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Risk Development and Dollar Inflation

by Elmar Altvater Wednesday, Jul. 08, 2009 at 9:14 AM

Two articles by emeritus professor Elmar Altvater reveal the contradictions of credit or bubble prosperity in the counter-revolution of capital. As work cannot define us, competitiveness and profit maximization do not define the human experience Speculation could bring a new feudalism..



By Elmar Altvater

[This article published in the Swiss WoZ-Die Wochenzeitung, November 27, 2008 is translated from the German on the World Wide Web,]

Managing the financial market crisis with injections of money means triggering new crises. Who will pay for the bailout plan and how?

At the beginning of October 2008, the International Monetary Fund (IMF) estimated the losses from the global financial market crisis at the enormous sum of .4 trillion. A month later the Bank of England quantified market losses in the US alone at .577 trillion. In the euro-zone, losses come to 5 billion with 7 billion in England. Switzerland is not yet included. All this amounts to around twice IMF expenditures four weeks ago and nearly three times as much as the losses estimated by the Bank of England in April 2008 (.15 trillion in the Financial Stability Report of the Bank of England, October 2008). How quickly the situation came to a head appears in the increasingly dramatic news. The crisis is obviously hard to bring under control. State subsidies and guarantees amounting to several thousand billion dollars aim at that control but success is uncertain, as the future strain on taxpayers is certain. “With the greatest difficulty,” the European Central Bank quantifies the “fiscal costs of the present financial market turbulences” in the euro-zone at around 3 percent of the gross domestic product (GDP). State obligations amount to more than 2 trillion euro, 21 percent of the GDP (monthly report of the European Central Bank, November 2008).

Which is the greater horror: the astronomical losses through the global financial market crisis and its distribution by the state? Or the fact that the average temperature at the Poles is up to five degrees celcius above the long-term global trend? The climate collapse is just as bitter as the financial- and economic crisis. The consequences are as expensive as the financial market crisis. A fifth of the global social product could be lost through climate change, according to the much-cited 2006 report of Nicholas Stern for the British government. Given that 923 million people suffer hunger in the world according to FAO data and that the energy crisis is by no means over because of the limitation of fossil resources (peak oil) even if the oil price in the fall of 2008 was in a nose-dive owing to the financial- and economic crises, a critical-emancipatory worldview warns of “global risks” not suspected by the World Economic Forum of Davos. These risks endanger human security. Thus the financial market crisis is only part of a much more extensive crisis of energy supply, food security and climate change. The crisis is systemic and has the potential to change the world order.


…Many people have lost much in the financial- and economic crises. However the economic crises are also a kind of “fountain of youth” of the system that renews its basis through “creative destruction” in the crises (according to economist Joseph Schumpeter). “Crises,” Karl Marx said, “are always only forceful solutions of existing contradictions, forceful eruptions that restore the disturbed balance for the moment until the next crisis.

This is different from natural disasters that cause irrevocable changes – deteriorations – of the environment. In the past history of humanity, regional or local cultures fell by the wayside because of the ecological catastrophes; societies on the Easter Islands disappeared including the cultures of Maya and Inca. In times of globalization, the intensification of crises up to the global collapse of the climate, energy supply, bio-diversity and production of food cannot be completely excluded. This would be a bitter monetary loss, as in the financial market crisis and the destruction of human living conditions. Evolution would suffer a breach and continue very differently than we imagine it today.

There is no question that industrial countries are mainly responsible for the “mother of all crises” in the model of consumption and production of the capitalist metropolises. This model requires high growth rates of productivity, is designed for mass production and mass consumption and ensures the massive destruction of nature. Raw materials, fossil energy, tracts of land and bio-diversity are damaged. At the same time, the industrial countries are the powerhouses of the globalized capitalist world and therefore have the potential to counteract the systemic crisis – if the elites would join in. However the US, EU-states and other industrial countries are narrowed by the global financial crisis. In the economy and society, money is one of the means of nation-state and supra-state interventionism. An avalanche of money is pumped into the financial system today. This money is lacking to finance measures against hunger or against the threatening climate collapse. The relief organization Oxfam criticizes the industrial countries for slashing the promised twelve billion in development assistance to one billion dollars. With this contribution, every hungry person could be given one US-dollar. Here we make a mess while there are no half-measures in bailing out banks.


How could the greatest financial market crisis in the history of capitalism occur in the year 2008? The causes go back to the 1970s when the financial markets were liberalized after the collapse of the Bretton Woods system and political regulations were systematically abolished. The worldwide competition of financial locations is carried on with high profits and interests so that exploding profits occur in the financial sector. These profits grew substantially faster than the real economy, as all indicators show. Only a few of these indicators will be cited here. From 1970 to 2007, the total debts of households, businesses and the government in the US rose from .5 trillion to .7 trillion while the gross domestic product increased in the same time period from trillion to .8 trillion. Since 1973, the debts of consumers soared from less than 0 billion to nearly .5 trillion or from 62.0 to 127.2 percent of disposable income. These numbers demonstrate the predominance of the financial sector over the real economy. Many other indicators could be cited to confirm this tendency. No wonder that short-term fixation and shareholder value define entrepreneurial conduct. A growing indebtedness that corresponds to growing financial assets on the other side becomes the fuel of the “American lifestyle” the western consumer model so attractive all over the world.

The financial sector goes wild in view of the high profits. The financial demands on the real economy and normal revenue streams increase enormously. Deregulation led to actors in the financial markets striving for maximum profit in all freedom and developing innovative financial institutions and financial instruments to that end. With trust in the market, the former chairman of the board of Deutsche Bank, Rolf Breuer, even thought the best policy was to be taken in “the tow of the financial markets.”

John Maynard Keynes warning in the 1920s proves true: financial markets are inherently unstable and instabilities can intensify into crises. One speculation wave after another overruns different regions of the world, which are all drawn into crisis because of liberalization according to the “neoliberal counter-revolution” (as Milton Friedman proudly described the “revolutionary” 1970s). The third world in the debt crisis of the 1980s, the threshold countries in the financial market crisis of the 1990s, the US in the “savings and loan” crisis and in the crisis that followed the wave of hostile takeovers (1986 and 1989), the New Economy crisis of 2000 and finally the whole world in the “sub-prime crisis” that seizes the US real estate sector and other branches and inflicts enormous losses on nearly all countries of the capitalist world economy.

Profits of twenty percent and more on one’s capital resources are far different than growth rates of one to two percent. The financial demands of the financial sector cannot really be fulfilled any more. As a result, they prove worthless. The securities guaranteeing their value are not really worth more than the paper on which they are written. Thus an immense write-off need exists that no one can quantify since deregulation leads to lack of transparency. The whining of hardcore neoliberals about misguided deregulation is intense. This released a “greed” that has been honored by false incentive systems. If not interpreted as a psychological defect, t is a quality of a “character mask” that plays a pre-determined role in the “stock market game of bankocrats” (Marx). This was also the reason Islamic banks were less afflicted by the current financial crisis than their competition from the deregulated financial centers of Atlantic capitalism. The formal interest prohibition stopped certain very lucrative businesses and extremely risky intrigues that brought western banks to the edge of bankruptcy. Financial “greed” is not compatible with the rules of the Koran.


The crisis cannot be conquered by steering money into the clammy vaults of financial institutions. Firstly, real production is not stimulated. In their first semester, students of economics learn the law of diminishing marginal utility. David Ricardo and others tried to show that the yield of the soil diminishes, as soil is cultivated since ever-poorer soil must be used – with increasing demand. Critical students learn of the law of falling profit rates and grapple with Karl Marx’ arguments. Capital expenditure increases to realize profit and this leads periodically and inevitably to falling profit rates. In other words, the surpluses from which the financial demands must be fulfilled decline in the course of historical development. These financial demands are responsible for the damages of the eco-systems today. In part, they caused massive costs and diminished the profitability of capital and the capacity for debt service. Thus the ecological costs become greater. The higher prices of raw materials, particularly fossil fuels, show this like the estimated costs of climate change.

Thus the financial market crisis results from the contradictions of the (real) capitalist accumulation process, through which the financial demands or monetary profits that must be gained out of the real surpluses are forced up. The financial crisis has its roots in the financial and “real” economy. This is a systemic crisis of capitalism.

The next act of the financial market crisis engenders the conflict over who can be saddled with the losses socialized by state intervention. The US would like to externalize these losses in order not to burden its own taxpayers. But to avoid internal political conflicts, geopolitical conflicts threaten – between the US and cou9ntries with massive dollar reserves, the EU, China and other threshold countries. In the meantime, these powers are coordinating their policies. The crisis is not over and could lead to political conflicts in the international system.

The extensive state interventions with enormous money do not change this at all. With the financial injections in the banks and funds, worthless securities described as “toxic waste” are sold or the speculative capital of financial institutions is restored. To whom and for what businesses can the banks lend this state-financed capital? Are there new fields of investment and solvent new debtors as after the crises in the 1980s and 1990s? New investment opportunities are emphasized again and again, a new upswing as after the New Economy crisis at the beginning of this century or as after the Asian crisis. The International Energy Agency (IEA) estimates the investment need of the oil industry up to 2030 at trillion. Thus the new business fields of financial investors are a guarantee for continuing the fossil energy system. On top of everything, the IEA recommends twenty to thirty nuclear power plants going on online every year over the next two decades until there are 1300, an almost suicidal scenario given the conflict over only one nuclear reactor in Iran.

Good investment opportunities are offered in environmental protection. The volumes of emission trade, if the European trading system is extended to the whole world, are estimated at trillion. These are exaggerated expectations since the emissions trade can only get going on this scale if the financial markets are “normalized.” In addition, investors are drawn to extraction of mineral raw materials and cultivation of bio-fuels to compensate for declining oil production. Converting whole districts into monocultures for bio-fuels would be a good business.

A considerable part of the fallow capital not devalued or replaced by state infusions could be absorbed in these new business fields. Repayment of the bailout packages to the public treasury is only guaranteed when banks successfully lend funds provided by nation states to debtors for investment projects. Otherwise there is nothing. The price would be high, namely ecological destruction and intensified social conflicts. A high price also arises when the funds for the financial sector are not used for investments. Then either the taxpayers must accept the mounting losses or the losses must be redistributed in an inflationary process and externalized by means of a devaluation of the currency. Only countries like the US whose currency is held as the reserve currency have this externalizing possibility. Other countries cannot externalize. If the financial crisis is an aspect of a systemic crisis, more is required for its conquest than bailing out banking houses that speculated with “irrational exuberance,” as Alan Greenspan described. The bailouts should not be at the expense of nature and the future chances of humankind.


Does the currency war threaten after the financial crisis? Widespread deflation can erupt suddenly. What could follow the collapse of the dollar is open

By Elmar Altvater

[This article published in: Freitag, 5/28/2009 is translated from the German on the World Wide Web,]

If there were only pirates in the world, the dollar would be safe as a reserve-, key- and trade-currency. In an interview, the former FBI agent Jack Cloonan involved in ransom negotiations with Somali pirates recently reported they would only accept dollars. Raw material traders and economies with high export subsidies and vast currency reserves dismiss the pirate example. They want to get rid of the dollar as soon as possible…

Like an old top dog, the dollar is challenged by younger rivals but still prevails and holds together its currency harems. Of the .2 trillion currency reserves, around two-thirds (.7 trillion) are held in dollars, a quarter in euros (.1 trillion) and the rest in other currencies. Thus the dollar is still dominant, even if to a decreasing extent. At the beginning of 2001, almost three-quarters of all currency reserves were in dollars.


The dilemma of the key currency diagnosed at the end of the 1950s reappears 50 years later. Dollar holdings accumulate abroad only because the US spends more than it earns and is allowed an enormous balance of payment deficit. The surpluses in other countries correspond to this deficit. Thus the dollar is strong as a reserve currency because the US piles up debts and paradoxically weakens the dollar.

The exchange rate relations of the euro, the Chinese Yuan or other currencies to the dollar are obviously unrealistic since the US for years was allowed a structural deficit both in its state budget and in its balance of payments of nearly 0 billion annually while other countries have balance of payments surpluses and their currency treasures swell.

What would a devaluation of the dollar mean in this system? The US could partly get rid of its debt burden and spare American taxpayers of trillions of losses of their financial system. Devaluation would be a breach with the decades-old tradition of dollar hegemony. But many sacred cows are slain in the severe financial- and economic crisis. The expansive monetary- and fiscal policy of the US Federal Reserve and the US government manifestly accepts the dollar devaluation, even if the risk is high. The future of the dollar is at stake as reserve currency, trade-currency, oil-currency and transaction-currency. These are the insignia of US sovereignty in the globalized economy and politics like scepters, swords and crowns for the power of kings.

At present, a devaluation or inflation does not seem realistic. Everything points in the opposite direction – toward deflation. The decline of the price level is increasingly clear since the outbreak of the financial crisis in 2007. According to the OECD, the world economy in 2009 will shrivel four to six percent. World trade will decrease 13.2 percent. Unemployment within the OECD is ten percent on average. Prices will fall 0.4 percent in the US, 1.2 percent in Japan and stagnate in the euro-zone.

Parallel to this, the deficits of state budgets shoot up. In the US, the deficit amounts to more than ten percent of its gross domestic product (GDP) and in Britain nearly 13 percent on account of economic injections and bailout packages.

However this drastic cure can only be successful when people are ready to endure the fever of inner inflation and outer currency devaluation. Deflation still governs with its destructive economic consequences for debtors, jobs and wages. How long will this continue?

The oil producers threaten to turn the tables.

Central bankers and financial market actors have a good sense of hearing and know what may come. A devaluation of the dollar in relation to other currencies would be painful for all countries and currency zones with dollar holdings. The currency reserves held in dollars will be devalued. Therefore a country like China “looks after” the value of the dollar (for which the US Federal Reserve is responsible) and obviously does not unselfishly carry out this bold mission because a cheap dollar could aggravate the export of its industry to the US.

Dollar devaluation could prompt oil exporters to calculate their shipments in other currencies than the dollar. This could cause great trouble to the land with hegemonial currency. In the past, these attempts failed. For example, Saddam Hussein converted the oil-for-food program in 2000 from the dollar to the euro. When the US three years later flanked by the “Coalition of the Willing” marched into Iraq, OPEC announced a few months later oil in the future would be invoiced without exception in dollars.

The Iranian oil burse – discussed for years – has also not gained acceptance against the traditional oil trading centers in London and New York. Oil is still invoiced in dollars. Whoever attacks this must expect harsh punishment. US sanctions on Teheran seek to prevent the planned dethronement of the dollar as oil-currency.

The dollar as a power gorilla has an Achilles’ heel: the threat of a coalition of oil-exporting states to get rid of the dollar as the oil-currency. This threat was often expressed but never carried out. The sheikdoms of the Gulf pursue this project. With Abu Dhabi and Dubai, they have two world financial centers to invoice oil in euros or in a basket of regional currencies and not in dollars any more. A regional currency block is also arising in Latin America.


While the euro will probably be strengthened if the dollar loses value, the world financial crisis can thwart this calculation. It is by no means certain that the states of central- and Eastern Europe can avert threatening state bankruptcies. While Austrian banks are intensely engaged there, people in Vienna can no longer avoid granting credit lines through the European Central Bank. Whether irreproachable solidarity remains the trademark of the euro can be doubted. Different than it seemed before the financial crisis, the euro does not automatically become stronger when the dollar falters.

The Yuan is still not an alternative since this currency is not convertible. On liberalized currency markets with many private actors, free convertibility is the prerequisite for accepting a currency as the key-, reserve-, trade- and oil-currency. The national capital market must also be fully integrated in the international financial system so there will be no trade barriers. That is not the case in China. For that reason, the Chinese central banker Zhou Xiaochuan artfully proposes supplementing the dollar with “special drawing rights” (SDR) as a unit of international payment. That would be like the artificial international currency that existed since 1969 between central banks and as a unit of payment in the International Monetary Fund. That currency cannot prevail as long as only the IMF stands behind it and not a powerful central bank. However Zhou challenges the dollar’s monopolistic power with the special drawing rights vehicle. He does not propose dethroning the dollar. Under some circumstances, oil business could be transacted with the special drawing rights. In so-called swap-deals between China and Argentina, the two currencies – peso and Yuan – were exchanged without falling back on the dollar. Is this a relapse into a currency bilateralism? Whoever assumes that misunderstands that a variety of the currency regime has been provoked by the crisis of the currency and intensified into hegemonial chaos through the world financial crisis.

A somewhat stable constellation rising out of the chaotic fog is imperative. The fall of US hegemony in the next two decades is predicted by a series of serious researchers. However the nation that could take the baton in the global race is not in sight. The EU is a possible candidate but is hardly a certainty. China proposes alternatives but the outcome remains to be seen.


“The Quiet Coup”: Simon Johnson

“The Great American Bubble Machine”: Matt Taibbi

“The Narcissism Epidemic”: Jean Twenge

“Capitalism as Religion”: Paul L. Walser

“Capitalism Hits the Fan”: Richard Wolff

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