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MORE TAXIS, MORE
PROSTITUTES
Originally I sat down to
write an article about the bank closures in Argentina, with an eye
to protecting yourself in case like events strike the United
States. Wait, don’t laugh, the last bank “holidays” in the
US occurred in 1983 & 1984 in Ohio and Maryland. Don’t think it
can’t happen here.
Then like Jack’s
beanstalk, the article grew out of control. You should observe
three things here. First, some economic and social problems are
peculiar to Latin America. Secondly, not all their wounds are
self-inflicted. Some arise from Latin America’s relations with the
Yankee Empire. Third, what are the outcomes of inflationary
depression? What happens to the people and their money? How do
they cope? What happens to society? Although the details may
differ in Latin America, the essence of those results are likely to
show up with any inflationary depression, and that is exactly what I
expect to see unfold in the United States.
INFLATIONARY DEPRESSION
What I have been trying
to impress upon your minds, dear readers, is the near inevitability
of an inflationary depression: deflationary economic
conditions with inflationary monetary conditions.
Unsustainable debt deflates, choking economic activity as
bankruptcies spread. Meanwhile, politics dictates that state and
central bank use their only weapon to combat depression:
monetary inflation.
Yes, this contradicts
simplistic notions of “inflation,” “deflation” and “depression.”
Normally economics thinks that “deflation” (a shrinking money
supply) causes “depression.” Viewed that way, “deflationary
depression” is a repetitious redundancy and “inflationary
depression” 2a self-contradictory oxymoron. But this view forgets
the force that presently rules us: politics.
The carotid artery of
political power in America is control of the money supply through a
banking cartel. Whoever controls the money supply controls the
economy, and whoever controls the economy controls the nation.
Power follows money. The root of this power is the
government-granted privilege to create money out of thin air and
force the public to take it through legal tender laws. Ahh, but
that is also its radical flaw. The source of power confers but one
power: inflation. Thus when crisis arrives, the mighty have
only one weapon against depression: inflation.
As Stalin observed,
“Obsolete classes do not voluntarily abandon the stage of history. …
Dying classes take to arms and resort to every means to save their
existence as a ruling class.” Wicked tyrant or not, he got it right
on that score. When economic conditions threaten the American
ruling class’s hold on power – the government – big business
Symbiosis – you can expect them to come out swinging with –
inflation.
The Great Depression
with its monetary deflation conditions our thinking about
“deflation.’ Then the money supply shrank, making each unit of
money more valuable and money hard to come by. An inflationary
depression works more subtly. First the huge piled-up debt shrinks
– the debt that forms the basis of our monetary system. All our
money must be borrowed into existence. When the debt evaporates
through bankruptcy or even merely fails to increase, then the money
supply shrinks, making more debt unserviceable in a vicious circle.
To combat this shrinkage the government floods the market with money
through various expedients – government spending, lower interest
rates, increasing bank reserves, monetising government debt, etc.
While debt deflation strangles economic activity, monetary inflation
is eating away the money’s value. Perversely, the medicine becomes
the poison, because the government’s cure (inflation) actually
steals purchasing power from every unit of money, thus shrinking the
whole money supply’s purchasing power. Exactly here is found the
source of the apparent contradiction, an “inflationary depression.”
Not only do you lose your job, but at the same time your savings
evaporate, the value of your real estate collapses, and prices of
necessities rise. With that in mind, let’s consider Latin America’s
peculiarities, and then the crisis there.
LATIN AMERICA’S
PECULIARITIES
A close friend of mine
spent much of his youth in Argentina. He is one of the most acute
and objective observers of men and money I have ever known and a
life long student and participant in free market economics. What
follows are his informed opinions of what ails Latin America.
-
Cartelised economy – Latin America is still ruled by an
estancia mentality, feudal and medieval. A few families still
control whole industries, and there is little room for upward
economic mobility.
-
Weak property rights – Latin America is governed primarily by
Napoleonic Code rather than the common law. Thus common law
property rights have never formed a foundation strong enough to
change economic and social inequities.
-
Corruption – Because people cannot transact business or enjoy
a reasonable hope of controlling property and freely buying and
selling, business must be done by corruption. That in turn feeds
and sustains family power and only strengthens the existing
feudalism.
My friend insists that
these three conditions prevail in all of Latin America other than
Chile, so that a medieval and feudal model rules both politics and
economics. While the rest of the world slips easily into free
markets, in Latin America liberalisation violence.
Privatisation pours billions of dollars into corrupt hands.
For example, my friend
had a close friend from Argentina who actually grew up in the United
States, then returned to Argentina. After marrying he moved back to
the States where he set up a profitable business. After a decade or
so he realised he wanted his children to grow up in his native land,
so he moved back to Argentina and set up a business. Twelve months
later he was back in the States. The corruption in Argentina was so
bad that although he is a savvy, well-educated, intelligent
entrepreneur, he could not function.
In the banking crisis,
billions will be stolen from Uruguayans. Billions have already been
stolen from lower and middle class Argentines. Small wonder then
that the entire Argentine economy runs on cash. It is not uncommon
for people in clunky old vehicles to carry a wad or $2-3000 US
dollars. What money is left is buried in back yards. Back in
March, 2001 smart money began to sneak out of the country as the
risk premium on government debt began to climb. By now an estimated
30% of the money supply’s cash base now resides in Miami. Likewise
South Americans are pouring out of their homeland, mostly to the
US: 130,000 Colombians in the past two years, 300,000 Ecuadorians
(2.5% of the entire population), 128,000 applications from Peru for
US Visas. Sixty percent of the Argentines polled said they would
leave if they could.
Likewise, as soon as the
privatisation dollars are spent, the money leaves. My friend calls
it “unforgivably glib” to talk about privatisation in Latin America,
given the current environment. Imagine trying to privatise medieval
Europe of 1525. “We can fix everything from England to the Caucasus
by just injecting $20 trillion.” It would only go to a handful of
families, and they’re not going to let go. My friend maintains that
their ruthlessness extends easily to murder. An Argentine told my
friend that the elite had already gotten their money out of the
country. Their response to the crisis is a cynical Spanish phrase
that roughly translates, “It only means more taxis and more
prostitutes.”
Finally, the fuel
(other than IMF and World Bank corruption) that drives this vicious
machine in Latin America is US drug
laws. Those laws create the
artificial profits that finance much of the horror and oppression.
PROBLEMS OF EMPIRE
But Latin America’s
problems do not all arise from ingrained social culture. The Yankee
Empire also makes things worse, largely through its economic
enforcement arms, the IMF and World Bank. These two subtle weapons
have replaced the crude military invasions of the 19th and early
20th centuries. Back then the Latin nation that crossed US big
business interests could rely on a visit from the US Marines. Today
US interests act more subtly, and through these financial agencies
wage an economic war more devastating than any military incursion.
Whoa –
many folks will dismiss my explanation above as
something hatched by right-wing conspiracy nuts or left wing
liberationists, but even the almighty New York Times
expresses a certain reserve toward American financial
“humanitarianism.” In the August 9 New York Times Edmund
Andrews wrote “IMF loan to Brazil also shields US interests.” The
last Brazilian IMF bailout was in 1998, and they are still working
on a $15.5 billion loan from two years ago. Although the Bush
administration had insisted that it would not support another
Brazilian bailout, the Bushites suddenly got religion on August 8,
when the IMF announced a $30 billion rescue package for “good”
Brazil but nothing for “bad” Argentina.
What’s the difference?
What changed the Bushite mind?
Well, Brazil's economy
is several times Argentina's, with a $264 billion debt about twice
Argentina’s. Still, the debt is not as important as whom it is
owned to: American banks like Citigroup, FleetBoston, and JP Morgan
Chase. Seems they have lent Brazil far more than Argentina.
Whoops! Did I forget to whisper that ex-Treasury secretary
Roberto Rubin is now a Citigroup- director, and Citigroup
leads the lending pack with $9.7 billion loaned to Brazilian
borrowers. Let’s not forget, either, about General Motors, with
billions invested in Brazil. As Andrews noted, upon announcement of
the rescue plan Citigroup and FleetBoston shares shot up six
percent. American corruption, you see, differs from Latin
corruption because . . . because, well, just because.
Further, the stakes are
higher than a mere passing bank bail out. It comes at just the
right time to influence Brazil’s presidential election when two
“left wingers” threaten to win and reverse Brazil’s “free market”
reforms. King George No. Two also wants to swing a gigantic free
trade agreement that will convert the whole western hemisphere into
one vast free trade agreement. )You know, like the highly
successful NAFTA, which has already sucked millions of jobs out of
the US.) But that wouldn’t fly with Latin nations defaulting right
and left. Plus, the bail out gives Bush an arm twister against
Brazilian reluctance.
IMF’S FOUR STEPS TO
DAMNATION
Not to be overlooked are
the effects of thraldom to the IMF. In the 4/29/2001 Observer
(U.K.), Gregory Palast interviewed Joseph Stiglitz, ex-chief
economist of the World Bank turned critic of IMF, globalisation, and
the World Bank. (As a practical matter, the IMF and World Bank work
are alter egos). See
http://www.observer.co.uk/business/story/0,6903,480069,00.html.
Stiglitz, former head of Bill "Squeaky Clean"
Clinton’s council of economic advisors, gently dissented from the
World’s Bank’s agenda. He was promptly fired and excommunicated.
“Each nation’s economy is analysed,” says Stiglitz, “then the Bank
hands every minister an identical four-step programme.”
·
Step One is privatisation.
Supported by World Bank or IMF demands, local politicians preside
over a fire sale of state-owned assets.
·
Step Two is capital market
liberalisation. Theoretically
removing capital controls attracts capital by allowing it to flow in
and out easily. Unfortunately, it only draws in the hot money that
speculates on real estate and currency, then runs before the trouble
begins. “A nation’s reserves can drain in days. And when that
happens, to seduce speculators into returning a nations’ own capital
funds, the IMF demands these nations raise interest rates to 30%,
50%, and 80%. Higher interest rates demolish property values,
savage industrial production, and drain national treasuries.”
·
Step three, market based
pricing. That means raising prices on
food, water, and cooking gas, which leads to
·
Step Three-and-a-half, the IMF
riot. “The IMF riot is painfully
predictable. When a nation is `down and out, [the IMF] squeezes the
last drop of blood out of them. They turn up the heat until,
finally, the whole cauldron blows up,’ as when the IMF eliminated
food and fuel subsidies for the poor in Indonesia in 1998.
Indonesia exploded into riots. … The IMF riots (and by riots I mean
peaceful demonstrations dispersed by bullets, tanks, and tear gas)
cause new flights of capital and government bankruptcies. This
economic arson has its bright side – for foreigners, who can then
pick off remaining assets at fire sale prices. A pattern emerges.
There are lots of losers but the clear winners seem to be the
western banks and US Treasury.”
·
Step Four,
free trade. “This is free trade by the rules of the World
Trade Organisation and the World Bank, which Stiglitz likens to the
Opium Wars. `That, too, was about “opening markets”,’ he said. As
in the 19th century, Europeans and Americans today are kicking down
barriers to sales in Asia, Latin America, and Africa while
barricading our own markets against the Third World’s agriculture.”
The tender mercies of
the IMF have reduced Africa’s income by 23%, Stiglitz maintains.
The only nation that has dodged this bullet has been Botswana.
Their defense? They kicked out the IMF. Reviewing the history of
IMF Latin American bailouts, the Botswana Solution appears to be the
only one that works. Over the years both Brazil and Argentina have
become IMF-junkies, lurching from crisis to crisis between IMF
bailouts. From the worlds tenth richest country in 1913, Argentina
had fallen to 36th by 1998. It’s last IMF aid came in 2000 – almost
$40 million. Uruguay received a $3 billion package from the IMF
earlier this year. Brazil still has a little over a billion left of
its last IMF package of $15+ billion.
By now you are
wondering, “Moneychanger, why this detour into the IMF?” Because
similar policies have similar outcomes. The politics of
commercial Empire dictate how the IMF deals with other countries.
Those same politics determine how your US government deals
with you. You just haven’t gotten in their way yet.
INFLATIONARY DEPRESSION
OUTCOMES
In recent times
inflationary depressions have turned up in Japan and South America.
So far the Japanese mess has not tended to the hyperinflationary,
as the Latin American ones have, but the Japanese experience teaches
us something. For the past twelve years the Japanese recession has
resisted every inflationary weapon the government has brandished.
The benchmark Nikkei stock index has dropped from 40,000 at the end
of 1989 to 9,500 recently (yes, a 75% loss.) In 1995 it took 80 yen
to buy a dollar; in 1998, 146. After a reaction to ¥100.26, the Yen
dipped again early this year to ¥136, and today a dollar costs about
¥118. The trend is decidedly bearish. The yen has lost about 41%
of its value against the dollar.
Latin Americans have not
been that lucky.
Look at the chart,
“Dollars per Argentine Peso,” beginning at March last year. The
exchange rate remains pegged to the US dollar at one to one, until
things began unravelling in December. As soon as 2002 opened, the
peso collapsed. It has since stabilised about US$0.26, losing
roughly 75% of its value in 3-1/2 months. The Uruguayans
experienced a similar drop. On June 18, 2002, the day the government
announced it would let the peso float, it fell 12% against the
dollar. By July 31st it had fallen to 35 pesos, losing 50% in six
weeks. Look at Brazil. From its high on March 6, 2001 to its low
on July 31, 2002, the Brazilian real shrank 42%.
Obviously this merely
examples what we already know: the value of any fiat
currency depends solely on public confidence.
Once confidence collapses, the currency’s value does as well.
Wait a minute,
Moneychanger – those are Latin
American currencies, and we all know they’ve been unstable forever.
None of those foreigners know how to manage their currency. What
about the gold old rock-solid US dollar, the mighty Samolean?
Well, what about it? Do not miss this connection: the fiscal
policies of these crisis-ridden Latin American countries – the
deficit spending, the welfare, the social security, the pensions,
the economic controls – differ from US policies only in degree,
not in kind. We do the same things they do,
except we manage to walk the line better.
For a reason.
The US dollar is the world’s reserve currency, so the US Empire gets
to export its inflation to the rest of the world, and the world has
to swallow it. Argentina, Brazil, and Uruguay have to live with
their inflation. Where does that difference really cut deeply?
When individuals in those countries – or their governments – have to
pay external dollar-denominated debts while they only earn
internal domestic-currency revenues. That catches them between two
razor sharp millstones. As their revenues’ value drops, the size
and cost of servicing their debt grows. A currency crisis then
becomes a bullet in the head.
Thus some outcomes of
these nations’ crises don’t apply to us -- yet. Still, we
ought to notice certain other
outcomes, namely, government responses and consumer reactions in
financial crisis.
After the last
Argentine financial & fiscal crisis in 1989, the government in 1991
pegged the peso to the US dollar at one to one. Before that, as
memory serves me, Argentina inflated three different currencies out
of existence in the single decade of the 1980s (Maybe I’m wrong;
maybe it was only two, but it was certainly more than one.
In 1983 inflation ran over 900%)
However, as the dollar
rose since 1995, Argentina found it had tied its foot to a shooting
star dragging it face down across the cosmos. The rising dollar
made Argentine exports less and less competitive. Lets look at the
effects of the crisis in several areas.
AUSTERITY MEASURES
Government austerity
measures are all aimed at lowering expenses and raising revenues,
i.e., taxes. Government workers form a large part of the
workforce in every developed country, and Argentina is no exception
(in the US, more than half the population earns its living directly
or indirectly from government). Austerity, we ought to remember,
always applies to us, not to them. In December 2001
the government halted pension payments. Let that sink in for a
moment. The government stopped paying pensions to retired
government employees. When they resumed, they reduced both pensions
and salaries by 13%.
Not only the government
but also other employers have been cutting wages and laying off
workers. Those lucky enough to get paid often aren’t paid on time.
Half the professionals are unemployed. People try anything
to survive, so every automobile becomes a cab. Older women (over
60) in Argentina are increasingly turning to prostitution to
survive. More taxis, more prostitutes.
BANKING
First the Argentine
government froze bank accounts, both those denominated in US dollars
and in pesos, so that owners could withdraw only minimal amounts.
Bank closures have been an off-and-on phenomenon since then. At the
first of August Uruguay also closed its banks for a week.
Argentines had been withdrawing cash in their Uruguayan bank
accounts so fast that since this year began the central bank had
lost 76% of its international reserves. Depositors withdrew 33% of
all deposits before June 30, 2002, and in July withdrawals
increased. Argentine bank closures have forced Argentines to hoard
cash and restrict their spending (even as their peso loses value).
Lower spending in turn knocks the economy in the head – not pleasant
after four years of recession and 20% unemployment to begin with.
BARTER & HARD GOODS
As the peso evaporates,
Argentines are buying anything of value as inflation hedges:
shares, jewellery, cars, property. Although agricultural experts
feared Argentine farmers would flood the market with soybeans in an
effort to raise funds, they have rather held beans off the market
because the beans function effectively as a savings account. Barter
becomes more and more common because no one has cash.
BONDS
Argentina’s government
owes $140 billion top overseas lenders. It defaulted on those
payments. Because firms and individuals couldn’t withdraw deposits
within Argentina, they have probably defaulted on millions of
private domestic and overseas debt as well.
CONTAGION
Latin American problems
were precipitated by Argentina’s recession. As that worsened and
broke out into financial crisis, it spread to Argentina’s trading
partners, Uruguay and Brazil. Depression is contagious across
national boundaries.
DEBT
Debt denominated in US
dollars has become a death trap for some Argentines. Besides
corporate borrowing overseas, consumers had mortgages denominated in
dollars. Although debtors with dollar loans and mortgages under
$100,000 were given relief by converting their dollar denominated
dollars into pesos, larger borrowers and those who had borrowed
overseas now face an impossible situation. They must now earn
four times as many pesos to service their debt. The government
is in the same boat.
EMERGENCY CURRENCIES
Strapped for cash,
localities will invent their own. Bankrupted provincial governments
are printing their own bonds to pay civil servants, and
everybody’s glad to get them. . People then use these bonds as
a local currency. Northwest of Argentina in La Rioja half the
workforce works for the government. They pay them in “Evitas”,
provincial bonds named for the picture of Eva Peron they bear.
National government bonds and even restaurant tickets pass as
currency.
FORESIGHT
After the Argentine
government closed the banks in December, the peso dropped about
30%. Those with pesos in the banks were doubly trapped. First,
they couldn’t get their money out of the bank, so they had no cash.
(If you are wondering, yes, by now Argentine and Uruguayan stores
are refusing credit cards). Second, the pesos they did have in
banks were losing value. Since they couldn’t withdraw them, they
couldn’t exchange them for US dollar cash, or gold, or silver, or
anything else. They could only watch while the exchange rate ate up
the value of their savings.
The lesson? The best
strategy in the world is worthless without timely execution.
What is “timely”? Before the crisis begins. At the brewing
storm’s first sign. So if the thought has crossed your mind, “I
ought to set aside a little cash in a safe place for a rainy day,”
you’d better do it now. All the more urgently, you ought to make
changes in your investments.
GOVERNMENT INSTABILITY
In December Argentina
ran through five (5) presidents in two weeks. The average tenure
expectancy of a minister of finance is about as long as it takes him
to explain his new recovery plans. Political unrest and utter
disaffection threaten anarchy.
REAL ESTATE
In spite of the peso’s
drop, real estate has crashed to about half its pre-crisis value.
SHORTAGES
Goods imported into
Argentina have become scarce, even imported insulin. When prices
rise, people normally delay selling anything, for hope of cashing in
on the rise.
VIOLENCE
Everyday violence has
increased, along with theft. As people stay unemployed and become
more and more desperate, they become more and more willing to commit
crime. The middle classes show their frustration in demonstrations
outside government buildings by beating on their empty pots. People
have lost all confidence in politicians and governments. That
threatens anarchy followed by dictatorship. It was the resentment
of the middle classes ruined by the 1923 hyperinflation that helped
bring Adolf Hitler to power.
CONCLUSION
Now please remember that
I am not predicting that the US will suffer the exact same
fate as Argentina. Rather, I am encouraging you to ponder that
similar causes will have similar effects. I want you to witness the
speed and ease with which government cuts people off from their
money, their livelihood, and all the rights to which they think they
are entitled. I want you to see that cash in the bank is not the
same as cash in the hand, and that fiat cash is not the same
thing as gold or silver. Most of all, I want you to see how an
inflationary depression works. Then I want you to ask:
What international
agency will bail out the United States when the dollar fails?
-- F. Sanders
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