by Ramin Mazaheri for The Saker Blog
Of course, developing countries were not hurt by the subprime crisis because they were not involved – the idiocy, usury, malfeasance and willful blindness which caused the subprime housing and banking crises were purely a Western invention.
This is why in the first years after 2009 developing markets produced stable growth – remember in 2010 when Brazil had “arrived”? Those days seem long gone….
Thus, the idea that it was a “failure of the world’s bankers” is preposterous – it was a failure of “capitalism with Western characteristics”. However, this false theory was immediately pushed by the US, which wanted to spread the blame around as much as possible.
The global slowdown only finally extended to all developing countries because of continued Western stagnation, which was caused by their unimaginative “double-down” on neoliberal policies and their hatred of socialist-inspired economics.
This series uses as its jumping-off point the 2018 book is Collusion: How Central Bankers Rigged the World by Nomi Prins, a former Wall Street executive who saw the light and is now informing on the crimes of Western imperialism-capitalism. Prins gives a thorough and chronological account of central banker doings in key areas – Mexico, China, Brazil, Japan and Europe – ever since US banker crimes set off the Great Recession in 2007. The essence of her thesis is that the US orchestrated collusion among the central bankers of many G20 economies and Eurozone in order to primarily save busted US banks, and then also to maintain the 1%-enriching policies of QE, ZIRP and no-strings attached bailouts.
And yet, as Prins notes, the cruel irony is that those who were forced to “react” to easy money policies are the ones who are being and who will be the most ruined by it.
Simply ask yourself: if Western nations and Japan can effectively “print as much gold as they want”, how can developing countries with weaker currencies possibly withstand year after year of this phony gold rush? They cannot print as much as they want – trillions of rubles, pesos and rials are sure to provoke terrible consequences for those manning those presses.
Because the US caused the global financial crisis, and because their economy is the most corrupted by bad loans, and because their laws are obviously the least suited to effective regulation of financial criminality, then certainly the value of the dollar should have fallen post-2008. Yet by flooding the world with trillions of dollars via QE the US was able to, paradoxically, maintain dollar dependence despite their crimes. The US dollar share of global reserves today is 62%, almost exactly what it was in 2008. Combined with the other source of the crisis – the euro – the two combine for 82% of global reserves. By comparison, the yuan – which so many predict is about to dethrone the dollar – is at below 2%; I wouldn’t hold my breath.
“None of this makes sense, Ramin!” Yes, I agree – nor is it fair.
I have good news and bad news – those who have protectionist policies and “resistance economies” are going to be fine when the next capitalist bust hits (Marx proved that capitalism goes from boom to bust in an endless cycle). However, those pro-globalization-capitalism nations who welcomed these diseased Trojan dollar horses into their economy yet again… they will be in for a rough ride.
This part discusses how QE is something that is never broached in the Western media: a way to create debt traps which increase Western control over their neo-imperial subjects. It also looks at how two large economies will be affected very differently when the QE bubble bursts – Iran and Brazil. Neoliberal capitalism financial policies must be viewed as a neo-imperial tool, of course.
Sadly, many do not make this direct link, even though in decades past the link between capitalism and imperialism was far more common knowledge. I think the difference is that “neo-imperialism” is a phrase rarely written and never uttered in Western Mainstream Media. Why do we have a hyphen for one and not the other, after all?
The reality is undeniable even if it is rarely explained like it will be here: Considering that the state of the Western economy is worse now than it was prior to QE, ZIRP and decreased regulation, developing economies with ties to the West and Japan (as opposed to those who increased their ties to China), are now weaker as well.
How Brazil will go even buster during the next bust in Western capitalism
Latin America is “Washington’s backyard”, but Brazil is a rare Latin American country with increased ties to China (like with BRICS institutions and agreements). However, Brazil’s tethering to QE and ZIRP are far deeper than what BRICS has thus far created.
QE and ZIRP have ensured that those who print the dollar and the euro buy as many expensive things as they can, while they can. While elite-class bubbles were created domestically of course investors looked internationally, because what’s the point of keeping money at home when your interest rate is zero (or negative)? And what do rich investors care to begin with – firstly, they all consider themselves never-miss investment geniuses, and secondly, they are playing with house money.
In a chapter with a subtitle that reads, “QE pushed US speculators into Brazil”, Prins cites from April 2016 Joao Barroso, a senior advisor at Brazil’s central bank who reported that, “…over 54 percent of capital inflows from the United States to Brazil were caused directly by QE. Most of that capital flowed into Brazil’s bond market, because rates there were so much higher than in the rest of Latin America.
Barroso also estimated that up to 65 percent of total US portfolio flows to major Latin American countries were caused by the Fed’s QE, isolating out all other factors. But, as he noted, ‘though these flows are small relative to the Fed’s $4.5 trillion balance sheet, they are considerably large relative to the recipient economies.’
Throughout Latin America, US capital had coursed more into equity markets (stock markets) than into bonds. Speculative capital, funded near zero thanks to the Fed, craved higher return. ” (emphasis hers)
(Due to unclear writing there appears to be a contradiction, which I will clarify: Brazil was the exception in Latin America, with more money in bonds than stocks.)
The process Prins and Barroso described began in 2011, with annual foreign direct investment more than doubling from the 2005-9 average, and nearly tripling in Brazil. ZIRP started this process, and then QE allowed this number to remain extremely elevated for several years. Over this time frame Latin American nations – to give one regional example – got tens or scores of billions of euros, which represent huge amounts in their economies. I think that the average person may hear words like “trillions” and “hundreds of billions” so often that they may not appreciate that $10 billion is a huge amount to many countries.
Brazil got more ensnared than anyone else in Latin America because in 2013, for example, Brazil’s interest rate went from 7.5 to 10%, whereas bonds in Mexico – Brazil’s main foreign investment rival – fell from 4.5 to 3.5%. When billions are involved, Brazil offered far bigger yields. Brazil’s economic crisis from 2013 onward would be so much terrible precisely because their bond market was implicated far more than the usual target – national stock markets – and that really cannot be stressed enough, as the government always plays the biggest economic role in any society regardless of their ideology.
By 2012 it was clear that austerity had failed, as Europe was in a double dip recession, and that QE had and ZIRP had done nothing for any nation’s “real” economy. And yet, the US still issued QE 3.
It made the entire world upset with Washington, because they saw that the US was acting totally irresponsibly and rapaciously with the untested policy of QE. They saw that, gasp!, the US was not benevolently guiding the world economy. They also no doubt saw that the Western media would not criticize QE 3 but instead talked about a phony “economic recovery” simply because stockholders were getting richer.
It was as if everyone realized the jig was up – QE and ZIRP was a rich-get-richer-quicker scheme, so the allies of the US all played along to benefit their 1% as long as possible.
QE 3 is when QE money flowed into foreign markets on sustained astronomical levels, pumping up their stock market and facilitating foreign takeovers. Japan was, as the originator of QE, the most active player, but the US was able to soon help topple Brazil’s Dilma Roussef government via not intrigue, as is commonly thought, but via QE-led turmoil in their economy. More on that later….
QE allowed bankers to collude with bankers, so of course Brazil’s government had to go
There is an absurdity to much of the coverage – often quite good – about the coup against Dilma Rousseff and the Car Wash Scandal: it totally excludes the aspect of high finance. This is, of course, because Western journalists are indoctrinated against questioning capitalism – or they self-censor – thus leaving a huge chunk of the story out of their coverage.
Major kudos to Prins, as she correctly sees how QE and macro-economic policies are truly at the heart of Brazil’s reactionary-inspired chaos, just as much as the neoliberal desire for right-wing structural “deforms”, and just as much as Washington’s desire to punish Brasilia for moving closer to Beijing. The storyline of nationalist competition does not ever take precedence over class warfare.
Back in 2011, when Brazil was riding high thanks to the astronomical increase in foreign investment from $30 billion to $100 billion, they wanted to keep everything nice and tight by doing exactly what Iran does – have capital controls to prevent foreign investors from screwing up the domestic economy. At that point their real was overvalued – QE had created huge artificial demand for the real – and Brazil naturally wanted to keep it that way to keep their citizens happy. (A strong currency benefits consumers but hurts corporations which export and bankers – this is detailed in Part 5: Understanding the West’s obsession with inflation.)
The problems foreign capital inevitably poses are quite simple. They are also predictable, because of Marx’s unveiling of the unchangeable boom-bust cycle of capitalism. For example, when the crisis hit in the US money immediately began flowing out of the periphery back to the bankers’ homelands. This is incredibly destabilizing for developing countries: they have done nothing wrong, yet their investments are getting shuttered because Western bank subsidiaries will certainly be allowed to fail before the home office does.
QE and ZIRP was allowing money to now come back in following the 2008 crisis, but way too much of it. Thus, even though it was the Western bank’s home country which caused the Great Recession, QE was helping to spreading chaos to even a strong developing country like Brazil.
Some in Brazil realized that all this capital was not necessarily a good thing back in 2011:
“What he (Guido Mantegna, the architect of Lula and the Workers’ Party economic programs of the 1990s) really wanted to do was keep a lid on capital flow volatility. But neither the IMF nor any major country agreed with him. To the United States, especially, loose financial borders meant a country was on the path to becoming ‘developed’ – the financial equivalent of nirvana. Combined with zero- to low-cost Western money, it was a policy of neoliberalism on steroids.”
But Brazil is not a revolutionary country – the money was already in, and now they had to fear it leaving again because they would not impose capital controls, and even though they had already captured so very much investment.
Typically, the foreign capital exit problem becomes compounded by the developing country’s reaction: countries which have succumbed to foreign investment go crazy and do anything to keep the capital from leaving the country, and thus so many workers and projects in the lurch – they cut sweetheart deals and eliminate transactional taxes, which means that foreign investors have succeeded in giving even less to the local economy as they can repatriate even more of their profits.
What’s far worse should be easily understandable: money flowing out of a developing nation (reduced demand) necessarily lowers their currency. Their currency is worth less, but they had contracted loans denominated in dollars back when dollar were cheaper for them. Thus, when the crisis inevitably hits and foreign money gets pulled out and the local currency drops, it obviously costs more of the developing country’s currency to buy a dollar, i.e. their loans just became harder to repay.
To sum up: Money started flowing in, creating a lot of risk… but when the crisis hits money stops flowing… and now even more money is flowing out… so your currency is worth less than when the foreign money was flowing…. thus your debt and inability to make payroll have both compounded in difficulty.
These types of chaos and policy confusion were wreaked on strong Brazil just a few years after they had “arrived”. However, it gets worse, especially because Brazil is not as leftist a country as some think: their domestic bankers were able to collude with foreign bankers to push government policies even further to the right.
It is easy to see how they were able to do that:
Prins relates how by 2012 private Brazilian banks, expressly because they were flush with QE investment and thus didn’t need to do any real work in Brazil, were able to hold the government hostage: they insisted on austerity measures to roll back leftist gains in the labor market as well as deregulation, in return for finally lending to small businesses and people. QE, infamously, has not been lent downwards in any nation. Domestic banks could strangle Brazil’s rising economy – lending rates for some people had reached up to 400% – and ride out the tough times because Brazilian banks were getting helicopter money rained on them from QE.
“Roussef chastised the ‘perverse logic’ of private banks: ‘The Selic (benchmark interest rate) is low, inflation remains stable, but the rates on overdrafts and credit cards are not coming down. She praised public banks for the concern they showed for Brazil’s people.”
It should be clear how US QE money destabilized Brazil’s system: it empowered private bankers – rather, it colluded with Brazilian private bankers – in order to imprison a center-left government, a rising Third World Power, and an ally of China.
In 2013 Brazil’s worst draught in half a century did create major price inflation, leading to massive strikes against the triple whammy of newly-enacted austerity, inflation and no private bank credit. And now we know the whole domestic financial context back when QE 3 arrived, amid Brazil’s resoundingly unsuccessful hosting of the World Cup in 2014. Sure, the CIA didn’t like Roussef, but international capital works on a much more important level than even the top spy agency. Money doesn’t sleep anymore, but spies do.
The lack of private bank lending, protests, continued global economic stagnation via growth-sucking austerity measures made the real start to drop despite Brazil’s still unusually-large foreign direct investment, a major problem for a country which had borrowed so much QE money.
But the die was set: No tinkering with interest rates could combat the weight of foreign capital. No amount of “investor confidence-creating” austerity measures could save them – the recently-strong real was quickly crushed by foreign speculation, consigning Brazil to debt slavery: in 2011 the Brazilian real was 1.5 to 1 US dollar, today it is 4 reals to 1 dollar. Pity those who took out dollar-denominated loans in 2012 – they “borrowed” more than double what they thought….
So that was how QE-fueled chaos caused Brazil’s real to drop precipitously, which jacked up domestic inflation, and which made companies with foreign debt in dollars even more indebted, and made them “arrived” no longer.
Of course, for the Western financial press trotted the same old line – “incompetent leftist managers” – they never discussed the negative role of foreign investment, which is allegedly always the greatest messiah since Jesus. This reality cannot be stressed enough: in any foreign economic collapse the role of Western investment is either downplayed or – most often – never even revealed to the reader.
Lula and Roussef were never successful revolutionaries and never as leftist as Cuba nor Venezuela, and because of they that they definitely adopted far-right policies such as austerity measures instead of forcing private banks to cooperate (make loans to everyday Brazilians in return for being allowed to receive foreign money into the country). The only solution is to have the biggest banks owned by the state, and in Brazil it’s only 3 out of the top 5 banks, and that is likely why – as they never had a popular revolution – they are about 60% leftist and 40% reactionary.
“In Brazil, the ongoing ideological battle of wills and elites over monetary policy raged internally. But externally, they were pressured by the presence of epic global central bank intervention that caused a deluge of capital flows from G7 countries seeking higher yields through a coordinated, unprecedented fabrication of capital. This had unnaturally fueled excessive speculative inflows from dominant to recessive countries, from those that controlled monetary policy or created the most artisanal (this means QE printing) money to those that reacted to it.”
How Iran will have avoided the next bust in Western capitalism
All this was started by borrowing foreign money, and I hope Iranian leaders are reading this because they are not immune!
Foreign capital is a double-edged sword, and Iran realizes that nobody can fight properly with such a deadly tool – all socialist-inspired countries are correctly skeptical of all capital.
Iran is often called the “last great untapped market” – Iranian companies of all types would surely get loans faster than a nanosecond from Western corporate banks if the Iranian government ever allowed that. But the process is simple, clear and never discussed in Western financial media for obvious reasons: the first Iranian company to accept foreign investment will be the first to fall into this debt trap (caused by capitalism’s inability to avoid busts) and thus the first to be taken over.
All of this could have happened exactly the same to Iran had they decided to capitulate, say, to Obama in 2008. The headlines would have been the exact same: “
Brazil Iran has arrived”, “Look at all the Brazilian Iranian tourists here now”, “ Brazilian Iranian society is more advanced than we gave it credit for”, but only to replaced with Iran being crushed by foreign capital and overrun by Western bankers, corporations and speculators.
It is very fortunate that Iran, whose government, society and political culture excludes the possibility of foreign privatization and massive foreign debts – this never-examined issue was explained in this article, What privatisation in Iran? or Definitely not THAT privatization, which is a chapter in my upcoming book (which you should buy if you read that article!). Ever since the war with Iraq ended Iran is a country with a rare trade surplus, and just today they found a new oil field which increases their proven reserve by a whopping third, but they should pay close attention to just “unarrived” Brazil now is. The billionaire hedge fund investors who want to tempt Iran are certainly not there to benefit Iran for the long-haul – they are they to grab profits and leave as quickly as possible.
It should not be surprising that the creation of new money (QE) and the discouraging of domestic saving (ZIRP) has created innumerable debt traps across the world. Latin America provides us with another suitable comparison of two different approaches to foreign capital, and that is the basis of Part 4: Iran vs Mexico: ‘economic inflows’ versus ‘economic independence’
Here is the list of articles slated to be published soon, and I hope you will find them useful in your leftist struggle!
Part 1 – Western central bankers: they’re God, they trust – a 10-part series on the QE economy
Part 2 – How QE has radically changed the nature of the West’s financial system
Part 3 – QE paid for a foreign buying spree: developing countries hurt the most
Part 4 – Iran vs Mexico: ‘economic inflows’ versus ‘economic independence’
Part 5 – Understanding the West’s obsession with inflation
Part 6 – The new ‘beggar thy neighbor’: wars to devalue labor, not
Part 7 – Blaming China for the Great Recession… to avoid emulating China’s (socialist-inspired) success
Part 8 – 1941, 1981, 2017 or today – Europe’s mess is still Germany’s fault
Part 9 – Don’t forget the real root of Brexit: fear of Eurozone economic contagion
Part 10 – Bankocracies: the real Western governance model
Ramin Mazaheri is the chief correspondent in Paris for Press TV and has lived in France since 2009. He has been a daily newspaper reporter in the US, and has reported from Iran, Cuba, Egypt, Tunisia, South Korea and elsewhere. He is the author of the books I’ll Ruin Everything You Are: Ending Western Propaganda on Red China and the upcoming Socialism’s Ignored Success: Iranian Islamic Socialism. His work has appeared in various journals, magazines and websites, as well as on radio and television.