vendredi 4 février 2011

The Reasons For The Present Global Financial Crisis

Comparison with that of 1929

There are striking similarities between today’s global crisis and the Great Depression of 1929-1934. However, there are also major differences. In 1929, the world was divided between the West, (primarily the United States and Europe,) and the Communist block, (Soviet Russia and China.) Much of the third world today was under the domination of colonial empires, principally those of Great Britain and France. But since the 1970's, globalization has increased geographically, and extended to include countries from the former colonial empires, including that of Russia The new division of the world is based on inequality of economic development. Therefore, between the situation of 1929 and the current one there is a considerable difference of scale. For the whole world is now involved.

A second and more aggravating difference between the world situation in 1929 and now is the effect of rapid and extensive globalization, which has itself led to major difficulties. Potential social instability has appeared everywhere. There is a particularly marked increase in inequality in the United States, and massive unemployment in Western Europe. Russia and the countries of Eastern Europe have also met with major difficulties because of an overly hasty liberalization. Whereas in 1929 unemployment in Europe occurred as a result of the financial and currency crisis, mass unemployment is already evident today within the European Union for different reasons. And it will only increase if the financial crisis today should worsen.

The credit system

Basically, the credit system leads to a creation of a means of payment ex nihilo. The holder of a bank deposit sees it as a source of available cash, while at the same time the bank has already loaned a portion of this deposit, or has redeposited it in another bank. With each credit transaction there is therefore duplication of money. Thus the credit system leads to money creation out of nothing by simply writing on a piece of paper. As the bank is lending what it only partially possesses, the system is therefore fundamentally unstable. The volume of bank deposits will depend upon a dual decision, that of the bank to lend and that of borrowers to become indebted. It follows from this that the total money supply is extremely sensitive to periodic fluctuations, and tends to grow during periods of optimism and decline in times of pessimism. In fact, the size of these fluctuations is directly related to the credit system, and without the growth of money creation (or destruction) by the banking system, they would be significantly reduced if not completely eradicated.

For recipients of credit, it seems miraculous since it permits the creation out of nothing of an effective purchasing power. However, whereas the mobilization of "real savings" by banks to enable them to finance productive investments is acceptable, the use of "false riches" by money creation is inherently harmful. For it undermines economic efficiency by the price distortions it generates in terms of unfair income distribution. Using short term deposits the bank’s activity leads to making financial investments in the medium or long term corresponding to the promises of loans it has made to its customers. This activity is thus based on the exchange of promises by the bank to pay over a given term, against promises to pay on longer terms with interest by its customers. The total assets and liabilities of a bank are equal, but this equality is just accounting practice. The result is a permanent potential instability of the banking system as a whole, since the banks are unable to cope with massive withdrawals of deposits or savings deposits reaching maturity, their assets only being available at a much later date.

If all investments in underdeveloped countries were financed by banks through private loans with a more or less long term maturity, and if funding shortfalls in current American transactions were only insured by long-term foreign investments in the US, all imbalances would have been much smaller with no major risk. What is highly dangerous is the increase of imbalances caused by the credit system, and the instability of the financial and monetary system as a whole on both national and international levels. This instability has been greatly aggravated by the total liberation of capital movements in most parts of the world.

After 1974, the global development of bank loans and the massive inflation that resulted over the next decade reduced real interest rates to very low, even negative values, generating both inefficiency and fraud. Real savings were replaced by long-term loans thanks to money creation ex nihilo. Efficiency as well as equity was seen to be compromised. The operating system has led simultaneously to a waste of capital and a diminution of savings. It is mostly due to money creation, if developing countries have been forced to implement ambitious and unreasonable development plans, and to postpone the necessary adjustments. Since it is easy to buy, one can just pay with promises to pay. By necessity, most debtor countries have had to obtain new loans, both to finance depreciation and interest on their debts and to make new investments. Gradually, however, the situation has become untenable. At the same time the debt of developed countries (as a percentage of gross national product and the interest burden as a percentage of public expenditure) has reached unbearable levels.

Since 1974, massive speculation has grown worldwide. The substitution in March 1973 of the system of floating exchange rate system to a fixed but adjustable parity, increased the influence of speculation on the credit backed exchange rates. Associated with the system of floating exchange rates, the credit system as it currently operates has greatly contributed to the profound instability of exchange rates since 1974. Throughout this period, unbridled speculation has grown over the relative exchange rates of major currencies, thanks to the credit system. Speculation in stocks and bonds has been equally spectacular. In New York since 1983 markets in options on stock-index futures, hedge funds, and derivatives presented as secure, have grown. These low cost futures markets where most positions are traded on credit, have increased speculation and generated a very high volatility. They were accompanied by accelerated growth of hedge funds.

In fact, without the creation of money and purchasing power ex nihilo allowed by the credit system, the extraordinary increases in stock prices that we saw before the big crisis would not have been possible. For expenditure devoted to buying stocks and shares would be restricted to cash payments, and there would be regulatory mechanisms designed to curb unwarranted speculation. Whatever the speculation, be it currency, stocks and shares, etc., the world has become a giant casino where the gaming tables are spread over all longitudes and all latitudes. The game and the stakes involving millions of players around the world never stops. Everywhere, the speculation is favored by the credit system, because you can buy and sell without paying or holding . Real economic data and the nominal rates determined by speculation are normally separate. On all stock exchanges this frenetic and feverish speculation is permitted, fed and amplified by the credit system. Never in the past it had reached such magnitude.

The entire world economy today is based on massive debt pyramid, each part resting on the other in a delicate balance. Never before has such an accumulation of ‘promises to pay’ been so difficult to handle. Never before have we seen such potential instability with a threat of total collapse. All the difficulties stem from the fact that no decentralized market economy can function properly if the uncontrolled creation of new means of payment does not have the necessary adjustments. This is so whenever we pay for expenses or debts with mere promises to pay, and without any direct or indirect compensation. Although all the experts are searching for ways to resolve such problems, no real agreement has been obtained on finding effective solutions. For the moment, almost all experts see little alternative, (due to the pressures on commercial banks, the issuing institutions and the IMF,) but to create new means of payment to allow speculators to repay their debts with interest, even if it means increasing the burden for the future. In fact, the current system of money creation through credit is certainly the "cancer" that irretrievably erodes all market economies and private property.


For the last two decades a new doctrine has gradually been imposed, that of free trade without any obstacles to the movement of goods, services and capital. Under this doctrine the removal of all barriers to these movements is a necessary condition for an optimal distribution of worldwide resources. The idea being that in all countries and in all social groups within each country the financial situation would hopefully improve. The market alone would lead to a stable equilibrium, especially if it could operate on a global scale. Proponents of this doctrine have become as dogmatic as the supporters of communism before its final collapse along with the Berlin Wall, in 1989. For them, any difficulties in the application of the free trade globalist doctrine would only be temporary. For all developing countries, their total opening up to the outside world was a necessary condition, and the extremely rapid development of emerging countries in South-East Asia was furnished as proof. It was the basis of Western countries growth. Therefore, the elimination of all tariff and other barriers was a condition of the developing countries’ financial success, the West being an example for them to follow if they wanted rapid growth and full employment.

All these convictions were eventually swept away by the deep crisis that has developed since 1997 in South-east Asia and Latin America, culminating in Russia in August 1998, and reaching the banks and the American and European stock markets in September 1998. This crisis has been felt everywhere, especially in Asia and Russia, where there is massive unemployment and social hardship. Everywhere the creed of the doctrine of globalist free trade has been questioned. Two major factors have played a decisive role in this global crisis on an unprecedented scale. Firstly, the potential instability of global financial and monetary system, and secondly the globalization of the economy both in monetary and in real terms. In fact, what had to happen has happened. The world economy, which was devoid of any real system of regulation and had become anarchic, could only find itself eventually in great difficulty.

The reigning doctrine has totally disregarded an essential fact. The full liberalization of trade and capital is only possible or desirable in the context of a regional grouping of countries with comparable economic and political social development. In fact, the New World Order has already collapsed before it has even begun. The factual evidence for this largely outweighs the ignorant doctrinal beliefs and ridiculous efforts of the super rich members of the secretive organizations trying to reign over the world’s population, the vast majority of which is getting poorer and more rebellious by the minute.

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