money and power

Money as instrument of power in theMoney as instrument of power in themodern financial-economic systemmodern financial-economic system

(english version)(english version)

Giovanni MorlinoGiovanni Morlino

MONEY AND POWER MONEY AND POWER

SUMMARY

● Creation of Money in the modern Central Bank SystemThe issue of interestThe creation of debt: the public debtHow Central Banks workThe concept of growth

● Money as instrument of PowerFrom the Great Depression in '29 to todayWhy crisis happenThe new role of finance as an instrument of social controlNeoliberalism as an ideological system

Interest rate: a simple example

Which is the effect of an interest rate on the whole economic system?

€ €

Expenses

€Gain

Gain

€ € € €

Assume a viable and close economic system

Calculate the wallet state for each individual as afunction of time:

Capital (t+1) = Capital(t) + Gain – Expenses

Role: if Capital < 0 → ask for a loan “P”

Let us assume an amortization of loan in 10 years:

Annual expenses for the loan Sa= P/10 + P*tassoTotal expenses after 10 years St= P*(1+tasso)

Exemple:

P = 10.000 €Rate = 5% → Sa = 1000 + 50 → St = 10.500 €

Each person start with the same initialcapital (10.000 €)

Individual gain and expenses arecalculated in a random way

C(0) = 10.000 €C(t+1) = C(t) + G(t) – S(t)

Se C(t)<0 chiedo prestito al 5%

C(t+1) = C(t) + G(t) – S(t) - Sa

The amount of moneyfluctuate in time

Total debt of the system: sum of all individualdebts at a fixed time:

D_Tot(t) = D(1,t) + D(2,t) + D(3,t) + ...


Interest rate= 20%

Interest rate= 5%

Interest rate= 10%Situation after 40 years,appling policy of debtrepayment after the first 30years.


Distribution of moneyafter 40 years

Ammount of total debt

The debt cannot be payed off but it always grows→ a system based on a positive interest rete is ALWAYS unstable

For this reason many past cultures considered loans with interest a fault oreven a crime

Growth of debt/capitalwith an interest rate of 5%

What happened in the past?

In the past this problem was solvedcancelling the debt with a periodicbasis: - giubileo (Christian church, every 25years)- sabbatic year (Jewish, every 7 years)

years

What happened in the past?

Debt crisis are present since the anchient history, namely since themoney was invented (i.e.~ VI-VII sec. A.C.) and they were faced in manydifferent ways, the most relevant being:

1 - EMIGRATION

2 - WARSGenerally they lead to the cancellation of debts with expropriation ofnatural resources and/or loss of sovereignty

3 - PARTIAL OR TOTAL CANCELLATION OF THE DEBTOften connected to religious cerimonies

4 - PUBLICIZING THE DEBTThe debt is converted from private to public.This techinque was mainly used in the '30 - '70 after many countries wereconverted in Republics. → This process practically involves the purchase of a bank from the State(including the central banks)→ in this way a fraction of the private debt becomes statal→ if the State owns money to itself, the debt becomes a virtual concept

“I believe that banking institutions are more dangerous to our liberties thanstanding armies. [...] The issuing power should be taken from the banksand restored to the people, to whom it properly belongs.”

Thomas Jefferson, see "Jefferson's Opinion on the Constitutionality of aNational Bank, 1791.”

“All the perplexities, confusion and distress in America arise, not fromdefects in their Constitution or Confederation, not from want of honor orvirtue, so much as from the downright ignorance of the nature of coin,credit and circulation.”

John Adams, letter to Thomas Jefferson, August 25, 1787.

“It is well enough that people of the nation do not understand our bankingand monetary system, for if they did, I believe there would be a revolutionbefore tomorrow morning."

Henry Ford

THE MODERN BANK SYSTEM

Who issues the currencytoday?

0,080,02

0,9

BillsCoinsScripturalmoney

Scriptural money (or virtual money)Issued by commercial banks as a consequence of

loan anked by citizens and companies.This is the money wich produce tha major amount

of inflation.

CoinsIssued by the State

(Zecca di Stato)But the amount is decided

by the BCE.It does not produce debt

for the State

BillsIssued by BCE in discretional

amount.It is lend to other banks withan interest rate called Offical

Discount Rate

THE MODERN BANK SYSTEM

BCEBCEBasic monetaryreserve

Through themechanism offractional reserve,banks multiply theamount of moneycirculating in the systemRef. Modern MoneyMechanics

Total sum of money incirculation.

Tot = R/F

The central bank provide the basicmonetary reserve (technically called M

0)

If the basic reserve is R= 1000 € and F = 10%→ Tot = 1000 € /0.1= 10.000 €

M0

Who provides money to theState?BCEBCE

Commercialbanks

STATE

Treasury Bonds = Public Debt

Nowaday States cannot create theirown money (in past they could)

Basic monetaryreserve

The treasury bonds are sold at publicauction

Who provides money to theState?BCEBCE

Commercialbanks

STATE

Treasury Bonds = Public Debt

The treasury bonds are sold at publicauction

Basic monetaryreserve

Citizens

IMPORTANT: the exchangeof money between the Stateand Citizens does not createa real debt because it isonly a game turn.

Nowaday States cannot create theirown money (in past they could)

THE ITALIAN PUBLIC DEBT

PUBLIC DEBT

GDP(Gross Domestic Product)

THE ITALIAN PUBLIC DEBT

Debt/GDP

PUBLIC DEBT vs. PRIVATE DEBT

Debit/GDP(year 2007)

PUBLIC DEBT PRIVAT DEBT TOTAL

ITALY 105% 49% 154%

GERMANY 66% 109% 175%

ENGLAND 42% 162% 204%

USA 70% 142% 212%

JAPAN 150% 136% 286%

For a correct evaluation of the economy of a single country one shouldaccount for the sum of public + private debt.

Let us compare few countries (data from 2007, before the crisis):

WHY ITALY WAS CONSIDERED A COUNTRY WITH HIGHER RISKSTHAN OTHERS IN SPITE OF A SMALLER TOTAL DEBT?

WHO OWNS THE ITALIAN DEBT?

Nazionalità Tipologia giuridica Banche/Fondi0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

56,4%

43,6%

12,7%

87,3%

46,8%

53,2%

Fondi

Banche

Istituzioni

Famigie

Stranieri

Italiani

Sources: - Elaborazione dati Banca d'Italia, Supplemento al bollettino statistico 14 ottobre 2011 n. 51; - Morgan Stanley, “Who owns Italy's government debt?”

Foreigners

Italians

Institutions

Families

Founds

Banks

Data 2011

DISTRIBUTION OF THECENTRAL BANK SYSTEM

CENTRAL EUROPEAN BANK

National Shares in the capital Money invested Central of BCE (in milions of €)Banks (in percentage)_______________________________________________________________

Deutsche Bundesbank 18,9 1.090Bank of England 14,5 59Banque de France 14,2 819Banca d’Italia 12,5 719Banco de España 8,3 478De Nederlandsche Bank 4,0 229Banque Nationale de Belgique 2,4 140Banca di Grecia 2,0 113Oesterreichische Nationalbank 1,9 112Banco de Portugal 1,8 101Finlands Bank 1,3 72Central Bank and Financial Services Authority of Ireland 1,1 64




The BCE is in charge to print money, but who are the owners?

DISTRIBUTION OF THECENTRAL BANK SYSTEM

The BCE is in charge to print money, but who are the owners?







BANCA d'ITALIA

Participant Shares Votes________________________________________________Intesa Sanpaolo S.p.A. 30,3% 50UniCredito Italiano S.p.A. 15,7% 50Banco di Sicilia S.p.A. 6,3% 42Assicurazioni Generali S.p.A. 6,3% 42Cassa di Risparmio in Bologna S.p.A. 6,2% 41INPS 5,0% 34Banca Carige S.p.A. 4,0% 27Banca Nazionale del Lavoro 2,8% 21Banca Monte dei Paschi di Siena 2,5% 19Cassa di Risparmio di Biella e Vercelli 2,1% 16Cassa di Risparmio di Parma e Piacenza 2,0% 16

BANCA d'ITALIA

Participant Shares Votes________________________________________________Intesa Sanpaolo S.p.A. 30,3% 50UniCredito Italiano S.p.A. 15,7% 50Banco di Sicilia S.p.A. 6,3% 42Assicurazioni Generali S.p.A. 6,3% 42Cassa di Risparmio in Bologna S.p.A. 6,2% 41INPS 5,0% 34Banca Carige S.p.A. 4,0% 27Banca Nazionale del Lavoro 2,8% 21Banca Monte dei Paschi di Siena 2,5% 19Cassa di Risparmio di Biella e Vercelli 2,1% 16Cassa di Risparmio di Parma e Piacenza 2,0% 16

BANKITALIA S.P.A.

• This situation contravenes the provisions of art. 3 of the Statuto della Bancad'Italia which, in the last paragraph reads: "... must be ensured thepermanence of the majority shareholding by public bodies or companieswhose majority of shares with voting rights are held by public bodies." But because the Bank of Italy is independent, this situation cannot bequestioned by the Government.

• With the election of Mario Draghi as Governor of Bank of Italy, this article ithas been deleted.

• Bank of Italy by law must control the balance sheets of commercial banks(supervision). But some doubt on its effectiveness arises because thecontrollers and the controlled are indeed the same people.

The Bank of Italy is a public institution as defined by the Banking Act of 1936, alsoconfirmed by a judgment by the Suprema Corte di Cassazione.

The stakes in are the 94,33% owned by banks and private insurance companiesand for 5.67% by public institutions (INPS and INAIL).

Historic summary

• '30 The Great Depression

• '40 II World War II and the Bretton Woods agreements

• '50-'70 The end of colonialism and the beginning of neo-colonialism

• '70 The oil crisis: end of the Gold Standard system

• '80 Beginning of the liberal era

• '90 End of Communism and the beginning of Globalization

• 2000 Financialization of the economy and the Big Crisis (2008)

THE GREAT DEPRESSIONIN 1929

Short summary:

• Stock market of Wall Street crash• The value of bank stocks collapse → assault to deposits• Inability to financing companies• Layoffs• Reduction of the total expenditure of households• Further reduction of businesses • Reduction of exports and imports• The crisis spreads to other countries (especially Europe)

Aftermath:

• Unemployment in USA reaches 25%, and theindustrial production drops by 50%• In '31 England give up the Gold Standard → end of English domination of financial system• In the '34 the dollar and the british poundsuffer a strong inflation

Solving the Crisis

• Attempts to find an international agreement failed (both because the lackof a leading country and of relevant international institutions)

• Countries imposed duties and push towards closed economies

• Strong role of the State to push economy:• New Deal promoted by Roosevelt in USA• (keynesian-fordist model: expansion of aggregate

demand and strong public investments)• Foundation of IRI in Italy in the '33 (Institute for the Industrial Reconstruction)

• Many countries start to adopt typical war economies

• The Great Depression ended only with the beginning of the WWII

THE GREAT DEPRESSIONIN 1929

Bretton Woods System:1945-1972

'44–'46 Bretton Woods Agreements

Aim: rebuilding of countries destroied by the war and creationof a new international monetary system able to guarantee theprice stability.

2 progects were presented:• John Keynes (England): creation of a clearing house forcredit/debts and intruduction of a single currency forinternational trade (BANCOR).

• Harry White (USA): system based on the US dollar forinternational trade (the dollar is in turn based on gold): fixed change rate between US dollar and other currecies.

The following institutes were founded:• Bank for Development and Cooperation (after called World Bank)

• International Monetary Found (IMF)• GATT (agreement on Tariffs and Trade for the •removal of customs duties) → today called WTO

'50-'70: from colonialism toneo-colonialism

World Bank and IMF were turned into intruments suitable to realize the neo-colonialism.

HOW DOES NEO-COLONIALISM WORK?

The neo-colonialism is based on the financial power, rather than on directviolence, as happened in the past.

1) The developing countries are enticed to enter in the free-market with the promise to reach the same welfare level of developed countries. 2) Counseling agencies make growth forecasts 3) The World Bank provides loans to support the country's economic growth 4) Growth is systematically below the expectations of forecasting models 5) The countries cannot repay debts 6) IMF enters the game providing new loans but only under specific conditions: (market liberalization, sales of public assets, reduction of puclic services) 7) Once the market is open, western corporations are free to buy Countrys' resources and businesses at very low prices

After the end of the colonialism era a problem araised for the western countries:how to keep under control the resources of the former colonies.

'71: the end of Bretton Woodssystem...

As a result of expenses incurred during theVietnam war, the US printed a significantamount of dollars and the public debt grewconsiderably leading to an inflation of theDollar.

Dollar inflation is aggravated by theeconomic growth of Germany and Japan.

Some Countries, like France, demanded conversion of their dollar reserves intogold.

1971: Nixon decides that dollars could not be converted into gold any more.

1971 Smithsonian Agreement: it puts an end to the Bretton Woods system whichwas replaced by a system of flexible exchange rates between currencies. The dollaris devalued slightly (but less than the forecasts).

Gold abandoned as international reserve

...e birth of the petrodollar-standard

The Dollar becomes the currency of international reference on a purely fiducialbasis.

The US achieved a huge advantage: get wealth in exchange of money which can beprinten in unlimited amounts.

The downside is that US have no longer a brake to the debt and in a few years itturned from being the world's largest creditor to be the largest debtor (in the80s).

The US economy is transformed from a production economy to an economybased on income (financial), consumption and debt.

“The power of Dollar was manifested inits purely hegemonic”

Guido Carli, governor of Banca d'Italia

WHY THE DOLLAR DOES NOT SUFFER A STRONG INFLATION?

1973: the oil crisis

• USA support Israel during the October war in 1973• The OPEC country reacted cutting the oil production and with an embargo of 5 months against the USA

• The oil price rose from 1,39$ (1970) to 8,32$ (1974)

After the embargo Washington begin to negotiate with the Saudis and in fewyears an agreement is reached:

The United States undertake to1) Unconditional support of the House of Saud, both political and military.2) Provide businesses and technologies to transform Saudi Arabia into a modernCountry.

Saudis undertake to 1) Provide oil at stable prices2) Investing dollars in US companies3) Selling oil only in dollars4) Buy US treasury bonds

With this agreement Saudi Arabia entersthe US imperial system

The dollar cycle:the master-slave dinamics

FED

Treasurybonds

dollari

Industrial andagriculturalproducts

USAbecomesa debtor

Japanbecomes a

creditor

Up to 1973 US are the majorworld creditor

Starting from the '80 US turnsinto the largest world debtor

The Neo-colonialismand the US public debt

Source: United States Treasury department Office for Public Affairs – June 2007

Who owns the US debt?

60s and 70s: social battles and achievements

Following the success of Keynesian recipes, Western countries undergo ahuge increase in wealth and a remarkable reduction of the gap between richand poor.

The greater well-being of the poor promotes social conflict:the 60s and the 70s saw a flourishing of mass movements seeking to obtain alarger democratic participation, more social and civil rights.

Social conflicts reduced the power of ruling elites who sought remedy.In 1975, the Trilateral Commission dedicates a conference to the "crisis ofdemocracy":→ Identifies the responsibility of the crisis (economic and social) in thehigher wages obtained by the working classes

→ As a remedy it was proposed: 1) wage deflation 2) reduction of social spending 3) increasing the capitals' freedom (in particular the free transfer between countries)

The 80s: beginning of the liberal era

1981: Election of president R. Reagan (vice-president G. Bush) (The Reagan Administration is tightly connected to the corporatocrazy)

At the World Bank McNamara was replaced by William Clausen. The WB and the IMF policies drastically changed: liberal theory from the Chicagoschool were applied rigorously. (The principal economists where Milton Friedman and George Stigler)

R. Raegan in US and M. Thacher in England started theprocess of deregulation:the keynesian idea of an economy based on the State actionwas abandoned; a new model is proposed where the State isabsent and the private businesses are supported, while anyconstraints external to the Market need to be removed.

• Liberalizazion of international trades

• Liberalizazion of capital flows ('82-'98)

The “Washington consensus”alias the “free market” system

The neoliberalism is a special form of capitalism (which is a theory ofaccumulation) based on three foundamental pillars:

Austerity → reduction of public deficit → cut of social services

Privatizzation → transfer of state monopolies into private hands

Liberalizzation → open borders to foreign goods → encourage the inflow of foreign capitals

A corollary of this theory is the “trickle-down” effect: “It is useless to take care of poverty, because the poorest gradually benefit as aresult of the increasing wealth of the richest.”...

The trickle-down effect has been empirically proven to be wrong.

NOTE: the mathematiclal model used to define the free market system isextremely simplified and not applicable to any realistic situation

Typical recipeproposed bythe IMF

The rule of IMF

1) The IMF provides loans to countries in crisis.2) In return the IMF asks the Countries to apply literally neoliberal economicrecipes.3) Sometimes the IMF even "suggest" the laws to be approved in parliament...

The IMF's power today is enormous: all countries will seek consensus, because hisapproval of economic policies guarantee the access to funding from the WorldBank and from the markets in general.

The IMF is basically an undemocratic institution: the policies "imposed" to aCountry are never discussed with the Country itself, and often presented in totalsecrecy.

After appling the IMF policies, almost all countries suffered severe economiccrises.Over the past 25 years there have been about 100 economic crises !!!

Note: before the 2008 crisis the IMF recipes have never been applied torich western countries!

A simplified sckech of themodern government system

IMF

WTOWorld Trade Organization

CentralBanks

Commercialbanks

Business banks(Goldman Sachs,

Leheman Brothers, etc.)

STOCKEXCHANGE

GOVERNMENTS

Corporations

Fiscal paradise

Bilderberg groupTrilateral

commission

Government policies

The government action is carried out through the control of the financialsystem.

Money is the main foundation of sovereignty (i.e. the possession of moneylegitimates the exercise of power).

In this system everything that can be commercialized (namely quantifiedin money) can be controlled.

Two major consequences: → The system tends to commodify everything possible → What is not commercialized is neglected (not because it can not be profit, but rather because it can not be controlled)

Profit is the means, not the final purpose:the ultimate goal of the liberal system (like the majority of systems)

is the social control.

Government instruments

The financial system can use different means to regulates relationsbetween countries and institutions and to excercise the social control.The principal are:

1) Monetary policy (namely how money is created and distributed)

2) Speculative bubbles (use of money to transfer powers and material goods)

3) Floating exchange system between currencies

4) Rating the counties economy through the rating agencies. From this rating depends the percentage of interest on Treasury bonds and the

easiness to get money from the capitals' markets.

Political solutions to thecrisis

For people in charge it is very difficult to develop solutions to the crisisthat go beyond the frame of the neoliberal ideology.

The mandatory commandment of this ideology is the growth. In factpoliticians from almost all parties are invoking growth as a foundamentalpillar to solve the crisis (but there is no demonstration that this will work)

Approach of the Left partiesIt calls for new rules to curb the destructive power of capitalism. There isno alternative to the free market system, but only a more humanecapitalism.

Approach of the Right partiesEven if new roles are invoked, the liberal Right uses the crisis torestructure the economic and social system in hierarchical way:

• Crushing the bottom (fragmentation of the social tissue)• Centralizing the top (generating monopoles and reducing the number of people in charge)

Building Europe throughthe crisis

“From one hand we are reducing the power of States and public sector ingeneral through privatization and deregulation [...] On the other hand weare transferring many of the powers of Nations in a more modern structureat European level (i.e. the European Commission, author's note) that helpsinternational business like ours”.

Daniel Janssen European Roundtable of Industrialists (ERT)

(member of the Trilateral Commission)

The European Commission is taking advantage of the instability caused by theeconomic crisis to steal State budgets from the decisions of their legitimategovernments, and has embarked on a process that will lead to a massivetransfer of sovereignty [...] Fiscal policies are no longer in the hands of nationalgovernments.

Neoliberism as ideology

As a general role in the human history, any power system needs to belegitimate through the creation of an ideology.

In spite of the common belife that we are living now in a post-ideologic era,we are rather living in the era of a single ideology.

Liberalism is presented as a natural theory of the market mechanisms. Liberalism asserts the tendency of the market (the invisible hand) toevolve spontaneously towards the most efficient state, which is the"best world" for both the producers and the consumers. So, according toliberalism the market system moves towards a situation of increasingorder.

Weak point: this ideology is purely immanent (without transcendence)

Afterwards the tendency is to say that all social areas may be treated as aparticular form of market.

The ideologicalrepresentation

Like many other ideological systems, Neoliberalism is a filter used to readthe reality.

An ideology is invasive by definition, since if it fails to interpret the reality,it will probably be replaced by another form of ideology.

The development of ideologies has similarities with the evolution of a speciesaccording to Darwinian principles and also with the evolution of scientifictheories.

Analogy with other systems of power: the case of the Christian religion.

Natural law ↔ Divine lawInvisible hand ↔ Providenz

Debt ↔ Sin

The money actually becomes the only symbolic generator of value

Why we need to growth?

As we have seen the debt can never be repaid, but increases exponentially,up to produce a "brake" in the system.

In the framework of neoliberism, a single Country or a single companyhave only one way to avoid the crisis and the failure: increase profitsbeyond the level of the interest rate.

This is the origin of the need for growth as currently presented.

The growth, however, can not be a global and stable solution in the longterm because it cannot be applied simultaneously to the whole economicsystem.

The Footprint concept: the World seen by its exploitation (source WWF: Living Planet Report-2003)

Practical consequences of thepresent economic system

Which alternatives?

“You will never changethings fighting the existingreality.

To change something, builda new model that makesreality obsolete“

“You will never changethings fighting the existingreality.

To change something, builda new model that makesreality obsolete“

(Buckminster Fuller)

Islamic financeIslamic finance is based on interpretations of the Koran. Its two central pillars are:

1) you can not get interest on loans and 2) you must make socially responsible investments.

In practice, when an Islamic bank lends money to an enterprise, the bankbecomes a shareholder. Hence, if the enterprise goes well than the bank willtake part of the profits. Conversely, if the company goes wrong and lose, thebank also will lose part of the capital borrowed.

The Argentinian caseAfter the economic crisis in 2001, Argentina introduced a new type of bonds,an equity-type warrants, which pay interest only if the GDP actually grew upat the end of the year (while the capital is 100% guaranted).The basic concept is similar to the one adopted by Islamic finance.

Which alternatives?

money and power

Economy & Finance