Category Archives: Global financial elite

Israel: Tax haven for Jews

http://www.haaretz.com/israel-news/.premium-1.726821

Lyin’ to Zion: Israel Is Haven for Fraudsters From France
Efforts to attract Diaspora Jews have made Israel a haven for a few who are trying to escape the long arm of the law.

Hagai Amit

Jun 24, 2016 9:40 AM

In a recent article on the connections between alleged French fraudster Arnaud Mimran, currently on trial in France, and Prime Minister Benjamin Netanyahu, the French newspaper Liberation featured a headline calling Israel a “paradise” for French swindlers.

“Six of the 12 junior defendants in the Arnaud Mimran case were not in court, because they were in Israel, including Eddie Abittan, Michael Haik, Gabriel Cohen, Jeremy Grinholz and Frederic Sebag,” the French daily reported.

“Others involved in the ‘sting of the century’ also found sanctuary in Israel before being extradited to France. That’s the case with Cyril Astruc, alias Alex Khan … who found sanctuary in Israel and was arrested in January 2014. If the vast majority of French Jews who emigrate to Israel are honest, hundreds of others choose to immigrate to Israel to evade legal proceedings in France or use Israel as a base for fraud that they plan to carry out abroad,” the newspaper wrote.

The coverage was prompted by a series of fraud cases that have surfaced involving French Jews. And that is even before Haaretz reported that the star witness in the “sting of the century,” Eithan Liron, is hiding in an apartment on Tel Aviv’s Nordau Boulevard.

In early May, seven Netanya residents with French citizenship were arrested on suspicion of committing massive fraud against several foreign companies. They allegedly hacked the email accounts of senior executives at the targeted multinationals in order to impersonate them and persuade company employees to transfer large sums into bank accounts under their control, ostensibly in order to pay suppliers.

In April, French media outlets reported that five Israeli foreign currency firms were at the center of a French investigation of a 105-million-euro ($118 million) alleged fraud against investors. Fifteen suspects were detained on suspicion of involvement in the case. And in January, five suspects of French origin were arrested for allegedly impersonated corporate executives for the purpose of fraud.

Liberation reported that the instigator of the alleged scheme was Gilbert Chikli, who it said was living in a home with a pool and Jacuzzi in Ashdod, protected by armed guards, “even though he had been sentenced [abroad] to seven years in prison and a fine of a million euros.”

Reports from recent months also allege connections with other cases from the last two years, including one reported at the beginning of last year involving two Jewish suspects of French origin who are accused of systematically collecting information about executives at hundreds of French companies that they were said to be seeking to defraud.

The reports claimed that the two, who live in Tel Aviv and Herzliya, impersonated lawyers and business people and approached the companies demanding that funds be transferred to the pairs’ bank accounts.

If international investigators in Israel perceive crime from Central and South American as relating to drugs, and crime from Russia and Ukraine as fraud-related, in recent years, crime from France has related more and more to sophisticated technology-related crime, in their view.

Bilateral cooperation

Some 7,500 Jews immigrated to Israel last year, compared to 6,700 in 2014 and 3,300 in 2013.

Most are at least middle- class individuals and families who come to Israel in order to escape religious tensions and anti-Semitism in France, and because they want to live in the Jewish state. But for a small minority of these immigrants, Israel is a haven of another sort.

The criminal ties between the two countries have for some years accounted for a significant amount of the workload in the international investigation units of the Israel Justice Ministry and its French counterpart. Cooperation between agencies is close and includes annual meetings to review outstanding cases. The number of extraditions from Israel to France rises every year.

It’s not only legitimate Jewish immigration from France that worries Israeli officials. The Law of Return, which gives Jews and their extended families the right to immigrate to Israel and become citizens, has also been a subject of the authorities’ attention. When there is a new wave of immigrants from a particular country, there is frequently also a rise in the number of people who try to “hitch a ride” at their expense, in order to settle in Israel and exploit their knowledge of the language and customs of their country of origin to engage in criminal activity from their new Israeli base.

The French immigrant community is not thrilled about the reports of criminal links between Israel and France.

“There are a few French Jews who have done things that are not good in France and Israel has taken them in,” says Ouriel Boubli, a lawyer who works with French immigrants. “Apparently that was a mistake. It causes problems and the French community in Israel is angry at these people who have tainted it.” The recent cases have also made it difficult for “good folks” who want to come to Israel to invest, he added.

People of means are choosing to immigrate, Moti Morad, the CEO of the Rishon Letzion branch of Mati, which works with French immigrants, confirms. “People who used to come here just on visits and would count the number of days that they could remain without paying taxes have become citizens, but I don’t see a trend involving the transfer of black [market] money to Israel. There is always a certain percentage.”

An article in Newsweek in late March reported data from the group New World Wealth, which seeks to estimate the flow of capital around the world. The data included an effort to survey international migration by people of means and it reported that a quarter of the 10,000 millionaires who left France in 2015 were Jewish.

This year, the report claims, 4,000 new immigrant millionaires have come to Israel, half of whom have settled in Tel Aviv, but Herzliya, Netanya and Jerusalem were also mentioned as cities that have attracted new immigrant millionaires. The figures reflect the fact that in recent years, Israel has become a magnet for wealthy Jews from around the world and not just from France.

Italy, too

“There is an extensive Italian community that is currently transferring a lot of money to Israel out of concern over steps that the government there would take, but we know that there are also a lot of French people coming and buying property in Israel,“ says Arik Gruber, a lawyer.

One possible reason for Israel’s attractiveness for some is the fact that in 2008, the law was amended to give new immigrants and returning Israelis who had left the country a 10-year tax exemption on income produced outside of Israel or generated from assets outside the country. The amendment also exempted them from reporting overseas income and assets. That’s no small attraction for someone seeking to bring black market assets into the country, but Israeli government authorities have no data on the extent to which such assets have been transferred here.

Avichai Snir of the Netanya Academic College, who conducts research on the subject of black market capital in Israel, says: “The phenomenon exists of money laundering by Jews from around the world in Israel. Historically, the Israeli view was that Jews were to be pitied even under those circumstances and that we needed to help them smuggle their capital. That’s a view from the early years of the country, that persisted for a long time.”

Gruber says a lot of black-market money has come into the country through a variety of means. And a former senior staffer in the Israel Tax Authority’s investigation department added: “Israel has always supported Jews bringing their money here. As a result of legislation, they come here, and for their first ten years here, they have almost no contact with law enforcement authorities.”

Suspicion over money laundering is sometimes the only grounds on which the Israeli police can deal with crime committed abroad. To open a money-laundering investigation in connection with activity committed abroad, the activity has to be significant not only from an Israeli standpoint, but also where it is committed, Israel Police sources say.

If it involves gambling money that is sent to Israel, in a place like the Czech Republic, for example, gambling is legal. If the law is broken in the country of origin, when the property comes into Israel, it is coming in as part of an effort to remove it from where the offense was committed. In such a situation, the money laundering is a separate offense that is divorced from the original offense, according to law enforcement officials.

The officials add that if the profits from fraud are brought into Israel, Israeli law enforcement addresses only the economic aspects of the case, attempting to prosecute the alleged offender for money laundering.

That still requires the cooperation of officials in the country where the initial offense was committed to prove that the motive was to hide the assets in Israel.

“The moment that parties with illegal funds enter Israel, they look for cash-rich transactions through which in one fell swoop they can launder a lot of money,” said a knowledgeable source.

“Investment in real estate is the last stage in the process, after I’ve put the money into the system. Leaving the money in the bank is more problematic, because it’s much more exposed. In real estate, you can register the property in the name of an aunt or sister or a straw man, whereas an account with several million euros in it is something that is usually reported and that could arouse suspicions,” said the source, who asked to remain anonymous.

Greek Truth Committee on Public Debt – Preliminary Report (Executive Summary)

Truth Committee on Public Debt

Preliminary report

The Truth Committee on Public Debt (Debt Truth Committee) was established on April 4, 2015, by a decision of the President of the Hellenic Parliament, Ms Zoe Konstantopoulou, who confided the Scientific Coordination of its work to Dr. Eric Toussaint and the cooperation of the Committee with the European Parliament and
other Parliaments and international organizations to MEP Ms Sofia Sakorafa.

Members of the Committee have convened in public and closed sessions, to produce this preliminary report, under the supervision of the scientific coordinator and with the cooperation and input of other members of the Committee, as well as experts and contributors.

The preliminary report chapters were coordinated by:

Bantekas Ilias
Contargyris Thanos
Fattorelli Maria Lucia
Husson Michel
Laskaridis Christina
Marchetos Spyros
Onaran Ozlem
Tombazos Stavros
Vatikiotis Leonidas
Vivien Renaud

With contributions from:
Aktypis Héraclès
Albarracin Daniel
Bonfond Olivier
Borja Diego
Cutillas Sergi
Gonçalves Alves Raphaël
Goutziomitros Fotis
Kasimatis Giorgos
Kazakos Aris
Lumina Cephas
Mitralias Sonia
Saurin Patrick
Sklias Pantelis
Spanou Despoina
Stromblos Nikos
Tzitzikou Sofia

The authors are grateful for the advice and input received from other members of the Truth Committee on Public Debt as well as other experts, who contributed to the Committee’s work during the public sessions and hearings and the closed or informal consultations.

The authors are grateful for the valuable assistance of Arnaoutis Petros Konstantinos, Aronis Charalambos, Bama Claudia, Karageorgiou Louiza, Makrygianni Antigoni and Papaioannou Stavros.

Executive Summary

In June 2015 Greece stands at a crossroads of choosing between furthering the failed macroeconomic adjustment programmes imposed by the creditors or making a real change to break the chains of debt. Five years since the economic adjustment programme began, the country remains deeply cemented in an economic, social, democratic and ecological crisis. The black box of debt has remained closed, and until a few months ago no authority, Greek or international, had sought to bring to light the truth about how and why Greece was subjected to the Troika regime. The debt, in the name of which nothing has been spared, remains the rule through which neoliberal adjustment is imposed, and the deepest and longest recession experienced in Europe during peacetime.

There is an immediate democratic need and social responsibility to address a range of legal, social and economic issues that demand proper consideration. In response, the President of the Hellenic Parliament established the Truth Committee on Public Debt (Debt Truth Committee) in April 2015, mandating the investigation into the creation and the increase of public debt, the way and reasons for which debt was contracted, and the impact that the conditionalities attached to the loans have had on the economy and the population. The Truth Committee has a mandate to raise awareness of issues pertaining to the Greek debt, both domestically and internationally, and to formulate arguments and options concerning the cancellation of the debt.

The research of the Committee presented in this preliminary report sheds light on the fact that the entire adjustment programme, to which Greece has been subjugated, was and remains a politically orientated programme. The technical exercise surrounding macroeconomic variables and debt projections, figures directly relating to people’s lives and livelihoods, has enabled discussions around the debt to remain at a technical level mainly revolving around the argument that the policies imposed on Greece will improve its capacity to pay the debt back. The facts presented in
this report challenge this argument.

All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and
odious.

It has also come to the understanding of the Committee that the unsustainability of the Greek public debt was evident from the outset to the international creditors, the Greek authorities, and the corporate media. Yet, the Greek authorities, together with some other governments in the EU, conspired against the restructuring of public debt in 2010 in order to protect financial institutions. The corporate media hid the truth from the public by depicting a situation in which the bailout was argued to benefit Greece, whilst spinning a narrative intended to portray the population as deservers of their own wrongdoings.

Bailout funds provided in both programmes of 2010 and 2012 have been externally managed through complicated schemes, preventing any fiscal autonomy. The use of the bailout money is strictly dictated by the creditors, and so, it is revealing that less than 10% of these funds have been destined to the government’s current expenditure.

This preliminary report presents a primary mapping out of the key problems and issues associated with the public debt, and notes key legal violations associated with the contracting of the debt; it also traces out the legal foundations, on which unilateral suspension of the debt payments can be based. The findings are presented in nine chapters structured as follows:

Chapter 1, Debt before the Troika, analyses the growth of the Greek public debt since the 1980s. It concludes that the increase in debt was not due to ex4 cessive public spending, which in fact remained lower than the public spending of other Eurozone countries, but rather due to the payment of extremely high rates of interest to creditors, excessive and unjustified military spending, loss of tax revenues due to illicit capital outflows, state recapitalization of private banks, and the international imbalances created via the flaws in the design of the Monetary Union itself. Adopting
the euro led to a drastic increase of private debt in Greece to which major European private banks as well as the Greek banks were exposed. A growing banking crisis contributed to the Greek sovereign debt crisis. George Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt crisis in 2009 by emphasizing and boosting the public deficit and debt.

Chapter 2, Evolution of Greek public debt during 2010-2015, concludes that the first loan agreement of 2010, aimed primarily to rescue the Greek and other European private banks, and to allow the banks to reduce their exposure to Greek government bonds.

Chapter 3, Greek public debt by creditor in 2015, presents the contentious nature of Greece’s current debt, delineating the loans’ key characteristics, which are further analysed in Chapter 8.

Chapter 4, Debt System Mechanism in Greece reveals the mechanisms devised by the agreements that were implemented since May 2010. They created a substantial amount of new debt to bilateral creditors and the European Financial Stability Fund (EFSF), whilst generating abusive costs thus deepening the crisis further. The mechanisms disclose how the majority of borrowed funds were transferred directly to financial institutions. Rather than benefitting Greece, they have accelerated the privatization process, through the use of financial instruments.

Chapter 5, Conditionalities against sustainability, presents how the creditors imposed intrusive conditionalities attached to the loan agreements, which led directly to the economic unviability and unsustainability of debt. These conditionalities, on which the creditors still insist, have not only contributed to lower GDP as well as higher public borrowing, hence a higher public debt/GDP making Greece’s debt more
unsustainable, but also engineered dramatic changes in the society, and caused a humanitarian crisis. The Greek public debt can be considered as totally unsustainable at present.

Chapter 6, Impact of the “bailout programmes” on human rights, concludes that the measures implemented under the “bailout programmes” have directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law. The drastic adjustments, imposed on the Greek economy and society as a whole, have brought about a rapid deterioration of living standards, and remain incompatible with social justice, social cohesion, democracy and human rights.

Chapter 7, Legal issues surrounding the MoU and Loan Agreements, argues there has been a breach of human rights obligations on the part of Greece itself and the lenders, that is the Euro Area (Lender) Member States, the European Commission, the European Central Bank, and the International Monetary Fund, who imposed these measures on Greece. All these actors failed to assess the human rights violations as an outcome of the policies they obliged Greece to pursue, and also directly violated the Greek constitution by effectively stripping Greece of most of its sovereign rights. The agreements contain abusive clauses, effectively coercing Greece to surrender significant aspects of its sovereignty. This is imprinted in the choice of the English law as governing law for those agreements, which facilitated
the circumvention of the Greek Constitution and international human rights obligations. Conflicts with human rights and customary obligations, several indications of contracting parties acting in bad faith, which together with the unconscionable character of the agreements, render these agreements invalid.

Chapter 8, Assessment of the Debts as regards illegitimacy, odiousness, illegality, and unsustainability, provides an assessment of the Greek public debt according to the definitions regarding illegitimate, odious, illegal, and unsustainable debt adopted by the Committee.

Chapter 8 concludes that the Greek public debt as of June 2015 is unsustainable, since Greece is currently unable to service its debt without seriously impairing its capacity to fulfill its basic human rights obligations. Furthermore, for each creditor, the report provides evidence of indicative cases of illegal, illegitimate and odious debts.

Debt to the IMF should be considered illegal since its concession breached the IMF’s own statutes, and its conditions breached the Greek Constitution, international customary law, and treaties to which Greece is a party. It is also illegitimate, since conditions included policy prescriptions that infringed human rights obligations. Finally, it is odious since the IMF knew that the imposed measures were undemocratic, ineffective, and would lead to serious violations of socio-economic rights.

Debts to the ECB should be considered illegal since the ECB over-stepped its mandate by imposing the application of macroeconomic adjustment programmes (e.g. labour market deregulation) via its participation in the Troika. Debts to the ECB are also illegitimate and odious, since the principal raison d’etre of the Securities Market Programme (SMP) was to serve the interests of the financial institutions, allowing the major European and Greek private banks to dispose of their Greek bonds.

The EFSF engages in cash-less loans which should be considered illegal because Article 122(2) of the Treaty on the Functioning of the European Union (TFEU) was violated, and further they breach several socio-economic rights and civil liberties. Moreover, the EFSF Framework Agreement 2010 and the Master Financial Assistance Agreement of 2012 contain several abusive clauses revealing clear misconduct on the part of the lender. The EFSF also acts against democratic principles, rendering these particular debts illegitimate and odious.

The bilateral loans should be considered illegal since they violate the procedure provided by the Greek constitution. The loans involved clear misconduct by the lenders, and had conditions that contravened law or public policy. Both EU law and international law were breached in order to sideline human rights in the design of the macroeconomic programmes. The bilateral loans are furthermore illegitimate, since they were not used for the benefit of the population, but merely enabled the private creditors of Greece to be bailed out. Finally, the bilateral loans are odious since the lender states and the European Commission knew of potential violations, but in 2010 and 2012 avoided to assess the human rights impacts of the macroeconomic adjustment and fiscal consolidation that were the conditions for the loans.

The debt to private creditors should be considered illegal because private banks conducted themselves irresponsibly before the Troika came into being, failing to observe due diligence, while some private creditors such as hedge funds also acted in bad faith. Parts of the debts to private banks and hedge funds are illegitimate for the same reasons that they are illegal; furthermore, Greek banks were illegitimately recapitalized by tax-payers. Debts to private banks and hedge funds are odious, since major private creditors were aware that these debts were not incurred in the best interests of the population but rather for their own benefit. The report comes to a close with some practical considerations.

Chapter 9, Legal foundations for repudiation and suspension of the Greek sovereign debt, presents the options concerning the cancellation of debt, and especially the conditions under which a sovereign state can exercise the right to unilateral act of repudiation or suspension of the payment of debt under international law. Several legal arguments permit a State to unilaterally repudiate its illegal, odious, and illegitimate debt. In the Greek case, such a unilateral act may be based on the following arguments: the bad faith of the creditors that pushed Greece to violate national law and international obligations related to human rights; preeminence of human rights over agreements such as those signed by previous governments with creditors or the Troika; coercion; unfair terms flagrantly violating Greek sovereignty and violating the Constitution; and finally, the right recognized in international law for a State to take countermeasures against illegal acts by its creditors, which purposefully damage its fiscal sovereignty, oblige it to assume odious, illegal and illegitimate debt, violate economic self-determination and fundamental human rights. As far as unsustainable debt is concerned, every state is legally entitled to invoke necessity in exceptional situations in order to safeguard those essential interests threatened by a grave and imminent peril. In such a situation, the State may be dispensed from the fulfilment of those international obligations that augment the peril, as is the case with outstanding loan contracts. Finally, states have the right to declare themselves unilaterally insolvent where the servicing of their debt is unsustainable, in which case they commit no wrongful act and hence bear no liability.

People’s dignity is worth more than illegal, illegitimate, odious and unsustainable debt.

Having concluded its preliminary investigation, the Committee considers that Greece has been and still is the victim of an attack premeditated and organized by the International Monetary Fund, the European Central Bank, and the European Commission. This violent, illegal, and immoral mission aimed exclusively at shifting private debt onto the public sector.

Making this preliminary report available to the Greek authorities and the Greek people, the Committee considers to have fulfilled the first part of its mission as defined in the decision of the President of the Hellenic Parliament of 4 April 2015. The Committee hopes that the report will be a useful tool for those who want to exit the destructive logic of austerity and stand up for what is endangered today: human rights, democracy, peoples’ dignity, and the future of generations to come.

In response to those who impose unjust measures, the Greek people might invoke what Thucydides mentioned about the constitution of the Athenian people: “As for the name, it is called a democracy, for the administration is run with a view to the interests of the many, not of the few” (Pericles’ Funeral Oration, in the speech from Thucydides’ History of the Peloponnesian War).

Piketty and the Crisis of Neoclassical Economics

Piketty and the Crisis of Neoclassical Economics

by John Bellamy Foster and Michael D. Yates

http://monthlyreview.org/author/johnbellamyfoster/

John Bellamy Foster is the editor of Monthly Review and professor of sociology at the University of Oregon. Michael D. Yates is associate editor of Monthly Review and editorial director of Monthly Review Press.

Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon.1 Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled “The Great Inequality,” and which has recently been dramatized by the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics.

To understand the nature of this crisis of received economics it is necessary to look at the two principal bulwarks of neoclassical theory, which were originally erected in response to socialist critics. The first is the notion that a freely competitive capitalist economy left to itself generates full employment, indicating that unemployment is the product of various frictions, imperfections, or government interference. The second is the related proposition that income and wealth inequality are determined by the “marginal productivity” (or relative contributions to output) of the various factors of production, chiefly capital and labor—a logic that is extended to the contributions of individuals themselves. The renowned post-Second World War national income statistician, Simon Kuznets, in his famous Kuznets Curve, even argued that there was a tendency in developed capitalist economies towards a decrease in inequality, due to the effects of modernization, including enhanced educational opportunities.3

Contrast these propositions to the reality of the mature capitalist economies today. Far from a full-employment equilibrium, what we see rather is a long-term tendency to economic stagnation. Moreover, this reality describes all of the developed capitalist economies and can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than converging, have diverged sharply—a divergence that cannot be attributed to differences in education and skill, nor to the contributions of capital relative to labor.5 In short, both of the principal justifications for the system provided by neoclassical economics have collapsed before our eyes.6

The first of these fissures in the outlook of neoclassical economics is long-standing and well known. During the Great Depression, unemployment in the United States rose at its height in 1933 to 25 percent. It was in this context that John Maynard Keynes, the intellectual heir to Alfred Marshall at Cambridge University, and hence one of the principal figures in neoclassical economics, broke partially with the economic orthodoxy with the publication of his magnum opus, The General Theory of Employment, Interest and Money in 1936. Keynes sent mainstream economics into a tailspin by attacking (as had Marx earlier) the notion of Say’s Law of classical economics, which postulated that supply creates its own demand.7 He thus engaged in a frontal assault on the notion that full-employment equilibrium was an inherent tendency of the system. Instead Keynes contended, “When effective demand is deficient there is under-employment of labour in the sense that there are men who are unemployed who would be willing to work at less than the existing real wage.”8 Nor was this an unusual circumstance under capitalism; mass underemployment in this sense was the normal condition in rich capitalist economies. As John Kenneth Galbraith summed up Keynes’s heresy in The Age of Uncertainty:

Keynes’s basic conclusion can…be put very directly. Previously it had been held that the economic system, any capitalist system, found its equilibrium at full employment. Left to itself, it was thus that it came to rest. Idle men and idle plant were an aberration, a wholly temporary failing. Keynes showed that the modern economy could as well find its equilibrium with continuing, serious underemployment. Its perfectly normal tendency was to what economists have since come to call an underemployment equilibrium.9

Keynes was convinced that the capitalist economy tended towards stagnation, a phenomenon that he explained in terms of a decline in the marginal efficiency of capital (expected profits on new investment). He did not, however, present a coherent explanation of stagnation in The General Theory but contented himself with pointing to a waning in “the growth of population and of invention, the opening-up of new lands, the state of confidence and the frequency of war”—all of which had constituted historical factors stimulating capitalism in the past.10 These were the factors that Alvin Hansen, Keynes’s leading early follower in the United States, primarily focused on in his Full Recovery or Stagnation? and other works, delineating a theory of “secular stagnation.”11

Later, a more developed analysis of stagnation, focusing in particular on the growth of monopoly capital (but also taking into account other conditions of capitalist maturity) was to emerge in the work of Michał Kalecki, and, in particular, in Josef Steindl’s Maturity and Stagnation in American Capitalism (1952), which built on Kalecki. Paul Baran and Paul Sweezy’s Monopoly Capital (1966) constituted an attempt to extend this analysis to the entire social and economic system of capitalism and to bring out its connection to the Marxian critique. Later Harry Magdoff and Paul Sweezy were to connect stagnation to financialization, most notably in Stagnation and the Financial Explosion (1987).12

Today we see a reemergence of notions of secular stagnation in neoclassical economics, beginning with Lawrence Summers’s resurrection of the idea in a 2013 speech to an IMF forum.13 But it remains divorced from the rich historical tradition that emerged within Marxian theory (and even from Hansen’s historically based analysis, rooted in Keynes)—thus offering little in the way of a real explanation.14 Nevertheless, the notion that the capitalist economy tends towards full employment—or that macroeconomic techniques inherited from Keynes effectively produce the same result, as Paul Samuelson (Summers’s uncle) famously argued in the so-called “neoclassical synthesis”—has no legs left to stand on, owing its continuing presence entirely to the ideological function of neoclassical economics.

The second main justification of the system provided by neoclassical economics—the notion that capitalism promotes a kind of equality, at least in terms of the determination of earnings by the marginal productivity of factors (and individuals)—has shown itself to be just as false. As this has become more apparent neoclassical economists have sought to declare the whole issue out of bounds. Martin Feldstein, chairman of the Council of Economic Advisors under President Reagan, replied to critics of the Robin Hood-in-reverse policies of Reaganomics by stating, “Why there has been increasing inequality in this country is one of the big puzzles in our field and has absorbed a lot of intellectual effort. But if you ask me whether we should worry about the fact that some people on Wall Street and basketball players are making a lot of money, I say no.”15 Likewise Robert Lucas, Jr. of the University of Chicago, the most influential macroeconomist of his day, was merely stating the dominant view of the profession and of the establishment as a whole when he opined in 2004, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of [income] distribution.”16

Feldstein’s and Lucas’s sharp dismissals of any concern over income and wealth distribution reflected the mainstream economic view that inequality is benign precisely because it can be attributed to different levels of marginal productivity and the corresponding different education and skill sets. In this accounting, a person’s income is simply a function of his or her productivity and willingness to work. People are poor because they are not very productive or because they have a weak attachment to the labor force as a result of their own choices. Productivity is driven in the main by the willingness of individuals to invest in their “human capital,” and the most important type of such investment is education. Attachment to the labor force depends on “leisure preferences” of individuals. This refers to the relative weight potential workers place upon the utility they will gain by buying the goods and services that an increase in income makes possible—while factoring in, through a benefit and cost calculus, the happiness they could have by not working, by choosing more free time. Thus those with high incomes are presumed to have invested in their human capital and have low leisure preferences, while for the poor the opposite is true.

Modern technology, in this view, has only made human capital more important. Many people have been left behind in the race to the top of the income distribution because they do not possess the knowledge that modern technology requires. Most mainstream economists do say that appropriate public policies could help reduce inequality, by, for example, making it easier for those without means to attend college. However, it would be dangerous, we are told, to reduce inequality too much—for example, through free higher education for all—because then individuals would not have an incentive to work hard and be productive. This would be to the detriment of the capacity of the economy to grow and thus to provide the extra income needed to distribute to those at the bottom. Equality is therefore self-defeating.

The Mad Hatter logic of neoclassical economics can actually be used to demonstrate that in perfectly competitive markets there can be no wage and salary inequality at all!17 Consider a woman making a career decision. Assume, as does the neoclassical economist, that she has complete knowledge of the wages and benefits associated with every occupation she is considering entering. She also knows the costs of the education and training necessary for employment in each occupation, as well as the income she will lose by not working while she is getting this schooling and training. Any particular negative aspects of an occupation, such as physical danger, are also known, as are their costs. What should she do? She will weigh the benefits against the costs of each occupation and pick the one for which the net benefits are highest.

Implicit in this scenario is a wage for each occupation that at least covers the cost of entering it. Competition in the marketplace will, in fact, make the wage just equal to the entry cost. An occupation with a wage higher than the entry cost will attract new applicants; this will put downward pressure on the wage and upward pressure on the costs (as more people demand schooling and training); and eventually, the above average wage-cost difference will disappear. Remarkably, this theory shows that, while some workers earn higher wages than others, these higher wages simply reflect higher entry costs. A doctor is therefore not really better off than a motel room cleaner; in terms of wages minus costs, they are in exactly the same position. Voilà! At least as far as labor income is concerned, there can be no inequality.

Enter the real world. The Great Financial Crisis of 2007–2009 and the Occupy Wall Street uprising punctured this neoclassical fairy tale. The Occupy movement pinpointed the growing division between the 1% and the 99%—achieving in a very short time a transformation in public consciousness on inequality that radical political economists had sought to effect for decades. The press began to draw more frequently on data showing skyrocketing income and wealth inequality that had long been available but had been relegated to the status of a dirty little secret of the capitalist economy.18 For decades researchers had been compiling sophisticated statistical portraits in this area. Now due to Occupy and the sheer outrage of the population, it all began to come out into the open. Especially notable in this respect were the contributions of New York University economist Edward N. Wolff, a leading authority on wealth distribution; the Economic Policy Institute, which publishes The State of Working America; Branko Milanovic, a heterodox economist employed by the World Bank’s research division; and James K. Galbraith, a prominent institutionalist economist and analyst of inequality in pay.19

Yet, the big change on the data front, making it impossible to deny any longer the extent of the growth of inequality in all of the mature economies was the development, over the last decade and a half, beginning with the early work of Piketty, of the World Top Incomes Database (commonly referred to as the Top Incomes Database). The result of a major international project, involving some thirty researchers, this database primarily uses income tax data, focusing on most of the mature capitalist economies.20 The leading researchers for the U.S. case were Piketty himself, located at the Paris School of Economics, and Emmanuel Saez, a professor of economics at the University of California, Berkeley. The Top Incomes Database is the single largest historical database on long-term inequality currently in existence, covering countries in Europe and North America, but also a sampling of countries in Asia, Africa, and Latin America.

The publication by Harvard University Press in 2014 of Capital in the Twenty-First Century by Piketty, using the Top Incomes Database to explain the dynamics of growing inequality at the center of the capitalist world, was therefore bound to draw extraordinary attention in the economic world. For Piketty is no ordinary economist. He is at one and the same time a dissenter and a representative of the higher circle of the economics establishment. Although he served for a few months in 2007 as the economic adviser to Ségolène Royal in her campaign as the Socialist Party nominee for president of France—she lost to Nicolas Sarkozy—Piketty is no Marxist, or even an institutionalist or post-Keynesian political economist, in whose work one could expect to find an analysis centering on inequality. Rather, he is a highly credentialed member of the neoclassical economics elite. Thus, when he presented a theoretical perspective that challenged the primary approach to questions of income and wealth distribution previously held to by almost all neoclassical economists, the result was explosive. Suddenly there was a work on growing inequality that had the imprimatur of the establishment (backed by prestigious publications in the Quarterly Journal of Economics, American Economic Review and the Journal of Economics Literature), and could not be easily dismissed ad hominem as the work of a “non-scientific” heterodox economist. If not exactly a revolution against neoclassical economics, the contents of his book had all the looks of a palace coup. And remarkably too, Piketty had a gift of expression and breadth of knowledge unusual in economists, allowing him to draw on Jane Austen and Honoré de Balzac as much as Adam Smith and Karl Marx. Within a short time the book reached number one on Amazon, surely an unprecedented achievement for the author of a data-filled economics book of 685 pages.

For most readers it was not the fine details of Piketty’s analysis that were so interesting but rather the overall conclusions dramatically highlighted in the very beginning of the book.21 Here he made it clear he was challenging head-on some of the core assumptions of orthodox economics—though from inside rather than outside of the neoclassical perspective. It was this divorce of his analysis from the main ideological propositions of received economics—the sense of letting the numbers speak for themselves—that gave Piketty’s work the feeling of a disinterested inquiry after the truth rather than what Marx called “the bad conscience and evil intent of apologetics” that has so long dominated orthodox economics.22

Most importantly, Piketty concluded in what will undoubtedly be his single most enduring contribution, that “There is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently” in a capitalist economy. This can be seen as the critical counterpart (within the realm of distribution) to Keynes’s break with Say’s Law, or the notion of a natural tendency in capitalism to a full-employment equilibrium. Not only does Piketty point out that Kuznets’s assumption of growing equality in developed capitalist economies is wrong, but he argues that the standard neoclassical human-capital argument of equality-cum-meritocracy—wherein deviations from equality are simply due to attributes such as greater skill, knowledge, or productivity—is equally false in the real-world economy.23

This is shown by his now famous formula r > g, where r stands for the annual rate of return to wealth—referred to by Piketty as capital—and g for the growth rate of the economy (the rate of increase in national income). Wealth in slow-growing capitalist economies (below 1.5 percent per capita), which Piketty takes as the normal case, expands more rapidly than income—a phenomenon no doubt heightened in our financialized age.24 He argues that the higher rate of per capita growth in the first quarter century after the Second World War, when the per-capita growth rate in the United States was about 1.9 percent, was exceptional, and that we are seeing—for one reason or another—a return to the norm of much lower growth (1.2 percent or even 1 percent per capita), which he calls at one point a “low-growth regime.” (This applies to all of the mature economies on the “technological frontier”—but not to economies now experiencing catch up such as China.)25

Relatively slow growth—what we would term stagnation—thus provides the background condition for Piketty’s r > g, practically ensuring that wealth at the top of society will become ever more concentrated, while the main wealth-holders accrue their wealth not so much because of what they do but because of where they are placed in the social-class hierarchy. Indeed, capitalism in its normal case, Piketty tells us, promotes patrimonial dynasties. “Liliane Bettencourt,” the heiress to the French cosmetic giant L’Oréal, “who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working.”26

Piketty thus drives a critical wedge into the traditional justification of the system, according to which income and wealth shares are determined by the marginal productivity of the various factors of production (thought to be applicable to individual contributions as well). To understand the full significance of this, it is useful to quote from the 2012 book The Price of Inequality by economist Joseph Stiglitz. According to Stiglitz, with the rise of capitalism,

it became imperative to find new justifications for inequality, especially as critics of the system, like Marx, talked about exploitation.

The theory that came to dominate, beginning in the second half the nineteenth century—and still does—was called “marginal productivity theory”; those with higher productivities earned higher incomes that reflected their greater contributions to society. Competitive markets, working through the laws of supply and demand, determine the value of each individual’s contributions.27

Piketty’s argument and his data make a mockery of this core neoclassical economic thesis. But Piketty advances such an argument without breaking completely with the architecture of neoclassical economics. His theory thus suffers from the same kind of internal incoherence and incompleteness as that of Keynes, whose break with neoclassical economics was also partial. Deeply concerned with issues of inequality, just as Keynes was with unemployment, Piketty demonstrates the empirical inapplicability over the course of capitalist development of the main conclusions of neoclassical marginal productivity theory. His work has thus served to highlight the near-complete unraveling of orthodox economics—even while staying analytically within the fold.28

This overall incoherence, as we shall see, ultimately overwhelms Piketty’s argument. He is unable to explain why capitalist economies tend to grow so slowly as to generate such a divergence between wealth and income (and between capital and labor). Hence, while his analysis sees slow growth or relative stagnation as endemic to this system, he neither explains this nor is concerned directly with it. Significantly, he replaces more traditional notions of capital as a social and physical phenomenon with one that equates it with all wealth.29 As a result the accumulation of capital in his analysis means no more than the amassing of wealth of whatever kind, from plant and machinery to financial assets to jewelry, thereby confusing the whole issue of capital accumulation.30 Nor does he address the relations of power—principally class power—that lie behind the inequality that he delineates. His analysis is confined largely to distribution rather than production. He neither follows nor (by his own admission) understands Marx, though at times clearly draws inspiration from him.31 The question of monopoly capital is entirely missing from his study, which, as he says, does not include imperfect competition as a factor in generating inequality.32

But even with these and other deficiencies, Piketty, nevertheless, brings a certain degree of reality—even a sense of “class warfare” (if only implicitly)—back to bourgeois economics. The result is to heighten the crisis of neoclassical theory. Moreover, he argues—even though he dismisses the idea as “utopian”—for the imposition of a tax on wealth.33 Piketty thus represents a partial revolt within the inner chambers of the economics establishment.

Not surprisingly, given the extraordinary attention given to Capital in the Twenty-First Century and the breech in the wall of the neoclassical orthodoxy it represents, the Wall Street Journal sought to counterattack in May 2014, with an op-ed by none other than Feldstein. Reagan’s former economic advisor predictably condemned “the confiscatory taxes on income and wealth that Mr. Piketty recommends,” declaring that “the problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck” but rather that a small minority has fallen below the poverty line.34 However, Feldstein misses the mark completely. Piketty’s point is that skill and training cannot explain the gross inequality that has arisen in U.S. society, which is disproportionately weighted toward inherited wealth and CEO mega-salaries, and that while some do get vastly higher incomes by the “luck” of having been born with silver spoons in their mouths, they can hardly be said to have “earned” them.

Increasing Inequality: A Law of Capitalism

Prior to the publication of Piketty’s book, Piketty and Saez used Internal Revenue Service data to track U.S. income inequality from 1913 to 2010. These data show that the rise in inequality, as measured by the share of income going to the top 1 percent of “tax units” (not exactly comparable to families or households), is much greater in the United States than in any other rich capitalist country, although the United Kingdom is not far behind. Income inequality in the United States has not been this high since the early Roaring Twenties depicted in F. Scott Fitzgerald’s The Great Gatsby. The richest 1 percent now takes home more than 20 percent of the nation’s entire income, up from about 9 percent in the 1970s. In addition, the top 1 percent of income recipients has seized most of the past few decades’ gains in income. Of the increase in total household income from 1977 to 2007, the richest 1 percent got almost 60 percent, and the richest 0.1 percent (the top one-thousandth—in 2010, those earning more than $1.5 million a year) garnered roughly half of that. By comparison, the poorest 90 percent saw their income grow by “less than 0.5 percent per year.”35

Expanding upon these earlier conclusions, Piketty in Capital in the Twenty-First Century elucidates four key findings. First, similar trends, though less marked than in the United States, are found in almost every part of the globe. Second, in the United States, a major factor in this trend is the rise of an elite of “super managers,” top officials of the largest corporations who take home enormous salaries and have so much power that they can literally set their own pay.36

Third, Piketty stresses that the richest 1 percent enjoyed similar distance from the rest of us throughout most of capitalism’s history. The only period in which the capital-income ratio becomes more equal and the dominance of inherited wealth diminishes in the rich countries as a whole is that between the beginning of the First World War in 1914 and the mid-1970s. This was a truly exceptional time, marked by “shocks” to the system: two catastrophic wars, the Bolshevik Revolution, the Great Depression, and the rise of the social welfare state after the Second World War. Heavy taxes were placed on top incomes, fortunes were lost in both the wars and the Depression, and working-class movements arose and forced higher wages, benefits, and social insurance from employers and governments—both of which were willing to make concessions if only to avoid a deeper radicalization of the working class. However, once elites regained their bearings, capitalism began to return to the norm of growing inequality.37

Fourth, during the sixty-odd years of expanding equality, a substantial “middle” class arose—professionals, civil servants, and unionized workers—which, while not wealthy, had enough income to live well above subsistence and to accumulate a certain amount of wealth, mainly in the form of housing. The rise of this intermediate “petty patrimonial” propertied class of home owners, he argues, has had profound effects on the political trajectory of the rich nations, because there is now a sizeable portion of society outside the upper class intent on maintaining the value of their wealth and increasing it if possible.38

Most individuals earn income by working. However, very substantial incomes derive from ownership of wealth. What is more, certain types of wealth, such as stocks, bonds, and other financial instruments, represent control over the commanding heights of the economy and government. If these are divided in an unequal manner, then so is the power that flows from their ownership. The data show with great clarity that the distribution of wealth is extraordinarily unequal and likely to become more so. Edward Wolff has pioneered the study of wealth data in the United States. In his most recent paper, he finds that the average (mean) net worth of the wealthiest 1 percent in 2010 was $16.4 million. By contrast the average for the least wealthy 40 percent was $–10,600 (that is, it was negative!).39 For various asset classes, the share owned by the top 1 percent is even more astonishing:

Asset Class

Share of Top 1% in 2010

Stocks & Mutual Funds

48.8%
Financial Securities

64.4%
Trusts

38.0%
Business Equity

61.4%
Non-home Real Estate

35.5%
Source: Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle Class,” NBER Working Paper Series, Working Paper 18559, 2012, http:/nber.org/papers/w18559.pdf, 57, Table 9.

Indeed, it is in wealth statistics that the real social divide stands out. Thus, as Piketty notes, the Federal Reserve Board in recent estimates, covering the years 2010–2011, indicated that the top 10 percent of wealth holders in the United States own 72 percent of the country’s wealth, while the bottom half own only 2 percent.40 Meanwhile, there is much inequality even within the 1 percent. Sylvia Allegretto of the Economic Policy Institute tells us that in 2009, the mean net worth of the infamous “Forbes 400” (the four hundred wealthiest persons in the United States) was $3.2 billion; but the top wealth holder had a net worth fifteen times greater than the mean for the Forbes 400 as a whole, an increase from 8.6 times larger in 1982.41

Piketty has a great deal to say about wealth, and his data are global in scope. He is interested mainly in the capital-income (wealth-income) ratio. As noted above, he uses capital and wealth interchangeably, which has led to deserved criticism by heterodox economists. His book is about the distribution of societal output and the wealth of everyone, but especially those who own the nonhuman means of production used to produce this output. The title of the book suggests a connection to the most famous book about capital, Marx’s Capital. However, Marx’s conception of capital and Piketty’s conception could not be more unalike. Piketty has no notion of capital as an exploitative social relationship. Instead, for him capital has an existence simply as private wealth (he does write about public capital, but this is an insignificant component of total social wealth). By, in effect, objectifying capital, considering it apart from the social relationship embedded within it, he marks himself well within the economic mainstream. Wealth, in his view, can generate income whether it is in the form of shares of stock in the largest corporations, a small apartment building, or a government bond. And wealth of any kind can provide enormous benefits to its owners.

Piketty thinks about wealth in terms of the number of years’ worth of income it represents. If for example, you have wealth equal to $100,000 and your annual income is $25,000, then your wealth equals four years of income. Your capital-income (or wealth-income) ratio is four. He does this for countries, using the data that he and his associates have painstakingly accumulated over many years of examining tax and various other public records. He looks at short-term fluctuations in the capital-income ratio (which he designates as β) and notes that these are considerable. For example, the boom in Japanese real estate and stock prices in the 1980s caused the ratio to rise, and the collapse of these bubbles made it fall precipitously.

However, what he is really interested in is the long-run trend in the ratio. He shows that throughout the eighteenth and nineteenth centuries, and right up until the First World War, wealth in most rich nations equaled six to seven years of national income. In the United States it was the equivalent of only about four to five years of income, for reasons that we will look at shortly. Then, over the next thirty years, the shocks of two world wars and the Great Depression caused a marked decline in the wealth-income multiple, to about two to four years.42 The causes were the destruction of physical capital, the loss of foreign holdings, and heavy taxes on the rich. In some nations, notably in Europe, much private enterprise was nationalized after the Second World War and progressive taxation funded social welfare programs, and these factors helped keep the wealth-income ratio low. However, beginning in the mid–1970s, capital made a remarkable comeback, and the ratio began to climb, and is now approaching the level that existed at the start of the First World War. Public capital has been privatized and political regimes throughout the world have been very well disposed toward the interests of wealth-holders.43

If we abstract from the special periods of wars, depression, and the social welfare state, what explains long-term trends in the capital-income ratio? Piketty outlines in Chapter 5 (“The Capital/Income Ratio Over the Long Run”) what he calls a “law of capitalism,” namely that over the long run, the capital-income ratio tends toward the quotient of the rate of saving and the rate of growth of the economy: β = s / g. As he explains in the book (and more clearly in a technical appendix to the book available online), this formula is the “steady-state” condition for a simple neoclassical growth model, such as the one developed by economist Robert Solow.44 It is significant that he chose a neoclassical growth model, one that has embedded in it very definite and not universally accepted assumptions about how the macroeconomy works, and one which assumes, for example, that there are such things as the marginal productivities of labor and of capital, and that capital and labor are reasonable substitutes for each other.45

Still, Piketty’s “law” has a certain intuitive appeal. The “weight” of “capital,” aka wealth (in terms, say, of its owners’ potential power), will be greater, other things equal, the lower an economy’s growth rate and the higher its rate of saving. Piketty finds that in the rich capitalist countries, the trend has been, and will most likely continue to be, toward relatively low growth rates and high savings rates (or, in Marxian terms, a high rate of surplus generation). This tells us that the capital-income (i.e., wealth-income) ratio will continue to rise, perhaps to levels never before seen. Low growth rates, he contends, will be the consequence mainly of low population growth rates, accentuated by low rates of technological change.46

As noted, Piketty takes into account the “catching up” achieved by countries such as China and India. He makes the point that nations with rapidly growing populations and high economic growth will be ones in which wealth accumulated in the past will not have as great an impact on how those societies operate as those in which these two types of growth are low.47 In the United States, for example, immigrants have arrived in very large numbers without much wealth, and they have had to rely upon current labor and income generation to accumulate capital. In dynamic economies, there is a churning within the wealth and income distributions, meaning that the capital-income ratio will be lower than in those where this is not true.

Piketty uses his formula β = s / g, along with an equation that defines capital’s share of national income, α = rβ (where r = the rate of return on capital and, as we have seen, β = the capital-income ratio) to show what will happen to the share of capital over time. A simple substitution yields α = r (s / g). From this, he derives his famous inequality: r > g.48 If the rate of return on capital r is greater than the growth rate of the economy g, then capital’s share of income will rise. Piketty shows that over very long periods of time, r has in fact been greater than g; in fact, this is the normal state of affairs in capitalist economies. Only during the long crisis, brought on by war and depression and the aftermath when social welfare policies helped keep r low and g high, was this not the case. And even as the capital-income ratio has risen, the fact that economies have become more capital intensive has not exerted enough downward pressure on r to push capital’s income share lower. Nor will increasingly “perfect” capital markets, brought on by rapid globalization, force r lower; in fact, the growing sophistication of financial instruments and money managers, along with the desire of poorer nations to attract capital, will keep r high. If, as Piketty thinks likely, g grows very slowly in the future, we are in for a steady rise in capital’s share of income and a steady fall in labor’s share. Increasing polarization of society, in terms of the two main social actors, workers and owners of capital, is a very likely prospect.

To make matters worse, those with the largest amounts of capital (wealth) almost always get a higher rate of return on their wealth than do those with lesser amounts. Piketty gives a telling example of this by looking at the returns garnered by the endowments of U.S. colleges and universities. He finds that there is a direct and significant correlation between the size of the endowment and the rate of return on it. Between 1980 and 2010, institutions with endowments of less than $100 million received a return of 6.2 percent, while those with riches of $1 billion and over got 8.8 percent. At the top of the heap were Harvard, Princeton, and Yale, which “earned” an average return of 10.2 percent.49 Needless to say, when those already extraordinarily rich can obtain a higher return on their money than everyone else, their separation from the rest becomes that much greater.

The research of Piketty, his associates, Wolff, and many others tells us without a doubt that income and wealth have become grotesquely unequal and are on a trajectory to become still more so. The implications of this are dire, exacerbating all manner of economic, social, environmental, and political problems. There is no way, for example, that it is possible now to say that we have anything even remotely resembling democracy in the United States, and for that matter, in any capitalist country. Rather plutocracy is now the dominant political form.

One thing we can say with certainty is that neoclassical economics does not have a viable theory of inequality, any more than it has a viable theory of unemployment. As we have emphasized throughout this article, received economics says that wages depend on worker productivity, meaning that as productivity rises, so will wages. If workers become more productive by, for example, investing in their “human capital” (getting more schooling, training, etc.), they will then add more to the employers’ revenues than existing wage rates add to costs. This increase in employer profits at current wages will supposedly cause employers to raise the demand for employees, pushing wages up .

Reality could not be more different than what neoclassical theory leads one to expect. In the United States, real weekly earnings for all workers have actually declined since the 1970s and are now more than 10 percent below their level of four decades ago. This reflects both the stagnation of wages and the growth of part-time employment.50 Even when considering real median family income that includes many two-earner households there has been a decrease of around 9 percent from 1999 to 2012.51

Indeed, the data show that while output per worker has risen considerably over the past forty years, wages have fallen far behind. Perhaps the most startling comparison is between wage and productivity gains. In a recent paper, Economic Policy Institute economist Elise Gould found that “Between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise over 80 percent of the private-sector workforce, grew just 8.0 percent. Productivity thus grew eight times faster than typical worker compensation.” This means that the gains from productivity went to capital and workers at the top of the wage scale. She also discovered that:

Between 1979 and 2007, more than 90 percent of American households saw their incomes grow more slowly than average income growth (which was pulled up by extraordinarily fast growth at the top).

By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class (households between the 20th and 80th percentiles [where most production and nonsupervisory workers reside]) reduced middle-class incomes by nearly $18,000 annually. In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.52

A 2013 report by the Federal Reserve Board of San Francisco showed that once the top 1 percent of wage and salary recipients are removed from the total, the labor share of overall national income plummets: “by 2010 the labor share of [income of] the bottom 99 percent of taxpayers had fallen to approximately 50 percent from just above 60 percent prior to the 1980s.”53 Neoclassical economics is completely incapable of explaining this sharp decline in the workers’ share of national income.

The Monopoly of Power

Piketty’s work raises the question of growing class inequality in a statistical sense without explicitly addressing either the roots of this or the question of growing class power. His work thus remains within the bounds of establishment discourse—though serving to shake up the ruling ideology with its revelations. He uses the term “upper class” for the top 10 percent of income recipients and the term “dominant class” for the top 1 percent (all those in the upper class who are not in the dominant class are referred to as the “well-to-do”). In the United States, with a total population of some 320 million—of which 260 million are adults—the top 1 percent is of considerable size: 2.6 million adults. The dominant class tends to congregate in a relatively few cities, to be concentrated in given neighborhoods, and to exercise “a prominent place in the social landscape.”54

A dramatic illustration of what Piketty means when he refers to the divergence in the social (and cultural) landscape appeared in the New York Times in August 2014, under the title “In One America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and Web Search Trends.” Those geographical locations described as “harder places to live,” associated with the lowest levels of educational attainment, household income, and life expectancy and the highest levels of unemployment, disability, and obesity were strongly correlated with Web searches for things like “free diabetic,” “antichrist,” “.38 revolver,” “ways to lower blood pressure,” “SSI disability,” and “social security checks.” While areas described as “easier places to live,” associated with the well-to-do or with the 1% itself, were strongly correlated with Internet searchers for “Canon Elph,” “baby jogger,” “baby massage,” “Machu Picchu” (and other exotic locales), “ipad applications,” “new nano,” and “dollar conversion.” We are increasingly living in a world so polarized that much of the 99% have nothing in common with the 1%.55

Piketty recognizes that the “dominant class” in the sense of the 1 percent is not really dominant; it is only when you get to the top 0.1 percent, which owns about half of what the 1 percent owns, that you begin to get at the really dominant income/wealth of the society. Thus he notes that Occupy Wall Street was not altogether wrong in contrasting the 1% to the 99% or in declaring that “We are the 99 percent!” He compares this situation to that of the French Revolution arising from the revolt of the Third Estate.56

But how does this relate to issues of class struggle and class power? What are the consequences of these realities in terms of control of corporations, the economy, the state, the culture, and the media? Piketty, though making a few tantalizing allusions, tells us next to nothing about this. Although he does not entirely avoid terms such as “class struggle,” he has very little to say about it. In fact, the nature of his analysis, which concentrates on statistical inequality and the relation between the growth of wealth and the growth of income, is far removed from the direct consideration of capital versus labor. His is an argument primarily about fairness and not social struggle—or even economic crisis/stagnation.

Piketty’s failure to relate inequality to power is not, it should be stressed, a particular failure on his part, but rather a general fault of neoclassical economics, tied to its position of ideological hegemony. “The neglect of power in mainstream economics,” as the heterodox Austrian economist Kurt Rothschild wrote in 2002, “has its main roots…in deliberate strategies to remove power questions to a subordinate position for inner-theoretic reasons,” such as the search for mathematical models with a high degree of mathematical certainty. In this respect, the messy issues dealt with in such fields as sociology and political science (or for that matter political economy) are deliberately excluded, even at the expense of realism of analysis. Moreover, part of the attraction of such pure models and the state of mind that they generate is that they reflect “the ideological preference of powerful socio-economic groups for a neoclassical type of theory,” which justifies the status quo by excluding all questions of power. As Rothschild pointedly put it: “Extremely formulated one could say that societal power promotes the study of models of powerless societies.”57

It goes without saying that Piketty’s acceptability to neoclassical economics is dependent on his avoidance of the question of inequality and power. Hence the contrast between his Capital in the Twenty-First Century and Marx’s Capital, as we observed, could hardly be greater. Moreover, it is precisely because Piketty is discussing inequality divorced from power that his analysis is inevitably disjointed and cannot approach anything like a general theory. It is not the mere recognition of inequality in itself, but the wider perception of its promotion as part of a system of power that raises questions that are dangerous to the system. Hence, the real importance of Piketty’s analysis only comes out when the implications are taken beyond what he himself, as a representative of orthodox economics, is willing or even able to address: issues of class power and monopoly power, and how these relate to overaccumulation, stagnation, and financialization.

Piketty starts with the fact that some individuals and groups of individuals arranged into percentages of the population have more income or wealth than others. He does not explain the origins of this or why, but he makes it clear that it is not simply a product of individual skill or productivity, as neoclassical economics has traditionally argued. In reality the basis of a capitalist society is the private monopoly of the capitalist class over the means of production, whereby the great majority of the population is relegated to a position in which it has nothing to sell but its labor power, i.e., its capacity to work. This sets up an extremely uneven power relationship, allowing the owners of the means of production to appropriate the greater part of the surplus produced. Far from being a description of society that pertained only to the nineteenth century, this, as Piketty helps us to understand, is probably a better description of our society today than at nearly any previous time in history. It is not difficult to discern who these owners of the means of production are: they are not so much the top 1 percent, as the top 0.1 percent of society (or even higher) in terms of income and wealth. In the United States a mere four hundred people, the Forbes 400, own approximately as much wealth as the bottom half of the population, or something like 130 million adults.58

Due to their power to appropriate the society’s surplus, which takes the form of financial wealth, and has a rate of return that, as Piketty tells us, normally grows faster than the income of society as a whole, those in the dominant class become richer both absolutely and relatively, benefitting from the upward flow of value, which seldom trickles down. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. From 1990 to 2002, for every added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (around 14,000 households in 2006) garnered an additional $18,000.59

Just as class power tends to concentrate, so does the power of the increasingly giant, oligopolistic firms which, in economic parlance, reap monopoly power, associated with barriers to entry into their industries and their ability to impose a greater price markup on prime production costs (primarily labor costs). The bigger firms, as Marx explained, tend to win out in the struggle over the smaller, while the modern credit system facilitates ever-larger mergers and takeovers, leading to the increased centralization of capital and a heightening of monopoly power.60 In 2008, the top 200 U.S. corporations accounted for 30 percent of all gross profits in the economy, up from around 21 percent in 1950. At the same time the revenues of top 500 global corporations were equal to about 40 percent of world income.61 Under these circumstances corporations, nationally and internationally, operate less as competitors than as—to borrow a term from the great conservative economist, Joseph Schumpeter—co-respecters.62 In some sectors, such as Internet Service Providers, and communications in general, we are seeing the reappearance of cartels—with the state, if anything, supporting such developments.63

Writing for the Wall Street Journal, Peter Thiel, co-founder of PayPal, declared that “Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away…. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits…. Monopoly is the condition for every successful business.” Indeed, this might even stand as the credo of today’s generalized monopoly capital.64

The class power of capital in the widest sense—as powerfully argued by economist Eric Schutz in his 2011 work, Inequality and Power: The Economics of Class—extends to all spheres of society and penetrates increasingly into the state and to civil society in general (including the media, education, all forms of entertainment).65 As Kalecki long ago pointed out, a labor party such as exists in many countries in Europe, even where it gains control of the government through popular election, is hardly likely to be in control of the state as a whole, much less the economy, finance, or media. It therefore remains subservient to those who retain the class power of capital, which controls production and through it the main organs of society.66

For Piketty himself there is no organic relation between the two main tendencies that he draws in Capital in the Twenty-First Century—the tendency for the rate of return on wealth to exceed the growth of income and the tendency toward slow growth. Nor is his analysis historical in a meaningful sense, which requires scrutiny of the changing nature of social-class relations. Increasing income and wealth inequality are not developments that he relates to mature capitalism and monopoly capital, but are simply treated as endemic to the system during most of its history.

In reality, however, capitalism matures as a system over the course of its history, as do its contradictions, which are an inescapable part of its being. Today the existence of inordinate class power coupled with ever-greater monopoly power (at both the national and global levels) are producing a more acute condition of overaccumulation at the top of society. This in turn weakens the inducement to invest, leading to a powerful tendency toward a slowdown in growth or stagnation. Under these conditions, as the system continues to seek outlets for its enormous actual and potential economic surplus, while at the same time enhancing the wealth of those at the top, it inevitably resorts to financial speculation. The result is what Summers has recently called “over-financialization,” associated with massive increases in total (primarily private) debt in relation to national income, leading to financial bubbles, one after the other, which inevitably burst.67 This dialectical relation between stagnation and financialization constitutes the primary reality defining today’s monopoly-finance capital.68

Here it is useful to recall that for Keynes the danger was not only one of secular stagnation but also the domination of the rentier. He thus called for the “euthanasia of the rentier, and consequently the euthanasia of the cumulative oppressive power of the capitalist to exploit the [artificial] scarcity-value of capital.”69 In today’s financialized capitalism, we face, as Piketty recognizes, what Keynes most feared: the triumph of the rentier.70 The “euthanasia of the cumulative oppressive power of the capitalist” is needed now more than ever. This cannot be accomplished by minor reforms, however—hence Piketty’s advocacy of what he calls a “useful utopia,” a massive tax on wealth.71

Yet, today we live in a world of global monopoly-finance capital: a system of class power, monopoly power, imperial power, and financial power. Just how unrealistic Piketty’s “useful utopia” is as a mere reform program becomes immediately apparent once we look at the class dynamics of society. It is even more apparent when we move beyond a national to an international outlook. Piketty’s data and analysis do not take him far beyond the rich countries, and hence he does not look at inequality in global North-South terms, much less recognize the reality of imperialism or a world ruled by global monopolies (multinational corporations). He therefore takes no account of the imperial transfer of value as a historical phenomenon or the consequences of this for the concentration of world capital. As Indian economist Prabhat Patnaik states in “Capitalism, Inequality, and Globalization”:

It is significant that imperialism plays no role in Piketty’s analysis, neither in explaining the growth of wealth and wealth inequalities, nor even in the analysis of past growth, or prognostication of future growth. On the contrary the book is informed by a perception according to which capitalist growth in one region…is never at the expense of the people of another region, and tends to spread from one region to another, bringing about a general improvement in the human condition. What this perception misses is that capitalist growth in the metropolis was associated not just with the perpetuation of the pre-existing state of affairs in the periphery but with a very specific form of development, which we call “underdevelopment,” which squeezed the people in an entirely new way. For instance, over the period spanning the last quarter of the nineteenth century and the first two of the twentieth (until independence), not only was there a decline in per capita real income in “British India,” but also the death of millions of people owing to famines.72

In such an imperial system, carrying down to our day, a tax on capital—Piketty’s one solution—would, as he realizes, have to be international in scope in order meaningfully to address issues of inequality and power. This then takes us inexorably to the question of a revolutionary reconstitution of society on a global level. Indeed, there is no real solution that does not require the worldwide transcendence of capital as a mode of production.

None of this of course is to deny that Piketty’s wealth tax would be a good, strategic place to start in promoting a new radical social project, since it challenges “the divine right of capital.”73 But this would require in turn a reorganization and revitalization of the class/social struggle, and in every corner of the globe. The goal must be a truly “utopian” struggle for a society of all; one that is of, by, and for the people—the 99%. Moreover, the 99% here must be understood as representing the dispossessed of the entire world, while recognizing their varying conditions. Today “members of the top percentile [among global wealth holders] are almost 2000 times richer” than the bottom 50 percent of world population.74 Issues of inequality must be seen as ubiquitous in today’s capitalism, occurring at every level, the product of imperialism as well as class, race, and gender—none of which are addressed directly in Piketty’s analysis.

Yet, despite the numerous gaps in Piketty’s argument from the standpoint of existing power relations, Capital in the Twenty-First Century embodies positive messages for social struggle in our time, which it would be a grave mistake to overlook. Significant in this respect is that he chose as the epigraph of his book a line from the Declaration of the Rights of Man and Citizen from the French Revolution: “Social Distinctions can be based only on common utility.”75 One could hardly pick a statement more opposed to the system in which we live, which seeks not the common but the individual utility. Indeed, Piketty’s saving grace, we believe, is that he cares for “the least well off,” beyond his own class. Although a social-democratic supporter of capitalism, he is also in many ways a critic of what he refers to as “the globalized patrimonial capitalism of the twenty-first century,” calling for its radical “regulation.”76 Coming from a neoclassical economist, this is little short of a revolutionary departure.

Notes

↩This is evident in recent mainstream discussions of what is called “secular” or long-term stagnation. For an analysis of this and recent trends see Fred Magdoff and John Bellamy Foster, “Stagnation and Financialization,” Monthly Review 66, no. 1 (May 2014): 1–24.
↩Michael Yates, “The Great Inequality,” Monthly Review 63, no. 10 (March 2012): 1–18; Thomas Piketty, Capital in the Twenty-First Century (Cambridge: Harvard University Press, 2014).
↩Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. 1 (1955): 1–28.
↩See John Bellamy Foster and Robert W. McChesney, The Endless Crisis (New York: Monthly Review Press, 2012), 1–21.
↩There has been no trend showing that the growing income and wealth gap has been accompanied by similarly growing education and skills gap. Neoclassical theory tells us that rising income and wealth inequality must be caused by such an increasing differential in schooling and skills. That is, those with relatively low incomes and wealth must be falling more and more behind those with relatively high incomes and wealth in terms of their skill and schooling levels. See Lawrence Mishel, “Education is Not the Cure for High Unemployment or for Income Inequality,” January 12, 2011, http://epi.org.
↩Piketty, Capital in the Twenty-First Century, 20–22.
↩An oversupply of aggregate output would lead to falling wages, interest rates and prices, which in turn would give rise to higher employment, capital spending, and increasing consumer demand. On the significance of Keynes’s critique in this area see Paul M. Sweezy, Modern Capitalism and Other Essays (New York: Monthly Review Press, 1972), 79–91.
↩John Maynard Keynes, The General Theory of Employment, Interest, and Money (London: Macmillan, 1936), 289.
↩John Kenneth Galbraith, The Age of Uncertainty (Boston: Houghton Mifflin, 1977), 216.
↩Keynes, The General Theory, 307–8; Sweezy, Modern Capitalism and Other Essays, 80.
↩Keynes, General Theory, 307; Alvin H. Hansen, Full Recovery or Stagnation (New York: W.W. Norton, 1938), 303–18; Sweezy, Modern Capitalism, 79–83.
↩Michał Kalecki, Theory of Economic Dynamics (London: George Allen and Unwin, 1954); Josef Steindl, Maturity and Stagnation in American Capitalism (New York: Monthly Review Press, 1976); Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). It is worth noting that Hansen took Steindl’s theory seriously, modifying some of his own assumptions. See Alvin H. Hansen, “The Stagnation Thesis,” in American Economic Association, ed., Readings in Fiscal Policy (Homewood, IL: Richard D. Irwin, Inc., 1955), 540–57.
↩Lawrence Summers, “Speech to the IMF Fourteenth Annual Research Conference,” November 8, 2013, http://larrysummers.com.
↩Magdoff and Foster, “Stagnation and Financialization.”
↩Feldstein quoted in “Grounded by an Income Gap,” New York Times, December 15, 2001, http://nytimes.com.
↩Lucas quoted in Paul Krugman, “Why We’re in a New Gilded Age,” New York Review of Books, May 8, 2014, http://nybooks.com.
↩The example outlined in this and the preceding paragraph are based upon the critique of neoclassical wage theory presented in Eric A. Schutz, Inequality and Power: The Economics of Class (New York: Routledge, 2011). One of the authors presented this example in a slightly different way, in Yates, “The Great Inequality.”
↩A search in the New York Times archives show that between January 1, 2007 and January 1, 2014, there are 4,260 articles listed under the term “income inequality.” Between January 1, 1977 and January 1, 2007, there are only 2,660 articles listed under this term.
↩Edward N. Wolff, Top Heavy (New York: New Press, 2002); Economic Policy Institute, State of Working America, http://stateofworkingamerica.org; Branko Milanovic, The Haves and Have-Nots (New York: Basic Books, 2011); James K. Galbraith, Created Unequal (New York: Free Press, 1998), Inequality and Instability (Oxford: Oxford University Press, 2012).
↩See “The World Top Incomes Database,” http://topincomes.g-mon.parisschoolofeconomics.eu.
↩The Wall Street Journal used Amazon’s “popular highlights” page associated with its Kindle e-book device to get an idea of how much books were being read. For every book, the top five most highlighted passages by Kindle readers are listed. All five pages most highlighted for Capital in the Twenty-First Century, which at that time had been out for three months to wide acclaim, were in the first twenty-six pages, suggesting that the beginning of the book (2.4 percent of the whole) has had the most impact on Kindle readers, and are the most closely read. Although one cannot draw much in the way of conclusions from this, it is undoubtedly here, in the beginning, that Piketty puts his argument and conclusions most clearly and forcefully, minus much of the detailed elaboration that follows. “The Summer’s Most Unread Book Is…,” Wall Street Journal, July 3, 2014, http://online.wsj.com.
↩Karl Marx, Capital, vol. 1 (London: Penguin, 1976), 97. Two other what we might call “empirical economists” are David Card and Alan Krueger, whose book, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1997), demolished the neoclassical “law” that raising the minimum wage leads inevitably to higher unemployment. Their book led to such a severe backlash from their neoclassical brethren that they stopped doing minimum wage research. Piketty’s findings have also been attacked, but he has the great advantage of teaching in France, where economists are not tied as tightly into the establishment—and required to toe the line—as they are in the United States, and where there is still a strong sense of social justice within the part of the working class. He says, “Hence they [economists] must set aside their contempt for other disciplines and their absurd claim to greater scientific objectivity, despite the fact that they know almost nothing about anything”; 32. It is difficult to imagine an orthodox economist in the United States saying this.
↩Piketty, Capital in the Twenty-First Century, 13–16, 20–22.
↩Piketty, Capital in the Twenty-First Century, 25–27.
↩Piketty, Capital in the Twenty-First Century, 72–74, 93–96, 353–58. It should be noted that Piketty likes to work with big data sets encompassing large parts of the world, and often bases his assumptions on data stretching back to the eighteenth century or earlier. Although he sees the Industrial Revolution as a turning point, he often skates over true historical analysis, often arguing as if all the societies covered by his data on all continents were essentially the same, and capitalist in structure from approximately 1700 on. Such crude practices naturally undermine his conclusions on long-term economic growth.
↩Piketty, Capital in the Twenty-First Century, 440.
↩Joseph Stiglitz, The Price of Inequality (New York: W.W. Norton, 2012), 30.
↩Piketty sometimes seems to endorse marginal productivity arguments in his book, as, for example, when he writes about the marginal productivity of capital in Chapter 6 and of labor in Chapter 9. In the latter case, he argues that over the long run education plays a very important role in determining individual worker productivity and income. However, he places so many qualifications on the marginal productivity theory that it is difficult to believe that he thinks it has much merit.
↩For Piketty “capital” is simply wealth, whether land, money, financial assets, or jewelry. Piketty, Capital in the Twenty-First Century, 45–50; James K. Galbraith, “Kapital for the Twenty-First Century?,” Dissent, Spring 2014, http://dissentmagazine.org.
↩The consequences of effacing the concept of capital with the concept of wealth are profound, but space does not allow their detailed treatment here. It took Marx three whole volumes to define the meaning of “capital” and if time had allowed he would undoubtedly have provided even more volumes. Suffice it to say that not only does Piketty eschew a social concept of capital, as in Marx’s Capital, but by confusing capital with wealth he also conflates capital as invested surplus (that is, capital accumulation or investment in new productive capacity as it is usually understood in economics) with financial speculation or what Marx called “fictitious capital.” Hence, while Piketty provides genuine insights by focusing on wealth versus income, his approach to capital as wealth is in many ways objectionable even in terms of standard economics.
↩Piketty indicates in a number of places his understandable difficulty in reading Marx. This is a problem that Sweezy used to argue faced any establishment economist, once inculcated into neoclassical marginal productivity theory, since the Marxian perspective requires a fundamentally different outlook and set of analytical tools. It is therefore not surprising that Piketty demonstrates at times penetrating insights with respect to Marx, such as his comments on “the principle of infinite accumulation,” coupled with such elementary errors as the notion that Marx failed to perceive the growth of productivity under capitalism, or that he saw the economy heading toward zero productivity growth. All of this encourages him to discount Marx’s economic vision as simply “apocalyptic.” Such errors seem to be the result of trying to model Marx in neoclassical terms. Although he has a lot to say about Marx, Piketty clearly has not gotten very far into Marx’s system. See Paul M. Sweezy, “Interview,” Monthly Review 38, no. 11 (April 1987), 3; Piketty, Capital in the Twenty-First Century, 7–11, 27, 227–30, 565; Thomas Piketty, “Interview,” New Republic, May 5, 2014, http://newrepublic.com.
↩Piketty, Capital in the Twenty-First Century, 27, 573.
↩Piketty, Capital in the Twenty-First Century, 21, 252–55, 515–18.
↩Martin Feldstein, “Piketty’s Numbers Don’t Add Up,” Wall Street Journal, May 14, 2014, http://online.wsj.com.
↩Piketty, Capital in the Twenty-First Century, 292–97, see especially figures 8.5 and 8.6. The original articles and data backing up the book are to be found in the Top Incomes Database, http://topincomes.parisschoolofeconomics.eu, and in the online “Technical Appendix of the book, Capital in the Twenty-First Century,” http://piketty.pse.ens.fr.
↩Piketty, Capital in the Twenty-First Century, 315–21.
↩Piketty, Capital in the Twenty-First Century, 274–76.
↩Piketty, Capital in the Twenty-First Century, 260–62, 418–21.
↩Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle Class,” NBER Working Paper No. 18559, November 2012, Table 4, http://ecineq.org.
↩Piketty, Capital in the Twenty-First Century, 257.
↩Sylvia A. Allegretto, “The State of Working America’s Wealth, 2011: Through Volatility and Turmoil, the Gap Widens,” Economic Policy Institute, Briefing Paper #292, March 24, 2011, Figure D, http://epi.org.
↩Piketty, Capital in the Twenty-First Century, 164–71.
↩Piketty, Capital in the Twenty-First Century, 170–72.
↩Piketty, Capital in the Twenty-First Century, 166–70, 231, “Technical Appendix of the book, Capital in the Twenty-First Century.”
↩For a critique of Solow’s neoclassical growth model and a comparison with the earlier Keynesian growth models of Roy Harrod and Evsey Domar, see E.K. Hunt and Mark Lautzenheiser, History of Economic Thought: A Critical Perspective (Armonk, NY: M.E. Sharpe, 2011), 450–57. For a critique of Piketty’s analysis itself in this respect see Prabhat Patnaik, “Capitalism, Inequality and Globalization: Thomas Piketty’s ‘Capital in the Twenty-First Century,’” International Development Economic Associates (IDEAs), July 18, 2014, http://ideaswebsite.org.
↩Although Piketty does not explain the long-term slow growth (below 1.5 percent per capita) that he says is closer to the norm for a capitalist economy, he does point to demographic factors and to technological innovation as guiding factors—pointing to Robert Gordon’s notion of declining innovation in order partly to explain the present economic slowdown. See Piketty, Capital in the Twenty-First Century, 94–95.
↩Piketty, Capital in the Twenty-First Century, 83–87.
↩Piketty, Capital in the Twenty-First Century, 52–54, 166–67.
↩Piketty, Capital in the Twenty-First Century, 447–52, see especially Table 12.2.
↩Economic Report of the President, 2014, Table B-15.
↩Calculated from the St. Louis FRED database, Real Median Household Income in the United States (MEHOINUSA672N). See also Fred Magdoff and John Bellamy Foster, “The Plight of the U.S Working Class,” Monthly Review 65, no. 8 (January 2014): 15–20.
↩Elise Gould, “Why America’s Workers Need Faster Wage Growth—And What We Can Do About It,” EPI Briefing Paper #382, August 27, 2014, http://epi.org.
↩Michael W.L. Elsby, Bart Hobijn, and Aysegul Sahin, “The Decline of the U.S. Labor Share,” Federal Reserve Board of San Francisco, Working Paper, 2013-27, 2013, http://frbsf.org.
↩Piketty, Capital in the Twenty-First Century, 252–55.
↩“In One America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and Web Search Trends,” New York Times, August 18, 2014, http://nytimes.com.
↩Piketty, Capital in the Twenty-First Century, 254.
↩Kurt W. Rothschild, “The Absence of Power in Contemporary Economic Theory,” Journal of Socio-Economics 31 (2002): 437–40.
↩Arthur B. Kennickell, “Ponds and Streams: Wealth and Income in the U.S. 1989 to 2007,” Federal Reserve Board Working Paper 2009–13, 55, 63, http://federalreserve.gov; Matthew Miller and Duncan Greeenberg, ed., “The Richest People in America” (2009), Forbes, http://forbes.com.
↩Correspondents of the New York Times, Class Matters (New York: New York Times Books, 2005), 186.
↩Marx, Capital, vol. 1, 777–78.
↩For data and analysis see Foster and McChesney, The Endless Crisis, 67–77.
↩Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper and Row, 1942), 90. Schumpeter referred here to such firms as “corespective.”
↩Robert W. McChesney, Digital Disconnect (New York: New Press, 2013), 113–20, 138–40. It should be noted that in emphasizing the role of monopoly capital in contemporary capitalism, and Piketty’s failure to incorporate this into his analysis, we are not thereby adopting a position like Stiglitz, who in his criticism of Piketty says it is not capitalism that is the problem but imperfect competition. No argument could be more ahistorical or absurd: a product of abstracted compartmentalization of neoclassical theory that thinks that capital and power can be separated. Piketty himself is free of this kind of illogic. See Joseph Stiglitz, “Phony Capitalism,” Harpers, September 2014, 14–16.
↩Peter Thiel, “Competition is for Losers,” Wall Street Journal, September 12, 2014, http://online.wsj.com. On generalized monopoly capital see Samir Amin, The Implosion of Contemporary Capitalism (New York: Monthly Review Press, 2013).
↩Eric A. Schutz, Inequality and Power (New York: Routledge, 2011).
↩Michał Kalecki, Selected Essays on Economic Planning (Cambridge: Cambridge University Press, 1986), 19–24.
↩Lawrence H. Summers, “The Inequality Puzzle,” Democracy 33 (Summer 2014), http://democracyjournal.org. On the sources of financialization, see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis (New York: Monthly Review Press, 2009), Fred Magdoff and Michael D. Yates, The ABCs of the Economic Crisis (New York: Monthly Review Press, 2009), and Costas Lapavitsas, Profiting Without Production (London: Verso, 2013).
↩Foster and Magdoff, The Great Financial Crisis, 63–76; Foster and McChesney, The Endless Crisis, 49–63.
↩Keynes, The General Theory, 376.
↩Piketty, Capital in the Twenty-First Century, 422–24.
↩Piketty, Capital in the Twenty-First Century, 515.
↩Patnaik, “Capitalism, Inequality and Globalization,” 5. In his discussion of forces leading to less inequality Piketty, Capital in the Twenty-First Century, 21, stresses the dissemination of “knowledge and skills.” He says this applies especially to the convergence of incomes between nations. However, even supposing that per capita incomes across nations are becoming more equal, this says nothing about either the transfer of incomes from poor nations to rich ones or the convergence of incomes within any particular country. Incomes have been becoming more unequal in China over the past few decades, but there has been a convergence between per capita income in China and per capita income in the rich countries. He appears to take the per capita income convergence as unalloyed good, but the issue is a great deal more complicated, as one would expect a sophisticated analyst of inequality like Piketty to recognize.
↩Marjorie Kelly, The Divine Right of Capital (San Francisco: Berrett-Koehler, 2003).
↩James B. Davies, Susanna Sandström, Anthony Shorrocks, and Edward N. Wolff, “The World Distribution of Household Wealth,” in James B. Davies, ed., Personal Wealth from a Global Perspective (Oxford: Oxford University Press, 2008), 402.
↩Piketty, Capital in the Twenty-First Century, 1, 479–480. A society in which this is true could not be a capitalist society. In a gathering and hunting society, a superior hunter may have social distinction, but he will not get a larger share of food than anyone else. His social distinction is therefore based on his serving the common good, by increasing the group’s food supply. Nothing comparable exists in capitalism, except in the ideological constructs of its apologists, especially neoclassical economists. Piketty’s notion of how modern capitalist societies function can at times appear painfully naïve. His wealth tax, he says, must be democratically debated, and the data he and his colleagues have amassed will make such debate possible. Yet, the very increase in the social “weight” of those at the top of the wealth distribution corresponds with so much political “weight” that it is reasonable to ask just how democratic debate, much less decision-making, is possible. His support for serious, even radical regulation of “global patrimonial capitalism” is commendable, but his faith in the capitalist version of democracy is not.
↩Piketty, Capital in the Twenty-First Century, 571–77.

Our Friends in Riyadh

https://www.jacobinmag.com/2014/10/our-man-in-riyadh/
Our Friends in Riyadh

by Toby C. Jones

The United States is allies with Saudi Arabia not in spite of the country’s authoritarian political order, but because of it.

Last Wednesday, a criminal court in Saudi Arabia sentenced Shia cleric Sheikh Nimr al-Nimr, one of the kingdom’s most visible political dissidents, to death. Saudi authorities have justified the verdict in terms of national security. Convicted on vague charges of sedition, Al-Nimr was tried in a court established to judge cases of terrorism.

As is often the case in Saudi Arabia, what passes for the rule of law and national security is more often the theater of the absurd. The execution verdict, which could be commuted to a lengthy prison sentence, is the product of a system based on political exclusion, a system that sacrifices human beings to maintain centralized authority and elite privilege.

Al-Nimr was arrested and subsequently sentenced not because he is a danger to Saudi society, but because he has long been a critic of oppression, has agitated against sectarian discrimination, and led protests demanding reforms to an unjust political order. Al-Nimr has been a prominent figure in supporting what has been a largely unseen, but nevertheless persistent protest movement in the predominantly Shiite communities of eastern Saudi Arabia.

Since 2011, shortly after citizens mobilized against the al-Khalifa in neighboring Bahrain, Saudi Shiites also took to the streets. In response, the authorities have cracked down brutally, criminalizing a broad range of activism, aggressively policing Shiite communities, and chasing down, arresting, or killing scores of activists.

Al-Nimr only poses a threat to the regime itself. The state’s repression, cloaked in the language of security and sedition, is a weak effort to mystify this fundamental fact. Given the stakes of expressing anger at the regime, particularly for the Shiite community, it is noteworthy that street protests have continued daily since the sentence against al-Nimr.

Of course, even casual observers of Saudi Arabian politics are likely unsurprised by the decision to execute a prominent Shia cleric. After all, the kingdom is widely believed to be a center of religious extremism and sectarian ferment. And it is certainly true that anti-Shiism has a history in Saudi Arabia.

Shiites, who make up as much as 15 percent of the Saudi population, have been targeted historically by both religious zealots and a central government tantamount to an imperial regime. The community has faced systematic discrimination and exclusion since the imperial expansion of the Al-Saud from central Arabia in the early twentieth century.

But sectarian pathologies, even in Saudi Arabia, have particular histories. And they are hardly as widespread as we might assume. It is certainly the case that discriminatory sentiment has become more entrenched in the last generation, but the worst varieties of anti-Shiism, especially those advocating violence and supportive of the regionalization of a Sunni-Shiite war, are a small, but powerful minority.

Anti-Shiism today is not so much the product of a retrograde or orthodox interpretation of Islam — widely labeled Wahhabism — as it is the convergence of several political forces, the most important of which is a vulnerable state.

Confronted by a number of internal and external threats — the Iranian pursuit of influence in the Gulf; the rise of Shiite power in post-invasion Iraq; the uprising in Bahrain, Saudi Arabia’s satellite state; and most importantly, the rise of a range of domestic challenges to Saudi authority since 2003, including criticism of deep state corruption and the absence of political rights — leaders in Riyadh have responded by fomenting discriminatory anti-Shiism. Rather than broadening participation or overturning inequalities, the regime’s impulse has been to pursue the politics of sectarian escalation.

Seen this way, the verdict against al-Nimr is not so much about national security or a reflection of deeply conservative, anti-Shiite sentiment as it is an indication of the regime’s vulnerability.

It is tempting to say that in threatening to execute al-Nimr the state seeks to dissuade other Shiite dissidents from challenging its authority. This is certainly true. But the regime is also throwing red meat to the worst reactionaries in its midst, engaging in the politics and practice of distraction, and, providing political legitimacy for the strident and virulent forms of sectarianism that have settled in across the region.  The obvious effect is that anti-Shiism, both at home and abroad, has and will continue to gain greater currency, as it seemingly has with the rise of the Islamic State in Iraq and Syria (ISIS). More subtly, the Saudi gambit is also based on a clear understanding that other potential forms of dissent — against charges of corruption or frustration at what is a heavy-handed security state — can be deflected or set aside by stoking anti-Shiism and by sacrificing Shiite bodies.

The sectarianization of Saudi politics is also political-economic and bound up in the kingdom’s “special relationship” with the United States. Since the uprising in Bahrain in 2011, United States has continued to support the autocratic Arab regimes in the Gulf rather than democracy or human rights. Justifications include priorities around “security,” the need to contain Iran, and ensuring that oil flows from the Gulf to global markets.

With these priorities in mind, it is unlikely that American officials will do much to challenge Riyadh on either al-Nimr’s verdict or try to alter its sectarian behavior more generally. Critics have called on the United States to rethink its strategic ties to Riyadh. But doing so would require confronting not only the contradictions in American policy, especially given that it is close to a Saudi state that supported the rise of ISIS, even if indirectly, even while it now claims to be committed to the Islamic State’s destruction.

In any case, the United States’ unwillingness to confront Saudi Arabia’s role in ISIS’s rise, aside from comments from Secretary of State John Kerry that seemed to acknowledge this, enables the kingdom’s contradictory behavior. Whatever the limits of American power, the plain reality is that Washington has never meaningfully pressed the Saudis on their complicity in the spread of post-2003 sectarianism or anti-Shiite terrorism.

Beyond these contradictions, it is important to keep in sight the role that the United States government and that American capital have played in the rise of autocracy and discriminatory politics in Saudi Arabia in the first place.

Al-Nimr comes from a small village called Awamiyya in Saudi Arabia’s Eastern Province, a place where American influence runs deep. It is in the east where almost all of the kingdom’s Shiite community lives, and where almost all of its oil sits. For a regime worried about internal threats, Shiite challenges to power are meaningful not only for their content, but also because of their location. The US government and American capital know this all very well.

Although American political and corporate interests surrendered direct control of Saudi Arabia’s oil resources in the early 1980s, they were present in the eastern province, in and around Shiite communities, from the late 1930s through much of the twentieth century.

Fearful of politically mobilized Saudi labor in the mid twentieth century, the Arabian American Oil Company (which was known to employ CIA officials) coordinated closely with Saudi leaders from the 1940s until the 1970s in building a centralized, discriminatory political order that was anti-democratic, anti-labor, and that sought to create disciplined and docile bodies in a place where the al-Saud lacked much in the way of political legitimacy. The very political order that Saudi authorities seek to shore up by way of show trials and capital punishment is the legacy of this twentieth century cooperation.

American policymakers no longer think in terms of the interests of an American oil company that controls Saudi oil. But its practical and political economic interests have changed very little. Since the late 1970s, in fact, these connections have proliferated, most importantly through weapons sales and the entanglement of the American military-industrial complex with Saudi oil wealth. There is no greater engine for the recycling of Saudi and Gulf Arab petrodollars than massive and expensive weapons systems. These sales are largely justified in the language of security and by invoking regional threats like Saddam Hussein and whatever regime sits in Tehran. The reality, though, is that they are hugely profitable.

While it has sometimes bristled at American policy over the last decade, Riyadh remains committed to its relationship with Washington. The opposite is also true. American policymakers continue to see Saudi Arabia as indispensable not because it has shown itself willing to change or develop a more inclusive and tolerant political order, but because it does not.

To push for democracy in Saudi Arabia, or even simply a more critical approach to the ways that Riyadh’s domestic political maneuvering courts regional catastrophe, would be to open up the possibility of a government that wouldn’t subordinate the interests of its citizens to American energy needs. That’s a risk the US government and capital aren’t willing to take.

The Global 1%: Exposing the Transnational Ruling Class

http://www.projectcensored.org/top-stories/articles/the-global-1-exposing-the-transnational-ruling-class/

The Global 1%: Exposing the Transnational Ruling Class

Censored Notebook Aug 13, 2012
by Peter Phillips and Kimberly Soeiro
__________________________

Abstract: This study asks Who are the the world’s 1 percent power elite? And to what extent do they operate in unison for their own private gains over benefits for the 99 percent? We examine a sample of the 1 percent: the extractor sector, whose companies are on the ground extracting material from the global commons, and using low-cost labor to amass wealth. These companies include oil, gas, and various mineral extraction organizations, whereby the value of the material removed far exceeds the actual cost of removal.We also examine the investment sector of the global 1 percent: companies whose primary activity is the amassing and reinvesting of capital. This sector includes global central banks, major investment money management firms, and other companies whose primary efforts are the concentration and expansion of money, such as insurance companies. Finally, we analyze how global networks of centralized power—the elite 1 percent, their companies, and various governments in their service—plan, manipulate, and enforce policies that benefit their continued concentration of wealth and power. We demonstrate how the US/NATO military-industrial-media empire operates in service to the transnational corporate class for the protection of international capital in the world.

___________________________

The Occupy Movement has developed a mantra that addresses the great inequality of wealth and power between the world’s wealthiest 1 percent and the rest of us, the other 99 percent. While the 99 percent mantra undoubtedly serves as a motivational tool for open involvement, there is little understanding as to who comprises the 1 percent and how they maintain power in the world. Though a good deal of academic research has dealt with the power elite in the United States, only in the past decade and half has research on the transnational corporate class begun to emerge.[i]

Foremost among the early works on the idea of an interconnected 1 percent within global capitalism was Leslie Sklair’s 2001 book, The Transnational Capitalist Class.[ii] Sklair believed that globalization was moving transnational corporations (TNC) into broader international roles, whereby corporations’ states of orgin became less important than international argreements developed through the World Trade Organization and other international institutions. Emerging from these multinational corporations was a transnational capitalist class, whose loyalities and interests, while still rooted in their corporations, was increasingly international in scope. Sklair writes:

The transnational capitalist class can be analytically divided into four main fractions: (i) owners and controllers of TNCs and their local affiliates; (ii) globalizing bureaucrats and politicians; (iii) globalizing professionals; (iv) consumerist elites (merchants and media). . . . It is also important to note, of course, that the TCC [transnational corporate class] and each of its fractions are not always entirely united on every issue. Nevertheless, together, leading personnel in these groups constitute a global power elite, dominant class or inner circle in the sense that these terms have been used to characterize the dominant class structures of specific countries.[iii]

Estimates are that the total world’s wealth is close to $200 trillion, with the US and Europe holding approximately 63 percent. To be among the wealthiest half of the world, an adult needs only $4,000 in assets once debts have been subtracted. An adult requires more than $72,000 to belong to the top 10 percent of global wealth holders, and more than $588,000 to be a member of the top 1 percent.  As of 2010, the top 1 percent of the wealthist people in the world had hidden away between $21 trillion to $32 trillion in secret tax exempt bank accounts spread all over the world.[iv] Meanwhile, the poorest half of the global population together possesses less than 2 percent of global wealth.[v] The World Bank reports that, in 2008, 1.29 billion people were living in extreme poverty, on less than $1.25 a day, and 1.2 billion more were living on less than $2.00 a day.[vi] Starvation.net reports that 35,000 people, mostly young children, die every day from starvation in the world.[vii] The numbers of unnecessary deaths have exceeded 300 million people over the past forty years. Farmers around the world grow more than enough food to feed the entire world adequately. Global grain production yielded a record 2.3 billion tons in 2007, up 4 percent from the year before—yet, billions of people go hungry every day. Grain.org describes the core reasons for ongoing hunger in a recent article, “Corporations Are Still Making a Killing from Hunger”: while farmers grow enough food to feed the world, commodity speculators and huge grain traders like Cargill control global food prices and distribution.[viii] Addressing the power of the global 1 percent—identifying who they are and what their goals are—are clearly life and death questions.

It is also important to examine the questions of how wealth is created, and how it becomes concentrated. Historically, wealth has been captured and concentrated through conquest by various powerful enities. One need only look at Spain’s appropriation of the wealth of the Aztec and Inca empires in the early sixteenth century for an historical example of this process. The histories of the Roman and British empires are also filled with examples of wealth captured.

Once acquired, wealth can then be used to establish means of production, such as the early British cotton mills, which exploit workers’ labor power to produce goods whose exchange value is greater than the cost of the labor, a process analyzed by Karl Marx in Capital.[ix] A human being is able to produce a product that has a certain value. Organized business hires workers who are paid below the value of their labor power. The result is the creation of what Marx called surplus value, over and above the cost of labor. The creation of surplus value allows those who own the means of production to concentrate capital even more. In addition, concentrated capital accelerates the exploition of natural resources by private entrepreneurs—even though these natural resources are actually the common heritage of all living beings.[x]

In this article, we ask: Who are the the world’s 1 percent power elite? And to what extent do they operate in unison for their own private gains over benefits for the 99 percent? We will examine a sample of the 1 percent: the extractor sector, whose companies are on the ground extracting material from the global commons, and using low-cost labor to amass wealth. These companies include oil, gas, and various mineral extraction organizations, whereby the value of the material removed far exceeds the actual cost of removal.

We will also examine the investment sector of the global 1 percent: companies whose primary activity is the amassing and reinvesting of capital. This sector includes global central banks, major investment money management firms, and other companies whose primary efforts are the concentration and expansion of money, such as insurance companies.

Finally, we analyze how global networks of centralized power—the elite 1 percent, their companies, and various governments in their service—plan, manipulate, and enforce policies that benefit their continued concentration of wealth and power.

The Extractor Sector: The Case of Freeport-McMoRan (FCX)

Freeport-McMoRan (FCX) is the world’s largest extractor of copper and gold. The company controls huge deposits in Papua, Indonesia, and also operates in North and South America, and in Africa. In 2010, the company sold 3.9 billion pounds of copper, 1.9 million ounces of gold, and 67 million pounds of molybdenum. In 2010, Freeport-McMoRan reported revenues of $18.9 billion and a net income of $4.2 billion.[xi]

The Grasberg mine in Papua, Indonesia, employs 23,000 workers at wages below three dollars an hour. In September 2011, workers went on strike for higher wages and better working conditions. Freeport had offered a 22 percent increase in wages, and strikers said it was not enough, demanding an increase to an international standard of seventeen to forty-three dollars an hour. The dispute over pay attracted local tribesmen, who had their own grievances over land rights and pollution; armed with spears and arrows, they joined Freeport workers blocking the mine’s supply roads.[xii] During the strikers’ attempt to block busloads of replacement workers, security forces financed by Freeport killed or wounded several strikers.

Freeport has come under fire internationally for payments to authorities for security. Since 1991, Freeport has paid nearly thirteen billion dollars to the Indonesian government—one of Indonesia’s largest sources of income—at a 1.5 percent royalty rate on extracted gold and copper, and, as a result, the Indonesian military and regional police are in their pockets. In October 2011, the Jakarta Globe reported that Indonesian security forces in West Papua, notably the police, receive extensive direct cash payments from Freeport-McMoRan. Indonesian National Police Chief Timur Pradopo admitted that officers received close to ten million dollars annually from Freeport, payments Pradopo described as “lunch money.” Prominent Indonesian nongovernmental organization Imparsial puts the annual figure at fourteen million dollars.[xiii] These payments recall even larger ones made by Freeport to Indonesian military forces over the years which, once revealed, prompted a US Security and Exchange Commission investigation of Freeport’s liability under the United States’ Foreign Corrupt Practices Act.

In addition, the state’s police and army have been criticized many times for human rights violations in the remote mountainous region, where a separatist movement has simmered for decades. Amnesty International has documented numerous cases in which Indonesian police have used unnecessary force against strikers and their supporters. For example, Indonesian security forces attacked a mass gathering in the Papua capital, Jayapura, and striking workers at the Freeport mine in the southern highlands. At least five people were killed and many more injured in the assaults, which shows a continuing pattern of overt violence against peaceful dissent. Another brutal and unjustified attack on October 19, 2011, on thousands of Papuans exercising their rights to assembly and freedom of speech, resulted in the death of at least three Papuan civilians, the beating of many, the detention of hundreds, and the arrest of six, reportedly on treason charges.[xiv]

On November 7, 2011, the Jakarta Globe reported that “striking workers employed by Freeport-McMoRan Copper & Gold’s subsidiary in Papua have dropped their minimum wage increase demands from $7.50 to $4.00 an hour, the All-Indonesia Workers Union (SPSI) said.”[xv] Virgo Solosa, an official from the union, told the Jakarta Globe that they considered the demands, up from the (then) minimum wage of $1.50 an hour, to be “the best solution for all.”

Workers at Freeport’s Cerro Verde copper mine in Peru also went on strike around the same time, highlighting the global dimension of the Freeport confrontation. The Cerro Verde workers demanded pay raises of 11 percent, while the company offered just 3 percent.

The Peruvian strike ended on November 28, 2011.[xvi] And on December 14, 2011, Freeport-McMoRan announced a settlement at the Indonesian mine, extending the union’s contract by two years. Workers at the Indonesia operation are to see base wages, which currently start at as little as $2.00 an hour, rise 24 percent in the first year of the pact and 13 percent in the second year. The accord also includes improvements in benefits and a one-time signing bonus equivalent to three months of wages.[xvii]

In both Freeport strikes, the governments pressured strikers to settle. Not only was domestic militrary and police force evident, but also higher levels of international involvement. Throughout the Freeport-McMoRan strike, the Obama administration ignored the egregious violation of human rights  and instead advanced US–Indonesian military ties. US Secretary of Defense Leon Panetta, who arrived in Indonesia in the immediate wake of the Jayapura attack, offered no criticism of the assault and reaffirmed US support for Indonesia’s territorial integrity. Panetta also reportedly commended Indonesia’s handling of a weeks-long strike at Freeport-McMoRan.[xviii]

US President Barack Obama visited Indonesia in November 2011 to strengthen relations with Jakarta as part of Washington’s escalating efforts to combat Chinese influence in the Asia–Pacific region. Obama had just announced that the US and Australia would begin a rotating deployment of 2,500 US Marines to a base in Darwin, a move ostensibly to modernize the US posture in the region, and to allow participation in “joint training” with Australian military counterparts. But some speculate that the US has a hidden agenda in deploying marines to Australia. The Thai newspaper The Nation has suggested that one of the reasons why US Marines might be stationed in Darwin could be that they would provide remote security assurance to US-owned Freeport-McMoRan’s gold and copper mine in West Papua, less than a two-hour flight away.[xix]

The fact that workers at Freeport’s Sociedad Minera Cerro Verde copper mine in Peru were also striking at the same time highlights the global dimension of the Freeport confrontation. The Peruvian workers are demanding pay rises of eleven percent, while the company has offered just three percent. The strike was lifted on November 28, 2011.[xx]

In both Freeport strikes, the governments pressured strikers to settle. Not only was domestic militrary and police force evident, but also higher levels of international involvement. The fact that the US Secretary of Defense mentioned a domestic strike in Indonesa shows that the highest level of power are in play on issues affecting the international corporate 1 percent and their profits.

Public opinion is strongly against Freeport in Indonesia. On August 8, 2011, Karishma Vaswani of the BBC reported that “the US mining firm Freeport-McMoRan has been accused of everything from polluting the environment to funding repression in its four decades working in the Indonesian province of Papau. . . . Ask any Papuan on the street what they think of Freeport and they will tell you that the firm is a thief, said Nelels Tebay, a Papuan pastor and coordinator of the Papua Peace Network.”[xxi]

Freeport strikers won support from the US Occupy movement. Occupy Phoenix and East Timor Action Network activists marched to Freeport headquarters in Phoenix on October 28, 2011, to demonstrate against the Indonesian police killings at Freeport-McMoRan’s Grasberg mine.[xxii]

Freeport-McMoRan (FCX) chairman of the board James R. Moffett owns over four million shares with a value of close to $42.00 each. According to the FCX annual meeting report released in June 2011, Moffett’s annual compensation from FCX in 2010 was $30.57 million. Richard C. Adkerson, president of the board of FCX, owns over 5.3 million shares. His total compensation in was also $30.57 million in 2010 Moffett’s and Adkerson’s incomes put them in the upper levels of the world’s top 1 percent. Their interconnectness with the highest levels of power in the White House and the Pentagon, as indicated by the specific attention given to them by the US secretary of defense, and as suggested by the US president’s awareness of their circumstances, leaves no doubt that Freeport-MacMoRan executives and board are firmly positioned at the highest levels of the transnational corporate class.

Freeport-McMoRan’s Board of Directors

James R. Moffett—Corporate and policy affiliations: cochairman, president, and CEO of McMoRan Exploration Co.; PT Freeport Indonesia; Madison Minerals Inc.; Horatio Alger Association of Distinguished Americans; Agrico, Inc.; Petro-Lewis Funds, Inc.; Bright Real Estate Services, LLC; PLC–ALPC, Inc.; FM Services Co.

Richard C. Adkerson—Corporate and policy affiliations: Arthur Anderson Company; chairman of International Council on Mining and Metals; executive board of the International Copper Association, Business Council, Business Roundtable, Advisory Board of the Kissinger Institute, Madison Minerals Inc.

Robert Allison Jr.—Corporate affiliations: Anadarko Petroleum (2010 revenue: $11 billion); Amoco Projection Company.

Robert A. Day—Corporate affiliations: CEO of W. M. Keck Foundation (2010 assets: more than $1 billion); attorney in Costa Mesa, California.

Gerald J. Ford—Corporate affiliations: Hilltop Holdings Inc, First Acceptance Corporation, Pacific Capital Bancorp (Annual Sales $13 billion), Golden State Bancorp, FSB (federal savings bank that merged with Citigroup in 2002) Rio Hondo Land & Cattle Company (annual sales $1.6 million), Diamond Ford, Dallas (sales: $200 million), Scientific Games Corp., SWS Group (annual sales: $422 million); American Residential Cmnts LLC.

H. Devon Graham Jr.—Corporate affiliations: R. E. Smith Interests (an asset management company; income: $670,000).

Charles C. Krulak—Corporate and governmental affiliations: president of Birmingham-South College; commandant of the Marine Corp, 1995–1999; MBNA Corp.; Union Pacific Corporation (annual sales: $17 billion); Phelps Dodge (acquired by FCX in 2007).

Bobby Lee Lackey—Corporate affiliations: CEO of McManusWyatt-Hidalgo Produce Marketing Co.

Jon C. Madonna—Corporate affiliations: CEO of KPMG, (professional services auditors; annual sales: $22.7 billion); AT&T (2011 revenue: $122 billion); Tidewater Inc. (2011 revenue: $1.4 billion).

Dustan E. McCoy—Corporate affiliations: CEO of Brunswick Corp. (revenue: $4.6 billion); Louisiana-Pacific Corp. (2011 revenue: $1.7 billion).

B. M. Rankin Jr.—Corporate affiliations: board vice chairman of FCX; cofounder of McMoRan Oil and Gas in 1969.

Stephen Siegele—Corporate affiliations: founder/CEO of Advanced Delivery and Chemical Systems Inc.; Advanced Technology Solutions; Flourine on Call Ltd.

The board of directors of Freeport-McMoRan represents a portion of the global 1 percent who not only control the largest gold and copper mining company in the world, but who are also interconnected by board membership with over two dozen major multinational corporations, banks, foundations, military, and policy groups. This twelve-member board is a tight network of individuals who are interlocked with—and influence the policies of—other major companies controlling approximately $200 billion in annual revenues.

Freeport-McMoRan exemplifies how the extractor sector acquires wealth from the common heritage of natural materials—which rightfully belongs to us all—by appropriating the surplus value of working people’s labor in the theft of our commons. This process is protected by governments in various countries where Freeport maintains mining operations, with the ultimate protector being the military empire of the US and the North Atlantic Treaty Organization (NATO).

Further, Freeport-McMoRan is connected to one of the most elite transnational capitalist groups in the world: over 7 percent of Freeport’s stock is held by BlackRock, Inc., a major investment management firm based in New York City.

The Investment Sector: The Case of BlackRock, Inc.

Internationally, many firms operate primarily as investment organizations, managing capital and investing in other companies. These firms often do not actually make anything except money, and are keen to prevent interference with return on capital by taxation, regulations, and governmental interventions anywhere in the world.

BlackRock, based in Manhattan, is the largest assets management firm in the world, with over 10,000 employees and investment teams in twenty-seven countries. Their client base includes corporate, public, union, and industry pension plans; governments; insurance companies; third-party mutual funds; endowments; foundations; charities; corporations; official institutions; sovereign wealth funds; banks; financial professionals; and individuals worldwide. BlackRock acquired Barclay Global Investors in December of 2009. As of March 2012, BlackRock manages assets worth $3.68 trillion in equity, fixed income, cash management, alternative investment, real estate, and advisory strategies.[xxiii]

In addition to Freeport-McMoRan, BlackRock has major holdings in Chevron (49 million shares, 2.5 percent), Goldman Sachs Group (13 million shares, 2.7 percent), Exxon Mobil (121 million shares, 2.5 percent), Bank of America (251 million shares, 2.4 percent), Monsanto Company (12 million shares, 2.4 percent), Microsoft Corp. (185 million shares, 2.2 percent), and many more.[xxiv]

BlackRock manages investments of both public and private funds, including California Public Employee’s Retirement System, California State Teacher’s Retirement System, Freddie Mac, Boy Scouts of America, Boeing, Sears, Verizon, Raytheon, PG&E, NY City Retirement Systems, LA County Employees Retirement Association, GE, Cisco, and numerous others.

According to BlackRock’s April 2011 annual report to stockholders, the board of directors consists of eighteen members. The board is classified into three equal groups—Class I, Class II, and Class III—with terms of office of the members of one class expiring each year in rotation. Members of one class are generally elected at each annual meeting and serve for full three-year terms, or until successors are elected and qualified. Each class consists of approximately one-third of the total number of directors constituting the entire board of directors.

BlackRock has stockholder agreements with Merrill Lynch & Co., Inc., a wholly owned subsidiary of Bank of America Corporation; and Barclays Bank PLC and its subsidiaries. Two to four members of the board are from BlackRock management; one director is designated by Merrill Lynch; two directors, each in a different class, are designated by PNC Bank; two directors, each in a different class, are designated by Barclays; and the remaining directors are independent.

BlackRock’s Board of Directors

Class I Directors (terms expire in 2012):

William S. Demchak—Corporate affiliations: senior vice chairman of PNC (assets: $271 billion); J. P. Morgan Chase & Co. (2011 assets: $2.2 trillion).

Kenneth B. Dunn, PhD—Corporate and institutional affiliations: professor of financial economics at the David A. Tepper School of Business at Carnegie Mellon University; former managing director of Morgan Stanley Investment (assets: $807 billion).

Laurence D. Fink—Corporate and institutional affiliations: chairman/CEO of BlackRock; trustee of New York University; trustee of Boys Club of NY.

Robert S. Kapito—Corporate and institutional affiliations: president of BlackRock; trustee of Wharton School University of Pennsylvania.

Thomas H. O’Brien—Corporate affiliations: former CEO of PNC; Verizon Communications, Inc. (2011 revenue: $110 billion).

Ivan G. Seidenberg—Corporate and policy affiliations: board chairman of Verizon Communications; former CEO of Bell Atlantic; Honeywell International Inc. (2010 revenue: $33.3 billion); Pfizer Inc. (2011 revenue: $64 billion); chairman of the Business Roundtable; National Security Telecommunications Advisory Committee; President’s Council of the New York Academy of Sciences.[xxv]

Class II Directors (terms expire in 2013):

Abdlatif Yousef Al-Hamad—Corporate and institutional affiliations: board chairman of Arab Fund for Economic and Social Development (assets: $2.7 trillion); former Minister of Finance and Minister of Planning of Kuwait, Kuwait Investment Authority. Multilateral Development Banks, International Advisory Boards of Morgan Stanley, Marsh & McLennan Companies, Inc., American International Group, Inc. and the National Bank of Kuwait.

Mathis Cabiallavetta—Corporate affiliations: Swiss Reinsurance Company (2010 revenue: $28 billion); CEO of Marsh & McLennan Companies Inc. (2011 revenue: $11.5 billion); Union Bank of Switzerland-UBS A.G. (2012 assets: $620 billion); Philip Morris International Inc. (2010 revenue: $27 billion).

Dennis D. Dammerman—Corporate affiliations: General Electric Company (2012 revenue: $147 billion); Capmark Financial Group Inc. (formally GMAC); American International Group (AIG) (2010 revenue: $77 billion); Genworth Financial (2010 assets: $100 billion); Swiss Reinsurance Company (2012 assets: $620 billion); Discover Financial Services (2011 revenue: $3.4 billion).

Robert E. Diamond Jr.—Corporate and policy affiliations: CEO of Barclays (2011 revenue: $32 billion); International Advisory Board of the British-American Business Council.

David H. Komansky—Corporate affiliations: CEO of Merrill Lynch (division of Bank of America 2009) (2011 assets management: $2.3 trillion); Burt’s Bees, Inc. (owned by Clorox); WPP Group plc (2011 revenue: $15 billion).

James E. Rohr—Corporate affiliations: CEO of PNC (2011 revenue: $14 billion).

James Grosfeld—Corporate affiliations: CEO of Pulte Homes, Inc. (2010 revenue: $4.5 billion); Lexington Realty Trust (2011 assets: $1.2 billion).

Sir Deryck Maughan—Corporate and policy affiliations: Kohlberg Kravis Roberts (2011 assets: $8.6 billion); former CEO of Salomon Brothers from 1992 to 1997 a Chairman of the US-Japan Business Council; GlaxoSmithKline plc (2011 revenue: $41 billion); Thomson Reuters Corporation (2011 revenue: $13.8 billion).

Thomas K. Montag—Corporate affiliations: president of Global Banking & Markets for Bank of America (2011 revenue: $94 billion); Merrill Lynch (division of Bank of America, 2009; 2011 assets management: $2.3 trillion); Goldman Sachs (2011 revenue: $28.8 billion).

Class III Directors (terms expire in 2014):

Murry S. Gerber—Corporate affiliations: executive chairman of EQT (2010 revenue: $1.3 billion); Halliburton Company.

Linda Gosden Robinson—Corporate affiliations: former CEO of Robinson Lerer & Montgomery; Young & Rubicam Inc.; WPP Group plc. (2011 revenue: $15 billion); Revlon, Inc. (2011 revenue: $1.3 billion).

John S. Varley—Corporate affiliations: CEO of Barclays (2011 revenue: $32 billion); AstraZeneca PLC (2011 revenue: $33.5 billion).

BlackRock is one of the most concentrated power networks among the global 1 percent. The eightteen members of the board of directors are connected to a significant part of the world’s core financial assests. Their decisions can change empires, destroy currencies, and impoverish millions. Some of the top financial giants of the capitalist world are connected by interlocking boards of directors at BlackRock, including Bank of America, Merrill Lynch, Goldman Sachs, PNC Bank, Barclays, Swiss Reinsurance Company, American International Group (AIG), UBS A.G., Arab Fund for Economic and Social Development, J. P. Morgan Chase & Co., and Morgan Stanley.

A 2011 University of Zurich study, research completed by Stefania Vitali, James B. Glattfelder, Stefano Battiston at the Swiss Federal Institute, reports that a small group of companies—mainly banks—wields huge power over the global economy.[xxvi] Using data from Orbis 2007, a database listing thirty-seven million companies and investors, the Swiss researchers applied mathematical models—usually used to model natural systems—to the world economy. The study is the first to look at all 43,060 transnational corporations and the web of ownership between them. The research created a “map” of 1,318 companies at the heart of the global economy. The study found that 147 companies formed a “super entity” within this map, controlling some 40 percent of its wealth. The top twenty-five of the 147 super-connected companies includes:

1. Barclays PLC*

2. Capital Group Companies Inc.

3. FMR Corporation

4. AXA

5. State Street Corporation

6. J. P. Morgan Chase & Co.*

7. Legal & General Group PLC

8. Vanguard Group Inc.

9. UBS AG

10. Merrill Lynch & Co. Inc.*

11. Wellington Management Co. LLP

12. Deutsche Bank AG

13. Franklin Resources Inc.

14. Credit Suisse Group*

15. Walton Enterprises LLC

16. Bank of New York Mellon Corp

17. Natixis

18. Goldman Sachs Group Inc.*

19. T Rowe Price Group Inc.

20. Legg Mason Inc.

21. Morgan Stanley*

22. Mitsubishi UFJ Financial Group Inc.

23. Northern Trust Corporation

24. Société Générale

25. Bank of America Corporation*

* BlackRock Directors

Notably, for our purposes, BlackRock board members have direct connections to at least seven of the top twenty-five corporations that Vitali et al. identify as an international “super entity.” BlackRock’s board has direct links to seven of the twenty-five most interconnected corporations in the world. BlackRock’s eighteen board members control and influence tens of trillions of dollars of wealth in the world and represent a core of the super-connected financial sector corporations.

Below is a sample cross section of key figures and corporate assets among the global economic “super entity” identified by Vitali et al.

Other Key Figures and Corporate Connections within the Highest Levels of the  Global Economic “Super Entity”

Capital Group Companies—Privately held, based in Los Angeles, manages $1 trillion in assets.

FMR—One of the world’s largest mutual fund firms, managing $1.5 trillion in assets and serving more than twenty million individual and institutional clients; Edward C. (Ned) Johnson III, Chairman and CEO.

AXA—Manages $1.5 trillion in assets, serving 101 million clients; Henri de Castries, CEO AXA, and Director, Nestlé (Switzerland).

State Street Corporation—Operates from Boston with assest management at $1.9 trillion; directors include Joseph L. Hooley, CEO of State Street Corporation; Kennett F. Burnes, retired chairman and CEO of Cabot Corporation(2011 revenue: $3.1 billion).

JP Morgan/Chase (2011 assets: $2.3 trillion)—Board of directors: James A. Bell, retired executive VP of The Boeing Company; Stephen B. Burke, CEO of NBC Universal, and executive VP of Comcast Corporation; David M. Cote, CEO of Honeywell International, Inc.; Timothy P. Flynn, retired chairman of KPMG International; and Lee R. Raymond, retired CEO of Exxon Mobil Corporation.

Vanguard (2011 assets under management: $1.6 trillion)—Directors: Emerson U. Fullwood, VP of Xerox Corporation; JoAnn Heffernan Heisen, VP of Johnson & Johnson, Robert Wood Johnson Foundation; Mark Loughridge, CFO of IBM, Global Financing; Alfred M. Rankin Jr., CEO of NACCO Industries, Inc., National Association of Manufacturers, Goodrich Corp, and chairman of Federal Reserve Bank of Cleveland.

UBS AG (2012 assets: $620 billion)—Directors include: Michel Demaré, board member of Syngenta and the IMD Foundation (Lausanne); David Sidwell, former CFO of Morgan Stanley.

Merrill Lynch (Bank of America) (2011 assets management: $2.3 trillion)—Directors include: Brian T. Moynihan, CEO of Bank of America; Rosemary T. Berkery, general counsel for Bank of America/Merrill Lynch (formerly Merrill Lynch & Co., Inc), member of New York Stock Exchange’s Legal Advisory Committee, director at Securities Industry and Financial Markets Association; Mark A. Ellman, managing director of Credit Suisse, First Boston; Dick J. Barrett, cofounder of Ellman Stoddard Capital Partners, MetLife, Citi Group, UBS, Carlyle Group, ImpreMedia, Verizon Communications, Commonewealth Scientific and Industrial Research Org, Fluor Corp, Wells Fargo, Goldman Sachs Group.

The directors of these super-connected companies represent a small portion of the global 1 percent. Most people with assets in excess of $588,000 are not major players in international finance. At best, they hire asset management firms to produce a return on their capital. Often their net worth is tied up in nonfinancial assets such a real estate and businesses.

Analysis: TCC and Global Power

So how does the transnational corporate class (TCC) maintain wealth concentration and power in the world? The wealthiest 1 percent of the world’s population represents approximately forty million adults. These forty million people are the richest segment of the first tier populations in the core countries and intermittently in other regions. Most of this 1 percent have professional jobs with security and tenure working for or associated with established institutions. Approximately ten million of these individuals have assets in excess of one million dollars, and approximately 100,000 have financials assets worth over thirty million dollars. Immediately below the 1 percent in the first tier are working people with regular employment in major corporations, government, self-owned businesses, and various institutions of the world. This first tier constitutes about 30–40 percent of the employed in the core developed countries, and some 30 percent in the second tier economies and down to 20 percent in the periphery economies (sometimes referred to as the 3rd world). The second tier of global workers represents growing armies of casual labor: the global factory workers, street workers, and day laborers intermittently employed with increasingly less support from government and social welfare organizations. These workers, mostly concentrated in the megacities, constitute some 30–40 percent of the workers in the core industrialized economies and some 20 percent in the second tier and peripheral economies. This leaves a third tier of destitute people worldwide ranging from 30 percent of adults in the core and secondary economies to fully 50 percent of the people in peripherial countries who have extremely limited income opportunities and struggle to survive on a few dollars a day. These are the 2.5 billion people who live on less than two dollars a day, die by the tens of thousands every day from malnutrition and easily curible illnesses, and who have probably never even heard a dial tone.[xxvii]

As seen in our extractor sector and investment sector samples, corporate elites are interconnected through direct board connections with some seventy major multinational corporations, policy groups, media organizations, and other academic or nonprofit institutions. The investment sector sample shows much more powerful financial links than the extractor sample; nonetheless, both represent vast networks of resources concentrated within each company’s board of directors. The short sample of directors and resources from eight other of the superconnected companies replicates this pattern of multiple board corporate connections, policy groups, media and government, controlling vast global resources. These interlock relationships recur across the top interconnected companies among the transnational corporate class, resulting in a highly concentrated and powerful network of individuals who share a common interest in preserving their elite domination.

Sociological research shows that interlocking directorates have the potential to faciliate political cohesion. A sense of a collective “we” emerges within such power networks, whereby members think and act in unison, not just for themselves and their individual firms, but for a larger sense of purpose—the good of the order, so to speak.[xxviii]

Transnational corporate boards meet on a regular basis to encourage the maximunization of profit and the long-term viability of their firm’s business plans. If they arrange for payments to government officials, conduct activities that undermine labor organizations, seek to manipulate the price of commodies (e.g. gold), or engage in insider trading in some capacity, they are in fact forming conspiratorial alliances inside those boards of directors. Our sample of thirty directors inside two connected companies have influence with some of the most powerful policy groups in the world, including British–American Business Council, US–Japan Business Council, Business Roundtable, Business Council, and the Kissinger Institute. They influence some ten trillion dollars in monetery resouces and control the working lives of many hundreds of thousands of people. All in all, they are a power elite unto themselves, operating in a world of power elite networks as the de facto ruling class of the capitalist world.

Moreover, this 1 percent global elite dominates and controls public relations firms and the corporate media. Global corporate media protect the interests of the 1 percent by serving as a propaganda machine for the superclass. The corporate media provide entertainment for the masses and distorts the realities of inequality. Corporate news is managed by the 1 percent to maintain illusions of hope and to divert blame from the powerful for hard times.[xxix]

Four of the thirty directors in our two-firm sample are directly connected with public relations and media. Thomas H. O’Brien and Ivan G. Seidenberg are both on the board of Verizon Communications, where Seidenberg serves as chairman. Verizon reported over $110 billion in operating revenues in 2011.[xxx] David H. Komansky and Linda Gosden Robinson are on the board of WPP Group, which describes itself as the world leader in marketing communications services, grossing over $65 billion in 2011. WPP is a conglomerate of many of the world’s leading PR and marketing firms, in fields that include advertising, media investment management, consumer insight, branding and identity, health care communications, and direct digital promotion and relationship marketing.[xxxi]

Even deeper inside the 1 percent of wealthy elites is what David Rothkopf calls the superclass. David Rothkopf, former managing director of Kissinger Associates and deputy undersecretary of commerce for international trade policies, published his book Superclass: the Global Power Elite and the World They Are Making, in 2008.[xxxii] According to Rothkopf, the superclass constitutes approximately 0.0001 percent of the world’s population, comprised of 6,000 to 7,000 people—some say 6,660. They are the Davos-attending, Gulfstream/private jet–flying, money-incrusted, megacorporation-interlocked, policy-building elites of the world, people at the absolute peak of the global power pyramid. They are 94 percent male, predominantly white, and mostly from North America and Europe. These are the people setting the agendas at the Trilateral Commission, Bilderberg Group, G-8, G-20, NATO, the World Bank, and the World Trade Organization. They are from the highest levels of finance capital, transnational corporations, the government, the military, the academy, nongovernmental organizations, spiritual leaders, and other shadow elites. Shadow elites include, for instance,  the deep politics of national security organizations in connection with international drug cartels, who extract 8,000 tons of opium from US war zones annually, then launder $500 billion through transnational banks, half of which are US-based.[xxxiii]

Rothkoft’s understanding of the superclass is one based on influence and power. Although there are over 1,000 billionaires in the world, not all are necessarily part of the superclass in terms of influencing global policies. Yet these 1,000 billionaires have twice as much wealth as the 2.5 billion least wealthy people, and they are fully aware of the vast inequalities in the world. The billionaires and the global 1 percent are similar to colonial plantation owners. They know they are a small minority with vast resources and power, yet they must continually worry about the unruly exploited masses rising in rebellion. As a result of these class insecurities, the superclass works hard to protect this structure of concentrated wealth. Protection of capital is the prime reason that NATO countries now account for 85 percent of the world’s defense spending, with the US spending more on military than the rest of the world combined.[xxxiv] Fears of  inequality rebellions and other forms of unrest motivate NATO’s global agenda in the war on terror.[xxxv] The Chicago 2012 NATO Summit Declaration reads:

As Alliance leaders, we are determined to ensure that NATO retains and develops the capabilities necessary to perform its essential core tasks collective defence, crisis management and cooperative security—and thereby to play an essential role promoting security in the world. We must meet this responsibility while dealing with an acute financial crisis and responding to evolving geo-strategic challenges. NATO allows us to achieve greater security than any one Ally could attain acting alone.

We confirm the continued importance of a strong transatlantic link and Alliance solidarity as well as the significance of sharing responsibilities, roles, and risks to meet the challenges North-American and European Allies face together . . . we have confidently set ourselves the goal of NATO Forces 2020: modern, tightly connected forces equipped, trained, exercised and commanded so that they can operate together and with partners in any (emphaisis added) environment.[xxxvi]

NATO is quickly emerging as the police force for the transnational corporate class. As the TCC more fully emerged in the 1980s, coinciding with the collapse of the Union of Soviet Socialist Republics (USSR), NATO began broader operations. NATO first ventured into the Balkans, where it remains, and then moved into Afghanistan. NATO started a training mission in Iraq in 2005, has recently conducted operations in Libya, and, as of July 2012, is considering military action in Syria.

It has become clear that the superclass uses NATO for its global security. This is part of an expanding strategy of US military domination around the world, wherby the US/NATO military-industrial-media empire operates in service to the transnational corporate class for the protection of international capital anywhere in the world.[xxxvii]

Sociologists William Robinson and Jerry Harris anticipated this situation in 2000, when they described “a shift from the social welfare state to the social control (police) state replete with the dramatic expansion of public and private security forces, the mass incarceration of the excluded populations (disproportionately minorities), new forms of social apartheid . . . and anti-immigrant legislation.”[xxxviii] Robinson and Harris’s theory accurately predicts the agenda of today’s global superclass, including

—President Obama’s continuation of the police state agendas of his executive predecessors, George W. Bush, Bill Clinton, and George H. W. Bush;

—the long-range global dominance agenda of the superclass, which uses US/NATO military forces to discourage resisting states and maintain internal police repression, in service of the capitalist system’s orderly maintenance;

—and the continued consolidation of capital around the world without interference from governments or egalitarian social movements.[xxxix]

Furthermore, this agenda leads to the further pauperization of the poorest half of the world’s population, and an unrelenting downward spiral of wages for everyone in the second tier, and even some within the first tier.[xl] It is a world facing economic crisis, where the neoliberal solution is to spend less on human needs and more on security.[xli] It is a world of financial institutions run amok, where the answer to bankruptcy is to print more money through quantitative easing with trillions of new inflation-producing dollars. It is a world of permanent war, whereby spending for destruction requires even more spending to rebuild, a cycle that profits the TCC and its global networks of economic power. It is a world of drone killings, extrajudicial assassinations, and death and destruction, at home and abroad.

As Andrew Kollin states in State Power and Democracy, “There is an Orwellian dimension to the Administration’s (Bush and later Obama) perspective, it chose to disregard the law, instead creating decrees to legitimate illegal actions, giving itself permision to act without any semblances of power sharing as required by the Constitution or international law.”[xlii]

And in Globalization and the Demolition of Society, Dennis Loo writes, “The bottom line, the fundamential division of our society, is between, on the one hand, those whose interests rest on the dominance and the drive for monopolizing the society and planet’s resources and, on the other hand, those whose interests lie in the husbanding of thoses resources for the good of the whole rather than the part.”[xliii]

The Occupy movement uses the 1 percent vs. 99 percent mantra as a master concept in its demonstrations, disruptions, and challenges to the practices of the transnational corporate class, within which the global superclass is a key element in the implementation of a superelite agenda for permanent war and total social control. Occupy is exactly what the superclass fears the most—a global democratic movement that exposes the TCC agenda and the continuing theater of government elections, wherein the actors may change but the marquee remains the same. The more that Occupy refuses to cooperate with the TCC agenda and mobilizes activists, the more likely the whole TCC system of dominance will fall to its knees under the people power of democractic movements.
______________________________________

peter phillips is a professor of sociology at Sonoma State University and president of the Media Freedom Foundation/Project Censored.

kimberly soeiro is a sociology student at Sonoma State University, library researcher, and activist.

Special thanks to Mickey Huff, director of Project Censored, and Andy Roth, associate director of Project Censored, for editing and for important suggestons for this article.

Notes

[i] For a more scholarly background on this subject, the following are required reading: C. Wright Mills, The Power Elite, New York, Oxford University Press, 1956; G. Willian Domhoff, Who Rules America 6th edition, Boston, McGraw Hill Higher Education, 2009; William Carroll, The Making of a Transnational Capitalist Class, Zed Books, 2010.

[ii] Leslie Sklair, The Transnational Capitalist Class, Oxford, UK, Blackwell, 2001.

[iii] Leslie Sklair, “The Transnational Capitalist Class And The Discourse Of Globalization,” Cambridge Review of International Affairs, 2000, http://www.theglobalsite.ac.uk/press/012sklair.htm

[iv] Tax Havens: Super-rich hiding at least $21 trillion, BBC News, July 22, 2012, http://www.bbc.co.uk/news/business-18944097

[v] Tyler Durgen, A Detailed Look At Global Wealth Distribution, 10/11/10, http://www.zerohedge.com/article/detailed-look-global-wealth-distribution.

[vi] “World Bank Sees Progress Against Extreme Poverty, But Flags Vulnerabilities,” World Bank, Press Release No. 2012/297/Dec., February 29, 2012, http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:23130032~pagePK:64257043~piPK:437376~theSitePK:4607,00.html.

[vii] Mark Ellis, The Three Top Sins of the Universe, http://www.starvation.net/.

[viii] “Corporatons are Still Making a Killing from Hunger,” April 2009, Grain, http://www.grain.org/article/entries/716-corporations-are-still-making-a-killing-from-hunger.

[ix] On the extraction of surplus-value from labor, see Karl Marx, Capital, Vol. 3 (New York and London: Penguin, 1991[1894]).

[x] See, e.g., Paul Burkett, Marx and Nature: A Red and Green Perspective (New York: St. Martins, 1999), Chapter 6; for additional information on the Fair Share of the Common Heritage see, http://www.fairsharecommonheritage.org/.

[xi] Freeport-McMoRan Copper and Gold, Notice of Annual Meeting of Stockholders, June 15, 2011, document April 28, 2001, www.ecocumentview.com/FCX_MTG.

[xii] “Freeport Indonesia Miners, Tribesmen Defend Road Blockades,” Reuters Africa, November 4, 2011, http://af.reuters.com/article/metalsNews/idAFL4E7M410020111104.

[xiii] “Police Admit to Receiving Freeport ‘Lunch Money,’” Frank Arnaz, Jakarta Globe, October 28, 2011,

http://www.thejakartaglobe.com/news/police-admit-to-receiving-freeport-lunch-money/474747.

[xiv] “Indonesia must investigate mine strike protest killing,” Amnesty International News, October 10, 2011, http://www.amnesty.org/en/news-and-updates/indonesia-must-investigate-mine-strike-protest-killing-2011-10-10; West Papua Report, November 2011, http://www.etan.org/issues/wpapua/2011/1111wpap.htm.

[xv] Camelia Pasandaran, “Striking Freeport Employees Lower Wage Increase Demands,”Jakarta Globe, | November 7, 2011, http://www.thejakartaglobe.com/business/striking-freeport-employees-lower-wage-increase-demands/476800.

[xvi] Alex Emery, “Freeport Cerro Verde, Workers Sign Three-Year Labor Accord,” Bloomberg News,

December 22, 2011, http://mobile.bloomberg.com/news/2011-12-22/freeport-cerro-verde-peru-workers-sign-three-year-labor-accord.

[xvii] Eric Bellman and Tess Stynes, “Freeport-McMoRan Says Pact Ends Indonesia Strike,” Wall Street Journal, December 14, 2011, http://online.wsj.com/article/SB10001424052970203893404577098222935896112.html.

[xviii] John Pakage, “When there is no guarantee of the security of life for the people of Papau,” West Papua Media Alerts, March 1, 2012, http://westpapuamedia.info/tag/freeport-McMoRan/.

[xix] “Reasons to go the Darwin,” The Nation (Thailand), November 30, 2011, http://www.nationmultimedia.com/opinion/Reasons-to-go-to-Darwin-30170893.html

[xxi] Karishma Vaswani, “US Firm Freeport Struggles to Escape Its Past in Papua,” BBC News, Jakarta,

http://www.bbc.co.uk/news/world-asia-pacific-14417718.

[xxii] Phoenix Arizona, October 28, 2011, Youtube report: http://www.youtube.com/watch?v=CvJxy2GvOHE.

[xxiii] BlackRock About Us: http://www2.blackrock.com/global/home/AboutUs/index.htm.

[xxiv] Data for this section is drawn for StreetInsider.com.

[xxv] Data for the corporations listed in this section comes fron the annual report at each corporation’s website. Biography information was gained from the FAX annual report to investors and online biographies for individuals wihen available.

[xxvi] Stefania Vitali, James B. Glattfelder, and Stefano Battiston, “The Network of Global Corporate Control,” PLoS ONE, October 26, 2011, http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995.

[xxvii] Willian Robinson and Jerry Harris, “Towards a Global Ruling Class? Globalization and the Transnational Capitalist Class,” Science and Society 64, no. 1 (Spring 2000).

[xxviii] Val Burris, “Interlocking Directorates and Political Cohesion Among Corporate Elites,” American Journal of Sociology 3, no. 1 (July 2005).

[xxix] Peter Phillips and Mickey Huff, “Truth Emergency: Inside the Military-Industrial Media Empire,” Censored 2010 (New York: Seven Stories Press, 2009), 197–220.

[xxx] Verizon Financials 2012, http://www22.verizon.com/investor/ Hoovers describes Verizon as, “the #2 US telecom services provider overall after AT&T, but it holds the top spot in wireless services ahead of rival AT&T Mobility.” Hoovers Inc. http://www.hoovers.com/company/Verizon_Communications_Inc/rfrski-1.html.

[xxxi] WPP: http://www.wpp.com/wpp/about/wppataglance/.

[xxxii] David Rothkopf, SuperClass: the Global Power Elite and the World They are Making (New York: Farrar, Straus, and Giroux, 2008).

[xxxiii] Peter Dale Scott, American War Machine, Deep Politics, the CIA Global Drug Connection, and the Road to Afghanistan (Lanham, MD: Rowman & Littlefield Publishers, 2010). See also Censored Story #22, “Wachovia Bank Laundered Money for Latin American Drug Cartels,” in Chapter 1.

[xxxiv] David Rothkopf, Superclass, Public Address: Carnegie Endowment for International Peace, April 9, 2008.

[xxxv] NATO: Defence Against Terrorism Programme, http://www.nato.int/cps/en/SID-EBFFE857-6607109D/natolive/topics_50313.htm’selectedLocale=en.

[xxxvi] NATO, Summit Declaration on Defence Capabilities: Toward NATO Forces 2020, May 20, 2012, http://www.nato.int/cps/en/SID-1CE3D0B6-393C986D/natolive/official_texts_87594.htm.

[xxxvii] For an expanded analysis of the history of US “global dominance,” see Peter Phillips, Bridget Thornton and Celeste Vogler, “The Global Dominance Group: 9/11 Pre-Warnings & Election Irregularities in Context,” May 2, 2010, http://www.projectcensored.org/top-stories/articles/the-global-dominance-group/ and Peter Phillips, Bridget Thornton, and Lew Brown, “The Global Dominance Group and U.S. Corporate Media,” Censored 2007 (New York: Seven Stories, 2006), 307–333.

[xxxviii] Willian Robinson and Jerry Harris, “Towards a Global Ruling Class? Globalization and the Transnational Capitalist Class,” Science and Society 64, no. 1 (Spring 2000).

[xxxix] John Pilger, The New Rulers of the World (New York: Verso, 2003).

[xl] Michel Chossudovsky and Andrew Gavin Marshall, eds., The Global Economic Crisis (Montréal: Global Research Publishers, 2010).

[xli] Dennis Loo, Globalization and the Demolition of Society (Glendale, CA: Larkmead Press, 2011).

[xlii] Andrew Kolin, State Power and Democracy (New York: Palgrave MacMillan,c2011), 141.

[xliii] Loo, Globalization, op cit., 357.
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The Money Masters : Behind the Global Debt Crisis

The Money Masters : Behind the Global Debt Crisis

By Adrian Salbuchi
Global Research, September 26, 2011
New Dawn Magazine No. 128 (September-October 2011)

In the US, we see untold millions suffering from the impact of mass foreclosures and unemployment; in Greece, Spain, Portugal, Ireland, and Italy, stringent austerity measures are imposed upon the whole population; all coupled with major banking collapses in Iceland, the UK and the US, and indecent bail-outs of “too-big-to-fail” bankers (Newspeak for too powerful to fail).

No doubt, the bulk of the responsibility for these debacles falls squarely on the shoulders of caretaker governments in these countries that are subordinated to Money Power interests and objectives. In country after country, that comes together with embedded corruption, particularly evident today in the UK, Italy and the US.

As we assess some of the key components of today’s Global Financial, Currency and Banking Model in this article, readers will hopefully get a better understanding as to why we are all in such a crisis, and that it will tend to get much worse in the months and years to come.

Foundations of a Failed and False Model

Hiding behind the mask of false “laws” allegedly governing “globalised markets and economies,” this Financial Model has allowed a small group of people to amass and wield huge and overwhelming power over markets, corporations, industries, governments and the global media. The irresponsible and criminal consequences of their actions are now clear for all to see.

The “Model” we will briefly describe, falls within the framework of a much vaster Global Power System that is grossly unjust and was conceived and designed from the lofty heights of private geopolitical and geo-economic1 planning centres that function to promote the Global Power Elite’s agenda as they prepare their “New World Order” – again, Newspeak for a Coming World Government.2

Specifically, we are talking about key think tanks like the Council on Foreign Relations, the Trilateral Commission, the Bilderberg Group, and other similar entities such as the Cato Institute (Monetary Issues), American Enterprise Institute and the Project for a New American Century that conform an intricate, solid, tight and very powerful network, engineering and managing New World Order interests, goals and objectives.

Writing from the stance of an Argentine citizen, I admit we have some “advantages” over the citizens of industrialised countries as the US, UK, European Union, Japan or Australia, in that over the last few decades we have had direct experience of successive catastrophic national crises emanating from inflation, hyper-inflation, systemic banking collapse, currency revamps, sovereign debt bond mega-swaps, military coups and lost wars…

Finance vs the Economy

The Financial system (i.e., a basically unreal Virtual, symbolic and parasitic world), increasingly functions in a direction that is contrary to the interest of the Real Economy (i.e., the Real and concrete world of work, production, manufacturing, creativity, toil, effort and sacrifice done by real people). Over the past decades, Finance and the Economy have gone their totally separate and antagonistic ways, and no longer function in a healthy and balanced relationship that prioritises theCommon Good of We the People. This huge conflict between the two can be seen, amongst other places, in today’s Financial and Economic System, whose main support lies in the Debt Paradigm, i.e., that nothing can be done unless you first have credit, financing and loans to do it. Thus, the Real Economy becomes dependent on and distorted by the objectives, interests and fluctuations of Virtual Finance.3

Debt-Based System

The Real Economy should be financed with genuine funds; however with time, the Global Banking Elite succeeded in getting one Sovereign Nation-State after another to give up its inalienable function of supplying the correct quantity of National Currency as the primary financial instrument to finance the Real Economy. That requires decided action through Policies centred on promoting the Common Good of We The People in each country, and securing the National Interest against the perils posed by internal and external adversaries.

Thus, we can better understand why the financial “law” that requires central banks to always be totally “independent” of Government and the State has become a veritable dogma. This is just another way of ensuring that central banking should always be fully subordinated to the interests of the private banking over-world – both locally in each country, as well as globally.

We find this to prevail in all countries: Argentina, Brazil, Japan, Mexico, the European Union and in just about every other country that adopts so-called “Western” financial practice. Perhaps the best (or rather, the worst) example of this is the United States where the Federal Reserve System is a privately controlled institution outright, with around 97% of its shares being owned by the member banks themselves (admittedly, it does have a very special stock scheme), even though the bankers running “Fed” do everything they can to make it appear as if it is a “public” entity operated by Government, something that it is definitely not.

One of the Global Banking Over-world’s permanent goals is – and has been – to maintain full control over all central banks in just about every country, in order to be able to control their public currencies.4 This, in turn, allows them to impose a fundamental (for them) condition whereby there is never the right quantity of public currency to satisfy the true demand and needs of the Real Economy. That is when those very same private banks that control central banking come on scene to “satisfy the demand for money” of the Real Economy by artificially generating private bank money out of nothing. They call it “credits and loans” and offer to supply it to the Real Economy, but with an “added value” (for them): (a) they will charge interest for them (often at usury levels) and, (b) they will create most of that private bank money out of thin air through the fractional lending system.

At a Geo-economic level, this has also served to generate huge and unnecessary public sovereign debts in country after country all over the world. Argentina is a good example, whose Caretaker Governments are systematically ignorant and unwilling to use one of the sovereign state’s key powers: the issuance ofhigh power non-interest generating Public Money (see below for a more detailed definition). Instead, Argentina has allowed IMF (International Monetary Fund) so-called “recipes” that reflect the global banking cartel’s own interests to be imposed upon it in fundamental matters like what are the proper functions of its Central Bank, sovereign debt, fiscal policy, and other monetary, banking and financial mechanisms, that are thus systematically used against the Common Good of the Argentine People andagainst the National Interest of the country.

This system and its dreadful results, now and in the past, are so similar in so many other countries –Brazil, Mexico, Greece, Ireland, Iceland, UK, Portugal, Spain, Italy, Indonesia, Hungary, Russia, Ukraine… that it can only reflect a well thought-out and engineered plan, emanating from the highest planning echelons of the Global Power Elite.

Fractional Bank Lending

This banking concept is in use throughout the world’s financial markets, and allows private banks to generate “virtual” Money out of thin air (i.e., scriptural annotations and electronic entries into current and savings accounts, and a vast array of lines of credit), in a ratio that is 8, 10, 30, 50 times or more largerthan the actual amount of cash (i.e., public money) held by the bank in its vaults. In exchange for lending this private “money” created out of nothing, bankers collect interest, demand collateral with intrinsic value and if the debtor defaults they can then foreclose on their property or other assets.

The ratio that exists between the amount of Dollars or Pesos in its vaults and the amount of credit private banks generate is determined by the central banking authority which fixes the fractional lending leverage level (which is why controlling the central bank is so vital strategically for private banker cartels). This leverage level is a statistical reserve based on actuarial calculations of the portion of account holders who in normal time go to their banks or ATM machines to withdraw their money in cash (i.e., in public money notes). The key factor here is that this works fine in “normal” times, however “normal” is basically acollective psychology concept intimately linked to what those account holders, and the population at large, perceive regarding the financial system in general and each bank in particular.

So, when for whatever reason, “abnormal” times hit – i.e., every time there are (subtly predictable) periodic crises, bank runs, collapses and panics, which seem to suddenly explode as happened in Argentina in 2001 and as is now happening in the US, UK, Ireland, Greece, Iceland, Portugal, Spain, Italy and a growing number of countries – we see all bank account holders running to their banks to try to get their money out in cash. That’s when they discover that there is not enough cash in their banks to pay, save for a small fraction of account holders (usually insiders “in the know” or “friends of the bankers”).

For the rest of us mortals “there is no more money left,” which means that they must resort to whatever public insurance scheme may or may not be in place (e.g., in the US, the state-owned Federal Deposit Insurance Corporation that “insures” up to US$250,000 per account holder with taxpayer money). In countries like Argentina, however, there is no other option but to go out on the streets banging pots and pans against those ominous, solid and firmly closed bronze bank gates and doors. All thanks to the fraudulent fractional bank lending system.

Investment Banking

In the US, so called “Commercial Banks” are those that have large portfolios of checking, savings and fixed deposit accounts for people and companies (e.g., such main street names as CitiBank, Bank of America, JPMorganChase, etc.; in Argentina, we have Standard Bank, BBVA, Galicia, HSBC and others). Commercial Banks operate with fractional lending leverage levels that allow them to lend out “virtual” dollars or pesos for amounts equal to 6, 8 or 10 times the cash actually held in their vaults; these banks are usually more closely supervised by the local monetary authorities of the country.

A different story, however, we had in the US (and still have elsewhere) with so-called global “Investment Banks” (those that make the mega-loans to corporations, major clients and sovereign states), over which there is much less control, so that their leveraging fractional lending ratios are far, far higher. This greater flexibility is what allowed investment banks in the US to “make loans” by, for example, creating out of thin air 26 “virtual” Dollars for every real Dollar in cash they held in their vaults (i.e., Goldman Sachs), or 30 virtual Dollars (Morgan Stanley), or more than 60 virtual Dollars (Merrill Lynch until just before it folded on 15 Sept 2008), or more than 100 virtual Dollars in the cases of collapsed banks Bear Stearns and Lehman Brothers.5

Private Money vs Public Money

At this point in our review, it is essential to very clearly distinguish between two types of Money or Currency:

Private Money – This is “Virtual” Money created out of thin air by the private banking system. It generates interests on loans, which increases the amount of Private money in (electronic) circulation, and spreads and expands throughout the entire economy. We then perceive this as “inflation.” In actual fact, the main cause of inflation in the economy is structural to the interest-bearing fractional lending banking system,even among industrialised countries. The cause of inflation nowadays is not so much the excessive issuance of Public Money by Government as all so-called banking experts would have us believe but, rather, the combined effect of fractional lending and interest on private banking money.

Public Money – This is the only Real Money there is. It is the actual notes issued by the national currency entity holding a monopoly (i.e., the central bank or some such government agency) and, as Public Money, it does not generate interest, and should not be created by anyone other than the State. Anybody else doing this is a counterfeiter and should end up in jail because counterfeiting Public Money is equivalent to robbing the Real Economy (i.e., “we, the working people”) of their work, toil and production capabilities without contributing anything in return in terms of socially productive work. The same should apply to private bankers under the present fractional lending system: counterfeiting money (i.e., creating it out of thin air as a ledger entry or electronic blip on a computer screen) is equivalent to robbing the Real Economy of its work and production capacity without contributing any counter-value in terms of work.

Why We Have Financial Crises

A fundamental concept that lies at the very heart of the present Financial Model can be found in the wayhuge parasitic profits on the one hand, and catastrophic systemic losses on the other, are effectively transferred to specific sectors of the economy, throughout the entire system, beyond borders and public control.

As with all models, the one we suffer today has its own internal logic which, once properly understood, makes that model predictable. The people who designed it know full well that it is governed by grand cycles having specific expansion and contraction stages, and specific timelines. Thus, they can ensure that in bull markettimes of growth and gigantic profits (i.e., whilst the system, grows and grows, is relatively stable and generates tons of money out of nothing), all profits are privatised making them flow towards specific institutions, economic sectors, shareholders, speculators, CEO and top management & trader bonuses, “investors”, etc who operate the gears and maintain the whole system properly tuned and working.

However, they also know that – like all roller coaster rides – when you reach the very top, the system turns into a bear market that destabilises, spins out of control, contracts and irremediably collapses, as happened to Argentina in 2001 and to the better part of the world since 2008, then all losses are socialised by making Governments absorb them through the most varied transference mechanisms that dump these huge losses onto the population at large (whether in the form of generalised inflation, catastrophic hyperinflation, banking collapses, bail-outs, tax hikes, debt defaults, forced nationalisations, extreme austerity measures, etc).

The Four-sided Global “Ponzi” Pyramid Scheme

As we know, all good pyramids have four sides, and since the Global Financial System is based on a “Ponzi” Pyramid Scheme, there’s no reason why this particular pyramid should not have four sides as well.

Below is a summary of the Four-side Global “Ponzi” Pyramid Scheme that lies at the core of today’s Financial Model, indicating how these four “sides” function in a coordinated, consistent, and sequential manner.

Side One – Create Public Money Insufficiency. This is achieved, as we explained above, by controlling the National Public entity that issues public money. Its goal is to demonetise the Real Economy so that the latter is forced to seek “alternative funding” for its needs (i.e., so that it has no choice but to resort to private bank loans).

Side Two – Impose Private Banking Fractional Lending Loans. This, as we said, is virtual private money created out of thin air on which bankers charge interest – often at usury levels – thus generating enormous profit for “investors,” creditors and all sorts of entities and individuals who operate as parasites living off other people’s work. This would never have been the case if each local central bank were to flexibly generate the correct quantity of Public Money necessary to satisfy the needs of the Real Economy in each country and region.

Side Three – Promote a Debt-Based Economic System. In fact, the whole Pyramid Model is based on being able to promote this generalised paradigm that falsely states that what really “moves” the private and public economy is not so much work, creativity, toil and effort of workers, but rather “private investors,” “bank loans” and “credit” – i.e., indebtedness. With time, this paradigm has replaced the infinitely wiser, sounder, more balanced and solid concept of corporate profit being reinvested and genuine personal savings being the foundation for future prosperity and security. Pretty much the way Henry Ford, Sr. originally grew his most successful company.

Today, however, Debt reigns supreme and this paradigm has become entrenched and embedded into people’s minds thanks to the mainstream media and specialised journals and publications, combined with Ivy League universities’ Economics Departments that have all succeeded in imposing such “politically correct” thinking with respect to financial matters, especially those relating to the proper nature and function of Public Money.

The facts are that this Model generates unnecessary loans so that banking creditors can receive huge profits, which includes promoting uncontrolled, unwarranted and often pathological consumerism, which goes hand in hand with the increasing abandonment of the traditional value of “saving for a rainy day.”

Such debts having political and strategic goals rather than merely financial ones, are usually given a thin layer of “legality” so that they may be imposed by the creditor on the debtor (i.e., in the case of The Merchant of Venice, the bond entered into between Antonio and Shylock giving the latter the legal right to a pound of the former’s flesh; in the case of chronically indebted countries like Argentina, such “legality” is achieved through a complex public debt laundering6 mechanism carried out by successive formally “democratic” Caretaker Governments to this very day).

Side Four – Privatisation of Profits/Socialisation of Losses. Lastly, and knowing full well that, in the long run, the numbers of the entire Cycle of this Model never add up, and that the whole system will inevitably come crashing down, the Model imposes a highly complex and often subtle financial, legal and media engineering that allows privatising profits and socialising losses. In Argentina, this cycle has become increasingly visible for those who want to see it, because in our country the local “Ponzi” Pyramid Cycle lasts on average 15 to 17 years, i.e., we’ve had successive collapses involving brutal devaluation (1975), hyperinflation (1989) and systemic banking collapse (2001), however in the industrialised world, that cycle was made to last almost 80 years (i.e., three generations spanning from 1929 to 2008).

Conclusions

The fundamental cause of today’s on-going global financial collapse that exerts massive distortions over the Real Economy – and the ensuing social hardship, suffering and violence – is clear: Virtual Finance has usurped a pedestal of supremacy over the Real Economy, which does not legitimately belong to it.Finance must always be subordinated to, and in the service of, the Real Economy just as the Economy must heed the law and social needs of the Political Model executed by a Sovereign Nation-State (as we back-engineer this entire system, we thus understand why it is necessary for the Global Power Elite to first erode the sovereign Nation-State and to eventually do away with it altogether, in order to achieve its monetary, financial and political ends).

In fact, if we look at matters in their proper perspective, we will see that most national economies are pretty much intact, in spite of having been badly bruised by the financial collapse. It is Finance that is in the midst of a massive global collapse, as this Model of “Ponzi” Finance has grown into a sort of malignant “cancerous tumour” that has now “metastasised,” threatening to kill the whole economy and social body politic, in just about every country in the world, and certainly in the industrialised countries.

The above comparison of today’s financial system with a malignant tumour is more than a mere metaphor. If we look at the figures, we will immediately be able to see signs of this financial “metastasis.” For example, The New York Times in their 22 September 2008 edition explains that the main trigger of the financial collapse that had exploded just one week earlier on 15 September was, as we all know, mismanagement and lack of supervision over the “Derivatives” market. The Timesthen went on to explain that twenty years earlier, in 1988, there was no derivatives market; by 2002 however, Derivatives had grown into a global 102 trillion Dollar market (that’s 50% more than the Gross Domestic Product of all the countries in the world, the US, EU, Japan and BRICS nations included), and by September 2008, Derivatives had ballooned into a global 531 trillion Dollar market. That’s eight times the GDP of the entire planet! “Financial Metastasis” at its very worst. Since then, some have estimated this Derivatives global market figure to be in the region of One-Quadrillion Dollars…

Naturally, when that collapse began, the caretaker governments in the US, European Union and elsewhere, immediately sprang into action and implemented “Operation Bail-out” of all the mega-banks, insurance companies, stock exchanges and speculation markets, and their respective operators, controllers and “friends.” Thus, trillions upon trillions of Dollars, Euros and Pounds were given to Goldman Sachs, Citicorp, Morgan Stanley, AIG, HSBC and other “too big to fail” financial institutions… which is newspeak for “too powerful to fail”, because they hold politicians, political parties and governments in their steel grip.

All of this was paid with taxpayer dollars or, even worse, with uncontrolled and irresponsible issuance of Public Money bank notes and treasury bonds, especially by the Federal Reserve Bank which has, in practice, technically hyper-inflated the US Dollar: “Quantitative Easing” they call it, which is Newspeak forhyperinflation.

So far, however, like the proverbial Naked Emperor, nobody dares to state this openly. At least not until some “uncontrolled” event triggers or unmasks what should by now be obvious to all: Emperor Dollar is totally and completely naked.7 When that happens, we will then see bloody social and civil wars throughout the world and not just in Greece and Argentina.

By then, however, and as always happens, the powerful bankster clique and their well-paid financial and media operators, will be watching the whole hellish spectacle perched in the safety and comfort of their plush boardrooms atop the skyscrapers of New York, London, Frankfurt, Buenos Aires and Sao Paulo…

Notes

1. The concept of “Geoeconomics” was coined by the New York-based Council on Foreign Relations, through a studies group honouring Maurice Greenberg, the financier who was for decades CEO of American International Group (AIG) which collapsed in 2008 and had strong conflict-of-interest ties with major insurance and reinsurance broker Marsh Group whose CEO was his son Jeffrey. Both father and son were indicted for fraud by then New York Attorney General Elliot Spitzer. Spitzer would later pay a very heavy price for this after becoming Governor of New York State when someone “discovered” his sex escapades which were quickly blown up into a major scandal by The New York Times…

2. We have described the basic Global Power Elite structure, model and objectives in our e-Book The Coming World Government: Tragedy & Hope”, available through www.asalbuchi.com.ar.

3. For more information, see the Third Pillar of the Second Republic Project “Reject the Debt-Based Economy” on www.secondrepublicproject.com.

4. Some notable exceptions: Today: Libya, Iran, Syria, China; In the past: Peron’s Argentina, Germany and Italy in the 30’s and 40’s…. Are we seeing a pattern here?

5. See The New York Times, 22 September 2008

6. See White Paper comparing Debt Laundering mechanisms to Money Laundering mechanisms, lodged under Pillar No 3 “Reject the Debt-Based Economy” of Second Republic Project inwww.secondrepublicproject.com.

7. This is more fully described in the author’s book

The Coming World Government: Tragedy & Hope”, in the chapter “Death & Resurrection of the US Dollar”. Details onwww.asalbuchi.com.ar. Also available upon request by E-mail: salbuchi@fibertel.com.ar.

Adrian Salbuchi is a political analyst, author, speaker and radio talk-show host in Argentina. He has published several books on geopolitics and economics in Spanish, and recently published his first eBook in English: The Coming World Government: Tragedy & Hope” which can be ordered through his web sitewww.asalbuchi.com.ar, or details can be requested by E-mail to arsalbuchi@gmail.com. Salbuchi also works as strategic consultant for domestic and international companies. He is also founder of the Second Republic Project in Argentina, which is expanding internationally (visit:www.secondrepublicproject.com).

The above article appeared in New Dawn No. 128 (September-October 2011). www.newdawnmagazine.com.

The Largest Heist in History

The Largest Heist in History

 

October – December 2008

 

Building the Great Pyramid: The Global Financial Crisis Explained

 

This article was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

 

When the financial crisis erupted at the end of September 2008, there was an unusual sense of incredible panic among banking executives and government officials. These two establishment groups are known for their conservative, understated approach and, above all, their stiff upper lip. Yet at the time they appeared to the public running about like headless chickens. It was chaos. A state of complete chaos. Within a few weeks, however, decisions were made and everything seemed to returned to normal and back under control. The British Prime Minister Gordon Brown even famously remarked that the government “saved the world.”

 

But what really caused such an incredible panic in the establishment well known for its resilience? Maybe there are root causes that were not examined publicly and the government actions are nothing more than a temporary reprieve and a cover-up? Throwing good money after bad money, maybe?

 

Money Making Machine

 

In order to answer these questions we have to examine the basic principles on which the banking system operates and the mechanisms that caused the current crisis. Students at the A-level are taught about “multiple deposit creation,” It is the most rudimentary money creation mechanism for banks, which if administered properly serves the economy and public at-large very well. In the deposit creation process a bank accepts deposits and lends them out. But almost every lending returns soon to the bank as a deposit and is lent again. In essence, when people borrow money they do not keep it at home as cash, but spend it, so this money finds its way back to a bank quite quickly. It is not necessarily the same bank, but as the number of banks is limited (indeed very small) and there is — or was — a very active interbank lending. In terms of deposit creation the system works like one large bank.

 

Therefore, the same money is re-lent over and over again. If all depositors of all banks turned up at the same time there would not be enough cash to pay them out. However, such a situation is highly unlikely. Every borrower repays his loan and pays interest on it. In principle, the difference between a loan and a deposit interest rate is a source of the banks’ profit. Naturally, banks have to account for some creditors that will default and reflect it in the lending interest rate, or all the creditors who repay cover the costs of defaults. On top of it, the banks possess their own capital to provide security.

 

Fundamental to this deposit creation principle is the percentage of deposits that a bank lends out. The description above used a 100% loan-deposit ratio, meaning that all deposits are lent out. In traditional banking this ratio was always below 100%. For example, years ago, Westminster Bank (before it merged into National Westminster Bank), intended to lend out 86.5% of every deposit. For every £100 deposited, the bank lent out £86.5, while the remaining £13.50 was retained in the banks reserve with a small portion of it kept in the Bank of England. In practice, this ratio was the bank’s control tool on deposit creation process, ensuring that the amount of money supplied to the market was limited. According to this principle, for every £1 deposited, a bank lends out £0.865. After only 5 cycles the amount is reduced to below £0.50 and after 32 cycles it is below 1 penny. If this process continued forever the total amount of money lent out of a pound would be less than £6.41. With every cycle of deposit creation, a bank built up its reserves, ultimately collecting almost entire £1 for every £1 initial deposit. Added to capital repayments, interest payments on loans and the bank’s own capital base this system ensured that that there was always enough money in the bank for every depositor. For years banks worked as a confidence trick – the notional value of deposits and liabilities to be paid by the bank exceeded the value of money on the market. Since only a very small number of depositors demand cash withdrawals at the same time and almost all these paid-out deposits are deposited in a bank again quickly the banks ensured that every depositor got his money while circulating money in the economy and stimulating growth. The loan-deposit ratio was a self-regulating tool. As with every cycle it multiplies, the reduction of amounts created decreases exponentially and quickly. The faster the deposit creation cycles occur the faster the reduction progresses, thus accelerating with every cycle. The total “created” from the original £1 deposited in a bank is a finite, not more than £6.41 at the 86.5% loan-deposit ratio, backed by nearly £1 reserve. It is an inverted pyramid scheme starting from a fixed initial deposit base and quickly reducing through deposit creation cycle to zero.

 

Building a Pyramid

 

In a City bar back in 1998, an academic was discussing modern banking with his City colleagues from university. He was encouraged to invest in shares as their growth was well above inflation. He pointed out, however, that the inflation index does not take into account the growth of share price and as a consequence the market will run out of cash to pay for shares at some point. The only way would be down—a shares price crash. His City colleagues argued that there would be additional money coming in from different economies preventing a crash (a pretty thin argument in the world of global banking as foreign investors were already market players.) They also argued that the modern financial instruments allowed “securitisation”, “hedging” the risk and “leveraging” the original investment. Indeed it was a killer argument.

 

The deposit creation process is at the heart of the banking system servicing the public and stimulating economic growth. The modern banking instruments of securitisation, hedging, leveraging, derivatives and so on turned this process on its head. They enabled banks to lend more out than they took in deposits. According to Morgan Stanley Research, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. Another conservative estimate shows that this indicator for major UK banks was at least 174%. For others like Northern Rock it was a massive 322%. [For more details, refer to Table A.] Banks were “borrowing on the international markets” and lending money they did not have but assuming to have in the future. Likewise, “international markets” were doing exactly the same. At first sight it might not seem so much different than deposit creation. Deposit creation is lending money by the banks they do not have on the assumption that they will get enough back in sufficient time in the future from borrowers.

 

On closer examination there is a remarkable difference. With every cycle of the 86.5% loan-deposit ratio every £1 deposited is reduced becoming less than £0.50 after 5 cycles and less than 1 penny after 32. With a loan-deposit ratio of 137% — lending £137 for every £100 — not to mention 174% or indeed 322%, the story is drastically the opposite. Imagine a banker gets the first £1 deposit in the first week of a new year and lends it out. Imagine that twice every week in that year the amount lent out comes back to him as a deposit and he sustains such deposit creation process with a ratio of 137% twice every week for the year. This is a perfectly plausible scenario on the current electronic financial markets. By the following New Year’s Eve, the final amount he finally lends out from the original £1 is over £165 trillion (165 with 12 zeros, or over 16 times the amount governments have so far injected into economy). The total amount lent out in a year by a banker is over £447 trillion. Significantly with a loan-deposit ratio 100% or above no reserve is created.

 

It is an acknowledged monetary principle that the lending interest rate cannot be below 0%. This would allow borrowers to borrow money and banks would keep paying them for doing so. Indeed, there would be no incentive to lend and borrowing would have become a source of income for a borrower. Ultimately, lending would have stopped completely. It is a very similar principle that the loan-deposit ratio cannot be 100% or above, as in such circumstances, an amount of money coming from economic activities into deposit creation cycle would be multiplied very rapidly to infinity. Economic growth and inflation would not be able to catch up with it, which happens if loan-deposit ratio is below 100%.

 

The loan-deposit ratio below 100% that traditionally served as a very strict self-regulating mechanism of money supply stimulating the economy becomes a killer above 100%. The banking system becomes a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable. Any bank can always print an impressive account statement or issue a new deposit certificate. The problem is whether the cash is there.

 

The qualitative and quantitative difference between loan-deposit ratio of 0% and 99% is infinitely smaller than between 99% and 100% or 101%. With ratios between 0% and 99%, we always end up with a money-making machine that creates a finite amount of money out of the initial deposit with a reserve nearly equal to the original deposit. If a ratio climbs to 100% or above the amount of money created spirals to infinity, if above 100% with exponential speed and no reserve is generated in this process. It is little wonder that Northern Rock which used the ratio of not less 322% collapsed first well ahead of others, HBOS with a ratio of around 175% ended up in a meltdown scenario later, while HSBC that used the ratio of not more than 91% was relatively safe (being a part of the global banking system, however, it has been at a risk stemming from the actions of other banks). [For more details, refer to Table A.]

 

Facing the Inevitable

 

For years the impressive-looking banks results brought a lot of confidence and the City was hailed as a beacon of the British economy. Bank executives, traders and financiers collected huge bonuses — not surprisingly, a lot of it in cash, rather than financial instruments. Influential economists and politicians alike justified stratospheric bonuses and hailed the City as the workhorse of the economy. Government strategic decisions were quite often subordinate to the objective of keeping the City strong. Irrational exuberance triumphed. Ultimately, City executives, traders and financiers proved to be pyramid purveyors not any more sophisticated (although perhaps better mannered) than their Albanian gangster counterparts who carried out a similar scheme 1996-97.

 

 

As with any pyramid scheme (and as long as there is still cash in the scheme) the beneficiaries are the operators of the scheme and “customers” who know when to get out of it. During the hectic dawn of the current financial crisis it is very likely that bank executives realised that it was the time that their pyramid started collapsing. This easily explains why banks stopped trusting one another and interbank lending collapsed. It was impossible to predict which node (financial institution) of a pyramid scheme would collapse next. There was a very distinct risk that if a bank lent money to another, the next day the bank-borrower may be bust and the money would be gone.

 

The collapse process, always an instant one, is accelerated by a dramatic loss of confidence amongst the pyramid customers. Once a single customer cannot withdraw his deposit, a great number of others start demanding payouts. City executives must have known this mechanism and explained to the government officials that unless the state shifts its weight injecting cash, guaranteeing deposits and lending, the system was bound to collapse. The Northern Rock case was a good dry run that pyramid purveyors gave government officials in September 2007. Facing a complete meltdown and an “Albanian scenario” the government acquiesced to the bankers’ demands by injecting cash on an unprecedented scale and giving wide guarantees.

 

The Route to Recovery

 

This is only the beginning of the story. According to some estimates there are around $2 quadrillion worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system — so-called toxic waste. These instruments are in the financial system and there are prospective beneficiaries of these instruments when they are redeemed, however. Furthermore they appreciate in value and attract interest so their notional value continues increasing over time. Governments around the world injected cash into the global banking system to a tune of around $10 trillion, or 200 times less than $2 quadrillion. At the same time they allowed bank executives and financiers who organised this pyramid scheme to remain at their posts to manage the injected money. Governments became the ultimate customers of pyramid purveyors with the hope that when they offer their custom it would somehow stop the giant pyramid scheme from collapsing. This is extremely naïve and very dangerous. The incredibly fast growth to infinity of pyramid schemes, which is only accelerating, will ensure that the government will not stand a chance to sustain it, unless this massive pyramid scheme is brought to a halt and liquidated. But there is no sign of governments contemplating doing that yet.

 

If governments do not liquidate the global pyramid scheme, the money they injected will be, in time, converted into toxic instruments (e.g. securities) and cashed in by organisers and privileged customers of these schemes (or in the case of Albania, gangsters and their customer friends). As the amount injected is around 200 times less than the notional value of toxic instruments, the economy will not even see a difference. It will be a step back to September 2008, only now with trillions of dollars of taxpayers’ money spent to sustain the pyramid scheme. It will be merely throwing good money after bad. But can governments afford to come up again with the same amount money and do it 200 times over or more? This is based on a very optimistic assumption that the notional value of toxic instruments is not increasing. If governments take the route of continuing to inject money, they will make taxpayers dependant on the financial system in the same way that criminal loan sharks control their customers — their debt is ever increasing and customers keep on paying forever as much as it is possible to extract from them.

 

In a normal free market economy a business that fails should be allowed to collapse. If a business is a giant pyramid scheme, like the current financial system, it must be allowed to collapse and its executives and operators should face prosecution. After all running pyramid schemes is illegal. Letting the banks collapse would have been a far more commercially sound solution than the current approach, provided the governments would have secured and guaranteed socially vital interests directly. For example, individual deposits would be guaranteed if a bank collapsed. Deposit accounts records, along with mortgage and genuine business accounts, would be moved to a specially created agency of the Bank of England which would honour them with government help. If a pension fund collapsed due to a bank collapse, individual pensioners would continue receiving their unchanged pensions from the social security system. This would guarantee social stability and a normal flow of cash into the economy.

 

The hard part would be to liquidate financial institutions while sifting through their toxic waste and to distinguish genuine non-toxic instruments and the results of pyramid scheme operation. Deposits, mortgages and business accounts are clearly non-toxic in principle. However, in the modern banking they were mixed with potentially toxic assets. This would be a gargantuan task.

 

The current “quantitative easing” (printing cash) is an attempt to convert more toxic instruments, like securities, into cash, albeit at some inflationary costs, and make them state-guaranteed, as cash is guaranteed by the state. It is just another trick of the financial pyramid purveyors to extract even more cash from taxpayers through the governments on the back of the scheme. Looking back to the 1990s, Albanian gangsters must feel really crossed considering that they were not offered such a “rescue” package first by Albanian government, and then by the World Bank and International Monetary Fund.

 

Unless and until the governments identify, isolate and write off toxic instruments held by financial institutions every pound put into “rescue” is very likely to end up being good money thrown after bad. (The governments, as ultimate customers of the global pyramid scheme, are supplying the pyramid purveyors and beneficiaries with tax payers’ cash and the largest heist in history continues.) Alongside the liquidation process, but after the toxic waste has been isolated and fenced off in failed financial institutions, governments must launch a fiscal stimulus package and go after the pyramid purveyors and beneficiaries to recover any cash and assets from them and bring them to justice. As the financial pyramid scheme is global, any action — including the recovery cash and assets — must be global, too. It is intriguing that banks in traditional offshore financial centres like Belize, US Virgin Islands, Bermuda, do not appear to suffer from liquidity problems. They do not require rescue packages even though a lot of them are subsidiaries of much larger banks which are affected by the current crisis. Is it a sheer coincidence that, for example, the loan-deposit ratio at US Virgin Islands banks is at a very prudent 42%? Little doubt there is a lot of cash there not created in those little economies. Mr John McDonnell MP [Member of Parliament in the UK] wrote in The Guardian on 20 February 2008:

 

“One series of offshore trusts associated with Northern Rock were called Granite (presumably a witty pun on the Rock bank). Granite holds approximately 40% of Northern Rock’s assets, around £40bn. Yesterday, the Treasury minister told the house that “Granite is and has always been a separate legal entity”.

 

Let’s look at that: Northern Rock does not own Granite, that’s true. It is however, wholly responsible for it: it’s officially “on” its balance sheet in its accounts. But it is legally “off” its balance sheet when it comes to getting hold of its assets as the basis for the security of the sums owed the Treasury.

 

Granite is based in Jersey, an offshore tax haven where Northern Rock’s best assets sit outside the reach of taxpayers. So the bill to nationalise Northern Rock will, in fact, be nationalising only dodgy debt, which will increase the burden on the taxpayer and put at risk the jobs of Northern Rock workers. The sad truth is that by failing to regulate the financial sector adequately, the government has been hoist by its own neoliberal petard. The participants in this tax dodge will be allowed to walk away with millions, when workers may lose their jobs and the taxpayer risk billions.”

 

Epilogue

 

Some economists see overvaluation of financial instruments as the root cause of the current financial crisis. Overvaluation was not a necessary factor, but only a contributory and accelerating factor that worsened the crisis. The crux of the matter is that financial institutions have considered financial instruments, like securities, as good as cash and added them as cash in the deposit creation cycles at a rate that brought the loan-deposit ratio to 100% or above. Without non-cash financial instruments considered as cash it is impossible to go above 100% in a deposit creation cycle. And it does not matter if these instruments were given proper risk characteristics individually discounting their notional, face value. As long as with any residual value, they have been added in deposit creation process to an extent that its ratio was 100% or above, the disaster was only a matter of time. Because of exponential character of the creation it was a matter of a short time.

 

Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events: natural disasters, wars, etc or sometimes unpredictable mood swings of market players. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc. However it is AIDS that made the curable illnesses lethal.

 

Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.

 

 

TABLE A

 

UK BANKS

[source: http://news.bbc.co.uk/today/hi/today/newsid_7648000/7648508.stm, http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5106455.ece]

 

BANK LOAN/DEPOSIT RATIOS MARKET SHARE

HSBC 90% 2.8%

RBS 112.3% 6.2%

Barclays 123.45% 6.3%

Lloyds TSB 140.84% 8.1%

Alliance & Leicester 172.41% 3.6%

Bradford & Bingley 172.41% 3.9%

HBOS 175.43% 20.1%

Northern Rock 322.58% 8.1%

 

Weighted average LOAN/DEPOSIT RATIO = 174.26%

 

Additional information:

 

– the RBS position includes ABN AMRO – without it RBS position was around 135% [source: MS Research/Howard Davies Presentation – http://www.lse.ac.uk/collections/meetthedirector/pdf/Banking%20and%20the%20State%2002.10.08.pdf]

 

– Abbey position after acquisition of Bradford & Bingley was 75% [source: http://www.santander.com/csgs/StaticBS?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1205449310144&cachecontrol=immediate&ssbinary=true&maxage=36000]

 

TABLE B

 

[source: MS Research/Howard Davies Presentation – http://www.lse.ac.uk/collections/meetthedirector/pdf/Banking%20and%20the%20State%2002.10.08.pdf]

 

COUNTRIES/REGIONS LOAN/DEPOSIT RATIOS

UK 137%

Germany 121%

USA 105%

France + Benelux 103%

UK + Asia 89%

 

TABLE C

 

[source: Asian Banks? Is Credit Crunching Asia. – http://www.fidelity.com.sg/pdf/volatility/FD%20-%20Asian%20Banks.pdf

 

Singapore, Taiwan, Philippines, Malaysia, India, India, Indonesia Thailand, China. Hong Kong had loan/deposit ratio between 80% – 60%, whilst South Korea had nearly 130%.

 

APPENDIX A

 

MECHANICS OF THE FINANCIAL CRISIS 2008 – 2009: WHY CAPITAL REQUIREMENTS DID NOT WORK

 

Below is a draft of explanation (in a rigorous way) why financial institutions, technically, complied with Basel 1 and/or Basel 2 of capital requirements (8%), yet they collapsed.

 

1. Definitions: CR(T) – total capital held (requirements by Basel @ minimum 8%); CR(I) – capital held in financial instruments (taking into account risk, i.e. discounting for it); CR(C) – capital held in cash; L/D – loan to deposit ratio.

 

2. CR(T) = CR(I) + CR(C); when L/D is above 100% then CR(C) portion of CR(T) tends to 0; this means that a ratio of cash reserves to balance sheets also goes to 0. It happens with exponential speed (i.e. this process constitutes a pyramid scheme). In practice, this means that in banks balance sheets growing at exponential rate (base above 1), there is less and less cash, i.e. cash reserve to balance sheet ratio also goes to 0 at exponential speed.

 

3. Initially in the first phase, this process sucks the cash out of reserves, CR(C), and replaces them with instruments (so-called assets) CR(I) as CR(T) has to be maintained. The initial gains and increase in values of assets CR(I) is achieved with additional liquidity on the market (at the costs of CR(C) depletion). This drives the price of assets that constitute CR(I) high.

 

4. The assets of CR(I) are valued using price-to-market method. This creates a lethal cycle: the higher assets of CR(I) go up, the more cash of CR(C) is sucked from bank reserves, which results in even higher assets of CR(I) valuation (in price-to-market model). This cycle has exponential growth of cash, CR(C), being sucked out of the banking system, therefore, by definition, it is a pyramid. This constitutes a period of exuberant growth. However it is a bogus growth: statistics are induced by incredibly fast growing balance sheets and consumer confidence is induced by temporary massive availability of cash (being sucked out from cash reserves, CR(C)).

 

5. Like in any pyramid, as long as there is still enough cash in the banking system to sustain high price to market CR(I), it allows financial institution to maintain the right level of capital requirement of CR(T), technically complying with Basel 1 and Basel 2. However the element of CR(C) of CR(T) becomes smaller and of CR(I) becomes larger. A ratio of cash to balance sheets gets smaller at exponential speed, i.e. it is a pyramid scheme.

 

6. Any pyramid scheme collapses when due to an exponential speed of growth of balance sheets, availability of cash becomes inadequate. This creates the second lethal cycle: due to shortage of cash confidence goes down, value of assets CR(I) valued at price to market goes down, this creates a necessity for bank to start withholding cash supply to make up for the fall of CR(I) with CR(C) to comply with CR(T), which leads to even greater lack of cash and further loss of confidence and so on. And the cycle becomes a meltdown.

 

7. With L/D ratio below 100% such cycles look completely different. For example if CR(T) is 8%, L/D ratio of 92%. Using financial instruments as part of capital requirement does not lead to an exponential growth of balance sheets but it is always limited by a final amount of money. In case of CR(T) 8% and L/D 92% the total money put in circulation from $1 is $12.5. (Unlike when L/D ratio is above 100% this becomes massive. Technically it can even go to infinity.) Therefore price to market method works as valuation method when L/D is below 100% as it reflects cash in circulation at all times, rather than inflated and continuously growing balance sheets when L/D ratio is above 100% (see paragraph 4 above). Interestingly HSBC kept L/D ratio at 90%, thereby assuring 10% CR(T) but importantly with L/D below 100%.

 

8. When L/D ratio is below 100% an economic crisis is a readjustment sometimes even caused by consumers’ confidence. That is why in such situations consumers are encouraged to spend as the cash they hold rebalances back cash to balance sheets and CR(T) ratios to correct level.

 

9. When L/D ratio is above 100%, at a point of collapse consumers are very short of cash to spend and big debts, banks do not have money anymore to lend as any cash put in as deposits by the consumers (or injected by government) has to rebalance the balance sheets to get CR(T) to a right level. Due to a huge disparity this rebalancing process is ineffective and it is unrealistic to expect it to be effective. (Over $2 quadrillion of unbalanced balance sheets was thus far met to around 1%.)

 

10. Example: when L/D ratio is below 100%, price to market valuation of companies reflects their fair value. Normally if an investor wants to take over a company he has to pay a premium (as control has a value to an investor). When L/D ratio is above 100% after a point of collapse, even depressed price to market valuation of companies overall does not reflect a market value, but actually overvalues them. If an investor wants to take over a company for cash he is likely to negotiate a good discount (as the market is cash hungry).

 

11. One can generalise: when L/D is below 100% price-to-market valuation method reflects market liquidity with an element of confidence factored in it; when L/D is above 100% (or equal) price-to-market valuation method reflects misguided confidence in banks balance sheets until a collapse of this pyramid.

 

Summary:

 

1. The analysis above is not made with benefit of hindsight: anyone who understands basics of computational complexity (issues around Cobham’s Thesis) would have done it 10 years ago. Therefore avoiding the exiting crisis was extremely trivial.

 

2. This analysis is deterministic and events are predictable. The exact point of collapse is not easily predictable, but since it is a pyramid scheme it is inevitable in short time. (I.e. it was as predictable as Albanian pyramid scheme collapse.) It appears to be a reason why lawmakers made it illegal.

 

3. It is clear that there was no failure in terms of law and regulations: Basel 1 and Basel 2 stipulate CR(T) at 8% and pyramid schemes, i.e. L/D ratios above 100%, are outlawed. The failure came from non-enforcement of existing law and regulations.

 

4. The rigorous mathematical proofs and quantitative analysis is available on request. You may also wish to look into a basic example how it all works.

 

 

 

POSTED BY GREG PYTEL AT 13:07

Restoring the Dollar II


Restoring the Dollar II


Dr. Edwin Vieira, Jr.

Constitutional Control Removed

Clearly, the Federal Reserve was established to remove the Constitution as the controlling agency in national monetary policy, and to guarantee that certain special interest groups be monopolistically represented in determination of that policy for the special benefit of those groups and at everybody else's expense. There are two levels of analysis on which to consider this fact.

First Level: Banking

The Federal Reserve System is a tool for stabilizing the inherently fraudulent fractional reserve system. The purpose of the Federal Reserve System is not to do what the bankers want; but to do what the bankers need.

Let us look at the way a monetary system corrupts from a regime of commodity money to that of fiat. In a regime of commodity money, the bankers employ the inherently fraudulent fractional reserve system; they expand the supply of fiduciary money beyond the supply of commodity money available. This has two effects.

One, it enables bankers to loan more money than they otherwise would, and that increases their profits.

Two, it makes the holders of the fiduciary money unknowing, and, I assume, unwilling partners with the bankers in those excessive loans and spreads the risk of the loans throughout society, indirectly insuring the bankers at the expense of the public.

Because the expansion of the supply of this inherently fraudulent fiduciary money is limited by the possibility of bankruptcy — lots of people asking for redemption, followed, logically by the bankruptcy of the banks — the bankers support legislation that is designed to insulate the fractional reserve banking system.

First Con: Propaganda

They use propaganda and all sorts of disinformation to con the public into believing that the banks are sound. One such mechanism is so-called deposit insurance. "If we fail, the government will pay. Don't ask us who will pay the government." But it is you who will actually pay. So the first con is disinformation.

Second Con: Suspension of Specie

With their influence, as we saw in the 1930's and many instances before that, the bankers asked the government to authorize what was called "suspension of specie payments" or simple refusal to fulfill their promises to redeem the fiduciary money with commodity, allowing bankrupt bankers to stay in business — not allowed for any other segment of the economy.

Suspension of specie payments is a key indicator of the breakdown of the free-market economy because that is a governmentally allowed repudiation of contracts. In effect, they are governmentally licensed thefts.

Third Con: Fiduciary Turns Fiat

To prevent bank runs altogether, the bankers get government permission to repudiate fiduciary money totally; converting the fiduciary money into fiat money. No more bank runs: there's nothing to redeem.

The government then forces circulation of the fiat currency by some mechanism such as making that to be money for payment of taxes for public expenditures. Or the government could declare that money legal tender for all debts; or the government could outlaw contracts that are payable in any other form of money, especially commodity money. That is precisely what the government did in the banking crisis in the 1930's –1933, '34 and '35. They, in essence, with respect to gold coin, at least, turned Federal Reserve Notes into a fiat legal tender currency. This substituted the government, or the taxpayers, for the banks and the banks' shareholders as the ultimate guarantors of fiat money, in return for which the banks agreed to do two things:

Bankers' Concessions

First, they agreed to monetize the public debt; that is, to buy government securities for duly created fiat money, in effect, enabling the government to use the fiat money system as an instrument of taxation.

Second, the banks agreed to cooperate in some kind of cartel or self-regulatory scheme to control the expansion of the supply of fiat money within limits that maintained public confidence; that is, the government and the banks agreed to divide the amount that can be looted from the general public by manipulation of the money supply and to moderate that looting so that the system doesn't collapse and the public doesn't catch on.

The fractional reserve banking system is nothing but a conspiracy between the public officials and the bankers to loot the American people. The Federal Reserve is simply a very elaborate and complicated device that has been set up to accomplish these simple ends in a higher more deceptive way.

The Federal Reserve system was created in response to failures in the reserve banking system at the local or regional levels. It is a national system regulating all; and it was an attempt, essentially domestically, in 1913, and then internationally under the Bretton Woods agreement in 1944, to expand that kind of fractional reserve system, first throughout the United States and then throughout the world.

Real fiat money came into existence in this country only in 1968. The promise to pay in gold was repudiated in 1933; and the promise to redeem all currency, or any currency, in silver was refuted in '67 and into '68. It was in June of 1968 that we finally had, for the first time in this country, a true fiat currency in the Federal Reserve. So this is a fairly recent problem, as historical political problems go.

In only about twenty years of fiat currency we have seen a geometric breakdown in the monetary system, under which we suffer today.

In this system, the Federal Reserve plays a simple but very vital role. The public confidence in the monetary banking system weakens because of the effect of overexpansion of the supply of fiat money. That is always the direction in which fiat money goes: expansion, expansion, expansion. The Federal Reserve jumps in to "restore confidence," by what they call "fighting inflation;" that is, producing increases, and then decreases in the purchasing power of the medium of exchange. The Federal Reserve may use what the public considers drastic means in this alleged fight. Nixon imposed wage and price controls with a four percent inflation. But the Federal Reserve will never use means so drastic that they precipitate a genuine economic collapse or seriously endanger the long-term interests of the banking cartel, its satellite industries or its political cronies.

However, any system of fractional reserve banking suffers from inherent instability that increases over time; because at the base, fractional reserve banking is a kind of Ponzi or pyramid scheme. For that reason, fractional reserve banking is a confidence game in both senses of the term. The Federal Reserve, the banking cartel, and the politicians of the American one-party system operate under the theory that you can fool all the people some of the time, and some of the people all of the time, and that's good enough. But they forget that, as Lincoln remarked, "You can't fool all the people all the time." Over time, some people encourage others to learn what's going on. And people who have learned tend to act.

So we can expect that the remaining lifetime of the Federal Reserve confidence game will be relatively short.

Second Level: Economic

Now let me shift to a somewhat higher level of analysis.

The Federal Reserve system is not simply a control mechanism for the national banking cartel. It is one of the most important mechanisms in a pervasive system of Fascist economic regulations that has been set up in this country, slowly but surely, since the turn of the century. This explains the political independence of the Federal Reserve system in a way that is much more logical than the idea that money and banking are not politically important, divisive or even interesting.

If a Fascist administrative state is to regulate the economy with relative autonomy from the electoral public and most special interest groups — which is the definition of an administrative state — it runs the economy without having to be subject to the whims of the voters. In that kind of state, the monetary agency has to claim political independence. In fact, all of the major regulatory agencies have to claim political independence — which, they really all do claim, to some degree. The Federal Reserve claims it to the greatest degree. So political independence is precisely what one would expect the Federal Reserve to claim, being a part of an anti-Democratic mechanism of economic and political control.

And that no constitutional branch of the national government — not the Congress, not the President, and not the Judiciary — ever disputes the Federal Reserve system's supposed independence, proves that those branches, too, have been couped with agencies of this Fascist state.


 

… by functioning as a mechanism for redistributing wealth, modern political money systematically corrupts the electoral process because it enables politicians to buy votes with promises of new government spending programs made possible only by the banking system

Is Fractional-Reserve Banking Fraudulent?

September 19, 2005

Is Fractional-Reserve Banking Fraudulent?
by Nelson Hultberg

"Where you and Professor Fekete are making your mistake is that you are condoning fraud with your toleration of fractional-reserve banking in the discounting of real bills. It is incumbent on government to prohibit such a practice. The law must make sure that in the case of time deposits, bankers be required to loan no more than the amount of the deposit. And the law must stipulate that demand deposits can never be loaned at all since they are payable to the owner on demand."

So wrote a reader in response to my recent article, The Money Fallacies of Rothbard. This reader is defending the advocacy of 100% gold reserve banking. And he is prepared to enforce by law its requirements. Under such a system, no banker would be able to issue credit in excess of the gold coins that have been given to him under a time contract, and no banker would be able to loan or invest demand deposits of gold coins at all. Any violation of these requisites is to be termed fraud, and any banker partaking in such is to be prosecuted. This is basically what the Rothbardian camp will have to endorse if they are to implement their goal of a 100% gold monetary system.

How Do We Define Banking Fraud?

The important questions that we must ask here are: Would such a legal approach be logical and practical? Would it be true to freedom and justice? And most crucial of all, is it fraud for bankers to loan in excess of their gold reserves? Let's investigate further and see if we can come up with some definitive answers.

The determination of what is "fraud" in the policies of banking revolve around how we are to define the money that a depositor gives to a bank. For several centuries now, it has been defined by the courts in Europe and America as a loan to the bank. The banker is thus entitled to invest those funds in various profit-making ventures. In this sense, all banking can be considered to be "investment banking." We as depositors operate fully aware of this. We realize that the banker is going to invest our money in any number of possible vehicles — real estate loans, auto loans, venture capital loans, treasury bonds, muni-bonds, real bills, etc. We know that banks are in business to make money, and that they are going to put our deposits to work in pursuit of profits. In other words, we know ahead of time that this is going to take place. We also know that we don't have to deposit our money in such a bank under these conditions. But we do so because it is more preferable than keeping our money under the mattress, or in a safe deposit box.

Murray Rothbard challenges this practice and says that it should be declared by the courts as fraudulent. He maintains that the depositor's money should be declared to be what is termed in legal jargon, a "bailment." This means that the deposit should be declared to be equivalent to a warehoused item. The banker cannot loan it out; he must keep it on hand for whenever the depositor wishes to demand it back. In other words, the depositor is not loaning his money to the banker; he is putting it there for safekeeping to be retrieved whenever he wishes. [See The Case Against the Fed, Mises Institute, 1994, pp. 40-45.]

The banker, under the Rothbardian "bailment" system, would be able to only loan out or invest clearly stipulated time deposits of gold and gold notes, i.e., CDs. All demand deposits of such, i.e., checking accounts, would have to be warehoused. No percentage of them could be loaned out or invested by the banker, whether in real estate, bonds, or real bills. Period. Thus the term 100% banking. All deposited money (whether in gold or gold notes) must be warehoused unless it is stipulated as a time deposit. And any credit issued by a banker on time deposits of gold cannot exceed the amount of the time deposits.

This certainly is one way to structure the banking system. It would be super safe that is for sure. But would it be practical, and would it be free and just under the principles of a free-market society? Unfortunately the real issue is being overlooked by almost everyone: Are we to mandate by law that all banking be of this nature? Or should we simply leave the market FREE to decide on its own what kind of banking structure people would prefer to utilize?

For example, in a genuinely free-market there would be nothing to stop entrepreneurs from forming Rothbardian "warehouse banks" by opening up for business to try and attract customers. And no doubt, they would gain a certain portion of the depositing public. They would have to charge their customers for this service, but I'm sure there are a certain amount of people who would be willing to pay for such a warehouse form of banking. However, I doubt their number would be sizeable. Far and away, most depositors would prefer to deposit their money in the more conventional "fractional-reserve banks" because these types of banks would offer higher interest for their time deposits, and they would not charge for their demand deposits. In fact in a true free-market, many such banks would probably pay interest on demand deposits also. Some do right now under our present form of banking.

Government or Market — Which Is Best?

Here is the paramount issue involved — to which Rothbardians remain steadfastly impervious. What they are advocating will require that government mandate what type of banking the people should be allowed to partake in, rather than letting the marketplace decide. Government will have to legally stipulate that no one be allowed to operate a "fractional-reserve" bank, that all banks must in fact be "warehouse" banks. This is why I have stated in past articles that Rothbardians will have to become government interventionists in order to implement their 100% gold monetary system. They must interject government into the free interaction of entrepreneurs and customers to dictate what form of trade they may partake in.

If men and women are simply left alone to make up their own mind (i.e., if we allow the marketplace to decide), then both fractional-reserve and warehouse forms of banking would spring up. My guess is that the overwhelming majority of people would choose to bank with the former rather than the latter. But which one they choose is not the issue. The issue is who is to make the choice between these two forms of banking — the government or the people? Are we to have the choice dictated to us by politicians and their armed police, or are we going to be allowed to freely decide for ourselves in the marketplace?

Because they declare fractional-reserve banking to be fraud, Rothbardians must opt for state dictates and armed police to decide. If they truly believe such banking practices to be fraudulent, they must bring in the law. This is the law's job, to prohibit "fraud." The question of allowing fractional-reserve banking thus cannot be left up to the free choice of the marketplace. It must be mandated by government. But this is a very sticky issue, this thing the Rothbardians are calling fraud. Are they defining it correctly? I don't think so. Fraud's first requisite is what we call "intent." The defrauder has to be "intending" to deceive and rob the other party of his property. He has to be engaged surreptitiously in acts of thievery. He has to be purposely trying to steal values from someone by not fully disclosing relevant details.

Is this what would take place in a free-market banking system? In other words, would it be fraud for bankers to partake in fractional-reserve lending under the requirement to redeem all notes in gold upon demand and openly disclose their policies and their portfolios? I think not. It is fraud for banks to be able to suspend specie payment and still operate, and it is fraud for banks to hide their portfolios from the public. But if these privileges and policies are disallowed, then what bankers and their depositors do between themselves in free trade is their business. If the bankers wish to hold only 50% gold coin reserves behind their purchase of merchants' real bills because they know from hundreds of years of experience that such a reserve is more than sufficient to handle redemption requests, it is not fraud. They are openly divulging this aspect of their portfolio to the public, and they are not intending to steal anything from anybody. To some this might be risky and irresponsible, but to suppress this by use of government law is to violate the rights to free trade of the bankers and depositors.

The Rothbardian detractors of fractional-reserve banking have constructed a theory of malfeasance to serve their ideological agenda! In so doing, they are leaving out the concept of "intent." And they are ignoring the fact that under a free-market system of banking the policies and portfolios of all bankers would be fully disclosed.

Therefore the practice of fractional-reserve banking in a free-market system would not be fraudulent. The reason why is because all banks would be required to redeem all gold notes in specie (and if they didn't, they could be held liable under law for their failure). In addition, they would have to fully disclose the content of their portfolios, which would be brought about through the "competition for reputation" that would naturally develop in a monetary system devoid of government control. See my article, Real Bills vs. Rothbard's 100% Gold System for a detailed discussion of why and how this would work. So the key is to divorce banking totally from the government control and intervention that is corrupting it, and it would police itself as far as quality and liquidity are concerned through natural market forces. Perhaps it could even be mandated legally that banks fully disclose every quarter, but that is a question that legal scholars such as Edwin Vieira would have to answer.

Further Disclosure — Boon or Bane?

Rothbardians, no doubt, would insist on further, more explicit forms of "disclosure" on the part of banks, such as mandating a written warning to be issued to all potential depositors stating that they are engaging in business with a fractional-reserve bank, and that they as depositors are not to assume their funds are held 100% in the vault. If such a warning were to be legally required, I doubt that such a disclosure would deter many would-be depositors.

In a free-market system, the primary determinant as to where one deposits his or her funds will always be that bank's reputation built up over the years. Fractional-reserve banking is perfectly capable of being operated safely if done in a system with gold convertibility backing it that is devoid of central government control. The reason why such a system became abused in the past is because banks were granted special privileges by government regarding their portfolios and the necessity for specie redemption. Eliminate the privileges and protections from government, and fractional-reserve banking ceases to be dangerous.

Under such a benign form of fractional-reserve banking, the responsible practitioners would gain the lion's share of customers via the reputation they have built up over the years. Requiring them to announce in writing to all potential depositors that their funds will be loaned out and invested for profit rather than stored in the vault would be rather gratuitous; it would be to announce what everyone already knows.

To be consistent, the Rothbardians would then have to also require that all airlines announce, ahead of time in writing, to all their passengers that they are embarking upon a journey in an aircraft that could crash and kill them? Rather gratuitous, I would say. It's something that everyone knows and basically lives with. No one has to get on the plane; they could choose to drive, or take a train to their destination. They could choose safer forms of travel if they desired.

Here is where we meet the slippery slope of state interventionism! Our politicians and bureaucrats, operating under a Rothbardian mandate to warn bank depositors and airline travelers of the dangers of their endeavor, would certainly not stop there. They would, of course, extend their "protective bureaucratism" to every nook and cranny of our lives. Is this not what they are doing presently in modern society? Thus if Rothbardians wish to legally mandate that depositors be warned about engaging in fractional-reserve banking, they are going to have to abandon their free-market philosophy and don the hat of Nanny State bureaucratism. There is no logical cut-off point where they can successfully contain their "banking mandates" from spilling over into all other human endeavors.

What are we to conclude from all this? Fractional-reserve banking, properly conceived and implemented, is not fraudulent. To try and prohibit it will require an unjust violation of the rights of free men. To try and discourage it with government propaganda warnings will merely unleash the monster state to permeate the rest of our economy. Depositors basically live with the fact that bankers are investing their deposits, rather than storing them in their vaults. If Rothbardians will just allow the marketplace (that they so rightly champion) to freely and fully operate, then all depositors would be able to choose a warehouse form of banking if they desired its higher level of safety over the fractional-reserve form. And they would also be able to choose the opposite if they so desired. Would this not be far more in keeping with the ideals of freedom? Would this not be the more just way to organize our banking system?

The answer should be obvious. Those who have bought into the Rothbardian agenda of a 100% gold system are grievously wrong about what proper banking is and is not. Their prescriptions will never build a sane and prosperous economy, much less a free one. Our answer to this monumental monetary question is to restore a true free-market society in America that gives all men and women the right to make their own choices as to which form of banking they prefer.

Nelson Hultberg
Americans for a Free Republic

Nelson Hultberg is a freelance writer in Dallas, Texas and the Executive Director of Americans for a Free Republic www .afr.org. His articles have appeared in such publications as The Dallas Morning News, Insight, The Freeman, Liberty, and The Social Critic, as well as numerous Internet sites. He is the author of Why We Must Abolish The Income Tax And The IRS (1997) and Breaking the Demopublican Monopoly(2004). He is presently finishing a book on political-economic philosophy entitled The Golden Mean: The Case for Libertarian Politics and Conservative Values.