Money, Debt, and the Finance Cabal

It’s hard not to wonder what the fuck is going on these days. Waves of civil unrest, coronavirus cases, and media-induced histrionics continue to crash methodically into nearly every nation’s communities. It sometimes feels like watching our entire social structure, including its global and national political institutions, economic agreements, and social norms, rapidly collapse; other times, it feels like watching the same old political incompetence, crony capitalism, and social alienation continue its steady march towards an increasingly bleak and obscure future. 

It’s essential to remember that we are not living in a brand new world. Things have superficially changed, but no systemic or ideological shift occurred this year. Despite high unemployment, bankruptcies, and Corporate-Sponsored Riots, 2019’s world remains intact. The current disruptions to labor markets, global trade, and social and political norms pre-date COVID-19, so we must examine the larger historical backdrop. We can’t understand 2020 without understanding 2016, and we can’t understand 2016 without understanding the 2008 Global Financial Crisis, and we can’t understand that without understanding Nixon’s decision to take the US Dollar off the Gold Standard in 1971, and we can’t understand that without understanding the Post-WW2 regime established at the Bretton Woods Conference in 1944. All of this requires understanding how and why money, debt, and influence circulate around the globe. 

All economies are ‘human economies’ in the sense that they orient our interactions with members of our family, our community, friends, and other nations. Understanding ourselves and our place in the world, therefore, necessitates understanding our current economic and financial regimes. Luckily, the story is fascinating and the past hundred years have delivered tremendous shifts that normally occur only once every several hundred years. 

By situating David Graeber’s Debt: The First 5,000 Years alongside Yanis Varoufakis’ The Global Minotaur, we can compare and contrast Graeber’s long duree approach that thinks in continents and feels in centuries with Varoufakis’ focus on 20th century political economy that thinks in countries and feels in decades. Whether one believes Graeber’s thesis that the Post-WW2 global economy had to collapse due to its inability to accommodate all workers everywhere or Varoufakis’ argument that America’s fiscal deficits collapsed it, Richard Nixon had no choice but to take the US Dollar off the Gold Standard in 1971. That action fundamentally altered the nature of money and therefore of the financial order, which triggered mass financialization of economies based on credit. Easy money for banks through low interest rates and quantitative easing; ample credit cards and loans for the masses. The 2008 Global Financial Crisis proves that the slew of policies enacted by Richard Nixon, Bill Clinton, and Alan Greenspan were insufficient. Our current mire further proves it, and suggests that it might take several decades before we understand how to recover from their mistakes. 

Debt, Credit, and Power

Friendly sayings like ‘you gotta give him credit’ pay vague homage to the origins of the heart of our economy: credit, which we all need to buy a home or a car, attend school, receive life-saving healthcare, or pretty much anything else. People also use credit cards to buy things they don’t even need. The nonchalance with which we associate friendly banter with economics, however, isn’t surprising because economics were once intimately intertwined with essential human impulses to be loving and accommodating with friends and neighbors. 

Human societies have always revolved around exchanges based on credit and debt— not money or barter. The textbook economic example of two individuals who merely calculate exchange value of their goods and then barter for each other’s products in the absence of money simply never occurred (Graeber, 29). That’s Adam Smith’s sociopathic utopia. Instead, people kept running accounts of debts and credits with their peers.  Forgive me for quoting at length about a Scottish village, but the actually-occuring practices are remarkable:

“Employers..often lacked the coin to pay their workers; wages could be delayed by a year or more; in the meantime, it was considered acceptable for employees to carry off either some of their own products or leftover work materials, lumber, fabric, cord, or so on…So they went to the pub, ran up a tab, and when the occasion permitted, brought in a bag of nails to charge off against the debt” (Graeber, 38). 

Anthropologists note that the same practice occurred in colonial Virginia, where tobacco was used as IOU tokens. Merchants in the West Indies used sugar to the same effect. Even farther back, in Ancient Sumeria, people calculated credits and debts in silver, but they did not need to be paid in silver. A person could pay, say, one shekel’s worth of silver in goats or barley, or anything else; importantly, people could accrue debts, account them casually with peers over time, and then pay them off during harvests, which were obviously infrequent events (Graeber, 38). They managed to have a fully functioning economy despite ‘real money’ hardly circulating in the real economy because most of Sumeria’s silver simply sat in Temples and their Treasuries. What we consider as ‘real money,’ for most of human civilization, was something akin to a debt token that indicated a relationship between two people, something like an IOU. This is much different than our modern idea of money as a free-floating object whose sole purpose is to indicate purchasing power. By contrast, the latter seems sociopathic. 

This semi-formal, infrequent manner of accounting for debts feels very homey and perhaps desirable, but it did come to absorb more hostile human impulses. After all, people sometimes accrued debts that couldn’t be paid back for metaphysical reasons. If one person accidentally kills another’s sibling, then no amount of goats or silver can square the accounts. Human life cannot be calculated in bullion. Therefore, one had to offer something on the same extra-material plane, such as a wife, a sister, etc. in the form of a slave (Graeber, 140). Hence patriarchal norms about men’s ability to pawn women as currency became vital to everyday accounting. 

While such a financial system cannot help but become a product of both amiable and hostile human characteristics, the introduction of paper money or bullion (i.e. gold, silver) does not do us any better. In fact, their popularity rises with warfare. It is easier to pay soldiers with easily portable goods that will be accepted anywhere, regardless of the context; soldiers passing through an area do not have the familiarity with local people in order to establish credit with them.  It would have been much harder for kings to pay people to fight in their armies without such a cold, calculated abstraction as gold. In times of uncertainty, where one cannot trust the people around them, the need for cold-hard cash or gold rises. Bullion is multilingual.

It is critical to note that the colonization of the Americas coincides with Western Europe’s desperate need to pay Asian merchants in impersonal bullion. Due to its looting of South America, Europe experienced a massive influx of gold during the 1400s, but economic research shows that this gold did not stay in the continent or reach its peoples. Instead, during, “much of the Tudor period, the circulating medium was so small that the taxable population simply did not have sufficient coin in which to pay the benevolences, subsidies, and tenths levied upon them;” by, “1540, a silver glut caused a collapse in prices across Europe” (Graeber, 312). At the same time, China was importing 90-97% of South American silver, while offering Europeans huge amounts of silk, porcelain, and other Chinese products (Graber, 312). Where people cannot exchange goods, one party gives money in exchange for goods; bullion most often changes hands between people who are not friends or neighbors, and who are not interested in creating humane relationships. So while Chinese and European merchants profited massively during the trade, ordinary Europeans’ quality of life suffered and South Americans got slaughtered and had their civilizations destroyed. 

Despite its associated volatility, this world of bullion-backed financing lasted for several hundred more years, ultimately experiencing a few hiccups in the 20th century that led to its demise. 

Global Plan: Post WW2: 1944-1971

Crises often force powerful people to reconsider how they administer their regimes, and

The Great Depression and World War II  catalyzed a desire to ensure more stable economic and political relations. During the 1930s and 40s, various countries abandoned the Gold Standard, but they quickly reverted back to gold-backed currencies after the period of calamity. Historians like David Graeber therefore see the post-WWII agreements as restorations of the bullion-based economic systems that had already existed for several hundred years. After all, for Graeber, economic systems revolve around the terms of exchange, specifically the means of exchange (i.e. nails, tobacco, gold, paper money). 

But others, like Yanis Varoufakis, correctly note that economics refers to issues besides exchange— such as production and investment. After all, the Bretton Woods Conference set the stage for new relationships to emerge among world powers’ economies. They agreed to new trade agreements, and, even more importantly, to invest in each other. Via the Marshall Plan, United States’ bankers invested today’s equivalent of 150 billion dollars into Europe to help reconstruct their countries in the wake of war.  Furthermore, the new hegemon overrode Europe’s anxieties about a re-industrialized Germany and helped them industrialize. America helped orchestrate free trade deals to enable German goods to circulate more easily, and the country also kept countries flush with cash. 

America also nursed the economy of its former adversary, Japan, even going so far as to write their constitution for them. In crafting the country’s foundational text, they created, “the famed Ministry for International Trade and Industry to create a powerful, centrally planned (but privately owned), multisectoral industrial base, [which] allowed Japanese manufacturing goods to be exported, with minimal restrictions wherever the United States considered would be a good destination for its new protogees: (Varoufakis, 78). Of course, none of this was motivated by sheer benevolence. 

After all, keeping other countries’ economies stable meant that they were, “well stocked with US dollars, so they could select high-value added American goods” (Varoufakis, 78). America needed to create markets for its products and make sure others could afford their goods. Other countries would buy American goods, and, “in return, [America] would export its surplus capital to its protogees in the form of direct investment, aid, or assistance” (Varoufakis, 85). They achieved this by investing in productive capacities and circulating currency such that there were no gluts among the economic cooperative. Yanis calls this strategy a Global Surplus Recycling Mechanism (GSRM) and notes that it is essential to the stability of the Post WWII’s Golden Age of Capitalism. 

Graeber agrees on this description of capitalism’s golden age. He notes that the working classes, “from the United States to West Germany…set aside any fantasies of fundamentally changing the nature of the system, [and] they [were] allowed to keep their unions, enjoy a wide variety of social benefits (pensions, healthcare, etc.)” (Graeber, 374). He concedes, “the period saw both rapidly rising productivity and rapidly rising incomes” (Graeber, 374). If one puts aside revolutionary ambitions, the post War era unambiguously improved the lives of workers across America, Western Europe, and select allies in Asia. Despite worries that the end of World War II would enable a return of Depression-era Economics, many countries continued to grow their industries and offer better prospects to its workers.


The Global Plan Breakdown: 1971

The Global Plan, however, could not reproduce itself endlessly into the future because its monetary system could not accommodate America’s deficit spending, nor could it extend its perks to all workers in all countries. 

The first big contradiction revolved around the monetary system’s reliance on gold to back the US Dollar. Although economists like John Maynard Keynes wanted a single currency for all economies, they eventually established that the US Dollar would be pegged to gold at a rate of $35 per ounce; all other countries would then peg their currencies to the US Dollar. Consequently, America needed to back all of its government spending with its gold reserves. This hardly mattered in the immediate post-War years, but the Vietnam War caused America’s budgets to massively balloon such that they could hardly keep up with their production of dollars with adequate procuring of gold. Furthermore, due to the monetary agreement among countries, the more the US printed, the more other countries had to print their own money in order to maintain the currency peg. 

Exporting inflation caused such ire in the international community that the French president and British government both sent navy destroyers to ask the US to exchange their currencies for their equivalent in gold— which was their right according to the Bretton Woods agreements (Varoufakis, 94). Of course, this irritated President Rich Nixon because it risked exposing the United States’ excessive spending. Just four days later, he announced the end of the US Dollar’s convertibility into gold. This formally ended the Bretton Woods agreements and ushered in a new era of global capitalism. 

Surprisingly, despite Graeber’s usual attention to the nature of money, he identifies socio-economic, not monetary, restrictions as the reason why the Bretton Woods agreements had to collapse. The Global Surplus Recycling Mechanism offered a good deal, but its underlying tension stemmed from:

“could be seen as demands for inclusion: demands for political equality that assumed equality was meaningless without some degree of economic security. This was true not only of movements by minority groups in North Atlantic countries who had first been left out of the deal — such as those for whom Dr. King spoke— but what were then called ‘national liberation’ movements from Algeria to Chile, which represented certain class fragments in what we now call the Global South” (Graeber, 375). 

Quite simply, according to Graeber, the global capitalist accord could not accommodate everyone: it necessitated an insider vs. outsider dynamic because not everyone could enjoy the lifestyle of, say, American auto workers. This held true at both the national and international level. For example, as more racial minorities and women entered the workforce, they competed for scarce resources and accelerated interclass tensions that drove down wages for everybody; at the global level, former colonies wanted to enjoy the same political and economic mobility as their colonizers, so they fought in wars for their ability to direct their resources as they saw fit. 

This exposed the fact that the Global Plan relied not just on the backs of trade agreements and capital recycling, but also that the marginalization of women and racial minorities across the globe. In fact, the introduction of more countries, workers, and firms — which ultimately increased global competition— meant that corporate profits would continue to shrink due to capitalism’s tendency to cause profits to fall. That, plus the social impact of unequal development, provided too much strain for the system to endure.

In sum, then, the Bretton Woods’ Global Plan offered a great deal to a privileged slice of the Western European, American, and select Asian countries. But the internal logic of capitalism, which could not withstand downward pressure on wages and profits, and the fragility of the gold standard meant that it could not endlessly reproduce itself into the future. It formally broke down in 1971 and precipitated a massive shift in global economics. 

The Global Minotaur and Credit: 1971-2008 

Varoufakis and Graeber both view this as a fundamental shift in the nature of political economy. For Graeber, it undoes the 500 year long tradition of reliance on gold as a foundation of economic exchange.  

The United States suddenly found itself needing to fund its deficits without cutting back spending, increasing taxes, or reducing its global dominance. This required them to reverse the flow of capital away from the United States and, instead, attract money into the country. Money previously invested in other countries’ industries needed to land in the US Treasury’s account or in Wall St. With the Reagan Revolution, a  slew of neoliberal economists made America more attractive to investors by boosting productivity without raising costs, which it did by attacking unions and cutting taxes; the previous alliance between productivity and rising wages formally ended.  

Consequently, the profitability of American companies skyrocketed, which attracted foreign capital. Previously, America exported its surplus dollars by investing in other countries; now, “the [new] Global Minotaur worked in reverse: America absorbed other peoples’ surplus capital, which it then recycled by buying their exports” (Varoufakis, 110). People all over the world invested in American businesses, which turbocharged the financial gains of global elites, while typical Americans, who didn’t see their wages rising, could only afford cheap goods produced in other countries like China. Global demand for American goods decreased while demand for stocks in their companies increased. All the extra money in American financial system also meant that the US Government could always find investors to buy its bonds— which meant they could always finance their fiscal deficits. 

Capital inflows into Wall Street caused tremendously high valuations for companies, which further excited investors. Companies consolidated, cut wages, and enjoyed lower taxes— all of which benefited their investors. During the same time period that workers didn’t experience any real wage growth, corporate profits skyrocketed. 

That said, however, the continued capital’s continued tendency to cause profits to fall meant that companies needed to turbocharge their returns on investments, which they found ingenious ways to achieve. Outsourcing production to countries with cheaper labor is an infamous strategy. But more importantly, hyper financialization allowed companies to nearly circumvent the production of non-financial goods.  

That’s why it’s so easy to show that, “the financialization of the economy has been a process of recovering capital’s profitability… an apparatus to enhance capital’s profitability outside immediately productive processes” (Marazzi, 31). Just between 1960 and 1970, “the profit quota of the total income of companies…had gone from 24% to 15-17% in the US,” and, “has never since exceeded 14%-15% and financialization is structured accordingly, becoming for all intents and purposes the modus operandi of contemporary capitalism” (Marazzi, 31). Although shareholder companies have existed for hundreds of years, this hyper financialization became a new escape hatch for capitalism.

The point, therefore, is that when people like Pete Buttigegeg tweet “the stock market is not the economy,” he is largely incorrect. The financial sector, however ‘fictitious’ it may be, is increasingly the most reliable way to secure profits— which, from the cool, detached standpoint of capitalism, makes it the realest part of the economy. 

Hence the need to financialize everything, from housing to transportation to healthcare to education. Finance capitalism, “turns bare life into a source of profit” (Marazzi, 39). Everything requires payments, which often requires loans, which enables the wizards of finance to create securitized loans that get lumped together according to differentiated credit risks and sold to investors. Novel ways to repackage debt became the new assembly line of capitalism. While ordinary Americans experienced essential goods as reasons to incur debt, parasitic investors found new ways to maximize. The graph on the left illustrates that households roughly doubled their level of indebtedness between 1980 and 2008 financial crash.

While this transition was necessary to continue the capitalist regime, they needed easy money to make it happen. After all, all this money for loans needed to come from somewhere. In their tremendous fervor, the fellas on Wall St. invented new ways to increase profits, which included fancy derivatives and new securities enabled them to diversify risk assets in order to ‘eliminate risk.’ In retrospect, the era looks like a mad frenzy, but, at the time, this financial model ran so smoothly that the now infamous central banker, Ben Bernanke, referred to this time period as, “The Great Moderation” (Bernanke). 

A mere glance at raw data indicates the madness of bankers’ investments. By 2007, US investment banks invested 7 trillion dollars worth of collateralized debt obligations (CDOs), which are basically just a financial product whose value derives from underlying loans; bankers’ 7 trillion dollar liability was larger than the debt burden of the entire US government at the time. For every one dollar of income in the world in 2007, twelve dollars were invested in such derivatives (Varoufakis, 131). 

The Global Financial Crisis 

Most of know how this story goes. Such manias cannot last indefinitely, and so, in 2008, after years of ‘risk-free debt,’ the bubble finally exploded. Banks got caught holding trillions of dollars worth of Collateralized Debt Obligations that they quickly realized were not risk free; citizens also got caught responsible for mortgage payments that they could suddenly no longer afford. 

In this landscape, just months after the financial system showed signs of snapping, Americans elected Barack Obama in an electoral landslide, alongside a blue wave in congress, that gave him an nearly filibuster-proof supermajority in both houses of congress and mandate to fix the economy on behalf of ordinary Americans. But Citibank hand-picked his cabinet and he moved quickly to save the bankers who crashed the economy (Eley). 

In a section hilariously titled, With a little help from my friends: the Geithner-Summers Plan, Yanis outlines the brilliant financial chicanery played by the Wall St-sponsored Obama Administration. They quickly acted to salvage roughly trillions dollars of bad investments from the big banks. They developed a quick plan to get the toxic CDOs off of banks’ balance sheets, which, though encouraging moral hazard and representing financial depravity, is sheer brilliance. 

Let’s say that Citibank had bought a CDO for $100, which, after the crash, is only worth $5. Further, because they bought the CDO on credit, they could not simply eat the loss; they also had to pay back the loan they got from someone else, which, given the immense amounts of debt associated with the time, could’ve been roughly 60% of the CDO’s face value. But banks couldn’t incur such losses without going bankrupt, which means they needed Obama’s Wall St. liaisons, Timothy Geithner and Larry Summers, to cook up a brilliant bailout scheme. 

They enabled a hypothetical hedge fund (H)  to create an account (A) that could bid for Citibank’s nearly worthless CDO. To put lipstick on a pig, the US Treasury would pitch-in $5 and so would the Hedge Fund (H), and the $50 difference would be made up from a loan from the Federal Reserve; because those loans were non-recourse loans, the Hedge Fund (H) wouldn’t have to pay back the loan if they did not profit after selling the CDO they just bought (Varoufakis, 171-172). Ultimately, hedge funds were asked to pitch-in 5 dollars for an asset that, if the plan went well, they would be able to sell for much more than that. 

The problem, obviously, was that no wise investor wanted to buy these toxic, worthless CDOs— regardless of the price. Timothy Geithner and Larry Summers knew that. But the ingenuity of their strategy consisted in the fact that they let the banks themselves open their own hedge funds, which they would then use to buy back their own toxic derivatives. 

Looking back at the CDO they purchased for $100, $60 of which is now debt, they would pitch-in, say, $5, which the US Treasury would match. The Federal Reserve would then loan them the 50 dollar difference between the funds and their debt, which they wouldn’t have to pay back if they didn’t profit off the resale. Of course they didn’t resell. But this whole procedure allowed them to lessen the loss of the investment massively. Instead of losing 94% of their investment, which would have been the natural ‘free-market’ consequence and would’ve landed them in bankruptcy, they paid $5 to clear their balance sheet of that asset. The scheme forced them to take a loss on the $40 investment, but it cleared their debt and allowed them to live another day; it reduced their losses by over 50%. America’s political-financial system procured billions of dollars to bailout its banks. It simply fabricated the money to save money that was also fabricated in computer screens. 

While that gets into the more obscure elements of the 2008 Global Financial Crisis, most of us already know what happened to the rest of us. No bailouts, no fancy auctions to ease debt traps. Obama’s fiscal stimulus package spent 800 Billion dollars, which, when tallied with the trillions of dollars that state and city governments trimmed from their budgets,  citizens experienced net austerity while Wall St. received its bailout. Many people never regained reliable, good-paying jobs after the crash because the elite made no effort to reconstruct a viable economy that worked for everyday Americans. In fact, 95% of the jobs created after the crisis are part-time, low-paying jobs that do not offer benefits (Investing). 

Whose Money is it Anyways? 

The post-crisis years saw a continuation of easy money policies from the Federal Reserve, while the government all but forgot about ordinary folks. We failed to imagine beyond the scope of monetarism, which sees the economy as a simple function of money supply. It’s no surprise that the money ends up with wealthy corporations who buy back their own shares, but that’s not because it’s an intractable feature of economics. 

It is fundamentally a moral issue— one of perspective. The current moral backdrop is such that the banks are too big to fail, or, in today’s parlance, that they are essential businesses. Meanwhile, normal Americans experience debt as, “a matter of self-indulgence, a sin against one’s loved ones” and that they do not deserve helping hands (Graber, 379). But the overwhelming data from the $1,200 stimulus checks suggests that families spend government money on essentials like food and utilities (Adamczyk). Helping people during hardship does not encourage frivolous spending. But even if such spending merely enabled people to, “acquire houses for their families, liquor and sound systems for parties, gifts for friends…why shouldn’t they be able to create money out of nothing too?” (Graeber, 379). Certainly, the pro-social effects of easy money for the masses is more desirable than money for more derivative contracts. 

After all, the truth of the 2008 Financial Crisis is that we can create money out of nothing. We do it all the time. The Federal Reserve has already added 3 trillion dollars worth of assets to its balance sheet in just the past 5 months. The larger issue is who that money is for and what it’s supposed to achieve. We can certainly create money that achieves more than stimulating stock buybacks, padding bank balance sheets, and bailing out insurance companies. Money can denote something besides debt peonage.  We can use that money to build better schools and roads, invest in renewable energy, and provide healthcare and housing to everyone. Every financial crisis is a moral crisis for which the answer seems to be more money, but the question is for whom and to achieve what

Money either sits idle, gets invested into financial products, or invested into real economic and social development. This holds true at the national and international level, for which we must remember Yanis’ arguments about Global Surplus Recycling Mechanism. Just as we cannot allow money to inflate the elites’ assets, we cannot allow capital to primarily belong to the bidder whose labor is cheapest; money can be given — not loaned — to countries whose industries need help, just as the Bretton Woods Agreements provided for after World War II. Just as the durability of the human race probably relies on international economics to advance beyond the language of competition, investments must take socialized forms— not profit-driven. And in the case of people whose freedoms are crushed by debt, we must remember that debts can be destroyed or forgiven just as easily as they are created. 


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