Public Debt, Finance and Imperialism

RamaaVasudevanColorado State University

Political Economy of Public debt Intersection of state and financial markets

State-credit standard: basis of monetary system

Key currency system: instrument for extending and preserving imperial power

Draw on two lines of analysis in Marx: Fictitious capital Primitive accumulation

Public Debt as Fictitious Capital Contradictions of the money form: general equivalent

and financial asset

Separation of finance from commerce: development of an artificial system of settling payments

Fictitious capital: Valuation on the basis of capitalization of future earnings Transformation of claim on future earnings into a tradable

asset

Wealth accumulates from such capitalization relatively autonomously from from real investment

Public debt is fictitious capital:

Public Debt as lever of primitive accumulationPublic debt depends on and fosters the growth

of financial markets

The emergence of financiers, speculators … international credit system

Social relation between finance and enterprise

Management of public debt and class relations

Evolution of the monetary base of the financial system from bullion to state credit - fictitious capital

Monetary Roots of financial systemDevelopment of credit and financial system

Basis of “two price model”: distinct form of valuation of money

Money as a financial asset comes into contradiction with its role as a general equivalent

Crisis: Collapse to monetary roots

Public debt as a successful ponzi scheme? Enrichment simply through the accumulation of

public debt? subject to volatile logic of finance.

Role of Central Bank Significance of the role of the central bank in managing public debt

assumes greater significance.

Pivotal organ or an ally of the state playing an important role in shaping the changing balance of class forces within a country.

Equally important in managing relations between countries

Hoarding of reserves: “Measure of power between nations”

Autonomy of central banks - monetary power of state – constrained by that of other states

Key currency system: monetary liability of a dominant state becomes the basis for the international financial system.

Instability inherent in this two –price framework are resolved and extended

Elasticity of international credit system, Export of fragility

UK Public Debt

Sterling Standard

Divergence between financial evolution in France and England Increasing role of public debt in war financing ( 250% of GDP at the end of the

Napoleonic Wars) Thriving bond markets alongside growing public debt: growth of financial elite

Strengthened central role of London and sterling bills (precursor to modern securitization)

Expansion of international liquidity beyond metallic basis of gold reserves

Transcend deflationary consequences of an international monetary system based on gold reserves

Bank of England played pivotal role in calibrating international capital flow

Power was not absolute…

Increasing engagement of Bank of England in the market for bills Liquidity and depth and breadth of markets Class basis of commitment to convertibility

Debt and DominanceRole of military interventions in sterling

dominance

Napoleonic Wars and the Franco-Prussian Wars

National rivalries not abolished: came to head with First World War

Rise of the US: debt as an instrument of power Inter Ally debt payments and German reparations Lend Lease agreement and imperial preference Suez crisis

Bretton Woods: establish dollar standard

Marshal and Dodge plans, Korean War

Problem of Willing creditorsBritain drew on the resources of the colonial

empire and special depositors like Japan.

Dollar crisis and the collapse of Bretton Woods

Rival capitalist countries- France, Germany.

The floating dollar standard: OPEC Japan and the Plaza Accord

Debt and the PeripheryDebt used to incorporate developing countries

and emerging markets into the international financial system

Sterling standard: colonies and primary exporters in the periphery

Safety Valve: Export of crisis to periphery (Argentina, Brazil, Australia)

Gunboat diplomacy and sanctions for debt default Egypt 1882, Venezuela 1902 Barings and Argentina 1890

…Debt and the PeripheryCurrent context: IMF conditionality deployed to

integrate emerging markets ( Not that different!)

Debt crisis in Latin America: enforcement of neoliberal program

Asian Crisis: similar enforcement

United States as the world banker: taps into the surpluses of creditor countries in the periphery and recycles surpluses through financial markets to emerging markets in the periphery.

Emerging markets have borne the brunt of speculative attacks : safety valve role

Banker to the World The state credit standard is linked to imperial policy and

helps sustain tremendous growth of liquidity

However this role entails the generation of growing global Imbalances: shift of production base

Hegemony of finance is the outcome of the inherent logic of use of debt as international money

Pre War Britain: No longer workshop of the world

Competition from Europe, US and Japan

Growth of finance with London and Bank of England as the “center of gravity”

Investment income from foreign investments critical to current account surpluses

British Balance of Payments £ millions

Banker to the World: Dollar standardGlobal imbalances linked to Floating Dollar

standard

Outsourcing of manufacture and dominance of finance

US is in a peculiar position: positive net earnings from foreign investments despite being a net debtor country

Return premium: The exorbitant privilege of being banker to the world (Venture Capitalist? Ponzi scheme?)

Securitization machinery

Current Account Balances ($ billions)

USA: Net International Income Receipts (Share of GDP)

Tensions in the Dollar standard Changing structural position of Latin America and Asia

Current account surpluses: and accumulating war chest of reserves

Less vulnerable to capital flight: breakdown of safety valve mechanism

Reversal of recycling pattern- capital was drawn from the rest of the world to the US markets: including to the sub prime markets

Debt fuelled bubble: weak link in international financial system

Collapse of international credit system: financial disintermediation

USA: Capital Flows, Current Account Deficit

The credit crisis Paradox: Crisis caused by Implosion of US financial markets

precipitated a flight to safety to US treasury bills

Monetary roots of crisis: clamor for “money” : US treasuries at apex of credit pyramid

Federal Reserve and Treasury have to deal with changing financial landscape

Quantitaiveeasing: taking on more toxic assets in the Fed balance sheet

Market maker of last resort: Assert control over market Fostering another bubble

Glut of treasuries - Management of public debt:

State hostage to finance

Federal Reserve Assets

Federal Reserve Liabilities

US Public Debt

Sovereign debt CrisisDistinctive nature of US public debt: fiscal backing

of US state

Asymmetric response to crisis in other deficit countries Iceland, Baltic countries, Hungary. Greece, Ireland Severe fiscal cutbacks and austerity measures

Euro-zone crisis: Fragmented market for Euro-zone debt ECB does not have the same tools as the Fed to

manage public debt. Bailout Mechanism, ECB purchases of sovereign debt

Currency war Dollar remains anchor of the system

Quantitative easing: fuelling capital flows to emerging markets

Appreciation of currency in Brazil, Korea…

Defensive policies: capital controls, currency interventions

Relapse to protectionism?

Also reflects the constraints facing the US state

US –China relations Global reserve currency Quantitative targets for current account balances

The present junctureMountain of debt

Power of finance Recovery through new asset bubbles?

Beyond the question of sustainability of debt to investigate the political economy of debt

Relation between US state and private finance and the balance of class forces within the US

Relation between US and the rest of the world, the manner in which US exercises its hegemony

US: International income receipts and payments

Latin America and Asia: Trade and Reserves ($ billions)