Opinion Sur
The expression ‘The Markets’ refers to the enormous mass of finance capital that today dominates the global economy, and is composed of a myriad investors acting singly or combined into gigantic managed funds with powerful figures at their helms. ‘The Markets’ are mobile, swift, and ruthless. They stand in judgment of public policies; they outpace and outnumber the resources of multilateral agencies; they dodge and eschew regulation; they vote with their feet and with their bucks, often making a mockery of both technocracy and democracy; they make or break entire states. In short, they rule the world, but alas they cannot rule themselves. In the past they have wreaked havoc in emerging countries. Today they are focused on the advanced ones. The globe resembles a speeding bus with a mad driver at the wheel.When a person has “maxed out” his or her credit cards, she or he is at risk of defaulting on the accumulated debt, and faces bankruptcy. When a country accumulates debt, the situation is similar, except in this case it is the state and not a private individual that is the principal agent. Other powerful agents intervene to help or to hinder –be they other states or multilateral agencies, as well as the anonymous mass of investors known as “the markets.”
A country can get out of unsustainable debt through three paths, and three paths only: a default on its obligations, the devaluation of its currency, and inflation. These paths (and their attendant policies) are not mutually exclusive –they may be attempted (or fallen into) in sequence or simultaneously. There is a fourth way, which is the only healthy one: growth. For growth to be sustained, it must be inclusive and fair. Therefore, the corollary from these basic truths can be stated as follows: A successful multilateral program for managing a sovereign crisis is meant to restore a country’s balance of payments viability with a minimum cost to its sustainable growth prospects. That is the very raison d’être of multilateral organizations like the International Monetary Fund. Its history, however, belies this mission.
When a country has overspent and borrowed too much, it falls into what is known as “the debt trap.” The cost of borrowing even more to meet prior obligations increases dramatically. Investors (potential buyers of the country’s bonds) demand higher interest for what they rightly perceive as a risky game. They are the famous or infamous “Markets” that one reads in the business section of newspapers, and that authorities in any country –especially one near bankruptcy—heed most, often at the expense of their own citizens.
Maybe we should ask who controls ‘The Markets’, although that’s not how convention tells us to put the question. We don’t hear politicians say, if we don’t comply with the demands of the people who control the markets, they’ll force us to comply. They say if we don’t do it, ‘The Markets’ will do it for us… and it will be much more painful (or words to that effect). Politicians never question the legitimacy of this unelected clique, to influence social life, to such an extent. Too few people do, with the possible exception of comedians. [[I recommend that the reader of this note click on [this website->http://www.youtube.com/watch?v=SwRFoxgEcHc ].]] Only not the whole truth, but a half-truth emerges when politicians find themselves in dire straits. At the end of 2001, the super finance minister of Argentina Domingo Cavallo, having tried to no avail every trick in the book to avoid bankruptcy, cried in exasperation on the eve of the hitherto biggest sovereign default in the history books, “What are ‘The Markets’? A few yuppies with cell phones!” He finally gave up, and a country that had been paraded as an example of neo-liberal reform in the 1990s and the obedient pupil of the IMF, collapsed. What followed was a disorderly default on internal and international obligations, a severe political crisis (five presidents in a few months), the “little corral” where countless depositors were trapped, unable to withdraw their savings, and a massive devaluation of the currency, following the collapse of the currency board (a rigidly fixed exchange rate of parity with the dollar), and the sudden plunge of half of the population into dire poverty.
Then came “debt restructuring”, a polite term for convening creditors and paying back what can be paid, on an agreed-upon schedule and a deep discount, also known as “haircut.” In the long line of claimants, some were given precedence: they were paid more and/or paid first, or they were simply left stranded holding broken promises. The creditors honored (in decreasing order of reneged commitments on bonds, pensions, salaries, welfare, and health) were:
• Multilateral agencies
• Big banks
• Pension funds
• Workers and employees
• Small savers
• Retired persons
• The poor
• The children of the poor
The bottom of the social pyramid (BOP) suffered the most and had the least leverage to prevent massive social and economic abuse. For people at the bottom, the crisis was the equivalent of a natural catastrophe –an earthquake, a nuclear attack or a tsunami. In defaulted countries like Argentina in 2002, the behavioral consequences were extreme: the nights of Buenos Aires saw a ghost army of cartoneros (cardboard and rag pickers) silently sorting the refuse; armed robberies multiplied; the collapse of the currency led to barter; during the day all sorts of demonstrations and riots took place, and last but not least, there was a tenfold increase in suicide among the elderly. Hitherto, such traumas of social and intimate disruption took place –for the average European and American—“out there”, in the periphery and the suburbs of the globe. The media made them aware of the troubles in the third and in the developing worlds, but also inured to the suffering entailed. Argentina was a bit of an embarrassment for those with residual historical memory, a modicum of education, and minimal economic literacy. Argentina had been of the wealthiest nations at the turn of the twentieth century, and after a long period of decline and political instability, it had supposedly joined the first world as the poster child of neo-liberalism and the showcase of the Washington consensus. Now that its recent fortunes were reversed, the official blame fell on the “profligate Argentines” themselves, on account of poor policies, local corruption, and on the subtly racist portraits of a dysfunctional “national character” (always trust many pundits and academics to put lipstick on such piggish stereotypes).
But –oh surprise—as we enter the second decade of the twenty first century, the pigs have started flying and –like the proverbial chickens—have come home to roost, except that pigs do not roost: they make a much worse mess of things when they come home. First the euro zone periphery, the so-called PIIGS (the acronym for Portugal, Ireland, Italy, Greece, and Spain), then some of the more central European countries themselves, finally none other than the “indispensable nation,” the United States of America, face the possibility of default today. Latin Americans, whom the recent global financial crisis has largely spared, exclaim with concerned amazement: “We have seen this movie before.” [[As I argue in more detail in my last book South of the Crisis. A Latin American Perspective on the Late Capitalist World, London: Anthem Press, 2010.]]
Experience shows that a catastrophic default comes about after a long period of denial regarding the dire unsustainability of a country’s economic model. The stabilization recipes of the International Monetary Fund and of other multilateral agencies perpetrate this long agony. These public entities have become custodians not of the public interest but of the interests of “The Markets” and those who control them, under the cover that “perhaps things will sort themselves out.” Time and again, the IMF has based its recipes of stabilization on the fallacy that a crisis of insolvency is a crisis of liquidity. Fiscal austerity and draconian cuts in services are imposed on a country, mostly on the shoulders of the BOP. Such measures have the added defect that they are pro-cyclical and only deepen the crisis. The only advantage of this error and the ensuing prolonged agony is that it gains time for big creditors to discount the oncoming default and to pass most of the risk to governments, so that in the end the losses incurred by risk-taking funds are, to put it simply, socialized. Herein may lie an explanation of why, in the face of clear evidence to the contrary, the IMF (under the now-dethroned Dominique Strauss Kahn) insisted in foisting upon Ireland, Greece, and Portugal the same policies that sunk Argentina in 199-2001 and Latvia in 2008-2009. As the economist Desmond Lachman argues, such experiences “should have informed them IMF that, under the euro –the most fixed of exchange rate systems—such a policy was bound to produce the deepest of economic recessions.” [[Desmond Lachman, “The IMF is making the same mistakes all over again,” Financial Times, May 19 2011, p.11.]] In the end deep recessions will make it politically impossible for these countries to stay the course –and default will follow as surely as the night follows daylight.
In the first world, especially the United States, there is an additional embarrassment. The much-celebrated political system of liberal democracy, combining checks and balances with popular participation at the polls, seems beset by deep dysfunctionality. In the US, the two parties wrangle in a stalemated Congress over how to deal with a staggering debt. It is a sorry spectacle of the exercise of reciprocal vetoes –a gridlock situation that Karl Marx once aptly described as “parliamentary cretinism” in his masterful tract The Eighteenth Brumaire of Louis Bonaparte. The American government, in the poker face of its Treasury Secretary, warns that unless the paralyzed Congress raises the debt ceiling, it will have to satisfy its creditors by betraying other constituencies, just like erstwhile Argentine authorities did on occasion of their historic default a decade ago.
This is only the beginning of this crisis: If Washington fails — yet again — to take immediate, painful and extremely unpopular steps, there’s a very real risk that the trickle of investors who are dumping treasuries and dollars today will become a torrent. Then ‘The Markets’ will attack –this time the US itself.
The consequences will be severe:
U.S. treasuries might collapse in value, crushing the entire bond market in their wake.
Interest rates will skyrocket, making it very expensive for the government, companies and consumers to borrow money.
The value and buying power of money will crash even faster — and the cost of living will rocket even higher — as global investors (“The Markets”) stampede out of \dollar-denominated investments.
Once again, those hurt the most will be people at the bottom of the social pyramid. And once again ‘The Markets’ will help themselves. The impending crisis will be accompanied with cries of sauve qui peut (save yourself if you can; or every man for himself). The few at the top of the pyramid will respond with a cruel parody of Obama’s campaign slogan: ‘yes we can.’
Haven’t we seen this movie before?
