cj#835-1/2> Chossudovsky: FINANCIAL WARFARE

1998-09-23

Richard Moore

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Date:         Tue, 22 Sep 1998
Sender: World Order Conference List <•••@••.•••>
From: Ross Wilcock <•••@••.•••>
Subject:      Financial Crisis
To: •••@••.•••

-----Original Message-----
From:   Michel  Chossudovsky [mailto:•••@••.•••]
Sent:   Monday, September 21, 1998 11:25 PM
To:     Recipient list suppressed
Subject:        financial crisis

FINANCIAL WARFARE
by
Michel Chossudovsky

Professor of Economics, University of Ottawa, author of "The Globalisation
of Poverty, Impacts of IMF and World Bank Reforms", Third World Network,
Penang and Zed Books, London, 1997.

Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. To
publish or reproduce this text, contact the author at •••@••.•••
or fax 1-514-4256224

*  *  *

"Practices of the unscrupulous money changers stand indicted in the court of
public opinion, rejected by the hearts and minds of men". (Franklin D.
Roosevelt's First Inaugural Address, 1933)

Humanity is undergoing in the post-Cold War era an economic crisis of
unprecedented scale leading to the rapid impoverishment of large sectors of
the World population. The plunge of national currencies in virtually all
major regions of the World has contributed to destabilising national
economies while precipitating entire countries into abysmal poverty.
The crisis is not limited to Southeast Asia or the former Soviet Union. The
collapse in the standard of living is taking place abruptly and
simultaneously in a large number of countries. This Worldwide crisis of the
late twentieth century is more devastating than the Great Depression of the
1930s. It has far-reaching geo-political implications; economic dislocation
has also been accompanied by the outbreak of regional conflicts, the
fracturing of national societies and in some cases the destruction of entire
countries. This is by far the most serious economic crisis in modern
history.

The existence of a "global financial crisis" is casually denied by the
Western media, its social impacts are downplayed or distorted; international
institutions including the United Nations deny the mounting tide of World
poverty: "the progress in reducing poverty over the [late] 20th century is
remarkable and unprecedented..."1. The "consensus" is that the Western
economy is "healthy" and that "market corrections" on Wall Street are
largely attributable to the "Asian flu" and to Russia's troubled "transition
to a free market economy".

Evolution of the Global Financial Crisis
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The plunge of Asia's currency markets (initiated in mid-1997) was followed
in October 1997 by the dramatic meltdown of major bourses around the World.
In the uncertain wake of Wall Street's temporary recovery in early
1998 --largely spurred by panic flight out of Japanese stocks-financial
markets backslided a few months later to reach a new dramatic turning-point
in August with the spectacular nose-dive of the Russian ruble. The Dow Jones
plunged by 554 points on August 31st (its second largest decline in the
history of the New York stock exchange) leading in the course of September
to the dramatic meltdown of stock markets around the World. In a matter of a
few weeks (from the Dow's 9337 peak in mid-July), 2300 billion dollars of
"paper profits" had evaporated from the U.S. stock market.2
The ruble's free-fall had spurred Moscow's largest commercial banks into
bankruptcy leading to the potential take-over of Russia's financial system
by a handful of Western banks and brokerage houses. In turn, the crisis has
created the danger of massive debt default to Moscow's Western creditors
including the Deutsche and Dresdner banks. Since the outset of Russia's
macro-economic reforms, following the first injection of IMF "shock therapy"
in 1992, some 500 billion dollars worth of Russian assets --including plants
of the military industrial complex, infrastructure and natural
resources-have been confiscated (through the privatisation programmes and
forced bankruptcies) and transferred into the hands of Western capitalists.3
In the brutal aftermath of the Cold War, an entire economic and social
system is being dismantled.

"Financial Warfare"
^^^^^^^^^^^^^^^^^^^
The Worldwide scramble to appropriate wealth through "financial
manipulation" is the driving force behind this crisis. It is also the source
of economic turmoil and social devastation. In the words of renowned
currency speculator and billionaire George Soros (who made 1.6 billion
dollars of speculative gains in the dramatic crash of the British pound in
1992) "extending the market mechanism to all domains has the potential of
destroying society".4 This manipulation of market forces by powerful actors
constitutes a form of financial and economic warfare. No need to recolonise
lost territory or send in invading armies. In the late twentieth century,
the outright "conquest of nations" meaning the control over productive
assets, labour, natural resources and institutions can be carried out in an
impersonal fashion from the corporate boardroom: commands are dispatched
from a computer terminal, or a cell phone. The relevant data are instantly
relayed to major financial markets-often resulting in immediate disruptions
in the functioning of national economies. "Financial warfare" also applies
complex speculative instruments including the gamut of derivative trade,
forward foreign exchange transactions, currency options, hedge funds, index
funds, etc. Speculative instruments have been used with the ultimate purpose
of capturing financial wealth and acquiring control over productive assets.
In the words of Malaysia's Prime Minister Mahathir Mohamad: "This deliberate
devaluation of the currency of a country by currency traders purely for
profit is a serious denial of the rights of independent nations".5
The appropriation of global wealth through this manipulation of market
forces is routinely supported by the IMF's lethal macro-economic
interventions which act almost concurrently in ruthlessly disrupting
national economies all over the World. "Financial warfare" knows no
territorial boundaries; it does not limit its actions to besieging former
enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults of
the central banks were pillaged by institutional speculators while the
monetary authorities sought in vain to prop up their ailing currencies. In
1997, more than 100 billion dollars of Asia's hard currency reserves had
been confiscated and transferred (in a matter of months) into private
financial hands. In the wake of the currency devaluations, real earnings and
employment plummeted virtually overnight leading to mass poverty in
countries which had in the post-War period registered significant economic
and social progress.

The financial scam in the foreign exchange market had destabilised national
economies, thereby creating the preconditions for the subsequent plunder of
the Asian countries' productive assets by so-called "vulture foreign
investors".6 In Thailand, 56 domestic banks and financial institutions were
closed down on orders of the IMF, unemployment virtually doubled overnight.7
Similarly in Korea, the IMF "rescue operation" has unleashed a lethal chain
of bankruptcies leading to the outright liquidation of so-called "troubled
merchant banks". In the wake of the IMF's "mediation" (put in place in
December 1997 after high-level consultations with the World's largest
commercial and merchant banks), "an average of more than 200 companies
[were] shut down per day (...) 4,000 workers every day were driven out onto
streets as unemployed".8 Resulting from the credit freeze and "the
instantaneous bank shut-down", some 15,000 bankruptcies are expected in 1998
including 90 percent of Korea's construction companies (with combined debts
of $20 billion dollars to domestic financial institutions).9  South Korea's
Parliament has been transformed into a "rubber stamp". Enabling legislation
is enforced through "financial blackmail": if the legislation is not
speedily enacted according to IMF's deadlines, the disbursements under the
bail-out will be suspended with the danger of renewed currency speculation.
In turn, the IMF sponsored "exit programme" (ie. forced bankruptcy) has
deliberately contributed to fracturing the chaebols which are now invited to
establish "strategic alliances with foreign firms" (meaning their eventual
control by Western capital). With the devaluation, the cost of Korean labour
had also tumbled: "It's now cheaper to buy one of these [high tech]
companies than buy a factory-and you get all the distribution, brand-name
recognition and trained labour force free in the bargain"...10
The Demise of Central Banking

In many regards, this Worldwide crisis marks the demise of central banking
meaning the derogation of national economic sovereignty and the inability of
the national State to control money creation on behalf of society. In other
words, privately held money reserves in the hands of "institutional
speculators" far exceed the limited capabilities of the World's central
banks.  The latter acting individually or collectively are no longer able to
fight the tide of speculative activity. Monetary policy is in the hands of
private creditors who have the ability to freeze State budgets, paralyse the
payments process, thwart the regular disbursement of wages to millions of
workers (as in the former Soviet Union) and precipitate the collapse of
production and social programmes. As the crisis deepens, speculative raids
on central banks are extending into China, Latin America and the Middle East
with devastating economic and social consequences.

This ongoing pillage of central bank reserves, however, is by no means
limited to developing countries. It has also hit several Western countries
including Canada and Australia where the monetary authorities have been
incapable of stemming the slide of their national currencies. In Canada,
billions of dollars were borrowed from private financiers to prop up central
bank reserves in the wake of speculative assaults. In Japan-where the yen
has tumbled to new lows-"the Korean scenario" is viewed (according to
economist Michael Hudson), as a "dress rehearsal" for the take over of
Japan's financial sector by a handful of Western investment banks. The big
players are Goldman Sachs, Morgan Stanley, Deutsche Morgan Gruenfell among
others who are buying up Japan's bad bank loans at less than ten percent of
their face value. In recent months both US Secretary of the Treasury Robert
Rubin and Secretary of State Madeleine K. Albright have exerted political
pressure on Tokyo insisting "on nothing less than an immediate disposal of
Japan's bad bank loans-preferably to US and other foreign "vulture
investors" at distress prices. To achieve their objectives they are even
pressuring Japan to rewrite its constitution, restructure its political
system and cabinet and redesign its financial system... Once foreign
investors gain control of Japanese banks, these banks will move to take over
Japanese industry..."11

Creditors and Speculators
^^^^^^^^^^^^^^^^^^^^^^^^^
The World's largest banks and brokerage houses are both creditors and
institutional speculators. In the present context, they contribute (through
their speculative assaults) to destabilising national currencies thereby
boosting the volume of dollar denominated debts. They then reappear as
creditors with a view to collecting these debts. Finally, they are called in
as "policy advisors" or consultants in the IMF-World Bank sponsored
"bankruptcy programmes" of which they are the ultimate beneficiaries. In
Indonesia, for instance, amidst street rioting and in the wake of Suharto's
resignation, the privatisation of key sectors of the Indonesian economy
ordered by the IMF was entrusted to eight of the World's largest merchant
banks including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs
and UBS/SBC Warburg Dillon Read.12 The World's largest money managers set
countries on fire and are then called in as firemen (under the IMF "rescue
plan") to extinguish the blaze. They ultimately decide which enterprises are
to be closed down and which are to be auctioned off to foreign investors at
bargain prices.

Who Funds the IMF Bailouts?
^^^^^^^^^^^^^^^^^^^^^^^^^^^
Under repeated speculative assaults, Asian central banks had entered into
multi-billion dollar contracts (in the forward foreign exchange market) in a
vain attempt to protect their currency.  With the total depletion of their
hard currency reserves, the monetary authorities were forced to borrow large
amounts of money under the IMF bailout agreement. Following a scheme devised
during the Mexican crisis of 1994-95, the bailout money, however, is not
intended "to rescue the country"; in fact the money never entered Korea,
Thailand or Indonesia; it was earmarked to reimburse the "institutional
speculators", to ensure that they would be able to collect their
multi-billion dollar loot. In turn, the Asian tigers have been tamed by
their financial masters . Transformed into lame ducks-they have been "locked
up" into servicing these massive dollar denominated debts well into the
third millennium.

But "where did the money come from" to finance these multi-billion dollar
operations? Only a small portion of the money comes from IMF resources:
starting with the Mexican 1995 bail-out, G7 countries including the US
Treasury were called upon to make large lump-sum contributions to these IMF
sponsored rescue operations leading to significant hikes in the levels of
public debt.13 Yet in an ironic twist, the issuing of US public debt to
finance the bail-outs is underwritten and guaranteed by the same group of
Wall Street merchant banks involved in the speculative assaults.
In other words, those who guarantee the issuing of public debt (to finance
the bailout) are those who will ultimately appropriate the loot (eg. as
creditors of Korea or Thailand) --ie. they are the ultimate recipients of
the bailout money (which essentially constitutes a "safety net" for the
institutional speculator). The vast amounts of money granted under the
rescue packages are intended to enable the Asian countries meet their debt
obligations with those same financial institutions which contributed to
precipitating the breakdown of their national currencies in the first place.
As a result of this vicious circle, a handful of commercial banks and
brokerage houses have enriched themselves beyond bounds; they have also
increased their stranglehold over governments and politicians around the
World.

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(continued...)


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