{"id":37005,"date":"2017-09-27T17:25:50","date_gmt":"2017-09-27T07:25:50","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=37005"},"modified":"2017-09-27T17:25:50","modified_gmt":"2017-09-27T07:25:50","slug":"addressing-claims-that-global-financial-markets-are-all-powerful","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=37005","title":{"rendered":"Addressing claims that global financial markets are all powerful"},"content":{"rendered":"

\t\t\t\tThe United Nations Trade and Development Report 2017<\/a> was published last week and carried the sub-title “Beyond Austerity: Towards a Global New Deal”. It is amazing that 9 years after the crisis emerged we are still discussing austerity and its on-going damaging consequences. Effectively the crisis interrupted the neoliberal agenda to increase the incomes shares of the elites at the expense of the workers, with growth being a secondary consideration if at all. Austerity was the means by which the elites could resume this push and used all sorts of depoliticised arguments to make it look as though there was really no choice. They have been spectacularly successful in their quest. More shame to the rest of us who have stood by and blithely accepted the agenda and, to make matters worse, become mouthpieces of the myths that the neoliberals have constructed to give ‘authority’ to their savage attacks on public purpose. So social democratic politicians lead the austerity charge. Citizens stand around in pubs and cafes mouthing neoliberal nonsense about fiscal deficits etc without the slightest evidence that they know what they are talking about. UNCTAD report on all this in the latest Report. It is a sorry tale and requires a massive return of collective action and as they say – a “global New Deal”.
\n<\/p>\n

On January 1, 2016, the UN’s 17 Sustainable Development Goals (SDGs)<\/a> and the 2030 Agenda for Sustainable Development<\/a> came into force.<\/p>\n

Like all these multilateral goals much food and drink was consumed over many years by high-paid elites in various organisations in the process of agreeing on this Agenda and specific goals.<\/p>\n

The UN believes that these goals “universally apply to all” countries who are required to “mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind”.<\/p>\n

As the expression goes – pigs might fly<\/a>!<\/p>\n

The starting point is that the goals are “not legally binding”, so just like the covenants that were signed at the end of World War 2 relating to human rights and associated state responsibilities, I wouldn’t hold my breath waiting for the modern states to do anything other than lip service to advance these goals.<\/p>\n

And so it is.<\/p>\n

Nearly two years have gone on the march to 2030 and the evidence is that nations have gone backwards in terms of these goals.<\/p>\n

As UNCTAD tells us:<\/p>\n

\nIn sharp contrast to the ambitions of the 2030 Agenda for Sustainable Development, the world economy remains unbalanced in ways that are not only exclusionary, but also destabilizing and dangerous for the political, social and environmental health of the planet.\n<\/p><\/blockquote>\n

That should fill anyone with confidence!<\/p>\n

UNCTAD continue:<\/p>\n

\nEven when economic growth has been possible, whether through a domestic consumption binge, a housing boom or exports, the gains have disproportionately accrued to the privileged few.<\/p>\n

At the same time, a combination of too much debt and too little demand at the global level has hampered sustained expansion of the world economy.\n<\/p><\/blockquote>\n

And then there are the “austerity measures” which:<\/p>\n

\n… have hit the world’s poorest communities the hardest, leading to further polarization and heightening people’s anxieties about what the future might hold.\n<\/p><\/blockquote>\n

UNCTAD recognises that TINA is the standard response from the “political elites”.<\/p>\n

But that has just spurred “xenophobic rhetoric, inward-looking policies and a beggar-thy-neighbour stance”.<\/p>\n

Then there are those who blame “technology or trade as the culprits behind exclusionary hyperglobalization”.<\/p>\n

You know, look for scapegoats everywhere but the elephant that has been staring the world in the face for the past decade.<\/p>\n

And UNCTAD knows exactly what that elephant looks like:<\/p>\n

\n… [the] obvious point: without signicant, sustainable and coordinated efforts to revive global demand by increasing wages and government spending, the global economy will be condemned to continued sluggish growth, or worse.\n<\/p><\/blockquote>\n

Okay, got it.<\/p>\n

1. Lack of “global demand”.<\/p>\n

2. Insufficient wages growth and government spending.<\/p>\n

3. Austerity and deregulation of labour markets (stagnant wages).<\/p>\n

Austerity, austerity, austerity.<\/p>\n

No surprises.<\/p>\n

But, UNCTAD being UNCTAD cannot quite get it completely right. And so we are also told that those amorphous and omniprescent characters, as shady as hell, from the global financial markets are just waiting in the shadows to destroy the currency of any nation that dares “to crowd in private investment with the help of a concerted fiscal push”.<\/p>\n

How? Well they think “capital flight” due to “today’s world of mobile nance and liberalized economic policies” which they claim means “no country can do this on its own”.<\/p>\n

So the “new deal” they advocate is still underpinned with the view that national sovereignty is impossible. The only way that a nation can improve its fortunes using fiscal policy, according to UNCTAD is via some sort of multilateral or supranational arrangement.<\/p>\n

I disagree.<\/p>\n

My new book with Thomas Fazi (published September 20, 2017) – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World<\/a> – examines the claim that international finance has the upper hand when it comes to the capacities of the state.<\/p>\n

We argue that it is essentially false to assume that global financial flows can, ultimately, destroy a national currency.<\/p>\n

While I agree with UNCTAD’s suggestion that “a globally coordinated strategy of expansion led by increased public expenditures, with all countries being offered the opportunity of bene ting from a simultaneous boost to their domestic and external markets” is the way to go, we should not be lulled into thinking that this is because it will somehow defray the powers of global capital.<\/p>\n

We should be advocating a global response, mediated through the national sovereign governments, because austerity has been a worldwide problem and most countries have large pools of underutilised labour (either unemployed, underemployed or in marginal labour force states).<\/p>\n

The UNCTAD Report is very detailed (200 pages). It begins by noting that fifty years ago, Martin Luther King implored his listeners at a meeting at New York’s Riverside Church that:<\/p>\n

\nWe must rapidly begin … the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, extreme materialism and militarism are incapable of being conquered.\n<\/p><\/blockquote>\n

The progressive vision must start with grand statements like that – the goal is a “person-oriented society” and we would add in this modern day that the aim must be broadened to be socioecological harmony.<\/p>\n

The two parts: people and society, on the one hand, and environmental sustainability on the other. Inextricably intertwined.<\/p>\n

From mediators to agents …<\/h2>\n

UNCTAD also note that:<\/p>\n

\n… the drive to achieve full employment with strong welfare provision was thrown into reverse gear decades ago, as governments effectively reinvented themselves as “enablers” rather than “providers”\n<\/p><\/blockquote>\n

I prefer to put this in more stark terms, reflecting the underlying class conflict in capitalism. Governments used to mediate the conflict between labour and capital (this is the “providers” period, using UNCTAD’s terminology).<\/p>\n

The terms “enablers” and “providers” is class free and, thus, weak and lacks true meaning of what has actually gone on.<\/p>\n

In my 2008 book with Joan Muysken – Full Employment abandoned<\/a>, we sketched what we called the full employment framework.<\/p>\n

The Post World War 2 economic and social settlement in most Western countries was defined by three pillars.<\/p>\n

First, the Economic Pillar was defined by an unambiguous commitment to full employment, which meant that unemployment was always a short-term phenomena and the state stood by to provide sufficient work to all.<\/p>\n

Second, the Redistributive Pillar was designed to ameliorate market outcomes and defined much of the equity intervention by government. It recognised that the free market was amoral and intervention in the form of income support and wage setting norms was a necessary part of a sophisticated society.<\/p>\n

Third, the Collective Pillar provided the philosophical underpinning for the Full Employment framework and was based on the intrinsic rights of citizenship. <\/p>\n

The Great Depression taught us that, without government intervention, capitalist economies are prone to lengthy periods of unemployment. <\/p>\n

Nothing has changed. Without a strong state presence, national economies are prone to extended periods of stagnation and mass unemployment. Just look at the Eurozone.<\/p>\n

It is important to understand that while both private and public employment growth was relatively strong during the Post War period up until the mid 1970s, the major reason that that full employment was sustained was that governments maintained a buffer of jobs that were always available, and which provided easy employment access to the least skilled workers in the labour force.<\/p>\n

Around the world, the public sector offered many buffer jobs that sustained workers with a range of skills through hard times. In some cases, these jobs provided permanent work for the low skilled and otherwise disadvantaged workers.<\/p>\n

Importantly, the economies that avoided the plunge into high unemployment in the 1970s maintained what Paul Ormerod described in his book The Death of Economics<\/em> (1994: 203) as a:<\/p>\n

\n… sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified.\n<\/p><\/blockquote>\n

Ormerod said that employment of this type may not satisfy narrow neoclassical efficiency benchmarks (based on private profit conceptions), but notes that societies with a high degree of social cohesion and a high valuation on collective will have been willing to broaden their concept of costs and benefits of resource usage to ensure everyone has access to paid employment opportunities.<\/p>\n

Ormerod (1994: 203) argued that countries like Japan, Austria, Norway, and Switzerland were able to maintain this capacity because each exhibited:<\/p>\n

\n… a high degree of shared social values, of what may be termed social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time.\n<\/p><\/blockquote>\n

The full employment commitment was buttressed by the development of the Welfare State, which defined the state’s obligation to provide security to all citizens. Citizenship embraced the notion that society had a collective responsibility for the well-being of its citizens and replaced the dichotomy that had been constructed between the deserving and undeserving poor<\/p>\n

The stability of this job creation and income redistribution framework came under attack in the 1970s as capital staged a strategic fightback.<\/p>\n

I have written about the work of Lewis Powell in this blog – The right-wing counter attack – 1971<\/a>.<\/p>\n

The Powell Manifesto spawned a multi-pronged attack on workers’ rights that resonates today.<\/p>\n

As neoliberalism took hold in the policy making domains of government, advocacy for the use of discretionary fiscal and monetary policy to stabilise the economy diminished, and then vanished.<\/p>\n

In the mid-1970s the opposition to the use of fiscal deficits to maintain full employment became visible for the first time and the inflation-first rhetoric emerged as the dominant discourse in macroeconomic policy debates.<\/p>\n

Why was this happening?<\/p>\n

Simple: capital wanted a higher share of national income and more control over workplaces and product markets.<\/p>\n

The rhetoric was not new and had previously driven the failed policy initiatives during the Great Depression.<\/p>\n

However, history is conveniently forgotten and the neoliberals were relentless in promoting the idea that the use of government deficits to stimulate the economy coupled with widespread income support mechanisms operating under the guise of the Welfare State were damaging progress.<\/p>\n

They also claimed the trade unions had gained excessive power as a result of the years of full employment.<\/p>\n

With support from business and an uncritical media, the paradigm shift in the academy permeated the policy circles and as a consequence governments relinquished the first major pillar of the Post-War framework – the commitment to full employment.<\/p>\n

It was during this era that unemployment accelerated and has never returned, in most countries, to the low levels that were the hallmark of the Keynesian period.<\/p>\n

In many countries successive governments began cutting expenditures on public sector employment and social programs; culled the public capacity to offer apprenticeships and training programs, and set about dismantling what they claimed to be supply impediments (such as labour regulations, minimum wages, social security payments and the like).<\/p>\n

Within this logic, governments adopted the goal of full employability, significantly diminishing their responsibility for the optimum use of the nation’s labour resources. <\/p>\n

This is the “enablers” period, using UNCTAD’s terminology.<\/p>\n

But don’t be seduced by this seemingly ‘class free’ terminology – enablers and providers.<\/p>\n

In the neoliberal period, the state has been co-opted and reconfigured by capital to become its agent. Rather than mediate the class struggle, the state now actively promotes the interests of capital over the workers and puts in place pernicious policy structures to keep the workers down.<\/p>\n

With the shift to full employability, substantial changes in the conduct of macroeconomic policy occurred.<\/p>\n

The shift to relying on central banks to target inflation targeting and the rise in the supply-side microeconomic policy agenda (privatisation, deregulation etc) was an explicit act of depoliticisation – shifting the responsibility for policy and its manifestations away from the elected polity to unelected and largely unaccountable technocrats.<\/p>\n

The pollies could then say – all this is being imposed on us by some outside or external agency – and thus escape political sanction.<\/p>\n

Somehow, they were successful in making inflation appear to be a worse problem than unemployment. It is clear that the political importance of inflation has been blown out of all proportion to its economic significance.<\/p>\n

Unemployment is the largest wastage there is – not only in terms of lost output but also in terms of all the related costs that accompany it.<\/p>\n

Part of the Reclaim the State Project involves reversing the neoliberal narrative about the inability of the state to use its fiscal policies to target well-being (people).<\/p>\n

The UNCTAD Report recognise that:<\/p>\n

\nTen years after the gales of financial destruction originating in Wall Street swept across the heartland of America and beyond … As “hyperglobalization” with the help of the very visible hand of the State has recovered its poise, business as usual has set in; the push for “light touch” regulation is under way yet again, and austerity has become the preferred response to “excessively” high levels of public debt.\n<\/p><\/blockquote>\n

Two points here:<\/p>\n

1. The “very visible hand of the State” – the GFC proved categorically what Modern Monetary Theory (MMT) has been saying all along that the state can arrest any decline in economic activity should it choose to do so.<\/p>\n

2. The reemergence of the neoliberal agenda that was interrupted by the crisis.<\/p>\n

It is also clear that the TINA scare is now being aggressively propagated again. This was the sort of tactic that the Left fell prey to in the 1970s and 1980s at the inception of all this.<\/p>\n

UNCTAD say that:<\/p>\n

\nInsisting that “there is no alternative” is yesterday’s political slogan. People everywhere desire much the same thing: a decent job, a secure home, a safe environment, a better future for their children and a government that listens and responds to their concerns; in truth, they want a different deal from that offered by hyperglobalization.\n<\/p><\/blockquote>\n

We outline in my new book what the alternatives are and how people can reach the well-being they crave after three decades or more of increasing insecurity.<\/p>\n

Global fiscal responses<\/h2>\n

At yesterday’s Brighton presentation, I was asked in the Q&A to explain why I thought global finance markets could not shut down a nation through the foreign exchange markets.<\/p>\n

This sentiment is, of course, a lasting hangover from the 1970s when the British Labour Party claimed in 1976 that it had run out of money and had to borrow from the IMF.<\/p>\n

It is a resonating theme among the Left – that somehow, these global capital markets are stronger than a sovereign state.<\/p>\n

So the question that has to be dealt with in progressive ranks is why do they still limit their aspirations as a result of this fear.<\/p>\n

This fear is behind UNCTAD’s claim that their “New Deal” has to be global – a coordinated rather than a unilateral effort.<\/p>\n

UNCTAD fall into the flawed reasoning when they say:<\/p>\n

\nThere is much uncertainty as to where the stimulus for a more robust recovery could come from.\n<\/p><\/blockquote>\n

The answer is simple: by governments around the globe increasing domestic demand through increased net spending.<\/p>\n

I understand that for governments that use a foreign currency, such as all the Member States in the Eurozone, the flexibility to engage in such a stimulus is more limited. But even in the Eurozone case, the 3 per cent of GDP deficit limit provides some room to move at present.<\/p>\n

But overall, for currency issuing states, the answer is simple.<\/p>\n

So what is this “much uncertainty” about?<\/p>\n

UNCTAD say that:<\/p>\n

\nSince 2010, the majority of advanced economies have opted for “medium” to “severe” austerity, and even the countries that have considerable fiscal room for manoeuvre have resisted robust expansion.\n<\/p><\/blockquote>\n

And there you have the problem in its conception – “countries that have considerable fiscal room”.<\/p>\n

Fiscal room means what? For UNCTAD it is related to some financial ratio or another.<\/p>\n

But the only meaningful way we can construe a concept such as fiscal space or fiscal room is in terms of the productive resources for sale in the currency of issue that are currently idle.<\/p>\n

Most countries still have elevated levels of labour underutilisation. Idle real productive resources.<\/p>\n

Which means that most countries have large amounts of fiscal space or room. I say that because the respective governments could always buy the services of the idle labour using their currency power via a Job Guarantee.<\/p>\n

If there is one extra worker available to work who is currently unemployed then there is fiscal space to purchase that worker’s services with the currency of issue.<\/p>\n

With millions unemployed around the globe, we can safely conclude there is massive fiscal space.<\/p>\n

So while the UNCTAD Report is correct in saying that:<\/p>\n

\nEnding austerity and harnessing finance to serve society once again, rather than the other way around, are the most urgent challenges.\n<\/p><\/blockquote>\n

It has a flawed view of ‘finance’ underpinning that conclusion.<\/p>\n

It elaborates that flawed view in this way:<\/p>\n

\nIncreasing nancial openness led to a rapid build-up of international positions by these ever-larger financial players, exposing individual countries to forces beyond the control of national policymakers, thereby intensifying financial vulnerability and heightening systemic risk.\n<\/p><\/blockquote>\n

The Left’s fear of exchange rate Armageddon and its, almost deification (or should we say demonisation) of the global financial markets, has been around for a long time.<\/p>\n

Once progressive scholars started to incorporate the increasingly global nature of finance and production supply chains into their analysis, the idea that these trends undermined the capacity of states to spend and maintain full employment became endemic.<\/p>\n

This became the perceived wisdom among most left-wing intellectuals throughout the 1970s, lending credibility (unwittingly) to the emerging monetarist\/neoliberal anti-statist mantra.<\/p>\n

As I noted in my new book with Thomas Fazi – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World<\/a> – one of the most influential texts in this respect was the 1973 book, The Fiscal Crisis of the State<\/em>, by American sociologist and economist James O’Connor.<\/p>\n

By way of summary, O’Connor’s so-called ‘fiscal crisis of the state’ arose because the state had to keep private profits high and growing, by socialising various costs of production that would otherwise be borne by the private sector, while at the same time providing a redistributive function to ensure that workers enjoy some of the prosperity created by the capitalist production process.<\/p>\n

It meant that government deficits would expand unless taxes rose, given that O’Connor failed to understand that once the Bretton Woods system of fixed exchange rates collapsed, governments no longer had to constrain their expenditures to meet the central bank requirements to sustain the currency parity.<\/p>\n

This ‘mistake’ set the pattern for Left discussion until the present day.<\/p>\n

It is true that if governments do nothing and allow ‘hot’ money (short-term speculative capital flows) to flow in and out at will then the “ever-larger financial players” will have a field day and will treat the national well-being as an irrelevance in their quest for yield.<\/p>\n

But, in reality, national governments, which issue their own currencies have a range of options, all of which, largely, overcome the power of the “financial players”.<\/p>\n

First, both flexible and fixed exchange rate regimes are subject to speculative attacks from financial players intent on seeking short-term gains.<\/p>\n

Ultimately, the best way to stabilise the exchange rate is to build sustainable growth through high employment with stable prices and appropriate productivity improvements, even if the higher growth is consistent with a lower exchange rate.<\/p>\n

A low-wage, export-led growth strategy, on the other hand, sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population.<\/p>\n

Of course, in extreme cases, the world’s desire to accumulate claims against a deficit country could disappear entirely, in which case the country’s current account deficit would get forcibly squeezed down to zero.<\/p>\n

It might also happen relatively quickly. This is known as a ‘sudden stop’ and is usually associated with a sudden slowdown or reversal of short-term speculative capital flows, also known as ‘hot money’.<\/p>\n

This harks back to the distinction between capital inflows that manifest themselves as foreign direct investment in productive infrastructure – which are relatively unproblematic, since they create employment and physical augmentation of productive capacity that becomes geographically immobile – and capital inflows that are not connected to the real economy and are purely speculative in nature, which tend to fuel unsustainable consumption booms (that inevitably go bust).<\/p>\n

Most boom-bust financial crises in developing countries in recent decades were associated with capital inflows of this nature, with foreign investors rushing into a country in search of short-term profits and then rushing out when things turned sour.<\/p>\n

A flexible exchange rate per se<\/em> provides no defence against these destructive flows.<\/p>\n

However, evidence shows that ‘sudden stop’ episodes are much more common in fixed exchange rate regimes.<\/p>\n

In fact, it is often forgotten that the Bretton Woods system was ultimately derailed precisely by speculative capital flows that threatened the exhaustion of the foreign exchange and\/or gold reserves of nations running external deficits.<\/p>\n

That said, countries can – and should – defend themselves from the destructive macroeconomic impact of rapid inflows and\/or withdrawals of financial capital, regardless of the currency regime.<\/p>\n

Second, there are a number of tools that nations can employ in that defense. Importantly, a sovereign nation can always impose controls on capital flows, as Iceland has recently demonstrated.<\/p>\n

Capital controls are another one of those ‘taboo’ topics for mainstream economists, who hate the idea of anything that interferes with the so-called ‘free market’.<\/p>\n

But the reason nations impose controls, despite traditional opposition from multilateral agencies such as the IMF, is that the financial markets are, in fact, highly irrational, and behave nothing like the way the economics textbooks would like us to believe.<\/p>\n

Despite the claims to the contrary, governments impose such controls because they are effective.<\/p>\n

There are many types of controls ranging from outright prohibitions to market-based incentives, which increase the cost of cross-border transactions.<\/p>\n

Capital controls function to limit the extent of the currency depreciation when a currency is under attack from ‘hot money’ speculators.<\/p>\n

If targeted to short-term capital transactions (‘hot money’) they counter the speculative flows that might destabilise an exchange rate and force a nation to run down its foreign exchange reserves.<\/p>\n

There are many examples where such policies can reduce foreign exchange market pressures.<\/p>\n

Malaysia imposed a range of controls on capital outflows during the 1997-99 Asian financial crisis, which were important in maintain its exchange rate stability in all the chaos that ensued.<\/p>\n

When the Czech and Slovak governments decided to abandon their short-lived monetary union in early 1993, cross-border currency movements were prohibited while new Slovak banknotes were issued. The old Czech banknotes were ‘stamped’ and were in use in Slovakia until August 1993.<\/p>\n

Capital controls were very effective in protecting the Slovak banking system.<\/p>\n

More recently, Iceland also imposed capital controls in 2008, which limited the extent of the depreciation of the currency. <\/p>\n

The retort is that the financial markets will always subvert capital controls, but the speculators know full well that such controls stop their damaging behaviour.<\/p>\n

As Dani Rodrik noted in his Op Ed (March 11, 2010) – The End of an Era in Finance<\/a>:<\/p>\n

\nOtherwise, why would investors and speculators cry bloody murder whenever capital controls are mentioned as a possibility?\n<\/p><\/blockquote>\n

Even the IMF now proposes that capital controls are an effective defense against short-term capital outflow.<\/p>\n

The IMF acknowledges that unilaterally imposed capital controls are beneficial bulwarks against the destructive forces of speculative financial capital.<\/p>\n

While it is usually claimed that imposing such controls would automatically cut a country off from access to international capital markets, plunging the nation into autarchy, the experience of various countries that have imposed capital controls in recent years disproves this claim.<\/p>\n

Indeed, the evidence shows that countries that employed constraints on surging capital inflows fared better than countries with open capital accounts in the recent global financial crisis.<\/p>\n

As I have noted often in the past, there are countries that will always be vulnerable to exchange rate pressure. Extremely underdeveloped countries that can only access limited quantities of real resources relative to their population and are highly dependent on imports of food and other life-sustaining goods – cannot ensure the well-being of their citizens alone, no matter the status of their currency sovereignty.<\/p>\n

This is especially the case, if their export potential is limited,<\/p>\n

These countries may find no market for their currencies and may be forced to trade in foreign currencies. I have long argued that in these cases, a new multilateral institution should be created to replace both the World Bank and the IMF, which is charged with the responsibility of ensuring that these highly disadvantaged nations can access essential real resources such as food and not be priced out of international markets due to exchange rate fluctuations that arise from trade deficits.<\/p>\n

But that situation does not apply to most advanced nations.<\/p>\n

Third, a sovereign nation does not have to borrow, so the global financial markets cannot influence the capacity of such a state to spend to advance domestic well-being. And nations with a strong adherence to the rule of law that provide security for contracts are ideal investment locations.<\/p>\n

Fourth, UNCTAD say that “Financialization was given a further boost by the capture of regulatory and policy agendas”. Which is exactly the point.<\/p>\n

Neoliberalism works through<\/strong> the state not apart from it. The state can set the conditions that private capital has to work within.<\/p>\n

Recall that when Argentina defaulted in 2001 it was threatened with all sorts of sanctions including never getting access to global financial markets again.<\/p>\n

But the break in the exchange rate peg meant, among other things, that its fiscal policy was no longer held hostage to the quantity of US dollars the government could accumulate; and its domestic interest rate came under control of its central bank. <\/p>\n

As part of the resolution of the 2001 crisis, the government realised it had to adopt a domestically-oriented growth strategy. <\/p>\n

One of the first policy initiatives taken by newly elected President Kirchner was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants, which was around 13 per cent of the labour force.<\/p>\n

This not only helped to quell social unrest by providing income to Argentina’s poorest families, but it also put the economy on the road to recovery. Conservative estimates of the multiplier effect of the increased spending by Jefes workers are that it added a boost of more than 2.5 per cent of GDP.<\/p>\n

In addition, the program provided needed services and new public infrastructure that encouraged additional private sector spending.<\/p>\n

Without the flexibility provided by a sovereign, floating currency, the government would not have been able to promise such a job guarantee.<\/p>\n

Argentina demonstrated something that the world’s financial masters didn’t want anyone to know about. The lesson was that a country with huge foreign debt obligations can successfully default and enjoy renewed fortune almost immediately based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed.<\/p>\n

The clear lesson is that sovereign governments are not necessarily at the hostage of global financial markets. A strong recovery path can be defined, which directly benefits the population and insulates the most disadvantaged workers from the devastation that recession brings.<\/p>\n

The nominal depreciation that followed the default created a major change in the fortunes of the traded-goods sector of the economy. Argentinean exports became much cheaper in world markets and demand for them grew rapidly at the same time as spending on imports fell because of the rise in prices in the newly restored local currency.<\/p>\n

The growth in China also helped Argentina via soya bean exports, which helped stabilise the currency. In general, agriculture boomed. The tourism industry also grew rapidly as a result of the currency depreciation.<\/p>\n

The Government sought to take advantage of the massive shift in the terms of trade by providing incentives for import substitution to stimulate local employment and relieve the cost pressure on local citizens. <\/p>\n

Before long, the peso started appreciating again. But by then, the domestic economy was on a solid growth footing with strong social welfare spending to maintain domestic demand supported by a booming export sector.<\/p>\n

In the mid-2000s the Government actually had to take measures to stop the peso appreciating further given the size of its trade surplus. The central bank acquired huge stockpiles of foreign reserves (US dollars mainly) by selling pesos in the foreign exchange market. The exchange rate stabilised at the higher value.<\/p>\n

The claims by the scaremongers that nobody would want the Argentinean peso once it depreciated were proven to be false. It is clear that people still wanted to buy the Argentinean currency on foreign exchange markets even with the massive default.<\/p>\n

By 2007, international buyers of the depreciating currency were many. The evidence failed to support any of the predictions from those who vehemently opposed the restoration of Argentina currency sovereignty, the default and the float.<\/p>\n

Conclusion<\/h2>\n

The idea that global capital markets are all powerful and subvert the nation state is one of the enduring claims made by all sides of the debate (and ideologies). It is hard to root it out because there are some truths embedded within it.<\/p>\n

But when you dig deeper and step outside the normal frames that are used to constrain this debate (for example, that global capital has to be allowed to freely move) then the options for a sovereign state become obvious and powerful.<\/p>\n

We don’t allow the traffic to ‘freely’ move around our cities. We should only allow global capital flows to freely move if they advance the well-being of our nations. Otherwise, they should be stopped.<\/p>\n

Reclaiming the State Lecture Tour – September-October, 2017<\/h2>\n

For up to date details of my upcoming book promotion and lecture tour in Late September and early October through Europe go to – The Reclaim the State Project<\/a> Home Page.<\/p>\n

Tonight’s event is in Berlin.<\/p>\n

Speakers:<\/p>\n