By Glenn Ashton · 19 Feb 2014
As an emerging market South Africa finds itself amongst a raft of emerging nations in increasing peril in the ocean of international currency markets, with value being speculatively eroded by the predator sharks of the casino economy. The prospect of rescue by capital institutions in the developed world appears slim.
Instead commercial and central banks, along with institutions like the International Monetary Fund and World Bank, disinterestedly observe the carnage. It is unsurprising that the World Bank and IMF are reluctant to intervene in these markets. Such action effectively undermines the Washington consensus, directed by the central banks of the G8, which are in turn linked at the hip to the too big to fail banks.
International currency markets are the free market on steroids. Speculative trades on currency exceed the value of global GDP every 12 days. Only 2.5% of all currency trades deal with actual money – the rest is speculative flim-flam. This indirect form of asset stripping simply enriches the apex predators of Wall Street and the Square Mile, ensuring their survival, with serious negative consequences for the real world economies of developing nations.
The double standards are clear. Despite rescuing renegade banks and financial institutions with billions of dollars stripped from national assets post 2008, the developed economies have signally failed to provide the assistance they have repeatedly promised to developing economies at various G8 and Davos gab-fests. Neither have they reformed the predatory banks and financial system.
The reality is that the post 2008 “economic rebound” was as illusory as the shadows flickering across the wall of Plato’s cave. International financial markets – dominated by speculative trading, too big to fail banks and deeply leveraged hedge funds - have not been meaningfully reformed, despite government promises to do so.
Not only are the sharks allowed to flourish, the system actively feeds them. They grow fat on speculative trading in vulnerable commodities – be they hard, soft, currency or human resources. These commodities are targeted, stripped of value through similar ploys as those which sank the sub-prime mortgage market.
Speculative financial market exploitation is comparable to the mechanisms that enable denial of service (DoS) attacks to disable targeted computer networks. DoS relies on anonymous botnets to amplify requests for service to targeted servers, effectively compromising their ability to operate thus putting them out of action.
Instead of DoS, the financial market employs arbitrage to speculate on derivatives, bonds and other exotic financial instruments, targeting vulnerable financial targets. Developing nation’s currencies are targeted because they lack adequate leverage to protect their vulnerable positions. This vulnerability is largely the consequence of exploitative economic policies imposed by the global north on the south.
The recent currency market instability has been further attributed to US interference in international financial markets through its controversial quantitative easing (QE) programme. QE was meant to increase market liquidity during times of low interest rates instead of simply printing money. Back in 2011 Nobel winning economist Joseph Stiglitz warned QE increased the risk of speculation, creating a bubble in emerging economies. His warning now appears prescient.
Some mainstream economists disagree with Stiglitz, insisting that unfettered growth without due control on financial flows fuelled a bubble in emerging markets. This is a trite analysis. Many countries presently under assault have seen constrained growth over this period. Just as Alan Greenspan was defended by conventional economists for unleashing cheap capital, fuelled by high interest rates, so too has his successor Ben Bernanke been defended for his QE policies, despite its apparent consequences.
The implications are increasingly serious for developing economies. From the BRICS to MINTs, all are vulnerable. Currencies around the world remain exposed to the sharks of capital. The IMF questionably blames the problem on insufficiently robust economic policies in developing countries, discounting the role of the dominant western controlled banking system.
The beneficiaries are the usual suspects, the global elite. Profits are sequestered in anonymous tax havens or redirected toward further damaging speculative activity. Since at least last November there have been ongoing investigations into the manipulation of international currency markets.
Barclays – already under scrutiny for the Libor rate setting scandal – suspended 6 traders in November. Regulators have been sniffing around J.P.Morgan. Deutsche Bank suspended its chief currency trader in New York before Christmas, with investigations digging back at least seven years, prior even to the 2008 meltdown! This month senior currency traders from Goldman Sachs and Citibank were suspended. These are only cosmetic investigations, targeting the visible sharks. What about those lurking out of sight, ripping into the currency derivatives sector at whim, pressured to maintain high returns by shorting vulnerable currencies?
It is also important to ascertain whether these developing currencies are as fundamentally weak as portrayed. Was the Indonesian Rupiah over-valued; or is the country being victimised because it has curbed exports of raw, un-beneficiated mineral commodities? Why is South Africa, which has the world’s highest reserves of strategic minerals like chrome, vanadium, manganese, zirconium, platinum, fluorspar and titanium, let alone coal and iron ore, and gold and diamonds, being nailed?
Could it be that South Africa has also begun to focus on beneficiating its commodities, to shift away from selling raw commodities into the open market? South Africa’s mineral reserves are estimated to be between US$2.5 – US$4.7 trillion in value. It is the third most bio-diverse nation on earth, further currency in this age of the bio-economy. This equates to serious money in the bank. The same applies to Russian gas and oil and Chinese gee-gaws.
Could it actually be that developed nations wish to access these commodities as freely and cheaply as possible? Isn’t devaluing currencies simply an easy way to achieve this goal?
The same questions apply to agricultural producers in the southern cone, including Argentina and Brazil, who produce animal feeds like corn and soy and ethanol as fuel. Devaluation of the Peso and Real reduces the cost of imported feed into European and US markets, effectively turning South American nations into the modern equivalent of “peons”, dependent peasant farmers.
How can the developing nations, the BRICS, the MINTs, ASEAN and other emerging blocs, control this exploitative, neo-colonial financial exploitation? Firstly there is a fundamental requirement that the G8 must maintain their promise to break up the oligopoly of “too big to fail” banks. They remain unreformed and disruptive of international financial markets through driving speculative behaviour. Secondly, speculation in assets such as currencies must be controlled by transparent regulation and oversight.
What other practical means are there to control these hugely powerful interests? One material change that must be tackled is to shut down the black holes of currency speculation, the tax havens. These effectively remove hot money from the marketplace. Next, unearned, speculative income and non-productive capital must be punitively taxed. Finally, the trades themselves, whether in currencies, commodities or any other speculative instruments, must be taxed.
While some blame can be laid on developing nations, they are certainly not responsible for the ongoing speculation. The actual recovery, even amongst developed nations, since 2008 is fragile. It is not founded on fundamental market improvements. Rather it is centred on business as usual by the predatory elite, exploiting the poor to benefit the rich. Inequality has increased since 2008. The currency rout presently underway will only deepen this trend.
The fact is that this continued immoral accumulation of wealth, made on the backs of the poor of developing nations, should be returned to those it has been stolen from, the citizens of the developing world. In reality this is unlikely to happen. We remain at sea, surrounded by sharks. Perhaps we should adopt the Western Australian practice of culling those perceived to act as renegades.
An excellent, excellent analysis of the fault-lines in the global economy. Coming just days after speculation that JP Morgan could be in danger of collapse due to speculative trading in gold futures, this is a timely reminder of how urgently the global economic system needs to be changed.
Instead commercial and central banks, along with institutions like the International Monetary Fund and World Bank, disinterestedly observe the carnage.
The rot in the financial system starts in the roots and that is in money. The purpose of money is to facilitate the voluntary exchange of goods and/or services between economic agents, once that role is compromised the whole 'real' economy is threatened. This is in fact what has been happening since countries abandoned the gold standard. For stability money must be umbilically linked to the values in real goods and services and in this electronic age there is no reason why it can't be done. See my article at http://roryshort.blogspot.com/