Debt: Latin America yesterday, Europe today

Introduction

The current crisis is not a crisis of trade or production of goods or services. The crisis is about the banks, about the financial sector. Its origin comes from far away and has an ideological nature: it comes from a David Ricardo distortion of Adam Smith ideas.

Smith admitted corporate egoism as an engine of economic movement, but with rules that could contain it. Ricardo advocated the elimination of restrictions. In particular, restrictions on three things: the issuance of paper currency, industrial overproduction and the movement of capital.

The issue of paper money produced since then the overproduction of money and a continuing loss of purchasing power. Industrial overproduction led to commercial imperialism. The unrestricted circulation of capital led to speculation and international scams.

In modern times it gets worse, complicated and expanded with the creation of "financial products" - because now financial services are said to be an industry - which circulate and are accepted without real guarantee of value, whether national or international. The names of those papers sound technical, with English euphemisms such as: default swaps, derivatives, sub-prime or quantitative easing (QE). The reality is that the whole world is a victim of a scam originated in Wall Street and the City of London. Nothing new, what is different this time is its sidereal dimension.

Background sovereign debt

Since the nineteenth century, approximately every 40 years, there is a succession of crises with the same origin. All caused by the collapse of financial speculation, which often lead to the onset of a war; the two world wars are not alien to this pattern. Military business, the elimination of trade rivals and the loot versed in the victor's bag, return banks in trouble to balance.

The current European crisis and the one in the 80s, all originated in 1944 at Bretton Woods. At the meeting between the future victors of WWII, to stabilize the world economy after the war, the dollar was adopted as an international reference currency but guaranteed a gold standard of US$ 35 / troy ounce. That agreement was reneged by the United States in 1971, the year it stopped exporting the oil that balanced its trade. It was definitely a default on its debt – the same thing that scandalizes when it is others that do it. Since then, the Federal Reserve began an emission of dollars without funds to cover a trade deficit. To prevent the dollar from being abandoned as the reference currency, OPEC cut production and imposed the sale of its oil only in dollars: the so-called petrodollars, which were issued for that function.

These surplus petrodollars could not be assimilated by the oil economies and ended up being deposited in banks, mainly Anglo-Saxon banks. Banks do not keep money; they place it. So very elegant bankers went out visiting lost corners of the Third World, offering low-interest loans without guarantees.

It is the well-known mechanics of providing capital, knowing that instead of being used on reproductive investments it will be squandered in current government expenditure, the imports of industrial products or in corrupt transactions, where the gain returns to foreign banks. But the debt remains and the state assumes it as sovereign debt to be paid by squeezing domestic resources with the so-called austerity programmes. The result is futile: it creates unemployment and is a pretext for the privatization of the debtor country's assets, especially those on monopolistic and essential public services.

History of Latin American debt

The chronic external debt of Latin America is being dragged on since independence, the reason for it is described with technical acuity by Swiss economic philosopher Jean Charles Sismondi: ...in wealthy nations production is often determined, not by needs, but by the abundance of capital, and that therefore, in quickly surpassing consumption, it creates cruel distress.

The opening of the immense market Spanish America offered to the industrial producers has appeared to me as the one event which could most relieve the English manufacturers. The British government thought so too; and in the seven years that have passed since the commercial crisis of 1818, an unheard of effort was made to introduce English trade into the most remote parts of Mexico, Colombia, Brazil, Rio de la Plata, Chile and Peru. ….

But however immense the market be that free America offers, it would have in no way sufficed to absorb all the goods England had produced above the needs of consumption, if the borrowing of the new republics would not have suddenly increased immeasurably their means to buy English goods. Each American state borrowed from England a sum sufficient to establish its government; and although this was a capital, it spent it immediately during the year as income; that is, it used it entirely to buy English goods for government account, or to pay for those which had been shipped for private account. Numerous companies were formed at the same time, with immense capitals, to exploit all American mines; but all the money they have spent is the same income that was paid to England, either for the machines they used directly ...or the goods shipped....

As long as this peculiar trade has lasted, in which the English asked from the Americans only that they would buy, with English capital, English goods, and to consume out of love for them, the prosperity of the English industry has appeared brilliant. Not income, but British capital was employed to stimulate consumption; the English, buying and paying themselves for their own goods sent to America, have foregone only the pleasure to enjoy them themselves.

Never had English manufacturers more orders than during that train of speculations in 1825 that has astonished the world; but as the capitals have been spent, and the moment of repayment has come, suddenly the veil has dropped, the illusion ended, and distress has come back even stronger than it was in 1818. (Sismondi, New principles of Political Economy, 1927, Fourth book, Chapter 4).

That Latin American debt to British banks was sold in the markets and caused setbacks throughout Europe. Thus arose collectors' coalitions that collected by gunfire. The most famous example is the French-Anglo-Spanish occupation of Veracruz, which undusted Iturbide's throne and gave it to Maximilian of Austria.

In the 1980s, Latin America saw repeatedly the same mechanism of debt, only that there were not gunboats, but the IMF, IDB and the World Bank, who were responsible for ensuring payment. Nor did they bring a foreign prince; today there are more discreet means and the reliable payment is left to local politicians. The collection efficiency increases because such appearance of legitimacy decreases the risk of violent rebellion. So that is how the Lost Decade of Latin-America happened.

The situation today

After the sad experience of Third World foreign debt, the governments of those countries, in general, abstained from borrowing. It also happens that some are still paying and have neither credit nor the political will. Their suffering has improved only transiently the banks’ finances and those of other gamblers that operate in the financial casinos.

Peter Drucker explained that the flow of financial economics had separated from the flow of the merchant economy of goods and services; pointing out that its size had increased and was several times bigger than the real economy. That – he said - happened because of the issuance of inorganic dollars since 1971 to pay for the trade deficit of the United States (Drucker, 1986). Emmanuel Todd said that the US role in the world economy seemed to be to provide virtual money (Todd, 2005). Wall Street and the City seem to forget a basic principle learned at Economics 101: that money is not wealth; it's just a symbol.

According to the Bank for International Settlements, (BIC, 2013) in the world, by April 2013, US$ 5.3 trillions of derivatives were sold daily; ie each day, one-third of US GDP. The total of these products in circulation was then estimated at around US$700 trillion. Taking into account that the Gross World Product in 2013 was 75 trillion, it is impossible to land that imaginary money into the real economy. That's what technically and legally is defined as a scam. The BIC has no recent public figures, but the numbers in the sequence from 2010 to 2013 indicate an increasing trend.

That overabundance of ascending stock, that is independent of the behaviour of the real economy, is the result of a lethal combination of constant cumulative inorganic money creation by the Federal Reserve of the United States - which is a consortium of private banks – which is handed over to banks with the euphemism of QE (quantitative easing) in order to invest massively in the stock and thus push back up the diminished value of their portfolios; this comes together with deregulation that liberates the banks’ speculative activities of any prudent restraint.

Unlike the real economy, which is socially positive, because growing delivers benefits to all stakeholders, the speculative economy is socially negative. Its actors are often stateless enterprises without social bonds. Its base is an imaginary abstraction, which issues papers called securities because they are assumed to be based on warranty, that are traded in financial markets. In reality, its main activity is to manipulate perceptions of the future and their only goal is profit in the short term, which is not distributed but maintained in the financial circuit, apart from the real economy; the one which produces socially perceptible well-being.

The history of the real economy is marked by crises that precede the relief of the protagonists countries, whose decline usually includes military episodes. I think we live in one of those moments. The real economies of the two Anglo-Saxon countries with the largest financial centres have marked signs of recession, while their bags only go up because the keyboards on computers of its traders give the illusion of creating wealth. An electronic click causes ups and downs in the stock price, while nothing has changed in the tangible reality. Prices are inflated by blowing up purchases until they explode like bubbles, and deflated when the shopping stops.

In 2008, four of those speculative bubbles exploded:

1. The bubble of raw materials and food, the first sign was called the "tortilla crisis" in Mexico. In the same sudden way, the prices of corn, oil and cereals, went up and down without an increase in retail consumption or production;

2. The housing bubble, fuelled by easy loans with mortgages over property of lower value, which were sold packaged together as "Sub-Prime Mortgages" instead of calling them garbage;

3. The stock market bubble, where stocks and securities rose and fell without major investment or fluctuation in dividends;

4. Bubbles in currency exchanges, where currencies rise and fall without changes in the country’s macro-economic data;

Except for the fall in property prices and the eviction on behalf of banks, the behaviour of speculators has not changed much since 2008.

Making the European crisis

In 2008, the dollar began to fall and that mortally threatened US hegemony. Towards 2010, the mainstream press began a campaign against the Euro, echoing pessimistic statements by European politicians of the European "establishment" and the international financial institutions. The Euro supposed weakness was the public debt crisis in some countries which are part of the Euro-zone. Those countries were indebted because their governments paid with public funds the "rescue" of domestic private banks. That debt does not come from an internal economic mismatch; it comes from the stupidity of those who made risky loans and the dishonesty of those who paid somebody else's debts with somebody else's money.

The landmark case was Greece, whose GDP in 2011 was 1.5% of the European Union Economy and 2.6% in the Eurozone (Eurostat, 2014); so it did not have the economic weight to drag down with its debt the economy backing the Euro. It was rather selective, because Greece with a € 215 billion GDP and a debt of 166% of GDP, was supposed to be a greater risk and must pay higher interest than Japan, whose GDP was € 4.4 trillion and its debt 228% of GDP (World Bank, 2014); but that is the way the risk evaluators in Wall Street do their job. The same pattern was repeated with Portugal, Ireland, Spain and Italy. This served to create distrust in the European economy and ... in the Euro.

The European Union is the world's largest economy and largest exporter. Its second economic partner is China, with € 428 billion ($ 567 billion) and the first is the US, with € 444 billion (Eurostat, 2013). As China's economy grows by 7.7% and the United States grows 2.5% (World Bank, 2013), it is likely that in 2014, China will already be the first European partner. For China the EU is already its first trading partner. In 2014 the GDP of the EU will be € 14,303 trillion (US $ 18,451 trillion) according to the IMF and its trade surplus in September 2014, it was already € 18.5 billion (Eurostat, 2014). The real European economy is not sick, it's the financial sector that has been infected by the Anglo-Saxon financial sector. The hegemonic political pressures are not absent in this contagion.

It was the bankers of Germany, France, Italy and the Netherlands, who pay large salaries and rewards to their undiscerning executives, who bought worthless securities issued by Anglo-Saxon banks, and sold them to banks in the peripheral economies of the European Union, like Greece, Ireland, Portugal, Spain, Cyprus & Co, which also have well paid executives. Now they are uneasy, because the values they sold fell to their real value and their customers cannot pay. As always, there was an intervention by the IMF, the World Bank and the European Central Bank to provide the necessary credit to pay the creditor banks; with a novelty in Cyprus that, in order to pay foreign creditors, banks confiscated money from their customers.

For a while there were tremors for fear that Greece would do what would be rational: return to the drachma. But it will not be so, because the bankers of the European tough group want to collect their credits in Euros. An additional detail, that is never mentioned, is that all the obligations of banks in peripheral European countries were secured with an insurance against non-payment (Credit Default Swaps), whose premiums were charged, but that are not applied to pay off the debts because such insurance is extended and traded among the creditor banks themselves.

The transatlantic agreement

United States proposed to the European Union a Transatlantic Trade and Investment Agreement - TTIP-, which aims to integrate their economies. There have been several econometric studies, all agree that the agreement would replace intra-European trade by trade with United States. This implies a European disintegration and the paradox is that the main advocate of the agreement is the European Commission. That gives an idea of who is the boss in Brussels.

According to a study by Jeronim Capaldo (GDAE / Tufts University, 2014) using the model UN Global Policy, in the first ten years of the agreement the results would be:

1. Net losses on European exports, mainly in Northern Europe (2.7% of GDP, followed by France (1.9%) and the UK (0.95%).
2. Net loss in GDP for countries in Northern Europe (-0.5), followed by France (-0.48) and Germany (0.29).
3. Loss of income for workers: France with € -5,500 per worker, countries of Northern Europe € -4.800, UK and Germany € -4.200 € -3.400.
4. Loss of 600,000 jobs. 223,000 in Northern Europe, 134,000 in Germany, 130,000 in France and 90,000 in Southern Europe.
5. Reduction of the share of wages in GDP, implying a transfer of income from labour to capital. In France, 8%; in the UK, 7%; in Germany and Northern Europe, 4%.
6. Loss of revenue for the states, due to declining revenue from indirect taxes. France 0.64% of GDP and for all countries this would push towards higher levels of public deficit than foreseen in the Maastricht agreement.
7. Increased instability and financial imbalances, caused by lower export earnings, lower wages, lower revenue, lower sales. The benefits of the investment would be supported by rising asset prices; ie bubbles.
8. Increased vulnerability to any crisis in the United States.

The findings are two: a) the studies commissioned by the European Commission did not use a good model and using the UN model the results are unfavourable to TTIP; b) at this time of low growth and austerity a trade reorientation would reduce labour income and would reduce economic activity.

As part of the proposal related to foreign direct investment, both France and Germany said they are not willing to negotiate clauses allowing arbitral extraterritorial jurisdiction to investors.

Our view is that the European economy is still healthy, its problems come from the spread of Anglo-Saxon financial sector toxicity and US pressure against trade with old strategic customers such as Iran and Russia. The US wants to sign the TTIP, to end the bad example of the European welfare state, to suck up the resources of the most powerful economy, to maintain the fictions at the stock markets and to keep the dollar as an international currency. Furthermore, there is that disturbing policy of destroying energy suppliers to Europe or alienating Europe from them. It seems that the United States seeks to eliminate energy options to Europe and make it dependent on its dubious fracking gas resources; sold in dollars, of course.

Conclusion: As Louis XVIII, King of France and a worldly man said, only ambition never ages. The economic system based on the dollar is falling apart, but ambition will keep it active until its final ruin.

References

Sismondi, Jean Charles (1827). Nouveaux Principes de Economie Politique De la richesse ou dans ses rapports avec la population. Paris: Delunay.

Drucker, Peter. (1986). The Changed World Economy, Washington: Foreign Affairs.

Todd Emanuel. (2002). Après l'Empire: essai sur la décomposition du système amèricain. Paris: Gallimard.

Capaldo, Jeronim, 2014. The Trans-Atlantic Trade and Investment Partnership:
European Disintegration, Unemployment and Instability, GDAE Working Paper 14-03, Tufts University, Medford, MA. http://ase.tufts.edu/gdae/policy_research/TTIP_simulations.html

BIC / BIS, 2014 Bank of International Settlements, Basel: http: //www.bis.org/statistics/dt1920a.pdf,

Eurostat, 2014; 2013, European Commission, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530.pdf

BM, 2014; BM 2013. World Bank. http://databank.worldbank.org/data/download/GDP.pdf