, we only summon the thinkers when the monied class is set flat on its ass. At some point, we’ll be out of aces. Our greatest policies came in our greatest time of need, so it seems ever so clear that we’ll have to once again wait for catastrophe before we turn to those who have the answers.
To the next John Maynard Keynes, wherever she may be.
Next week we’re going to pull on some more threads and examine the global order of power and the intersectionality between power and economic might. The overarching point should become abundantly clear at that time: The world is a tinderbox.
The current superpower is playing its last hand and knows only how to destroy to survive. And with no clear fight on the horizon but a shitload of cash and munitions, destruction will be our modus operandi when our hegemony is challenged. Across the world, the emerging power is forming its own alliances with our longtime allies to overtake our economic position. Is there anyone, anywhere that thinks we’ll go quietly into second place?
Finally, to those who might think this is excessive or alarmist...
It was thought at the turn of the 20th Century that the world was poised to enter a century of peace, at least as the western powers perceived it. They believed this because the industrial revolution had forged global markets with interdependent economies. War was bad for business. Forget the fact that the leaders of almost every country in World War One were literally related to one another, prevailing wisdom was that money was thicker than blood and everyone was about to get paid. And then, in an instant, the world descended into the bloodiest conflict ever recorded. On this, I’ll leave the final word to the author of The War That Ended Peace, Margaret MacMillan, probably one of my favorite books of all time. Here she is:
“Financial experts, whether bankers or finance ministers, took it for granted that the war would have to be short: the disruption of trade and the inability of governments to borrow money as the international capital markets dried up would mean that impending bankruptcy would make it impossible for the belligerents to carry on fighting. As Norman Angell, in his Great Illusion, warned, even if Europe was so foolish as to go to war, the resulting economic chaos and domestic misery would rapidly force the warring nations to negotiate a peace. What few realized...was that Europe’s governments had an untested but great capacity to squeeze resources out of their societies, whether through taxation, managing their economies or freeing up men for the front by using the labor of women, and that Europeans themselves had a stoicism and doggedness which could keep them fighting through the long years to come even as the terrible losses mounted…Before 1914, Europe for all its problems had hope that the world was becoming a better place and that human civilization was advancing. After 1918 that faith was no longer possible.”
Money is power. Power corrupts. Therefore money is corrupting.
Here endeth the lesson.
World Trade Organization: Clash of the GATT negotiators
International Monetary Fund: Where the IMF Gets Its Money
The War That Ended Peace: The Road to 1914, by Margaret MacMillan
The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources, by Javier Blas and Jack Farchy
Zombie Capitalism: Global Crisis and the Relevance of Marx, by Chris Harman
The Dawn of Everything: A New History of Humanity by David Graeber and David Wengrow