Volume 8

Number 4

May 2000

 

Main Contents

1

TO ALL WHO LONG FOR A REALLY GREEN ECONOMY

Mercy J. Harmer

2

FUTURE PLANS FOR THE GREEN ECONOMY WORKING GROUP

Mercy J. Harmer

3

Book Review: Goodbye America! Globalisation, debt and the dollar empire

Michael Rowbotham

4

Monetary Reform DVP

Brian Leslie

5

Understanding The Agenda of Tax-cuts: Deep-structural Economics in a New Millennium

John McMurtry

6

Australian Government Prepares to Abolish Social Security System

Mike Head

7

The IMF & World Bank —Two of Several Instruments of National Destruction

Michel Chossudovsky

8

Bilderberg

Jim Tucker

9

Preparing for the Meltdown

William Krehm

10

Are Central Banks Becoming Paper Tigers?

wk

11

"The Morning After The Night Before"

COMER, May 2000

12

The Co-failure of Communism and Capitalism in Russia

William Krehm

13

Trade and GDP growth

Jeremy Fox

14

Solution to the Problem of Urban Decay

Henry George Foundation

15

Goodbye Mr Taxman

Guardian, 2 Sep.1999

16

Money Illusion

David Gracey

17

Solution to the Problem of Urban Decay

18

The Euro Disproves the Washington Consensus

wk

 

Editorial:

Below is the text of the article which the new convenor of the re-formed , re-named Economics Working Group, now to be called the Green Economy Working Group, has submitted to Green World /Green Activist.

Following it: a proposal for a meeting before next Party Conference. Anyone interested in participating, please reply to Mercy ASAP.

The revised Monetary Policy DVP is on page 4.

Also in this issue: my review of Mike Rowbotham's new book, which I can strongly recommend to all doubters on the need for global monetary reform!

Index

1: TO ALL WHO LONG FOR A REALLY GREEN ECONOMY

Are you feeling frustrated by the limited output from the Economics Working Group over the past few years? Our Monetary draft voting paper has been appearing and disappearing at regular intervals without ever quite maturing into an actual voting paper, — and when some of you asked at the 1999 London Conference, "What shall we tell the electorate about Green Economics?" you may well have felt disappointed by the vagueness of the answers coming from the Economics Working Group.

This situation has been frustrating for all of us but unavoidable. If solutions to Green economic problems were easy to find all those worried about the i2creasing threats to our wonderful world would be clamouring for them to be implemented without delay.

However, because conventional economic theory is incapable of dealing with the complexities of our ever—changing modern world, we have had to build up our own theoretical base almost from scratch. We have to search the works of "alternative" writers who have developed green insights into various aspects of the subject and discuss the practicality or otherwise of their suggestions. At the same time we have to try and identify the gaps in understanding which still face us, search for ways of plugging these gaps and try to pass on each new insight to the rest of the group.

The good news is that we have progressed a long way over the past few years. The frustrating news is that no—one seems to find time to describe this progress to people outside the working group, besides which, as soon as we think we understand one level of complexity we are more than likely to recognise wider aspects of our problems which mean that we may have to re—think some of the proposals we thought we were ready to recommend. Our monetary draft voting paper is one example of this continual learning process and even now it is possible that new insights may emerge to delay the process still further.

This was the background to our discussions at the spring 2000 Scarborough Conference when we decided that we must find ways to speed up our progress and encourage more people to become involved in our explorations. We therefore made the following decisions:

1. THE ECONOMICS WORKING GROUP HAS BEEN RE-NAMED THE GREEN ECONOMY WORKING GROUP.

We hope this will bring in people who think they are incapable of understanding economic theory, not realising that too often economists don’t understand their own theories!. We need to draw in people who can use their complex experiences in everyday life to help us develop insights into how our economy actually works. Women in particular have wide experience of integrating the many competing demands made on them but have been poorly represented in our past discussions.

2. A MONETARY WORKING GROUP WILL IN FUTURE FUNCTION AS A SUB-SECTION OF THE GREEN ECONOMY WORKING GROUP.

This will free the group as a whole from getting bogged down in the problems of our erratic, complex, misunderstood and increasingly disfunctional monetary system.

3. Brian Leslie, who has held the Economics Working Group together through a very difficult period, is particularly interested in monetary problems so has agreed to be convenor of the Monetary Working Group. I have agreed to be convenor of the "umbrella" Green Economics Working Group, at least for the time being. Monetary problems will not, of course, be ignored by the wider group but we shall be looking at these in the context of the whole range of economic problems, leaving the Monetary Working Group to deal with the draft voting paper and detailed aspects of monetary theory — though we can expect, and will certainly need, an overlap of membership of the two groups.

FUTURE PLANS FOR THE GREEN ECONOMY WORKING GROUP

I am sending a letter to all those who gave me their names at the last two conferences as the first step in arranging a meeting before the Autumn Conference. Anyone else who would like to be included in these plans should contact me as soon as possible. Meanwhile we need to compile a booklist of useful texts which can be circulated to all those interested in these matters so I look forward to receiving suggestions as to what should be included, — ideally with short reviews of the books suggested. I should also like suggestions for subjects to be discussed at the next and future meetings.

I hope all this will speed up the development of Green Party plans for a Really Green Economy, and I look forward to hearing from all those interested.

Mercy J. Harmer.

Regent House, Church Rd., Shelfanger, Diss, Norfolk. IP22 2DG

Tel. 01379 643468

 

Index

2: PROPOSALS FOR A MEETING OF THE GREEN ECONOMY WORKING GROUP

Mercy J. Harmer

If you would like to attend a meeting of this group before the Autumn Conference please show what your preferences are for time, place and subject matter and let me know as soon as possible. As soon as I have a viable number of positive replies I will try to arrange something to suit as many people as possible.

DURATION:

When deciding how much time you can spare please bear in mind the fascinating Conference discussions which were just warming up when we had to stop because we had run out of time! Number your preferences from 1 to 5:

Sat lpm-5pm

Sat llam-5pm

Sun 1pm-5pm

Sun 11am—5pm

Sat 11am-Sun 4pm

POSSIBLE DATES:

Tick all those you would be able to attend. (I have excluded those I would find impossible and have just been told that Brian Leslie will not be available for the July dates):

July 8, 9.

Aug 12, 13, 19, 20, 26, 27.

Sept 2, 3.

PLACE:

So far my list of the addresses of those interested includes more people from the south of the country than from the north so suggest we should meet either in London, (too expensive for weekend meeting?) or in Cambridge, Oxford or Norwich or similar — wherever I or someone else can find a suitable meeting place or, if numbers are small enough, in someone’s home, bearing in mind the need to find accommodation if a weekend is planned,(or, during vacation, in university or similar if someone knows how to arrange this). SO PLEASE CONTRIBUTE YOUR IDEAS WITH OFFERS TO PROVIDE/BOOK A SUITABLE MEETING

PLACE (Failing other suitable suggestions I will arrange something in or near Norwich or Diss,—but one suggestion is Green Party London office). (Replies on back of this sheet)

MATTERS TO BE DISCUSSED:

Please send suggestions for topics, questions, etc and/or papers which could form the basis for discussion, ALSO SUGGESTIONS FOR READING LIST TO BE CIRCULATED TO ALL INTERESTED.

Time is short! Quick responses please! Very much looking to hearing from you!

All Good Wishes!

Mercy J. Harmer

Index

3: Book Review: Goodbye America! Globalisation, debt and the dollar empire

Michael Rowbotham

Publ. May 2000 ISBN 1 897766 56 4 £11 Post free in the UK from Jon Carpenter Publishing, Direct Sales Dept., 2 Home Farm Cottages, Sandy Lane, St. Paul's Cray, Kent BR5 3HZ (Add 10% for Europe, 20% ROW)

Visa/Mastercard by phone: 01689 870437

Mike's new book convincingly demonstrates the intimate links between the hot topical issues of globalisation and Third World debt—and between these and the less-debated issues of the national and global money systems, and political power.

The first chapter outlines the theme of the book: that globalisation and Third World debt are not only intimately connected issues, but illegitimate ones, stemming from the corporate agenda persued on behalf of its multinational corporations by the US government and the institutions it dominates: the IMF, World Bank, GATT and the WTO, the UN, &c.

He argues convincingly that Third World debt is an indictment of orthodox economics—that "The recurrent failure of the range of remedies proposed by conventional economists, indeed the fact that these policies have compounded the problems of debtor nations, serves only to underline that Third World debt stands as a profound indictment of current economic orthodoxy."

He demonstrates that the various claims promoted in the media, of incompetence and/or corruption by Third World leaders can together only explain an insignificant proportion of total Third World debt, and he describes the various justifications for 'free trade' and for the successive 'remedies' for Third World debt proposed or tried, including the infamous 'structural adjustment programmes' imposed by the IMF, showing how evidently sound and logical the reasoning behind them … except for the various factors he then points out, which show them to be naïve or cynical, tragic nonsense. He notes that Ricardo, commonly quoted as the historical champion of 'free trade', argued that "free trade requires, [to be] fair and mutually beneficial to the nations taking part [that]:

o Capital should not be allowed to cross borders from a high wage to a low wage country.

o There must be a balance of trade between participating countries.

o There should be full employment within participating nations.

o There should be perfect competition, with no monopolies or oligopolies (i.e. near-monopolies)."

These conditions clearly are not met today.

Having traced the problem of Third World debt back as far as the nineteenth century, he notes that 'endemic international debt goes back several centuries'.

Especially significant is the contrast between the defeated British proposals put forward at Bretton Woods in 1944 by Keynes, and the final agreement forced through by the US delegation. Keynes recognised the danger of the growth of international debt, and proposed an International Clearing Union and a neutral unit of international exchange, the Bancor, with interest payable by both creditor and debtor nations, to encourage the maintenance of a zero account balance. Instead, Bretton Woods established the World Bank and IMF.

The 'rich' Western/Northern nations are the deepest in debt—US national debt is $5.5 and rising. Mike draws attention to the further facts resulting from the debt-based nature of the money supply, of the increasing levels of private (especially mortgage) and commercial debts, and looks at the history of debate on monetary reform over past centuries, especially in the period between the two World Wars, arguing that the post-war experiences fully confirm the critics' points.

While not condemning all charging of interest, he strongly argues against the 'rentier economy' which now exists, based on the debt-money system.

"Economic theory is completely stood on its head by the rentier economy. The textbook explanation of debt and interest is that debtors have borrowed money from creditors, and the creditors are entitled to the interest they receive. In a debt-based economy the order of events is completely reversed---the only reason today’s creditors have any money is because, in the past, other people have gone into debt. In a very real sense, creditors owe it to debtors that their money even exists! And far from the act of lending involving a loan of actual money and a degree of risk, forbearance and commitment on the part of the lender, the lender shoulders no risk and can withdraw his money at will. Meanwhile, banks create additional credit to advance to borrowers and the entire money stock is perpetually inflated at a cost to both debtor and creditor!

The fact is, people with deposits are not lending anything. It is banks who lend—they lend credit-money they have created out of nothing, using the convenient fact that they are trustees of monetary deposits to shield this. Depositors are actually penalised, for although they receive interest for leaving their deposits with the bank, the bank is simultaneously inflating the money supply and reducing the value of their savings! Regardless of the fact that interest is paid to depositors, over the last three decades money left in a bank or building society has actually fallen in overall purchasing power.

So who gains in a rentier economy? Ultimately, the financial gain from a debt-based economy accrues to the banking sector, since these institutions acquire a permanent ‘lien’ over the property and assets against which debts are secured. By creating and issuing money as a debt repayable to them, they lay tacit claim to assets equivalent to those debts. Thus, Britain’s building societies now own 35% of the UK housing stock through the mortgages they have advanced.

The concept of a rentier economy is an important concept in understanding Third World debt, since an international rentier economy has been gradually established."

He acknowledges that many proposals for monetary reform have flaws, but argues that nevertheless their criticisms of the debt-based financial system are powerful, and they are the main concern of this book. The growth of debt and shortage of purchasing power are the source of the drive for exports—which in real terms impoverish the exporting countries—and 'globalisation'.

Just as much as mortgage debts and national debts, Third World debt has become an essential part of the world money supply and, like those debts, is in aggregate, totally unrepayable. It is owed by the Third World not to the 'rich' nations, but to commercial banks, via the World Bank and IMF.

Being accounted in foreign currencies (mainly in US$), it differs from national debts in the control it gives over debtor countries, wielded by the World Bank and IMF. Mike argues that complete cancellation is required, offering 10 compelling reasons.

He then offers three ways of doing this, even without full monetary reform, showing the benefits of each not only to the debtor countries, but also to their creditors, drawing for his argument on Susan George's 'The Debt Boomerang', among others.

His first option is for full effective cancellation of the debt bonds by removing from the banks their obligation to maintain parity of assets and liabilities, allowing them in perpetuity to record a deficit of the amount cancelled, or by leaving the debts on their books as assets for accounting purposes only.

The second alternative is the conversion of the debts into national debts, by the simple process of re-denomination in the appropriate national currencies, at the current exchange rates. This would put their future management in the hands of their countries' own governments, on the same basis as other countries' national debts.

The third option is for supported repayment through new money creation, either by the creditor countries' governments, or by an existing 'multilateral agency' such as the IMF, which could create it in the form of SDRs—a once-off issuance of 'special purpose drawing rights' to be used only for repayment of official debt.

For each of these proposals he cites existing precedents.

The main beneficiaries of Third World debt, apart from the banks making the loans, are clearly the multinational corporations which benefit from the low wages and commodity prices, tax concessions and other bribes to 'invest' in the Third World countries. The main losers are workers everywhere and the environment. The driving force is lack of effective demand, due to the nature of the debt-based financial system.

Looking to the future, Mike notes the need for a neutral international currency similar to `Keynes' 'Bancor', perhaps operated by a 'Clearing Union'. He acknowledges the complexity of the issues which arise from the need to maintain a material as well as fiscal balance of trade, and does not attempt a full discussion of the possibilities.

Universal monetary reform would, of course, greatly simplify these issues. Economies would be basically self-sufficient, and only exchange surpluses for material benefit, and not under duress.

Mike is clear that the main barriers to reform are political, rather than economic. Debt is a source of great power over the debtors; and the beneficiaries of the system wield great power over politicians and the media. The greatest hope for change lies in the joint, co-operative efforts of the NGOs and voluntary sector, supported by established economists, academics and politicians, bold enough to challenge the conventional 'wisdom', to build enough popular pressure for change in the 'creditor' countries; and joint action by the 'debtor' countries to repudiate their debts.

The book should be read by all concerned about globalisation, Third World debt, the environment and international justice—as well as by all economists and politicians!

Brian Leslie

Index

4: Monetary Reform DVP

Economy Section, MfSS

Delete all EC661-663, and replace with:

Background

EC661 Monetary Policy is defined as central government policy with respect to the quantity of money in the economy, the rate of interest (as influenced by central government via the central bank) and the exchange rate.

EC662 In a green society, monetary policies will ensure the creation and distribution of sufficient funds to facilitate the production of that quantity of commodity wealth (goods and services) which is commensurate with society's needs, subject to the restrictions imposed by the finite nature of the natural resources available. They will further ensure an equitable distribution to all of the commodity wealth so produced.

EC663 The failure of modern finance-capitalism to fulfil these criteria is manifest, as is evidenced by the profligate ravaging of the earth's natural resources, which, although causing an overall increase in material wealth, has allowed a small minority to become disproportionately rich whilst poverty for a larger minority has become more entrenched; and real needs throughout society remain unmet.

EC664 Fundamental to the emergence of this situation is the usurious debt-money banking system accepted by governments since the founding of the Bank of England in 1694, which has surrendered the issue and control of the nation's money supply into private hands. This system is now adopted by virtually every country in the world.

Principles

A Permanent Money Supply

EC665 Conventional economic practice rests on the assumption that all government spending must be met either by taxation, or by borrowing at a rate of interest from the private banking institutions (including the Bank of England). The fallacy of this argument is illustrated by the fact that the state has always had the right to create its own money supply, debt-free, as necessary in order to meet the needs of the national economy.

EC666 Under the current banking system, money is created predominantly as interest-bearing debt by commercial banks and the financial institutions. This has grown from a negligible proportion at the time of founding of the (then private) Bank of England, at first slowly, to 80% by 1965, and now accounting for over 97% of the total money supply, the remainder being the notes and coins spent into circulation by government.

Parallel with this growth of interest-bearing debt money, known as "credit", has been the growth of debt in general—National (i.e. government), commercial, private and "Third World". In aggregate, these debts are all un-repayable under this system, and must necessarily, eternally grow to avoid collapse of the system.

This is the driving-force of the modern economy; we have the knowledge, skills and materials to provide for everyone's needs and to enjoy extensive leisure without destroying our environment, but are prevented from achieving this through the imperative need to avoid or escape from debt.

EC671 The current deployment of high interest rates as the principal instrument of inflation control only succeeds in this regard by causing immense damage to the economy, often resulting in a depression, and is inflationary in its effects in the short term, insofar as payment of interest is passed on into prices. Further, it unduly rewards the rich and the financial institutions, raises the interest-burden of the National Debt, and penalises borrowers, including mortgage-holders (mortgage debt now accounts for over 60% of the money stock).

Policies

Short Term

Central Government

EC675 The banking facilities of the Central Government will be provided by a reconstituted Bank of England, as a trustee-governed, non-profit-making Central Community Bank. A Currency Commission will constitute a new department of the Bank of England, and will possess sole legal right to create, or cancel, national currency.

EC676 The Currency Commission will be responsible for the regulation of the money supply on the basis of an ongoing monitoring of the national economy. It will be publicly accountable and open to scrutiny, and ultimately answerable to parliament.

The Commission will require the government to spend into circulation the monies (in the form of credit or cash, as required) it creates, or to withdraw some from circulation for cancellation, in order to maintain the money supply, as a circulating medium of exchange, at the level needed to avoid undue to inflation or deflation, or for expansion or contraction of the Gross Domestic Product (GDP).

EC677 The National Debt will be paid off as the bonds it consists of mature, with money created for the government by the Bank of England for the purpose, instead of by the sale of new bonds, to be bought with money created by the private, commercial banks.

EC678 The Commission will also manage the sterling exchange rate on the basis of Purchasing Power Parity with other currencies and the settlement of any international trade imbalances (see also EC727).

Matching Money Supply to Need

EC680 Central government revenue shall always be maintained (see EC676) at a level sufficient to fund government commitments, as outlined in the MfSS, subject to environmental constraints. Contrary to conventional wisdom, a Green government shall recognise that maintaining a sufficient supply of money in the economy is more important than ensuring that the supply is not too great. The reduction of the levels of debt in the economy as money spent into existence replaces that borrowed into existence, and the consequent removal of the burden of interest charged on it, will dispel the perceived need for unnecessary and destructive economic activity. The developing situation will be monitored and adjustments made on the basis of need, and with reference to permaculture design principles (see AG445).

EC681 The system of lending and borrowing money could be used as a guide for managing the money supply. Given the natural inclination to avoid debt where possible, the general level of borrowing may become a useful indicator of the adequacy, or not, of the general level of money supply.

Medium Term

Restricting private creation of money

EC684 As the supply of money spent into existence increases, many adjustments must take place to avoid over-supply of debt-money. One powerful way to achieve this would be to reintroduce and progressively increase restrictions on borrowing for mortgages, as a multiple of annual income. This would have the beneficial effect of reducing house prices.

Commercial Banking

EC690 The Commercial Banks will gradually be restricted to lending no more than the total sum of monies contained in their customers' time-deposit savings accounts, although outstanding loans will be honoured.

Reduction of Usury

EC691 As the levels of debt and borrowing reduce, competition between commercial banks to lend for profit will tend to lower the interest they can charge. They will doubtless reintroduce/extend account charges, but again, competition should keep these in bounds.

New EC727-730:

Taxation on Financial Transactions

EC727 Financial speculation, by which the already rich trade financial assets in order to try to increase personal or corporate wealth still further, is not only morally unjustifiable, but because of the scale of activity, also has a seriously detrimental effect on national currency stability, and national and international economies generally.

EC728 The magnitude and frequency of these transactions, which have grown enormously as a result of the "IT revolution", means that taxation (e.g. the "Tobin Tax") at relatively low levels generates very high yields, without penalising ordinary currency exchanges by any significant amount. This will also have the effect of discouraging speculative activity generally. Taxes in the region of 0.05—0.5% are envisaged for all purely financial transactions.

EC930 Delete 'the IMF and World Bank' and replace with: 'the International Monetary Fund (IMF), 'World Bank', more correctly known as the 'International Bank for Reconstruction and Development' (IBRD), and the Bank for International Settlements (BIS)'.

 

Index

5: Understanding The Agenda of Tax-cuts:

Deep-structural Economics in a New Millennium

John McMurtry

 

The transnational corporate invasion of the world’s economies since the Reagan regime’s ascension to US state power in 1980 has been achieved by a unified strategy—to de-fund all social sectors across the world which provide non-profit, life-serving goods so that they can be commodified by for-profit service corporations. The growth of transnational service corporations, in turn, is the determining economic trend of our era.

This unseen program of corporate privatization of the civil commons has proceeded by three main avenues:

(1) vastly escalating military spending to divert public revenue resources to private military-industrial corporations;

(2) multiplying interest-rates on government debt and taxpayers with compound rates rising to over 20% prime in the 1 980s; and

(3) orchestrating continual tax and public-resource giveaways to dominant corporations and the rich.1

Systematically implemented over 20 years, this three-pronged attack on public revenues has effectively impoverished social sectors across the planet.2 It collapsed the poorer Soviet Union and the second-world by avenues (1) and (2)—a bankrupting arms race combined with a US-led quadrupling of interest-rates whose transnational effects multiplied East European debts (Yugoslavia’s and Russia’s civil collapses being the most dramatic examples of the social effects of this strategy)3 A similar but less ruinous strategy of restructuring by debt-crisis worked with allies like Canada by devices (2) and (3)—debt escalation by interest-rate quadrupling and corporate and high-income tax giveaways. By this master pattern, endless billions of dollars have been siphoned from social programs everywhere to financial and service markets.

Public debts remain managed to keep the social sector in its place. The main device now is avenue (3)—massive tax giveaways. These are demanded daily through the corporate media by corporately funded parties and ideologues who never stop baying for them. The politics of public garage-sale work by saturating market techniques which close out any alternative in the common interest from public discussion.

Consider the 2000 budget of the federal neo-liberals. A year ago, there was talk of restoring the country’s hollowed-out social infrastructure with the aid of budget surpluses. After the idea had been carpet-bombed for a year by the corporate media, the over 50% earmarked for restoring social programs was effectively eradicated, and more than 20 times more public money went to tax cuts to corporations and the top income brackets than to public health and education. To be precise, the Paul Martin budget awarded 25% more in tax-cuts to corporations, and 23-times more of government revenues spent on tax-cuts favouring the richest 6% than on restoring health and education funding.4 No mass media that I am aware of observed the topsy-turvy facts at the centre of the budget, or published a word of anyone who did.

This is the reality of Canada’s 2000 budget. It is why Bay Street and company were smiling afterwards. It is why the national press were silent about its obscene disproportions. And perhaps most deeply, it is why the tax cuts were not connected to the environment, although they unleash billions more self-serving money demand to the market tides polluting and consuming what remains of our life-world.

Not to be outdone, Presto-Man whined for still more. At the Empire Club the next day, I saw him on CPAC close to tears promise business "the biggest tax-cut in Canadian history" if they elected him. This is the way with the cancer stage of capitalism. It attacks the bloodflow of revenues to society’s life-serving functions with no inhibition, diverting all to its own money-sequences which are decoupled from any committed function to civil or environmental life-hosts. The normal social-immune resources of a free press and an independent intellectual class are too busy serving the invasion to notice.

The cover story for all this is always that "we must be competitive in the global market." And indeed the money sequence’s food-cycle is planetary, and set to consume ever more. Along with the policy-manufactured debt crises to appropriate social sectors, the global market itself has been re-engineered to free transnational corporations to sell high anywhere, while producing at lowest cost anywhere else— thereby evading domestic tax contributions, first-world wages and benefits, and compliance with environmental and labour regulations all at the same time. The stripping of life-infrastructures is omnivorous.

This structure of affairs is called ‘freedom." As corporations are freed from social obligations, social sectors are deprived of their revenue bases. And always at hand is the trap door of public debt which can be pulled at any time. For the fiscal room for social sectors to receive restored funding in the future as well is ruled out by more tax cuts now which guarantee that the debt will stay high to keep an evolved civil commons "unaffordable." The corporate kaleidoscope of mass-media-Fraser-and-Reform-Harris turning over the trap door spins only one way—ceaselessly demanding ever more tax cuts to ensure that the social sector can be fed on by the corporate market into distant quarters.

The attitude of the banking sector towards government and citizens’ debts is revealing in the context. "Let’s be clear," says a Citibank (Rockefeller) official, "Nobody’s debts are going to be paid. The issue is the borrower remaining creditworthy and able to carry the debt, but not repay it."5

Coupled with bottomless demands for lower corporate costs fixed into trade-and-investment regulations, a tightening noose is placed around every social sector which provides non-profit life goods to its citizens. Social spending can always be blamed for any deficits when the feeding frenzy of "the financial community" eventually bleeds underlying economies dry.

This is how the world ends—not with a bang, but with big lies. As we become inured to them, we should keep in mind that any social regime that can push "necessary tax cuts" and "unaffordable social programs" at the same time has lost all connection with the common interest.

John McMurtry is Professor of Philosophy at the University of Guelph, ON

1 I document and analyse this strategic management of social sector bankrupting in detail in my book, The Cancer Stage of Capitalism (pp. 67-78 and 104-27).

2 Systematic explanation of these matters and their alternatives may be found in my Unequal Freedoms: The Global Market As An Ethical System (pp. 304-90). The still deeper issue is the creation of public debt-money by private financial institutions which have wrested effective money-creation powers from constitutional public authority so that almost all money creation now is by private financial institutions leveraging credit with no cash-reserve requirements. Explanation and documentation of this occupation of the public sector by extra-constitutional means is provided in Unequal Freedoms, pp.298-400 as well as The Cancer Stage of Capitalism, pp. 85-190, 238-55.

3 The ‘strategic restructuring" of Yugoslavia began explicitly in a secret 1982 Us National Security Directive (NSDD 54), reiterated in 1984 (NSDD 133, entitled "United State Policy Towards Yugoslavia"), directives which were instituted simultaneously with debt bankrupting. (See Michel Chossudovsky, The Globalisation of Poverty. London: Zed Books, 1998, pp.244 ff.)

4 Corporate taxes were cut in the February 28 Federal Budget from 28% to 21%, and taxes were cut by $58 billion over 5 years compared to a one-time $2.5 billion increase to health and education transfers to the provinces. The Globe and Mail headlined this 25% tax cut to corporations and 23-times greater expenditure of federal revenues on tax-cuts, ‘Taxpayers Get Reward At Last.’

5 Cited by Kieran A. Kennedy, ‘The Role of the State in Economic Affairs, Studies, Summer 1985, p. 131.

—from COMER, May 2000

Index

6: Australian Government Prepares to Abolish Social Security System

Mike Head

After six months’ preparation, the Howard government last week released a welfare report calling for the abolition of the existing system of social welfare payments in Australia. The interim report from the government’s Welfare Reform Reference Group advocates a fundamental shift from Social Security benefits, which have existed since World War II, to a "Participation Support" program.

The name change embodies the fact that social security payments will no longer be provided as an entitlement. If the report’s approach is implemented, those dependent on welfare, particularly the unemployed, sole parents and the disabled, will have to negotiate "participation agreements" to receive Participation Support benefits. They will be required to take any kind of job, or else undertake unpaid community work, personal counselling, vocational courses or other "job preparation" activities.

These details are, however, well hidden away toward the back of the 71-page report. Much of the report’s language, and the coverage that greeted it in the media, are designed to create the impression that its purpose is to create a more compassionate and equal society. In their opening remarks, the report’s authors speak of "encouraging and supporting" people to participate as fully as they can in economic and social life, "without any dilution of the important contribution made by the income support safety net."’

The minister who commissioned the report, Family and Community Services Minister Jocelyn Newman, said it contained a "humane" response that the government would need to consider.

Unfortunately for the government, Employment Minister Tony Abbott blurted out the report’s true purpose two days later. "Snobbish" dole recipients would be cut off benefits if they did not take jobs "they may not like," he declared.

Abbott specifically referred to "McJobs"— low-wage exploitation of youth as casuals in fast food and retail outlets—and fruit picking, notorious for poorly-paid, back-breaking seasonal work. He accused young people of "lounging around in the streets while crops rot in the fields."

Interviewed later on radio, he said unemployed people should be compelled to move from one town to another to pick fruit.

They should be forced to take any job, in order to experience "the dignity of work."

Newman was forced into damage control mode. Newman was originally due to announce major cuts to the welfare system in a speech to the National Press Club last September. Four days before her speech, her office primed the media with leaks revealing that she would abolish benefits for sole parents once their children turned 12 (currently 16) and compel those on disability support pensions to seek work. Prime Minister John Howard intervened at the last minute, however, instructing Newman to retract her proposals.

Howard was evidently unnerved by the results of the Victorian state election, which ended conservative Premier Jeff Kennett’s seven years in office. Kennett had led the way nationally in slashing spending on social programs, particularly health, education, public housing and community services.

As a result, Newman adopted a well-tested mechanism—announcing a "comprehensive Green Paper on reform."

Newman needed appointees who could give her plan a "caring" facade. She also sought to co-opt prominent welfare agencies into the process. It is not until page 57 that the mailed fist emerges from behind the velvet glove. There the report proposes a sliding scale of sanctions against recipients:

"Sanctions can be applied in a graduated way to ensure compliance, with complete withdrawal of income support as the last resort where people have the capacity to participate and where there is no reasonable basis for non-compliance.

In other words, sanctions will be applied most harshly to all those who insist that they have a legal and political right to income support—whether because they are physically or mentally disabled, raising children or have been retrenched and cannot find decent-paying work.

Welfare beneficiaries’ private lives will be subjected to an unprecedented level of government intrusion. "One on One Service Officers" will provide continual individual supervision. As some of the report’s case studies show, recipients will be constantly monitored, harassed and coerced to "participate."

Newman and her seven advisers claim that their goal is not to reduce the level of welfare benefits nor cut people off them. Yet the report recommends specific means for doing precisely that, as part of a broader dismantling of the welfare system. Tax and other incentives to encourage recipients to take any employment—particularly casual, temporary, part-time and low-paid jobs. According to the report: "A temporary job is better than not having a job."

"Social partnerships—a euphemism for the continuation of the government’s creeping privatisation of welfare, handing it over to corporate agencies and religious charities.

Taken as a whole, these proposals amount to the final nail in the coffin of the post-war social security system. The new regime will blame and punish the jobless. While the report calls this a "new direction," major steps have already been taken along this road over the past 1 5 years. Recipients are effectively being fined up to $1,304 for "offences" such as failing to reply to letters, submit forms or attend interviews at scheduled times. For people struggling to live on basic payment rates of$163 a week—more than 20 percent below the official poverty line—such penalties are devastating.

As the government calculated, welfare bodies have largely welcomed the report, pledging to join in further consultations to produce a final report by mid-year. In part, this reflects the fact that such groups are benefiting from welfare privatisation. The government has already transferred the bulk of its Job Network employment services to charities like the Salvation Army and Mission Australia, and these organisations stand to gain similar multimillion-dollar contracts to supervise the new Participation Support regime.

More fundamentally, the welfare lobby’s role is rooted in the report’s underlying ideology. It labels the social security system as "passive welfare," blaming it for pushing recipients to the margins of society. According to this warped logic, it is the welfare state that creates mass unemployment, family breakdowns, homelessness and disabling injuries and ill-health.

Yet at the same time, the report points to some of the underlying economic processes at work. It refers to an "apparent contradiction." Despite more than five years of economic growth, one in seven Australian residents rely on welfare for at least 90 percent of their income. No less than 860,000 children—l 7 percent of Australia’s children—are living in jobless families. The inescapable conclusion is that the much-heralded economic prosperity of the past five years has worsened poverty and inequality, not alleviated them.

And this is part of a longer-term trend. Over the past 30 years the proportion of the workforce-age population receiving income support has quadrupled from 5 percent to 22 percent, even though the proportion in paid work has risen from 66 percent to 69 percent. The number of two-income couples has soared, but so has the number of families where no one has a permanent job.

What the report does not say is that these statistics point to two general trends: a general lowering of wages so that two incomes are needed to sustain a family, and the replacement of secure jobs by casual, temporary and part-time labour. Adding to the resultant social distress has been the slashing of spending on essential social services such as public housing, health care, government schools, child care, legal aid and community facilities, driven on by the demand of big business for ever-lower, more "competitive" corporate and personal tax rates. The welfare budget—the largest remaining item of social spending—has now become the central target.

When the jargon is stripped away, it is clear that the measures outlined in the report will increase hardship and inequality by pushing the jobless into low-paid jobs, further undermining the wages and living standards of all working people. In fact, that is the report’s essential purpose. Buried away on page 44 is the following:

"Thus, the new regime will assist employers to further drive down wage costs, with Participation Support benefits acting as a spur and sometimes a subsidy for low-wage labour. Not surprisingly, as the report notes, "the Business Council of Australia [the major employers’ group] proposed such a strategy in its submission.

—from COMER, May 2000

Index

7: The IMF & World Bank —

Two of Several Instruments of National Destruction

Part I of an interview with Michel Chossudovsky Professor of Economics, University of Ottawa Interview and editing by Jared Israel (4-16-00) www.tenc.net [emperors-clothes]

Chossudovsky: When an IMF mission goes into a country and requires the destruction of social and economic institutions as a condition for lending money - this is very similar to the physical destruction caused by NATO bombing. The IMF will order the closing down of hospitals, schools and factories. That's of course more cost effective than bombing those hospitals, schools and factories, as they did in Yugoslavia, but the ultimate result is very similar: the destruction of the country. The IMF has what is called the MAI - the Multilateral Agreement on Investment. It's the ultimate investment treaty. Signing leads to the economic destruction of the targeted country. Well, really, war is simply the MAI of last resort.

Jared: What are your thoughts on the demands of the folks protesting now in Washington?

Chossudovsky: Well, lots of people have converged on Washington to protest the Bretton Woods system, the IMF and the World Bank. The question is: what are we fighting for? I suspect the dominant position among the NGOs [Non-Governmental Organizations] is still that we need to reform these institutions, give them a human face, make them work for the poor and so forth. I think this approach, which developed from the "50 Years Is Enough" campaign against the Bretton Woods institutions is a mistake. And increasingly people are challenging it, questioning the legitimacy of these Washington institutions. But still there's a lot of confusion. Some think the IMF and World Bank are playing contradictory roles, which is not so. And also there's a tendency to see these institutions in isolation. In fact they are simply two tools used by the Western elite to destroy nations, to turn them into territories.

Jared: You think some people are fooled by the World Bank?

Chossudovsky: They believe the World Bank has adopted a humane approach, that it's involved in poverty alleviation whereas the IMF creates poverty. Or they even think there's a conflict between the two. That's nonsense. The World Bank is doing essentially the same job as the IMF; it merely has different responsibilities in the Third World. In a way, it is far more dangerous precisely because [of the fact that] its supposed mandate to alleviate poverty disarms critics. The simple fact is: Wall Street is behind both these institutions. They are run by bankers not sociologists.

Free Trade, brother of War

Chossudovsky: More important: a lot of people don't see the link to NATO. Very few of the organizations criticizing the Bretton Woods institutions opposed the attack on Yugoslavia. They didn't talk about it in Seattle and they aren't doing it in Washington now. They campaign against free trade, against the IMF, in favor of the Jubilee campaign to cancel third world debt, but not against war. But free trade and war go hand in hand. It was true with the British in the 19th century when they forced the Chinese to "freely" purchase opium and it is true today. And there's a good deal of coordination between the IMF and NATO. You saw it in Kosovo. The IMF and the World Bank had set up a postwar economic plan including free market reforms well before the onset of bombing. [See note #1 at the end] They work together. If a country refuses IMF intervention, NATO steps in, or NATO and various covert agencies, and they create the proper conditions for IMF programs to be imposed.

Israel: Very sharp point.

Chossudovsky: The countries that accept the IMF, like Bulgaria and Romania, may not get bombed but they are destroyed with the pen. In Bulgaria the IMF implemented the most drastic reforms, IMF medicine, which decimated social conditions - pensions slashed, factories closed, dumping of cheap finished goods, elimination of free medical care and transportation services and so on. And it's not just NATO. We see that in Central Asia and the Caucuses. Hand in hand with the imposition of IMF and World Bank reforms and privatization program we have not only NATO but also CIA covert intelligence operations - the institutions of war and economic management interface with one another at a global level. So right now various countries are being softened up with regional conflicts that are financed overtly and covertly by the Western elite. The KLA is just one example of an externally financed insurgency. You see these manipulated conflicts especially wherever there are strategic pipelines, and they are linked to the drug trade and the CIA, covertly, then openly linked to NATO and official US foreign policy, and finally to the IMF, the World Bank and regional banks and private investors. Links in a chain. Let's categorize these global institutions: you've got the United Nations system and peace keeping; they play a role and they are interfacing with NATO as well. Then you've got the IMF and the World Bank, and the regional development banks like the ADB, the Asian Development Bank, and so on. In Europe it's the European Bank for Reconstruction and Development. These are the main arms. Sometimes war creates the conditions, and then the economic institutions come in and pick up the pieces. Or conversely the IMF itself does the destabilizing, as they did in Indonesia. They insisted on cutting off transfer payments to the various states in the federation. Now that fractures a country like Indonesia which has 2,000 islands with a system of local governments. It is the geography of the bloody place. So they leave these islands to their own devices. Do you see what that accomplishes?

Israel: In other words, they insisted on cutting money that was supposed to subsidize local government?

Chossudovsky: Yes, for example for education and so on. By doing this - and incidentally they did it in Brazil as well - they destabilize the country because in order to have a country there must be fiscal coherence, a system of fiscal transfers. So in a place like Indonesia, each of these islands becomes a small state. And of course now the idea of going it alone becomes far more attractive to the many different ethnic groups. Of course they [that is, the planners] are fully aware of this - they have made it happen time and again. It took place in Yugoslavia; it took place in Brazil; it took place in the former Soviet Union where the regions are left to their own devices because Moscow doesn't transfer any money. Potentially it could happen in the United States as well. It is guaranteed to produce a situation of conflict, internal strife.

Israel: Mutually unproductive conflict.

Chossudovsky: Yes because people are impoverished to such an extent that they start fighting.

Israel: On every basis, especially ethnic.

Chossudovsky: Incidentally in Somalia there weren't any ethnic groups, but it worked there too. You don't need a multi-ethnic society to have divisions, to have Balkanization.

Israel: And you're saying this is part and parcel of a plan for Empire?

Chossudovsky: I am saying this is recolonization. Countries are transformed into territories, colonies essentially.

Israel: What distinguishes the two?

Countries vs. territories

Chossudovsky: A country has a government. It has institutions. It has a budget. It has economic borders. It has customs. A territory has only a nominal government, controlled by the IMF. No schools and hospitals, as those have been closed down on orders of the World Bank. No borders because the WTO has ordered free trade. No industry or agriculture because these have been destabilized as the result of interest rates of 60% per annum and that is also the IMF program.

Israel: 60% per year?

Chossudovsky: In Brazil it's much higher. I'm looking at Botswana now. The interest rate is horrendously high.

Israel: And this is imposed by the IMF?

Chossudovsky: They put a ceiling on credit. Do you see? So people can't get bank loans; it drives interest sky high and that kills the economy. Then they open it up to free trade. So the local capitalist enterprises have to borrow at 60% from the local banks and then they have to compete with commodities from the United States or Europe where interest rates are 6 or 7%. These reforms are essentially aimed at destroying local capitalism.

Israel: So how do we fight this?

Chossudovsky: Not with a single-issue movement. We can't focus solely on the Bretton Woods institutions, or the WTO, or environmental issues or genetic engineering; we have to look at the totality of relations. When we look at the totality we see the link to the use of force. Beneath this economic system lie the undercover features of the capitalist order: the military-industrial complex, the intelligence apparatus and the links to organized crime including the use of narcotics to finance conflicts aimed at opening nations to Western control. We have gone from gunboat diplomacy to missile diplomacy. In fact it is not missile diplomacy. It is sheer bombing.

Israel: You said that part of the military intelligence apparatus is gangsters. I know that you have been writing material about how drugs is actually an economically powerful force.

Chossudovsky: Well it is more complicated than that. Because in fact the gangsters are the instruments of big capital. They are not - they don't overshadow the system in any way. The gangsters are people who can be easily used precisely because they are not responsible to anybody. So it is much more convenient. Let's say you install Hacim Thaci [leader of the Kosovo Liberation Army] in the seat of government in Kosovo. It's much more convenient to have a gangster like this running a country than to have an elected prime minister that is responsible to citizens. The best thing is to have an elected gangster, somebody like Boris Yeltsin, that's the best - get an elected gangster. We have elected gangsters in the US as well. Why? Because elected gangsters are much easier to control than elected non-gangsters. But we must understand these gangsters are pretty obviously subordinate - when we say it is the criminalization of the colony, it is not true. It's the other way around. You are never going to have a situation where these gangsters will be given any power. The big ones perhaps... So there is a certain interpenetration of legal and illicit trade. But in effect illicit trade is always subordinate to large scale financial and business undertakings. An important aspect of this is that the IMF creates the conditions for the growth of illicit trade and for the laundering of dirty money, all over the world. That is very clear because when legal economies collapse under the brunt of IMF reforms what are you left with? It's the gray economy; it's the criminal economy.

Israel: And that encourages the development of forces that can be used to replace potentially responsible legal forces.

Chossudovsky: Yes and that type of collapse in legal economic systems creates also the conditions for developing insurgencies, destabilizing elected governments, closing down of institutions and transforming countries into territories which are then run as colonies.

Dear reader - this interview is continued. Part II will be posted as soon as the text is edited and laid out. - JI

********************************

Note # 1 "In Opening Kosovo to foreign capital" which you can read in full at http://emperors-clothes.com/articles/chuss/opening.htm, Michel Chossudovsky writes: "In occupied Kosovo under the mandate of UN peace-keeping, state terror and the 'free market' go hand in hand. The concurrent criminalisation of State institutions is not incompatible with the West's economic and strategic objectives in the Balkans. Notwithstanding the massacres of civilians, the self-proclaimed KLA administration has committed itself to establishing a 'secure and stable environment' for foreign investors and international financial institutions. .. "In close liaison with NATO, the Washington based financial institutions had already analyzed the consequences of an eventual military intervention leading to the occupation of Kosovo: almost a year prior to the beginning of the War, the World Bank conducted 'simulations' which 'anticipated the possibility of an emergency scenario arising out of the tensions in Kosovo'.

1 "While the bombing was still ongoing, the World Bank and the European Commission were given a special mandate for 'coordinating donors' economic assistance in the Balkans'

2. The underlying terms of reference did not exclude Yugoslavia from receiving donor support. It was, however, clearly stipulated that Belgrade would be eligible for reconstruction loans 'once political conditions there change'.

3 "With regard to Kosovo, the World Bank rather than providing loans to rebuild the province's infrastructure has focussed its intervention on providing 'assistance in designing the reconstruction and recovery program' as well as so-called 'policy advice in economic management' and 'institution building' namely 'governance'

4. In other words, an army of lawyers and consultants have been sent in to ensure Kosovo's transition to a 'thriving, open and transparent market economy.'

5 Support granted to the KLA provisional government would be geared towards 'the establish[ment] [of] transparent, effective and sustainable institutions'

6. An 'enabling environment' for foreign capital is to be established alongside suitably devised 'social safety nets' and 'poverty alleviation programs'. "Meanwhile, Yugoslav State banks operating in Pristina have been closed down. The Deutschmark has been adopted as legal tender and the banking system has been handed over to Germany's Commerzbank A.G which is the sole private shareholder in [Kosovo's] Micro Enterprise Bank (MEB) formed in early 2000 at the initiative of the World Bank's International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) together with the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO), Germany's International Micro Investitionen (IMI) and Kreditanstalt für Wiederaufbau (KfW). [Thus the German] Commerzbank AG will gain control over commercial banking functions for the province [of Kosovo] including money transfers and foreign exchange transactions."7 [To check out the references in the above text please see the original at http://emperors-clothes.com/articles/chuss/opening.htm ]

To browse articles from Emperors-Clothes.com, go to http://www.emperors-clothes.com and scroll down the page. www.tenc.net [emperors-clothes]

 

Index

8: Bilderberg

With only 11 days to go, this year's Conference venue has been exposed by U.S. Bilderberg chaser Jim Tucker: http://www.spotlight.org This right-wing newspaper is the only one which will publish Jim's revelations on these super-elite conferences. Let us hope this year some more green & left-leaning publications will grasp the nettle too.

1-4 June 2000

The Chateau Du Lac Hotel

15-20 kilometers outside of Brussels

Belgium

The Chateau Du Lac Hotel Web Page:

http://www.hotelbook.com/static/welcome_21468.html

Address:

The Chateau Du Lac Hotel

Avenue Du Lac 87

Brussels

1332

Belgium

Phone: 02-6557111

Fax: 02-6557444

Chairing this meeting will almost certainly be Viscount Etienne Davignon who chaired last year in Sintra, Portugal for the first time. Here are just some of the positions held by this highly influential man, as unelected as he is unknown to the general public.

New Bilderberg chairman - Viscount Etienne Davignon

Vice-Chair of the European Commission in the 1980's, Viscount Etienne Davignon is Chairman of Societe Generale De Belgique - massive banking and utility conglomerate in Belgium. He is also Chair of the shadowy European Round Table of Industrialists, who formulate policy for the European Commission to implement. Not suprising then that most of the directives coming out of Europe are monopolistic and pro big business.

Davignon is a founder member of and President of AMUE, the Association for the Monetary Union of Europe as well as being a member of David Rockefeller's Trilateral Commission, The European Institute in Washington and a Director of Anglo American mining.

In his position as Industry Commissioner in the 1980's Davignon was instrumental in turning European Institutions from supporting small business to supporting big business. He did this by getting European Industrialists, through the ERT, to draft Euro-policy, an anti-democratic practice continued to this day.

Bilderberg Chairman - Viscount Etienne Davignon and his company http://www.generale.be/CommUK/CVUK/CV2StevieUK.html

 

 

Index

9: Preparing for the Meltdown

William Krehm

As the lurchings of the world’s stock market attain seismic proportions, preoccupation about a collapse is spreading even in the financial press. But these are readily allayed as 300-point drops of Internet stocks are rapidly followed by the recovery of a few lead stocks to new heights: because of their weightings that can lift the entire index closer to heaven. When this happens concerns where the world might be heading fade; confidence is renewed that the "free market" will go on looking after its faithful. Above all there is no thought about an emergency plan to cope with a definitive drop when it does come. Critics of the system have responded reactively to aggressions of the establishment. On the whole they have allowed it to set the agenda. Gelded concepts such as "inflation," "interest rates as the one blunt stabilising tool," "productivity" "deficit" used by those in power remain largely unquestioned.

In this context an email entitled ‘Agenda for Economic & Political Reconstruction’ from John Hermann, one of the leaders of Economic Reform Australia is of particular interest. It sets up a framework for considering where the world is bound, and what is to be done about it.

"We live in a time of unprecedented change, when mighty structures collapse and new structures arise in their place. In planning an agenda for political, economic, and governmental reconstruction, consideration must be given to each of three periods, separated by two moments of transition.

"We are in the pre-meltdown period. In this period only about 10% of the general population are awakened to right values. Awakening of more people to new values is steady but slow.

"The pre-meltdown period cannot last, because it has within it massive elements of instability. It will lead to a moment of great crisis characterised by the collapse of stock exchanges and the free market global economy. This will lead to a period of great adversity and tribulation. This period may aptly be named the cauldron period because it will be a time of testing and purification in the fires of personal experience. Adversity and deprivation will bring out the best and worst in people. There will then be recognition that the old ways have failed. Amazingly bold initiatives will be inaugurated. But the majority will still be guided by wrong thinking and reactionary politicians will gain many eager ears. Reactionary options of violence and intensification of the old material, separative ways will be tried. But steadily and now rapidly, the number of people disillusioned by the old separative ways grows.

"People will begin to share and think in terms of the good of the whole of humanity. Then follows the era of peace and steady reconstruction. Because the people are united in true values and are working together in goodwill and unity, physical and psychological reconstruction projects become progressively successful in transforming society into a happy, sustainable global community."

(This is an excerpt of a much longer document. Hermann’s email address is [email protected])

This defines the scope of the problem:

salvaging society from destruction by of a system whose lone principle has been the virtue of unbridled greed. However, it stands in need of considerable fleshing out if the undertaking is to succeed.

Of Australia’s prospects Hermann has this to say: "Australia will be the litmus test nation for the entire world. Many third world nations have collapsed, but the affluent nations continue the free market practices believing they are insulated from such misfortune. Because Australia is the most foreign-owned of OECD nations, it is the most vulnerable of all middle-income nations. When hedge funds start to really bite into the Australian dollar so that it loses over half its value against stronger currencies, then the world will know that the free market economy has failed, even for affluent nations. Investor confidence globally will freeze, causing the rapid fall towards global economic meltdown.

"Many governments will panic and choose extreme measures along the old ways of thinking. We will witness massive degradation of the environment, failure of food crops and industry, massive unemployment, breakdown of social services, massive homelessness, crime and drug problems. In the third world there will be much starvation, many plagues, and new wars will break out. Such events are simply an externalisation of our present separative, material ways of thinking. And over time they will get worse the longer people delay an approach based on goodwill, love and sharing.

"But there are those charitable and goodwill groups, and non-government organisations which will be moved by compassion to respond to the need. These will become the seed group for the new society arising from the ashes. Around them the new economics will develop. They do not seek to hoard wealth, but give freely of what they have to provide assistance to any in need. Their numbers will steadily grow, because their work will be seen to get results."

But for all its merits, Hermann’s blueprint suffers from an excessive optimism that the mere espousal of moral principles will assure a happy ending. The Crash of 1929 and the Depression of the thirties certainly support Hermann’s overall vision, but it should be remembered that it took a world war to really wipe our the lingering depression. Nor must we forget that the technology of destruction in that conflict was still primitive compared to what it has since become. Subsistence economies throughout the world had a greater presence and were in better shape than today. The limits imposed on discussion of policy alternatives were far less absolute.

The rethinking of basic economic concepts must start at once. The immense growth of the world’s population, the extent of the urbanisation and the ecological degradation that has already taken place make it highly doubtful that more than a small fraction of the world’s population will have a chance of survival unless some hard-nosed rethinking of what the economy is about takes place.

One advantage we do have over the thirties. Much of the thought that helped bring society out ofthe depths before, during and after World War II lives on underground on library shelves and even in our law books. Though at times we have verged on the brink of book-burnings, it has nor yet overtaken us. We must make the use of that—for example, to bring back the true Adam Smith to replace the grotesque caricature that has been made of him.i

It is also important to appreciate the shift in the relative power of government institutions as a result of crucial historical experiences. A German writer, Peter Merseburger, has summed this up: "The very monumental and pompous style borrowed from antiquity—half temple, half fortress— announces Congress’s claim to supremacy. The Capitol, Alexander Hamilton already declared, is the political center and the heart of the nation. Up to now American history has known periods during which the supremacy of Congress was unquestioned, but others as well, when the President was unchallenged in his leadership of foreign policy. Generally, in times of international tensions or war, the President’s hand is strengthened, while with the ebbing of tensions or after a war the power pend9lum swings back to Congress. The uncertainties of the Cold War naturally shifted the control of foreign policy and the power over the use of the armed forces to the Presidency. Nations that lose wars, not unrarely suffer revolutions on the home front. The revolution after the lost Vietnam war saw Congress emerge as victor. Opposition to the Vietnam war had sharpened the consciences of the congressional representatives."

The diminished power of the President prevented him from obtaining money for munition, spare parts, fuel and medicaments for South Vietnam after the American withdrawal, and even moneys for humanitarian aid to the refugees from Vietnam. Watergate, and the resignation of Nixon, completed the process of weakening the presidency.

"Under Reagan an enfeebled presidency had to resort to the Contragare device to get arms to the Nicaraguan contras.

A similar loss of power has taken place in the case of central banks, and will become increasingly evident as the world they have created goes on crumbling. That their surrender of power to the mega-speculators was largely of their own doing heightens the case against them as the facts become known. The financial system put into power over the past three decades has suffered a series of lost wars, one superimposed on the other. Our banks were allowed to prescribe the form of their bailouts and invariably opted for more deregulation to allow them to gamble in more risky areas with ever higher leverage. For the purpose the capital accumulations in both private and public sectors have been put into formats where they could be thrown into the resulting stock market potlatch.

Specifically, the crisis of the financial system in the latter l980s was addressed on a world-wide scale by reducing further the statutory reserves that banks held with their central banks as a proportion of their credit-creation. In Canada it was phased out entirely by 1993. At the same time the Bank for International Settlements, a sort of central bankers’ club that will not even allow elected officials to attend its sessions, brought in its Risk-Based Capital Requirements. These declared the debt of OECD countries to be risk-risk free and thus allowing banks to load up with it without putting up a penny of their own. In this way the distressed Canadian banks could take on a further $60 billion. This has been tantamount to annual entitlement of at least $5 billion a year, and served as a platform from which the banks could move into orbit in their accumulation of risky financial investments throughout the world. The ratio oftheir assets to legal tender that had stood at 11.1 in 1946 reached a peak of 404:7 in September 1998. By June/99 dropped to 358.0, as their assets dropped by $65 billion—more than their entire capital. Still more disturbing, since the Office of the Superintendent of Financial Institutions allows them to list their assets at their acquisition costs rather than at its market value (if they hold less than a 20% interest in the total asset), this ratio understates the case.

Nor is the phenomenon at its worst in Canada. Mexico has in fact reintroduced statutory reserves with the new wrinkle that its central bank pay the banks commercial interest rates for the reserves they put up with it. Similar plans have been broached in Europe and elsewhere—trial balloons of what the next global bank bailout will look like, unless those who will pay for this awaken to the threat.

Another lost war of the establishment was the downloading of the responsibility for vital social and educational programs from one level of government to the other immediately below. In this way the burden hit the municipalities with a thud—less the funds to pay for these new responsibilities foisted on them. Evidence of the lost war against the deficit is becoming critically evident in the scandal of homelessness, ambulances with emergency patients scurrying around our cities to find hospitals able to accept them. At the same time, the belated passing of a bill by Parliament introducing capital accounting in the federal books—some forty years after its first recommendation by a Royal Commission,— casts serious doubt as to whether the supposed "debt wall" cited to justify the slashing of social programs ever existed.

Rarely has the scene been set for a greater shift of institutional power as a result of disastrously lost wars. In the Bank of Canada Act the provisions are in Article 1 8, items c and j for the central bank to carry up to one-third of the federal government’s unfunded debt and one quarter of that of any province, and no limit at all on the amount of government bonds it can hold. It is also empowered to hold any obligations guaranteed by either of the senior levels of government. That would, of course, include municipal bonds with such guarantees. That means that any interest paid to the central bank on its inventory of such municipal bonds so guaranteed or provincial bonds would substantially end up as dividend payments to Ottawa. These clauses open up a new dimension for cooperation between Ottawa and other levels of government. In return for undertakings to observe standards set by the federal government the latter could agree to reimburse them for part of the interest that ended up with it as a result of its loans.

In the mid-seventies the BoC held over 20% of the funded federal debt. Currently that is down to about 5%. It would be enough to raise that proportion to where it stood in the 1970s to make available basically interest-free money for the federal government which could be earmarked for urgent capital projects. To avoid possible inflation, the credit-creation by the chartered banks would have to be reduced correspondingly. Once the stock market really sits down, the chartered banks will be in no position to create much credit in any case. Governments at all levels—against federal guarantee—will have to take on debt to restore the vast part of the money supply that will have vanished in the chasm of bankruptcy.

It is also essential that statutory reserves be restored to provide a socially acceptable way of dealing with an overheated economy where it really does exists. (See Mathematical Corner, page 10.) All that would be necessary would be to raise the reserve requirement, rather than interest rates. And restrictions on new credit could be directed to really overheated industries instead of putting further interest burdens on a country that is already crushed under debt. The guideline for such restructuring of our banking system isto start by moving back to what worked in the past, and then to assess the results before continuing incrementally on this course.

1 See the article in Economic Reform (3/2000) on the subject.

2 Die unberechenbare Vormacht (The Unforeseeable Power Supremacy) C. Bertelsmann verlag Gmbh, Munich 1983, especially Chapter 5 on the ‘Crisis of Institutions.’ Translation byWK.

—from COMER, May 2000

 

 

Index

10: Are Central Banks Becoming Paper Tigers?

wk

As our commercial banks have changed their food chain from traditional banking to high speculation, the preoccupation of central banks is shifting from keeping an eye on what they are engaged in to covering up for them. This has been achieved by assigning them more of their own powers of money creation, Obviously, along with the complicity involved, this has seriously cut into central banks’ own powers. Despite the proverbial wisdom and might attributed to the Federal Reserve chairman, Alan Greenspan, the truth is that he is well on the way to becoming a paper tiger. Further evidence of this comes from an unusual source. In The Financial Times of London(17/Ol), Michael Klein, chief economist of the Royal Dutch/Shell group, writes:

"Talk of an international financial ‘architecture’ reveals a belief that clever humans can construct an orderly global financial system. However, what really determines the future may turn out to be a wave of technology-driven change in the world of money." But such an impression may be an astigmatism in the eye of the observer. As immense as the influence of technology undoubtedly is, human decisions determine its uses.

"First, monetary policy and central banks may become irrelevant. The growth of real-time settlement systems promises to reduce the need for some form of "financial settlement money." In addition, private settlement systems such as Chips may come to accept private means of settlement of payment including, for example, company shares. In a world of private money, the fate of central banks is privatisation, or maybe transformation into a regulatory body."

It is a fact that options on company stock are playing an ever greater role not only in rewarding executive staff, but in shaping firms’ bottom lines more alluringly. The cost of stock options to executives turns up only when they come to be exercised. But since the "new economy" lives increasingly in an unascertainable future, it is hardly forthcoming for firms to ignore costs that must arise unless the glowing prospectuses dismally fail to be realised.

Asia is at an early stage of recovery from its 1997-98 meltdown. And it is discovering the thrills of using company shares validated by frequent IPOs (Initial Public Offerings) as money. The legendary achievements of the North American stock market in this respect owes much to the gap between the "old economy" kept in a state of imminent or actual deflation by Asian competition and the "new economy" which exploits the marvels of technology to turn its back on conventional accountancy.

Now Asian Internet entrepreneurs are entering that field on their own behalf.. They are exploiting the potential immensity of local markets, the gap between living standards of the masses and the financial elite, the well-established circuits of nepotism and corruption, and even the collaboration of the governments for the purpose, capitalist or communist. The beauty of the "new economy" is that it appears to wipe out the constraints of time—the future is notionally achieved in the twinkle of an eye and validated as cash.

In an article in The Wall Street Journal (15/02) ‘Family Ties Live in Asia’s New Economy,’ Jon E. Hilsenrath and Richard Borsuk give us a glimpse of this magic:

"At its core, the high-stakes courtship of Cable & Wireless HKT Ltd. has all the earmarks of American-style capitalism hitting Asia with full force. First, two telephone companies—HKT and Singapore Telecommunications Ltd.— look to reinvent themselves in an age of deregulation by merger. Then an aggressive new-economy suitor, Pacific Century Cyber Works Ltd., barges into the merger talks, armed with a lofty share price, and looks to gobble up an old-economy emblem—Hong Kong’s former monopoly phone outfit.

"But also at its core, this unfolding drama has a particularly Asian characteristic: Its central figures come from two of the region’s most powerful families, Li Ka-shing’s in Hong Kong and Lee Kuan Yew’s in Singapore. Their role in this megamerger is a reminder that many of Asia’s influential families have emerged from the 1997-8 crisis as healthy as ever and ready to take a leading role as Asia hurtles into the "new economy.

"At the helm of PCCW, Hong Kong’s leading Internet company, is Richard Li, son of Li Ka-shing. The elder Li holds commanding positions in Hong Kong ranging from property and ports to telecommunications and drug stores. The younger Li, 33 years old, built a regional satellite-television network, Star TV, before he was 30, and sold it to Rupert Murdoch for $950 million." The Li family, of course are well represented in Canadian real estate and other investments, particularly on the West Coast.

"Richard Li’s interest in HKT flies in the face of SingTel, which is in talks about a friendly merger with HKT. Standing at the helm of Sing Tel is Lee Hsien Yang, 42, senior minister of Singapore who transformed the city-state from a colonial outpost."

"PCCW is a fast-rising Internet stock, and is ready to use its pricey shares to finance a deal for HKT. Since early May, when it went public, its shares have risen more than fourfold. SingTel is an old-guard telecom company, flush with cash that it has been slow to spend. Its shares have fallen 15% since May.

"PCCW has powerful investors such as CMGI Inc., Intel, and Microsoft. SingTel has a powerful investor, too, the government of Singapore which controls 76% of the shares, through Temasek, a state investment company.

"PCCW must convince HKT’s parent, Cable & Wireless PLC of the UK, that its remarkably high valuation is justified. With a market capitalisation of nearly $30 billion, PCCW’s value exceeds that of Internet retailer Amazoncom." Asian operators are already creating share-money on a scale approaching that in North America.

But let us get back to the Michael Klein piece in The Financial Times.

"Second, national and private currencies may compete effectively with each other, rendering exchange-rate policy and balance-of-payment concerns obsolete.

Smart payment cards and wireless communication devices are spreading across the world, even to the poorest countries, and costs continue to fall dramatically. The spread of the Internet allows each financial transaction to be settled 100 times more cheaply than manual settlement via bank branches. .Once the demand for privacy, security, and trust is met via encryption, regulation and branding, we may see a new world of financial settlement." The weakness in Mr. Klein’s insights is that sitting where he sits, he accepts the power element that clutches these new technologies as just part of the landscape.

"This is a world of ‘capital flight for all.’ People choose which currency bloc to belong to. There is no longer a match between geographical entities and the money used to settle transactions conducted on their territories. Governments lose the tool of nominal exchange-rate depreciation. National current-account deficits would be as meaningless as in currency unions."

"Thirdly, more flexible forms of denominating wages may act as a substitute for the loss of exchange-rate flexibility. Wage contracts are usually inflexible (‘sticky’) because people will not agree easily to a cut in their remunerations agree to in their contract. But in future, wages could, for example, be denominated in shares of the employer. But re-denominating contracts, society would create new "units of account. In fact, one cannot have both price flexibility for contracts with ‘sticky’ prices and a unique unit of account."

"In a world of private money competition, the state would no longer be able to provide open-ended deposit insurance or liquidity support by printing money. Overall, the disciplines on financial institutions would come to resemble the ones under the free-banking systems of the 18th and 19th centuries. Without regulatory prompting banks would typically carry capital in the order of 20% of assets or more, a bit like today under currency systems. They would advertise with hard numbers on their financial health."

"Beyond private insurance schemes, the residual burden to provide liquidity support for banks would fall on fiscal policy. This would require strong underlying fiscal positions, so that governments could borrow in times of crisis. Macroeconomic policy as we know it would be at an end.

"Finally, 19th-century-style deflation and financial crises may become more likely, at least during the transition to this new world of money.

The last three paragraphs give us a franker view of where we are headed. Particularly notable are the references to the banking system. Compare the 20% reserves that Klein foresees as compared with the less than .33 of a single percent reserves—the ratio of legal tender to bank assets of Canadian chartered banks when last reported. And the suggestion of the disciplines on our financial institutions coming to resemble those of the 18th and 19th century is chilling. Such a prediction could come to pass only after our high-flying financial institutions had lost their capital many times over, and ended up bankrupting not only themselves but the governments left with the task of bailing them out.

We agree with Mr. Klein on the danger of such a state of affairs coming to pass. The main difference between us is that we warn against such a prospect, and Mr. Klein somehow blames the leverage and deregulation allowed our banks onto technology. No improved chip, no matter how smart and fast, could possibly lead society to such a plight. But powerful humans, mad with greed, are well on the way to doing so.

—from COMER, March 2000

 

Index

11: "The Morning After The Night Before"

—from COMER, May 2000

Even steeper than the plunge of stocks on world markets is the collapse of credibility of those running the show. There is hardly a self-serving proposition elevated by them to high dogma that isn’t in shreds. On page 4 we carry a condensed version of an article by Joseph Stiglitz summing up his experiences as chief economist of the World Bank.

"I saw how the IMF, in tandem with the US Treasury responded to the gravest global economic crisis in a half-century. And I was appalled."

Mr. Stiglitz deserves applause for his tenacious fight within the world financial organisations to restrain their destructive policies. But his revelations merely scratch the surface. The current stock market’s mad-cow distemper is destroying trillions of dollars of private credit-money around the world. As in that disease the doomed beast goes on trying to pick itself up from the ground to no purpose. At the same time government debt—our only legal tender—has been compulsively reduced. Combined, the resulting credit implosion can bring on a depth of deflation unexperienced since the thirties. But our central bankers have expunged the very term "deflation" from their vocabulary. These doctors specialise exclusively in combatting high blood pressure. Low blood pressure, right to the point of death, they deny can exist.

Listen to The Wall Street Journal (17/4) in ‘Inflation Shows Signs of Stirring as Forces Restraining it Wane’ by Jacob M. Schlesinger and Yochi Dreaxen. From it appears the utter confusion reigning on what inflation might be, let alone what actually caused it.

"For three years, Fed Chairman Alan Greenspan has been warning that there are limits to how fast the New American Economy can grow without sparking inflation. ‘We do not know where that point is,’ he would say ominously. But when we reach that point short of a repeal of the law of supply and demand, inflation will return.

"Friday’s consumer-price report provided the most tangible reminder in a long time that the law of supply and demand hasn’t been repealed. Retail prices, excluding the volatile food and energy sectors rose 0.4% in March from the previous month and were up 2.4% from the previous year. That’s not much if measured against the price panics of the 1970s, or even the moderate inflation of the 1980s. But it’s the biggest monthly increase in the core inflation rate in five years..."

"Fed Governor Laurence Meyer, one of the central bank’s leading hawks, said "‘The gradualist approach has been fine as long as the Fed had been moving preemptively against the threat of higher inflation, without any direct corroboration from data on inflation," but if inflation expectations pick up, it would be important to react more aggressively."’ What could be the meaning of "without any direct corroboration from data on inflation"? Obviously, an absence of evidence that rising prices are a problem. They have nothing to go on other than partisan self-interest. Moreover, if such early preempting doesn’t work, shouldn’t that suggest reconsidering both the problem and the proposed cure, rather than stepping up the dosage?

"On the other hand if the market’s precipitous decline continues, the Fed will be loath to make it worse. And while all evidence is that the economy continues to gallop along at high speed, the instant evaporation of trillions in stock-market wealth may well presage some slowing in the excessive consumer spending that has worried officials."

The WSJ lists the Goldman, Sachs and Co.’s estimate of first-quarter growth rate from an already high 5% to a whopping 6%, plus an expected rate of unemployment by year’s end of 3.7 end vs. 4.1% today." In the midst of crashing stock markets, only a gullible reader will take seriously a brokerage firm’s estimate of the unemployment rate will be 8 months down the line. Starting with pink slips in its own firm.

But that is just one detail. On page 10 of this issue of ER the reader will find reference to two gross statistical errors that exaggerate the growth of the economy. On that growth depends the "natural rate of unemployment" that is supposed to warn governments when inflation is at our gates. Yet the same growth of the economy is supposedly proof of the benefits of globalisation that sources from the other side of the planet items once made at home. That entails an immense abuse of the ecosphere as fuel consumption is driven higher. That also drives up the price of oil which turns up in the prices of everything starring with transportation. What we are maximising" is not only stock market winnings but transport costs. These relationships belong at the very centre of the missing dialogue on globalisation and deregulated trade and finance.

Since public services are unpriced they turn up twice in the GDP—as increased output of the public sector and then as an increment of the price of marketed goods due to the growing layer taxation in their costs. Our GST and other regressive consumer taxes that are tacked onto end price should make that clear, but it holds for all taxation.

The other distortion is disclosed by some simple modulus congruence mathematics, revealing neglected possibilities of attacking higher prices by lowering rather than raising interest rates. This can be achieved by pairing lower interest rates to the government with a corresponding lowering of certain taxation. The net first-round effect to the treasury of such arrangements would be neutral—the government would lose in reduced tax revenue what it gained in lower-interest borrowing. But the ripple effects throughout the economy of both the lower taxation and the lower interest rates would reduce upward pressure on prices and in general be people-friendly. No need for central bankers to wield their "single blunt tool."

Imagine for a moment what would be the situation if engineers designing mechanisms or processes operated with a "single blunt tool"! The situation is no different in economics. Decades ago a Dutch economist, Jan Tinbergen, devised a counting rule no more complicated than our first-year algebra lessons in high school: It takes two equations to solve a problem with two independent variables. A single equation won’t do, even if we call it "a single blunt tool."1

Our economic problems cannot have just a single variable to match the central bank’s supposed "single blunt tool." The public sector does nor conform to market logic, nor does the household economy, nor the environment. Each of these then must have at least one independent variable—in fact each has many more. Working on the assumption that one blunt tool will do, and choosing for that, moreover, the revenue of money-lenders is bound to be counterproductive.

The roller-coaster behaviour of the stock markets is a shrieking judgement on this use of interest rates to "stabilise" the economy. Gone in no time flat will be the boasted surpluses of Messrs. Clinton and Paul Martin. And then the idiocy of reducing government debt on the eve of an inevitable meltdown of over-bloated private credit will be apparent. It is the measure of how deeply society has been brainwashed that Mr. Greenspan can go on using high-interest rates as a synonym for anti-inflationary policy.

Or let us take the official use of "core inflation" that excludes food and energy prices. Why exclude precisely these two ingredients that are essential to human survival and pervasive throughout the price structure? The official reason is that they are by nature turbulent. But isn’t that absurd as a criterion of what should be ignored in our "core" appraisals, when the stock market itself has become an insane roller coaster? Should we perhaps ignore the gyrations of the stock market as well to get to our core stock market assessment?

Nor can you eliminate food and energy prices merely by removing their explicit prices from statistical calculations. The price of food and energy enters implicitly into the costs and hence the prices of everything that moves or stands still.

Even the authors of the WSJ piece we are quoting have an inkling of that: "The March consumer-price figure reflected the spillover of higher oil costs into other sectors, notably transportation, which registered the biggest one-month jump of any sector outside energy." And the spillover costs of high interest rates themselves penetrate throughout society, including the high cost of homelessness.

And surely Mr. Greenspan can’t overlook that raising interest rates is not going to bring down oil prices set in Saudi Arabia, Nigeria, Venezuela, Mexico, except by collapsing the world economy. On the contrary to much of the world high interest rates have been the economic equivalent of Washington’s atomic arsenal. Its control over the international financial system has enabled it to exploit many of the oil-producing countries. Jacking rates up at a time like the present will if anything add to their resentment and induce them to make full use of their oil resource to even accounts a bit.

The very notion of high interest rate as "the one blunt tool" for stabilising the economy must go our the window. We must bring to centre stage the flagrant conflict of interest in bestowing on the revenue of a potentially parasitic economic group the monopoly as stabilisation tool. The abuse of interest rates has gone beyond simple usury. Today it is being used systematically as a battering ram to reduce labour, small businesses, pensioners and the government itself to the auction block.

There are many alternative measures to contain inflation—where it really becomes a problem—without making hot money king.

The most obvious is employing the Bank of Canada for its original purpose. The means for doing that are still to be found in the Bank of Ca nada Act. Let’s get after our politicians to use them.

1 Meltdown: Money, Debt, and the Wealth of Nations, ed. W. Krehm, COMER Publications 1999, PP. 156.

***************************

COMER (or "Economic Reform") is the monthly journal of the Committee on Monetary and Economic Reform (COMER), a Canada-based publishing think-tank.

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Index

12: The Co-failure of Communism and Capitalism in Russia

William Krehm

It is not the custom of this humble journal to carry reviews of book reviews. However, Marshall L. Goldmann's review of Chrystia Freeland's Sale of the Century: Russia's Wild Ride from Communism to Capitalism promises to initiate a new art form, so delightful is its satire in the guise of a laudatory review. The author is now deputy editor of The Globe and Mail.

That might be a hazard in commissioning a review over one of the most impressive sovietologist by-lines on the double swindle connected with the transition from the soviet regime to the present kleptocracy. In a few brief years the evangelists of total and instantaneous deregulation have run up a responsibility for the human catastrophe in the former Soviet lands second only to that of the Communist czars.

Goldmann opens with a clue to what is really on his mind. "Imagine how Canadians would react if the country's mineral wealth and factories were suddenly seized by a small band of opportunists and one-time government officials who ended up on the Forbes list of the world's richest. The uproar that would follow, especially if those raw materials and factories had been state-owned, would at least destabilise the government, if not lead to its overthrow.

"That is the story told by Chrystia Freeland, except that the scene of the crime is modern Russia, [and] there is virtually no uproar.

"Like other Moscow correspondents, Freeland—a former Moscow bureau chief of The London Financial Times—has an advantage over more academic analysts. She writes well. Moreover, because she was there beginning in January, 1995, just before the most audacious thievery, and was able to interview most of the major players, she is able to provide the reader with insights and information that even Russian analysts have not had. The usual format for journalists is a series of vignettes, usually printed previously as separate news or feature articles. Freeland instead tells the story of the initial hope and subsequent disappointment of a group of dedicated liberal reformers who set out to ensure that communism would never return to Russia. In the process, however some of these one-time reformers not only ended up compromising their values; they created a new monster almost as bad as the old—a new clique of rich oligarchs who proceeded to pillage the country.

"Unlike the robber barons of North America, these Russian manipulators actually created very little of anything; their practice was to seize existing state property and loot it. True, some opened new commercial banks, but the refineries, steel mills, smelters, pipelines, mineral deposits and factories they took over were all there before. Now, as part of the 'shock-therapy' reform process, it was sold off at a pittance, at first to the enterprise directors, and then to the new bankers, who used their banks to finance such purchases."

This, of course, is the process of "money creation" that operates-not always in the light of day—in the West as well. It is worthy of note that the very term 'shock therapy' was devised in the West.

"Freeland shows how the bank oligarchs thought up the concept of Loans for Shares, by which four or five of them made off with some of the country's most valuable oil fields, mineral fields and factories. Ostensibly Loans for Shares was designed as an auction for the state's remaining shares in various companies. But in almost every instance, instead of competitive auctions there turned out to be one bidder, usually the auctioneer himself, who seldom had to bid more than a dollar for every $10 of assets.

"While criticising Loans for Shares, Freeland implies that the scheme was part of the effort to save Russia from Communism."

This in fact was part of the Washington party line that made the historic mega-heist possible.

"Since the concept was initially put forward by Vladimir Potanin, one of the oligarchs, a more likely explanation is that it was just a blatant demonstration of greed. After all several of the richest oligarchs did not participate in the Loans for Shares effort. She virtually ignores Rem Vyakhirev, who had already become chairman of Gasprom, with the world's richest gas resources. Previously, he was the senior official in the Soviet Ministry of the Gas Industry. Similarly Vagit Alekperov, at one time Acting Minister of the Petroleum Industry, created Lukoil, Russia's richest petroleum company, out of a major portion of what had been that ministry."

There is nothing like continuity for keeping an even keel in the world's affairs.

Then comes a humdinger, that I suppose the G&M had to swallow as price for some of the excerpts that will be useful in promoting their deputy editor's book.

"Freeland also misinterprets the consequences of rouble devaluation. She writes that some of the reformers were unconcerned about borrowing dollars because rapid devaluation of the rouble would 'diminish the dollar value of their debt'. On the contrary, it would have increased it."

"Such criticisms aside, Freeland provides us with fascinating insights. She shows why Russian oligarchs actually want the law to be ambiguous: it keeps out foreign investors who worry that unless the law is specific, the courts usually rule against foreigners. She shows how, even though the oligarchs merge and split every few months, it always seems to be the state that ends up paying the bill." That, too, is not without its precedents in Western banking.

"Most tragic of all, she shows how despite their initially high aspirations, the reformers eventually rationalised themselves into accepting corruption as the price for instituting democracy."

Then comes the summing up.

"It is Freeland's flair for capturing the overarching phrase that helps us understand why the reform effort was due to fail. From the president of Gasprom, 'What was good for Gasprom was good for Russia." That, of course, was plain plagiarism from a former head of General Motors who had become a Washington cabinet minister.

"From a Texas investor asked what he invested in: 'Honey, I don't have to pronounce 'em. I just have to buy 'em.'

"From Chrystia Freeland: 'Russian privatisation was essentially a process of redefinition rather than redistribution.'

"No wonder the reforms are still very much a work in progress."

No wonder indeed.

William Krehm

Publisher-Editor

Economic Reform

mailto:[email protected]

Copyright © 2000

COMER Publications. Reproduced by permission of COMER Publications,

www.comer.org

 

Index

From the Net:

13: This is Jeremy Fox. I am a writer and management consultant. I have two comments. The first addresses remarks on:

Trade and GDP growth

Two key tenets of mainstream economics are that

a) trade fosters economic growth; and

b) increased trade is good for all parties (both importing and exporting regions).

We might perhaps look at the evidence for these twin gems of received wisdom.

Since 1950, exports have grown from 8 percent to 26.4 percent of World Gross Domestic Product. We should expect this rapid globalisation to have pushed real World GDP to unprecedented heights. Unfortunately this hasn't happened. I recently conducted a statistical analysis, using World Bank and WTO data, to see if a significant relationship existed between the growth in world trade and world GDP. It doesn't. To be specific, the correlation between the growth of World Trade and that of World GDP is so low as to be statistically insignificant. The rosy view of globalisation presented by western governments and the main international trade and finance agencies appears, therefore, to be no more than an unsubstantiated theory. And the evidence suggests that the theory is wrong.

The case of Mexico is particularly instructive since it was the first developing country to have fully opened its commercial borders to the First World.

Between the 1940s and the late 1980s, the Mexican economy grew consistently behind protective tariff barriers, and there was a slow but steady improvement in income distribution in favour of the poor.

In 1992, the country became a signatory to the North American Free Trade Agreement (NAFTA) and duly opened its borders to Canada and the United States. The results have been, by any standards, disquieting.

According to a recent study (Los Indicadores de Bienestar en Mexico, Inst. Lucas Aleman, 1998) salaries were 50% lower in 1997 than in 1980 in real terms, over half the population was classified as impoverished, and over one quarter were living in conditions of extreme deprivation. The 1995 peso crisis alone dragged an additional 10 million people below the poverty line. All the income gains made by the poor over the previous fifty years have been comprehensively wiped out. Entry into the NAFTA followed by devaluation of the currency, "structural adjustment", and the US-led rescue package have impoverished millions of Mexicans and enriched a few hundred. Mexico's signal economic achievement since 1992 has been to emerge as Latin America's top producer of billionaires.

However, it is relatively easy to pick holes in the free trade/globalisation model now being foisted on the Third World and on the poor everywhere, because it is plainly inadequate. But if we are to move towards a new model, we surely need to provide it with a sound theoretical foundation and appropriate analytical tools. This is my second comment.

There is too much here for the compass of a short "electronic" contribution - but one fruitful area of inquiry would be to clear up the widespread confusion between "national or regional economic efficiency" and the "efficiency of the firm". The two are different and, in many case, mutually exclusive. In a capitalist economy it is always efficient for the firm to produce at the lowest possible cost—and its techniques for doing so include maximising sales, reducing labour costs, and externalising social costs. But it is not economically efficient at the national level for people to buy superfluities (and create the associated waste), nor for a nation to cope with employment instability, the displacement of small farmers and business-owners by multinationals, the ravages of industrial pollution, and the societal disruptions that accompany extremes of inequality. Inequality itself is arguably a spur to capitalist enterprise, but it is also a charge on the social fabric. Currency and commodity markets can net vast rewards for a few businesses and individuals, but they often do so by devastating vulnerable populations. Can we find a useful means of measuring "net economic outcome" and using it as a tool of development thinking?

Fox Jones & Associates

54 Crofton Road

London SE5 8NB

England, U.K.

Tel: (0) 207 701-3107

Fax:(0) 207 701-6918

[email protected]

www.foxjones.com

 

Index

14: Solution to the Problem of Urban Decay

[Text of a leaflet from the Henry George Foundation:]

Almost every city in Britain is disfigured by areas of idle, ugly wasteland. The Department of the Environment’s Survey of Derelict Land in England, made in 1993, shows the stock of derelict land to be 396 square kilometres. This includes only land "so damaged by industrial or other development that it is incapable of beneficial use without treatment". It does not include land simply left empty and neglected. Nor does it include the derelict land of Wales and Scotland.

Why do we have these blots on our city landscapes? Is this land just surplus to requirements? Surely not, since office rents and the selling price of houses remain high in urban areas. Why do developers not rush in to build on these empty sites and take advantage of the market? How has it come about that in crowded cities where there are large numbers of people needing offices and factories to work in, houses to live in, parks, swimming pools, pubs and theatres to play in, land is wasted and left empty?

Change is of course natural and inevitable in the economic life of a community. Certain industries, like the cotton industry in Lancashire, fall into decline; passenger shipping is replaced by air travel and once busy ports fall into disuse; urban sprawl can make an inner city area less convenient for trade because its roads are inadequate for an increased volume of traffic. For reasons like these, factories, ware-houses, customs houses, shops may become redundant. But economic change does not explain why these redundant buildings are not converted to other uses or pulled down for others to build in their place. Nor does it explain why empty sites are left to decay and become a magnet for vandalism and crime.

The main reasons for this waste and neglect of inner-city spaces are land price inflation and land hoarding. When population is growing and industry expanding, land is greatly in demand and the price rises rapidly.

Seeing this, owners of land hold on to it as an ‘investment’ for the future, waiting for its price to rise still further before they sell or rent. This action increases the scarcity and inflates the price. Anticipating a need for building land in the future, both commercial firms and local authorities acquire or hold on to land they will not need for many years because they believe that, when they do need it, its price will have soared. This too contributes to the feared price rise.

In times of inflation, people acquire land as protection against loss when money is losing its value. Even in times of recession, those with the means to do so buy land as the most secure of possessions; it cannot be destroyed and in time it is bound to be in high demand again, for land is a limited resource. As land is simply the habitable surface of the earth, no one can respond to increasing demand by producing more of it, and no human activity can go on without it. Waste-land represents an opportunity for employment foregone.

Land close to the heart of a city tends to retain a high value even when derelict. When a high outlay for reclamation has to be added to a high price for buying or renting the land, it becomes a serious discouragement to potential developers as they weigh up the crisis and the opportunities involved in the regeneration of derelict land.

These causes of inner-city decay are aggravated by our system of taxation. The owner of an urban site who neglects it and leaves it to become an ugly, frightening place, a dumping ground for rubbish, a meeting place for drug addicts and drug pushers is charged little or nothing in taxation. The owner of a similar site who clears it, makes it safe for human habitation, builds a factory or office block where others find employment, is punished for his efforts by a hefty charge in business rates. Business rates operate as a check on development and reduce opportunities for employment. Since the seventies, successive governments have made strenuous efforts to tackle the problem of urban decay. Government offices have been moved out of London to less prosperous areas, Development and Enterprise Zones have been set up, new roads and motorways built and grants made available for reclamation. Local authorities have been ordered to sell certain sites and development corporations have been set up to simplify and speed up the planning procedures which have been a discouraging cause of delay and expense to would-be developers. Certain areas, like the Docklands in London, have been regenerated by such means, but others have meanwhile decayed further; 396 square kilometres of derelict land remain in England alone. The problem persists. The main difficulty is that measures designed to encourage development put up the value of the land and in the long run encourage land speculation and land hoarding again.

Having seen that the root cause of urban decay is land price inflation aggravated by an unfair tax system, the solution becomes obvious. Change the tax system so that it works negatively to discourage the holding of land out of use and positively to encourage regeneration.

This can easily be done by transfer-ring the tax base from the value of buildings to the value of the sites on which they are built. Land of the same type in the same area would then attract the same level of taxation whether used or unused. Owners who neglected land and left it unused would no longer be rewarded by a tax exemption. Owners who cleared, decontaminated and built useful buildings on a particular site would no longer be penalised by a system of taxation which imposed a heavier charge for each improvement made. This form of taxation would be a powerful incentive to redevelopment or resale. It would bring land onto the market, lowering its price and encouraging development, production and employment.

No one would be compelled to pay site value tax. Those who did not wish to use a plot of land could sell it. Under this system of taxation, no one would be robbed of any wealth he had created by his own efforts. Unlike that of the buildings erected upon it, the value of a site is not created by its owner, but by the presence of the surrounding com-munity; nearness to town centres, convenient transport facilities, schools, parks, all put up the value of a site.

As well as being fair and encouraging production and employment, site value taxation would also be easy to assess and hard to evade; land cannot be hidden or transferred to a tax haven. Above all, it would provide the means of tackling urban decay at its root instead of trying to deal with the symptoms piecemeal.

For further information please contact:

HENRY GEORGE FOUNDATION

Suite 427, The Fruit Exchange, Brushfield Street, London El 6EL

Tele:01713778885

Fax: 01713778686

E-mail: [email protected]

Registered Charity No, 259194

 

Index

15: Goodbye Mr Taxman

A new world needs new techniques

Guardian, 2 Sep.1999

The Institute of Directors is quite right to warn that the government could lose £lObn a year in VAT. revenues as a result of the expected swing towards trading on the internet. B-commerce in Britain is predicted to surge from £3bn this year to. £9.5bn by the end of 2001 and will continue surging thereafter. The loss of tax is not a reason fork trying to slow down the pace of e-commerce because, as Bill Gates reminded us this week, anyone who does not do business on the net will face ruin in five years time. But it is a timely warning that the government needs to have a strategy to deal with an almost inevitable loss of revenue as electronic trading takes off. It is not just the extreme difficulty of taxing music, films and software dispatched in digital form down telephone lines or wireless links: there are problems enough with physical trade. Who should (if they are able) collect the tax on something bought in Britain on an American web auction site registered in an offshore tax haven? It is not just VAT that is at risk because it will also be difficult to tax the incomes of people who are (say) working in the UK on a software product and sending the finished product electronically to the US or Australia. Who even knows they exist?

There are two solutions. The easier one is to shift the burden of taxation towards taxes that cannot be shrugged off (like land value taxation). The more difficult one is for every nation to cooperate to impose a "bit" tax, a minute tax on each bit of data transmitted. This is technologically possible, but politically difficult because it would only work if every country signed up. What is needed is a lively international debate (for which the internet would be an ideal vehicle). If nothing is done, national tax bases will be eroded and the welfare state will wither away. It may seem an odd moment to start a debate now when Britain is sporting a budget surplus. But if the forecasts are accurate, such surpluses will soon be a thing of the past.

 

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16: Money Illusion

David Gracey

Ours is a money oriented society. In everyday life, value is equated with price. "How much is it worth?" means "What did it cost?" We are so attached to our money culture that we seldom question how it works, or how money gets its value. Let’s think about it for a moment.

In the 19th century, Say’s Law stated that demand and supply must be balanced because the wages paid in production would provide the requisite purchasing power. In this paradigm, money was essentially neutral. With a relatively fixed money supply, the money paid out in wages (and other costs of production) was returned to the producer by the purchase of goods. In such a simple economy money was truly a "means of exchange."

With the rise of banking, this role of money as the link between production and consumption was weakened. Money could be created out of thin air — and destroyed just as easily, due to factors that had nothing to do with production or consumption. In a boom, money could be created by monetising assets — far beyond the productive capacity of the economy. This "excess" money would cause inflation until the bubble burst and much of the money was destroyed. In a depression, of course, there was insufficient money to maintain demand, and prices wages and output fell for lack of it.

Thus in the Great Depression we had the paradox of tremendous productive capacity co-existing with poverty and deprivation on a massive scale. There wasn’t enough money! Those who recognized the problem and called for the printing of money, were denounced as irresponsible, and yet when WWII began, the money was printed and the Depression ended. Nothing magical happened. The same resources — machines, labour and raw materials — that had lain idle for so many years were put to work again.

This lesson should have stayed with us but it has not. Instead we have become even more fixated on money— or the lack of it. Because "there is no money," we laid off thousands of nurses and teachers — in the name of sound’ financial management." Again we witnessed the paradox of a wealthy society cutting its most vital programs. Our leaders did not ask the question "Do we as a society have the resources to provide these programs?" (The answer is obvious.) Instead they asked "Do we have the money?" and the answer was no so we must cut, cut, cut.

The unemployed of the past decade were told they were part of a vast restructuring process. They were not told that the banking system created excessive credit in the ‘80s and when these loans collapsed they were forced to retrench. There was "no money" because the banks stopped lending — except to governments.

Today many cities are in desperate need of upgrades to their physical infrastructure —sewers, water supply, public transit etc. The resources for these tasks — the workers, the materials, the expertise — are eminently available. Everything needed to perform these tasks is at hand, but there is "no money." So Toronto, for example, has been forced to borrow about $2.4 billion, the interest on which will have to be paid by future taxpayers.

Of course there is lots of money around. The world bond market alone now exceeds $30 trillion (US) and millions more are being created daily. This vast pool of money can never be validated either by real output or by the assets it represents. This it is not a "means of exchange," nor is it a "store of value." It is simply a huge debt bubble, and it can only be kept afloat as long as society is willing to pay the interest on it. Poor countries in the Third World have found that this task is impossible. Eventually we will learn it too. When that happens, perhaps we will understand that the true wealth of a society lies in its resources, not in its "money." Then we can establish a sensible monetary system that maintains sufficient demand and does not force us deeper and deeper into debt.

—from COMER, June 2000

 

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17: Solution to the Problem of Urban Decay

[Text of a leaflet from the Henry George Foundation:]

Almost every city in Britain is disfigured by areas of idle, ugly wasteland. The Department of the Environment’s Survey of Derelict Land in England, made in 1993, shows the stock of derelict land to be 396 square kilometres. This includes only land "so damaged by industrial or other development that it is incapable of beneficial use without treatment". It does not include land simply left empty and neglected. Nor does it include the derelict land of Wales and Scotland.

Why do we have these blots on our city landscapes? Is this land just surplus to requirements? Surely not, since office rents and the selling price of houses remain high in urban areas. Why do developers not rush in to build on these empty sites and take advantage of the market? How has it come about that in crowded cities where there are large numbers of people needing offices and factories to work in, houses to live in, parks, swimming pools, pubs and theatres to play in, land is wasted and left empty?

Change is of course natural and inevitable in the economic life of a community. Certain industries, like the cotton industry in Lancashire, fall into decline; passenger shipping is replaced by air travel and once busy ports fall into disuse; urban sprawl can make an inner city area less convenient for trade because its roads are inadequate for an increased volume of traffic. For

reasons like these, factories, ware-houses, customs houses, shops may become redundant. But economic change does not explain why these redundant buildings are not con-verted to other uses or pulled down for others to build in their place. Nor does it explain why empty sites are left to decay and become a magnet for vandalism and crime.

The main reasons for this waste and neglect of inner-city spaces are land price inflation and land hoarding. When population is growing and industry expanding, land is greatly in demand and the price rises rapidly.

Seeing this, owners of land hold on to it as an ‘investment’ for the future, waiting for its price to rise still further before they sell or rent. This action increases the scarcity and inflates the price. Anticipating a need for building land in the future, both commercial firms and local authorities acquire or hold on to land they will not need for many years because they believe that, when they do need it, its price will have soared. This too contributes to the feared price rise.

In times of inflation, people acquire land as protection against loss when money is losing its value. Even in times of recession, those with the means to do so buy land as the most secure of possessions; it cannot be destroyed and in time it is bound to be in high demand again, for land is a limited resource. As land is simply the habitable surface of the earth, no one can respond to increasing demand by producing more of it, and no human activity can go on without it. Waste-land represents an opportunity for employment foregone.

Land close to the heart of a city tends to retain a high value even when derelict. When a high outlay for reclamation has to be added to a high price for buying or renting the land, it becomes a serious discouragement to potential developers as they weigh up the crisis and the opportunities involved in the regeneration of derelict land.

These causes of inner-city decay are aggravated by our system of taxation. The owner of an urban site who neglects it and leaves it to become an ugly, frightening place, a dumping ground for rubbish, a meeting place for drug addicts and drug pushers is charged little or nothing in taxation. The owner of a similar site who clears it, makes it safe for human habitation, builds a factory or office block where others find employment, is punished for his efforts by a hefty charge in business rates. Business rates operate as a check on development and reduce opportunities for employment. Since the seventies, successive governments have made strenuous efforts to tackle the problem of urban decay. Government offices have been moved out of London to less prosperous areas, Development and Enterprise Zones have been set up, new roads and motorways built and grants made available for reclamation. Local authorities have been ordered to sell certain sites and development corporations have been set up to simplify and speed up the planning procedures which have been a discouraging cause of delay and expense to would-be develop-ers. Certain areas, like the Docklands in London, have been regenerated by such means, but others have meanwhile decayed further; 396 square kilometres of derelict land remain in England alone. The problem persists. The main difficulty is that measures designed to encourage development put up the value of the land and in the long run encourage land speculation and land hoarding again.

Having seen that the root cause of urban decay is land price inflation aggravated by an unfair tax system, the solution becomes obvious. Change the tax system so that it works negatively to discourage the holding of land out of use and positively to encourage regeneration.

This can easily be done by transfer-ring the tax base from the value of buildings to the value of the sites on which they are built. Land of the same type in the same area would then attract the same level of taxation whether used or unused. Owners who neglected land and left it unused would no longer be rewarded by a tax exemption. Owners who cleared, decontami-nated and built useful buildings on a particular site would no longer be penalised by a system of taxation which imposed a heavier charge for each improvement made. This form of taxation would be a powerful incentive to redevelopment or resale. It would bring land onto the market, lowering its price and encouraging development, production and employment.

No one would be compelled to pay site value tax. Those who did not wish to use a plot of land could sell it. Under this system of taxation, no one would be robbed of any wealth he had created by his own efforts. Unlike that of the buildings erected upon it, the value of a site is not created by its owner, but by the presence of the surrounding com-munity; nearness to town centres, convenient transport facilities, schools, parks, all put up the value of a site.

As well as being fair and encouraging production and employment, site value taxation would also be easy to assess and hard to evade; land cannot be hidden or transferred to a tax haven. Above all, it would provide the means of tackling urban decay at its root instead of trying to deal with the symptoms piecemeal.

For further information please contact:

HENRY GEORGE FOUNDATION

Suite 427, The Fruit Exchange, Brushfield Street, London El 6EL

Tele:01713778885

Fax: 01713778686

E-mail: [email protected]

Registered Charity No, 259194

 

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18: The Euro Disproves the Washington Consensus

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The strategy of the Washington Consensus is to simplify what is complex by putting out of sight and mind its one "blunt tool" — high Interest rates. That rarely comes out more clearly than in the case of the Euro. Remember when the European Monetary Union was put together, there was no more fanatical "inflation fighter" than the German Bundesbank. Singed by the monetary aftermath of two lost world wars, the Bundesbank represented high interest rates as the one prerequisite for bliss.

Germany, however, had some countervailing traditions — a high degree of job security, powerful trade unions that had some minor input on corporation councils. As early as the days of Bismark social security had been a conscious means of achieving a degree of national consensus.

Yet the transatlantic prophets of deregulation by sheer decibels and the control of international financial organisations managed to leave their mark on the European Union. It advanced a holistic answer to all problems so simple as to be a no-brainer; all that was necessary was to brandish the one blunt tool and bring it down heavily on any dissenting skulls, and the future was assured.

That was symbolised by the award of what is called the Nobel Prize for Economics to Robert Mundell for his analysis of the advantages of currency unions. Citing his view of the prospects of the Euro currency, he predicted a robust future for it on the exchange markets because of the higher efficiency involved in doing away with the costs of moving from one to another of the old currencies.

However, that prophecy lies in the gutter today. The Euro since its debut in January 1999 has shed 24% of its value. Faced with the US Fed’s sixth increase in its bank rate since June of last year, with the most recent increase one-half percent rather than the earlier 1/4% increments, it pushed up the US bank rate to 6% while the European Central Bank (ECB) kept its rate at 3.75%. That led to a raid against the Euro by speculators that brought the Euro down nearly 3/4s of a cent to 90 US cents.

"Mr. Wim Duisenberg, European Central Bank president, repeated the ECB’s mantra, underlining forecasts for economic growth and trying to reassure average citizens that the withering Euro is not draining their pocketbooks" (Hans Greimel, Associated Press from Frankfurt in the G&M12/5).

There is this much to Duisenberg’s optimism: the sinking Euro improves the EMU’s export position — at the expense of the US and those tied to its policy as is Canada. It will therefore add to the American unfavourable balance of payments. A point will be reached when the beating taken by the US stock markets due to the persistent rises in interest rates, will reverse the flow of investment and speculative money away from the US. In short the situation is infinitely more complicated than the simplistic "one blunt tool" model of the ‘Washington Consensus." Essentially what it does is pretend that all other problems that it chooses to ignore don’t exist.

But every time further monetary unions or globalisations and deregulations are brought in, these "external" problems multiply. The European Monetary Union is very much like a nest of Russian babushka dolls—smaller ones within bigger ones on a descending scale. Thus even before the EMU became one flesh united Germany had its internal third world — East Germany with its 20% unemployment and abysmally low productivity. Even today unemployment hovers at 17.9%. To these the Union added Spain and Portugal, southern Italy, with Poland and Czechoslovakia and Hungary candidates for early entry.

All are relatively backward countries with substantial unemployment. They call for much public investment. But obviously this already strains the built-in constraints of the EMU: keep budgetary deficits below a 3% maximum, and the cap on their debt. The increases in interest rates of the Fed could thus lead to serious social turmoil. And the cultural diversity and historical backgrounds that the EMU set out to bridge could easily become a minefield. The one "blunt tool" applied to the US or Canada has not improved the relationship between region and region or between the blacks and the police force in Los Angeles. But the hazards there are child’s play alongside what exist in Europe. Moreover, even without the ECB aping the Fed, the introduction of deregulation, the "enhancement of shareholder value" and other such imports are already straining relationships.

What we are heading into as deflation asserts itself while the Fed rides out Wild Western style to campaign against inflation, is a spell of "beggar your neighbour" trade war reminiscent of the thirties. Other features of the thirties will not be slow in reappearing.

—from COMER, June 2000

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July 2000