The story that is emerging is that globalisation and deregulation of finance created an environment in which very large banks, corporations and financial funds have been able to systematically rob the countries they operate in, evading taxation, stripping assets and creating dangerous bubbles of debt for households, businesses and governments. The root of the problem lies in the difficulty of policing globalisation when the only effective institutions for doing so are competing nation states.
Britain was the first global super power, but with the loss of its empire faced the prospect of losing its role in international trade and finance. It responded by developing facilities for financiers and traders to operate supra-nationally using a network of offshore finance centres linked to the city of London that provide secrecy, low regulation and low taxation. These enabled the wealthy to land the profits from trade outside of any real nation state as well as to park wealth beyond the reach of national authorities, while benefiting from the investment expertise and special instruments available in London. As the dollar became increasingly used as the world's reserve currency this created a pressure on the United States to lower taxation and regulation in order to compete. When subsequently there was an expansion of international trade due to the work of the World Trade Organisation and other agencies to reduce barriers to trade, the stage was set for a competition for market share in which each nation wanted to have companies big enough to be global players. In this climate all the lessons learnt from the 1930's depression were forgotten.
Neo-classical economists revised Keynesian ideas until there was no reason to fear monopolies or the the expansion of non-government debt. This created the smokescreen needed to ignore what was happening. Take overs and mergers in the finance sector were seen as building world players, but they turned out to be "too big to fail" banks that bloated themselves by creating every opportunity they could imagine to expand the money supply as debts. While households were being encouraged to take on debt to keep up demand, the businesses that benefited were competing aggressively and finding that their best advantages lay in avoiding taxation using the tax haven system and shifting manufacturing to low labour cost countries. The people of the developed world were getting themselves in debt to finance the export of their jobs and the destruction of their tax base.
As the money flowed around the world, more and more of it landed in the offshore system, creating the opportunity to be assembled into massive single management funds with the power to exploit opportunities in a wide range of markets. The profits to be made by these power funds were sufficiently large that they didn't need to take on high risks. Hedge funds are so cash rich that they can operate in a market, shaping its direction without substantial borrowing. The private equity companies became giant parasites, preying on businesses that carried assets that were not being used as security for debts and using this potential to carry debt to finance their take overs. They use their money to buy political connections and preferred status in obtaining government contracts. Always the profits are channelled offshore. These monsters could not have come into being without a chase to the bottom competition to deregulate finance and remove effective oversight that coincided with a vast expansion of the banks' ability to create money as debt, due to control systems that were not designed for an age of electronic money. Provided debt was increasing with sufficient speed, banks were able to increase the money supply by lending money they didn't have and using the profit from lending to expand their reserves.
The cold light of dawn came when it was realised that much of the debt was not repayable. What followed was a scandal that may never be fully revealed. The major US banks saw what was going to happen and obtained, in early 2007, the consent of the US government to enact a grand fraud. Trillions of dollars were leant by J P Morgan Chase to Lehman Brothers, creating a flush of liquidity that concealed the imminent crash. This bought time in which the leading US banks went on a selling spree, spreading the risk in the US housing market to London and Europe, while using financial instruments to effectively bet that the debts they were selling would not be repaid. When the crash came, J P Morgan Chase took on the part of Lehman Brothers that held its debt and quietly closed the position while across the world the banking system went into spasm. With the end of the expansion of debt the banks now required massive injections of money to replace the money they had been creating. Faced with the prospect of a collapse of financial services, governments threw themselves into debt in order to maintain functioning economies.
Four years on the analysis of the crisis is still in process. In Europe the shared currency of the Euro Zone has been found vulnerable to the interests of individual states and this vulnerability has been exploited ruthlessly by the United States and the hedge funds. Was there malice-afore-thought in the work of Goldman Sachs in rigging Greece's entry to the Euro? Was the US government party to it? Certainly the US government set off the Greek crisis, lighting a fuse that may yet explode the Euro and with it the whole EU project. In 2009, the US government came under pressure from the Chinese for their careless attitude to the value of the dollar while they printed money to stimulate the economy. As one of the biggest buyers of US Treasury bonds, the Chinese did not want to continue investing in the US if they were devaluing the dollar and could see that they might need to invest more in Euros. The US responded by putting pressure on Greece to admit that they had been using a scam set up by Goldman Sachs to hide their true level of government debt. Hedge funds were tipped off to bet against Greek bonds and when the US based ratings agencies downgraded Greek government debt to junk, pension funds that held these bonds were obliged by their risk control rules to sell their bonds. The hedge funds walked off with the money the pension funds lost and the Euro crisis was born.
With the transfer of vast amounts of financial sector debt to governments through bail out programs and quantitative easing (what it is now called when governments create money from nothing), the public is being sold the idea of austerity. This is a grand dishonesty. It assumes that there is a way out of the crisis if everyone shuts up suffers and works hard. This is not the case. Most of the debts that household's carry are owed to banks that are being sustained by money being given to them by governments. As public service jobs are decreased, private sector jobs are increasing at lower wages. Many of these jobs are for companies that use their international trading to both avoid tax and to channel profits outside of nation state controls. Even quite small companies have deliberately put themselves in debt, where the money they have borrowed is through their own interests in offshore based shadow banking vehicles or is to repay leveraged buy out loans where the buyers of the company are the same people as the sellers, but in different names and where the seller is offshore. The result is that large numbers of people are working for low wages so that profits can be sent out of the country with no corporate tax. With a high risk of unemployment and a shrinking safety net, there are plenty of willing workers for these jobs.
It is however the private equity companies that are the leaders in this form of exploitative employment, but as the UK government drives to contract out government services, it is these companies that have the expertise and the financial strength to become the winning bidders. Through their connections they are also major political donors and donors to the political think tanks that create the façade of intellectual respectability to corrupt policies. The same organisations that are actively working to decrease the national tax base are the ones that are now profiting from the privatisation of government services. Not only are they not contributing to the nations investment in its people, its society and its infrastructure, they are using their power and status to rob the state with the complicity of those put in place to defend the interests of the people. The trust of the people in the nation state has been betrayed by a class of people in business and government who identify their interests as being beyond the nation state.
There is a danger of confusing effect with intent and those that struggle to believe the scale of theft and betrayal would no doubt want to dispute the facts as presented and to argue that these were things that happened, but that there was not intent. The evidence however points to a class of people who conspired to undermine nation states in the belief that they had become parasites on wealth creation that were using welfare to create a dependent population. They saw the offshore banking system and the globalisation agenda as a means to mobilise forces that would make the welfare state non-viable. Their strategy was to deliberately build up the amount of wealth outside the nation state systems such that nation states would be unable to act independently. They were aided in this by the development of Sovereign Wealth Funds as vehicles for money accumulated by trade imbalances. This money was added to the other large offshore funds to enable non-bank lending, or shadow banking, to exert a pressure for high risk lending on the regulated banks.
The Austrian economist Hayek and the Russian American pseudo philosopher Ayne Rand both advocated forms of capitalism in which the market rather than the state provided social services, accepting that this would create a highly competitive society in which losers would suffer in the short term. but would in the long term benefit from the increased wealth creation that was only possible if capitalism was free of the burdens and manipulations of the state. These are the views of a form of right wing extremism that is now ascending. Its power and interests should not be underestimated. They exert significant control over major media organisations. Through the kitchen economics of austerity and movements such as the Tea Party in America they are obtaining significant popular support. As they force down wages to generate the profits to pay off commercial debts owed to entities in the offshore system, and as they use speculation to drive up the cost of food and energy, they are effectively able to raise a vast tax on ordinary people that further diminishes the power of nation states.
The UK exemplifies the duality of purpose that this creates for nation states complicit in this process. On the one hand they have to conceal their betrayal with jingoistic parties to celebrate the Queen and the Olympics, while on the other they have to recognise the subservience of the British state to the offshore and supra-national entities that it has over the last sixty years done so much to create. In the United States the government has been trapped into a policy of using military power to ensure that the spread of the countries wealth creation capacity around the world does not result in its own demise. The central plank of this strategy is to ensure that oil is traded in dollars, creating a perpetual global demand for dollars that enables the US government to print money to keep its ransacked economy afloat. So far Iraq, Afghanistan, Libya, Syria, Sudan and Somalia have been the main victims of this strategy, with Iran now being being prepared as the next. However the US role in exposing the weakness of the Euro system has also been part of the same strategy.
When the history of this period is told with the benefit of hindsight and with at least some access to the documentary evidence, it is likely that the nation state and the rule of law as we know it will have passed into history. The robber barons that are creating the supra-national power will in due course become known and will have to face responsibility for the processes they have started. At Bretton Woods Keynes argued that enabling the dollar to replace the pound as the global reserve currency would be to commit the world's poor to a struggle they couldn't win. In effect the supra-national funds have been involved in a grand arbitrage, delivering jobs to people who ask the lowest wages and reducing the wages of those who have benefited most from the unjust trade advantages that the US and Europe afforded themselves. An arbitrage though, even on this scale is not a political and economic system that can enable humanity to address its challenges.
The steep climb in our numbers is a challenge for all peoples and survival will depend on our ability to collaborate rather than compete. We do not have the infrastructure for effective collaboration, but in the supra-national financial entities we have the seeds of a new global empire. The money and power of the hedge funds, the private equity companies, the major transnational corporations and the sovereign wealth funds will eventually be either dispersed as an aberration or will become the power to address global challenges. It is a power that will most certainly be exercised ruthlessly and with a cruel disregard for the suffering it causes. It will destroy cultures and languages and traditions. It will encourage ignorance and faith. It will sacrifice whole populations and only if it succeeds in creating a stable planet that meets human needs within a viable culture will we again see the expression of the enlightened compassion represented by the welfare state.
Should we in the UK be glad that our country is at the forefront of this change, or should we be hoisting our leaders from the nearest tree as traitors? Is the reason the left is unable to mount an effective challenge simply that the process has gone too far and there is now no realistic power capable of stopping the demise of the nation state with a democratic system rooted in the shared wealth of its people? The wealth has been stolen by the oligarchs and they are the as yet uncrowned rulers of the world. Unless we are ready to rise in revolution, we had better start getting used to it.
