November 10, 2006

Vicious Cycle of Debt

In the Americas the conquests
have yet to finish and the
discovery has yet to begin.

Luis Felipe Noe, Argentina

Ever wondered why a curious group of economists got together in a small town in New Hampshire at the end of WWII to create the International Monetary Fund (IMF) and the World Bank (WB)? Maybe you've wondered why these global bodies are based in Washington D.C.?


Banks are dreadfully boring, the World Bank even more so. In the Western World, where they were founded, the IMF and the WB are just about invisible. In the countries of Latin America from which I write, they make front-page news. This is not because people find them interesting. Far from it! It is because they play a real role in people’s lives. The strange thing is that the effects of these institutions are the opposite of what one might expect if one read their magnanimous charters.

This article provides an alternative perspective on these global organizations comparing their stated aims with their actual affects. It is a personal perspective but not extremely off kilter. As a former chief economist at the World Bank Joseph Stiglitz should be an expert. He earned a Nobel prize on this stuff and was a chairman of the US Council of Economic Advisers under Clinton when the US economy actually worked. Please take some time to read Mr. Stiglitz’s extensive works, or if you would rather read a student's guide to financial imperialism, read on.

Debt Dominion in a Nutshell

I write this piece from the poster-child of neoliberalism, the thorn in the side of the IMF, the death knell of multilateral loan agencies: or so the tabloids say.

Would that the latter were true!

The economics sections of the world’s newspapers were fond of discussing Argentina’s notoriety five years back. The huge loan defaults and the crises were heralded as a major event in the banking world. The contagion never happened, Brazil continues to pay off its loans, as do most other major creditors. You might also be surprised that Argentina made it’s final payment to the IMF of 10 thousand million US dollars this year to close this phase of it’s successful relationship with one of the world’s largest banking organizations.

Hang on a minute!

How can a defaulted loan be a successful banking relationship, especially when viewed from the standpoint of the bank? The WB and it’s sister organization the IMF are in the business to make development and emergency financial stabilization loans -- so not being paid back is bad. Right?

Yes and no.

While it is true that default is hardly what the IMF wanted, things could have been worse. Argentina might have stopped paying in oil.

What are the real purposes of the IMF and the World Bank?

I offer three standpoints: the official stated aims of organizations themselves, the secondary aims of stabilization of the world financial systems (also official but less publicized) and my alternative thesis, where I argue that even in default, the IMF and the World Bank system can be shown to have met it’s aims in Latin America. Argentina, Ecuador, Mexico and others have been paying both in oil and interest for loans that in many cases they never needed in the first place.

If one were to take a cursory look at the stated aims of the World Bank and the IMF one might be excused for thinking that these multilateral institutions were the world’s largest charities. In particular the recent facelift of the World Bank Millennium Goals has a particularly feel-good image. The laudable aims include reducing world hunger significantly by 2015. Were it not for the fact that plans for the Millennium goals are not even in place less alone funded or operational, I might be writing an entirely different article.

Stabilizing World Currency Markets

Let’s leave the fallacious aims of the Millennium Goals to the side and take a look at the IMF’s stated claim of stabilizing world financial systems.

By taking this small step forward we come closer to the reality. From an historical perspective the two major reasons the IMF and the World Bank came into existence in the first place were a global depression and its ugly child the Second World War (WWII).


The year was 1945, the game high stakes poker, even before the game ended the “winners” looked down at their stakes in front on them. The currencies had merged, there was one big winner, the USA and pot was all in Marshall dollars.

The German Mark, the Japanese Yen, the French Franc and most importantly, the British Pound Sterling, no longer had the gold reserves to warrant the power that they once wielded. They had spent the riches of empires in war, their raw power was gone so the US stepped in filling the power vacuum with greenbacks. It decided to rebuild the planet in it’s own image by offering huge loans in dollars to rebuild the same capitalist economies it had helped to destroy. They named this process after general Marshall. Another charity scheme? Hardly.

Jumping forward to the Seventies

Richard Nixon took the next bold step by breaking the connection between the dollar and gold and thus creating a world currency market that floated on thin air. Now it wasn’t just important to stabilize the precarious financial system, it was essential. The poker chips were now all that was left in the furious game of currency speculation. No way out now, the game can never stop, no-one can get up from the table and cash in their chips because the cashier had been fired.

Nixon chose the Seventies oil price shocks as his optimum time to break free from the shackles of gold valuation and float the dollar on energy, pure energy denominated in oil: a commodity only available in US dollars. Gold was replaced by black gold, oil was the commodity to end all commodities, the inflammable replacement for that silly metal that had been synonymous with value for centuries.

Promote the Dollar

The IMF and the World Bank were reborn. They became extremely efficient at recycling petrodollars from the enormous price increases in the barrel of oil. They plowed these dollars right back into the “third world” client economies in the form of development loans. More charity? They targeted economies that possessed what their new economy needed most: supplies of black gold.

It was a risky strategy but the short-term gains were huge. Nixon (and his successors) needed to go to stay on top of their game by controlling the oil markets and supplies. To do this the US had the financial markets in New York, the oil markets in Texas and London, the CIA, ExxonMobil and the largest military on the planet.

One of the trickiest aspects of this strategy was the vulnerability of the United States’ own addiction to oil, because US oil supplies were dwindling rapidly. Not only was the US military and it’s internal economy entirely dependent on cheap oil, but the globalization that kept those dollars circulating outside the USA was heavily dependent on diesel for trains, trucks, tankers and container ships not to mention jet fuel in the air.

It was a zero sum game because the supplies would eventually run out but there was an awful lot of money literally to be “made” from the energy trade in the meantime. The trade was now all in paper, green dollars, printed in the good ole' US of A.

A Game of Strategy and Risk

Strategically speaking, the US was not unaware that other economies were heavily dependent, albeit less so, on that same crucial and finite oil supply. This meant that the US needed to focus a lot of money and influence on countries where oil supplies were to be found. If it meant a coup with an IMF-friendly dictator then so be it, it’s cheaper than invasion so long as they play the "free" market game.

The various agencies went to work ruthlessly doing whatever they could to maintain control of the world’s oil supplies. This lead inevitably to the use of brute force in the Middle East to leverage control of that crucial but risky supply. To mitigate risk, the US decided that it would be unwise to depend on that supply. In order to conserve it’s own supplies it decided to “buy” from Mexico and South America, West Africa and Asia. Was it a coincidence that these oil exporters had become heavily indebted to the IMF? Last but certainly not least it was essential to keep the oil trade denominated in US dollar so as to prop up the paper’s own value even as you print more and more.

This last crucial point meant that the US could help to fund it’s expensive dominion with cheap US treasury bills which paid low interest to the world’s central banks. Every country needs to protect their own currency from speculative attacks and most need to buy oil. If you want to control the value of your own currency you have to pay-to-play so you need reserves in the attack currency, you need dollars.

If you were in the lucky position to be exporting oil, any surplus you maintain can be held in dollars re-invested in US treasuries at 4%. In the meantime those same economies are paying much higher interest on their own “development” loans. Brokered by whom?

You guessed it, the World Bank and the IMF.

Back to the Present

So the story ends where it began in Latin America where countries like Argentina, Mexico, and Brazil play their role in the Imperial game. Some even privatize their national oil companies to make a profit for the transnationals on the side, but that is icing on the cake. Their essential role is pumping out the last of the precious oil supplies and exporting them to the USA. From a Latin American perspective oil exports are a means to raise dollars to make their debt repayments to the IMF. The IMF and the World Banks highly paid consultants recommended liberalized markets and minimum royalty charges on exported resources to be “competitive” in the global race to the bottom. Best case, maybe they will have paid off their debt by the time the too were dependent on Middle Eastern imported oil.

Meanwhile the US wages war to control the largest reserves in the world not to maintain control of the middle east itself, but to control their customers, the US competitors, principally European and Asian.

End Game

All strategic games come to an end. In chess these scenarios are called end game. At this late stage of the game it helps to have a few powerful pieces in reserve to defend your King from eventual slaughter.

In a medieval world armies were fed on grasslands and food. Nowadays you need oil supplies to feed your tanks and missiles. Without oil your pieces don’t move, the aircraft carrier may be nuclear powered but the warplanes need their jet fuel.

Argentina has only nine years of oil self-sufficiency at current consumption and export rates. Cheap internal oil supplies help to subsidize the millions of hectares of soya grown by Cargill & others fertilized by products made from subsidized oil, harvested and transported by machinery run on subsidized diesel. Argentina continues to export both oil and soya to maintain a current account surplus. This surplus enables it to pay off debt and purchase US dollar treasury bills as a reserve so it can depress its own currency to maintain competitive cheap labor supplies. As the dollars drop in value so too does the Argentine peso locked to the dollar.

In short Argentina's strategic end-game ploy is to enslave its economy to export competitiveness while depleting its own oil reserves so that other countries can maintain their reserves for the global end game to follow. So where is the Argentine strategy? Who makes those profits? What happens in nine years? Rescue in the form of a Venezuelan pipeline or time to lean on Morales again?

Maybe this strategic game is less like chess and more like building house of cards. The house is made of worthless 100-dollar bills teetering on a foundation of empty barrels of oil.

Posted by Tony Phillips at 06:09 AM