Public Debt, Finance and Imperialism

1. Public Debt, Finance and Imperialism RamaaVasudevan Colorado State University

2. 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

3. 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:

4. Public Debt as lever of primitive accumulation Public 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

5. Monetary Roots of financial system • Development 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.

6. 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

7. UK Public Debt

8. 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

9. Debt and Dominance • Role 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

10. Problem of Willing creditors • Britain 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

11. Debt and the Periphery • Debt 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

12. …Debt and the Periphery Current 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

13. 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

14. British Balance of Payments £ millions

15. Banker to the World: Dollar standard Global 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

16. Current Account Balances ($ billions)

17. USA: Net International Income Receipts (Share of GDP)

18. 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

19. USA: Capital Flows, Current Account Deficit

20. 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

21. Federal Reserve Assets

22. Federal Reserve Liabilities

23. US Public Debt

24. Sovereign debt Crisis • Distinctive 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

25. 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

26. The present juncture • Mountain 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

27. US: International income receipts and payments

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