------------------------------------------------------------------------ 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. ------------------------------------------------------------------------ (continued...)
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