15th September, 2008.
Today’s news – of the collapse of Lehman Brothers, the sale of Merrill Lynch and of the difficulties of AIG – are momentous and of truly historic significance. While there is much more to be said about what is going on within the financial system, today I want to stand back and look at the bigger picture.
Five years ago almost to the day, and as part of a team at the new economics foundation (nef) I edited a book intended to shadow the IMF’s World Economic Outlook, whose ‘outlooks’ we believed to be based on delusional, if orthodox, economics. We called our book The Real World Economic Outlook (Palgrave, 2003) and, as noted in an article at the time for Open Democracy on 1st September, 2003, “released provocative new research … which argues that the “first world” is approaching a major debt crisis… The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina.” I leave you to imagine the sniggers with which our prediction was received within Washington, Whitehall and the City of London.
In our book we explained how the international financial architecture – or ‘globalisation’ - was structured in such a way as to enable the US to ‘hoover up’ money from the rest of the world, and use these resources to live beyond its means. I wrote that “It is this financial system which makes US financiers so confident that the rest of the world will continue to finance their nation’s extravagant spending binge. In the words of David Goldman head of debt research at Bank of America Securities: “America is at little risk for the foreseeable future, simply because the world’s capital has nowhere else to go”(Wall Street Journal, 13 August 2003).
Well the fall of Lehman Brothers shows that the world’s capital does now have somewhere else to go. This event therefore, marks the beginning of the collapse of the international financial architecture, as constructed, on very shaky foundations, by Richard Nixon in 1971. It was then that the US unilaterally dismantled the Bretton Woods system and began to shape a new system – ‘globalisation’.
Why? What has happened to mark the collapse of this system?
Simply this: Lehman Brothers expected to be saved by the state-run Korea Development Bank, and to the astonishment of its shareholders and investors, Korea – South Korea that oh-so-reliable US ally - last Tuesday, 9th September, refused to fund a bail-out.
The fact that sovereign wealth funds, as these state-run financial institutions are known, are now no longer willing to finance reckless US institutions, is of itself of the greatest significance. It implies a lack of confidence in the solvency of US financial institutions, and indeed of the US as a whole. This will lead to a fall in the dollar, which will have profound economic implications for the global economy, and for globalisation.
In his letter to shareholders in March, 2005, Warren Buffet predicted that in another 10 years’ time the net ownership of the US by outsiders would amount to $11 trillion. “Americans … would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an ‘ownership society’ will not find happiness in – and I’ll use hyperbole here for emphasis – a ‘sharecropper’s society’.”
He is right. And so the thing we must fear most now, is not just the collapse of banks and investment funds, or of the international financial architecture, but of a sharecropper society, angry at its downfall.