World financial system causing international disharmony
The world has recently seen an increasing frequency of financial crashes, each one more virulent than the previous ones. Leave out the East Asian financial crisis of 1997-98, basically caused by a sudden outflow of Western capital for which the Asian countries were nor prepared, the other crises have been caused by the USA, with the European Union being an active partner. With the US dollar being the main vehicle of international trade,
international investment and the reserve currency of most nations, its management by the US Federal Reserve has failed to ensure the continued stability of world financial markets. The US is the world’s largest debtor nation with the heavy burden of ensuring stability in world financial markets handled by a coterie of elite private bankers and financiers who control the US Federal Reserve. The bargain has not worked well even for the US public which suffered heavily in 2007-2008 due to easy money pouring in to housing and
credit card users in the vain hope of sustaining an economic bubble while
manufacturing and servicing were being outsourced and the real economy was
declining.
The US Federal Reserve is currently the real equivalent of the world’s Central Bank while its stated role is to control and guide the US financial structure with a view to creating employment and business development. Its method of stabilising markets in the liquidity crises caused by private bank failures is to create more and more dollars and pass them around the world through US banks and financial institutions, a method with the seemingly harmless equivocal name of Quantitative Easing. The massive bank failures of
recent times in the USA and the EU were caused by profit-seeking speculative trading in commodity markets and derivatives rather than lending to solid manufacturing enterprises. Additional easy finance for the same banks through continuing tranches of
massive Quantitative Easing, with the same corrupt managers, has created more
economic bubbles which will appear in the future.
The Europeans are aware of the need for more regulation of the banking system whose complex new speculative financial instruments baffle even the bankers themselves. It is a system run wild, justified by its proponents that the markets are self-regulating and must rule. However, this theory of self-regulating markets is denied when the bankrupted banks demand massive transfusions of public taxpayer money to bail them out after each failure. The timid solution comes in the form of the Basle ll and Basle III agreements that now define basic safety margins that banks must keep while doing business. Yet even this has not been ratified by the USA and is not enforceable.
The International Monetary Fund (IMF) was once supposed to be a Central Bankers’ Central Bank. Its stated purpose is this: “The IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.” (http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm) It also claims to be “the trusted advisor governments.” But it failed to ring the alarm before the recent financial collapses and it has failed to reign in the excesses of the US Federal Reserve or the Bank of England. Since its control has been firmly in the hands of the Americans and Europeans, it could never play this role with an even hand.
The major economic powers of the world, located in Europe and North America, are now facing economic problems caused by unsustainable debts. In the USA, the world’s largest economy, the mounting debt which now well exceeds the GDP, has led to repeated budget crises in the legislature and cuts in public spending that is threatening the welfare of the
of the public, except for the politically dominant super-rich. In the second most important economic area, the European Union of 28 states, bank debts have led to severe economic hardships and violent social protests and no happy ending is in sight. In much of the developing world, once ruled directly or indirectly by the Americans and Europeans, the flood of easy money being created in the form of US dollars, euros or, to a small extent, sterling pounds, has led to economic distortions that devalue their products and services in international trade and maintain them in a state of economic subservience. It is the irony of modern economic history that the biggest debtor nations control the world financial structure.
The most successful nations outside this charmed circle have now dubbed themselves the BRICS – Brazil, Russia, India, China and South Africa – to challenge the hegemony of the Western coalition. China, the world’s second largest economy, biggest exporter and holder of the largest capital reserves, is positioning itself to make the Chinese renminbi another
major international currency. Banks in UK, France, Australia, Russia, Brazil, are now buying the Chinese currency for trade with the expectation of later drawing on massive Chinese capital reserves. But this will only add one more player into an unfair system that retains power for the owners and sets the rules for other nations.
More than ever, the world needs a truly democratically created monetary centre which will oversee and regulate currency markets and currencies. But that is a dream that lies beyond the visible horizon.
Kenneth Abeywickrama
05 July 2013.