The City of London: Parasite of the World Economy

This article examines the City of London. My focus is on its international trading, bringing together some important material on British imperialism and finance. I will not be discussing whether banks based in the UK are ripping off consumers, failing to lend cash to struggling companies, mis-selling financial products or manipulating LIBOR. These matters are mere bagatelles. The bigger story is how tens of billions of pounds are extracted every year from the labour of others in the world economy by the regular daily mechanism of British finance.

1. Economic decline, but financial power

Most people know that the City of London is a big financial centre. However, the large scale of its operations is striking given that the British economy is a second-tier economic power at best, ranking well behind the US, behind China, Japan and Germany, and even behind France and Brazil, according to GDP data for 2011. When it comes to finance, the UK moves from being an also-ran to one of the major global medal winners.

Britain first achieved the position of being the world’s premier centre of commerce, credit and finance in the 19^th century. This was a natural complement to its domination of trade and its rule of a global empire. Some historians have characterised Britain as being more the ‘warehouse of the world’ than the ‘workshop of the world’ at this time. However, even when Britain’s position was challenged by rivals and weakened by two cataclysmic imperialist wars in the 20^th century, the prominence of commerce, and particularly of finance, continued as a critical dimension of the British economy. From a relatively weak position as a major power post-1945, British governments took every opportunity to prop up British economic privileges. First this happened by bleeding the colonies to help pay for the ‘welfare state’ and to subsidise British living standards. Then, until the 1970s, it was by using privileged trading and financial deals with ‘Commonwealth’ countries to protect British economic interests. But, it was clear to British governments that competition was tough, even in the post-war boom years, and that Britain’s economy was falling behind and losing market share to more successful countries. This was the backdrop for a succession of policies that promoted – or at least did not impede – the growth of the City’s international financial business.

From the late 1950s, this City business developed not on the back of UK sterling, as in the glory days of Empire, but by using the US dollar. American corporations were dominating world trade and the dollar was now the key currency for international transactions and most financial deals. However, government restrictions on financial markets in the US and elsewhere – but far less so in Britain – enabled the City of London to build up a strong business in dollar lending and borrowing. It was not as if the City was starting from scratch; it was already an international bank dealing centre. However, the eventual impact of this new development of the ‘eurodollar’ market – transacting in dollars outside the US, and outside the jurisdiction of the US government – was dramatic. It was a major step in the growth of global financial markets. By the early 1970s, the gross size of the eurodollar market in loans had already exceeded $500bn, exploding to some $3000bn by the end of the 1980s, helped by huge current account imbalances worldwide and credit expansion by international banks. By the 2000s, the eurodollar market’s size, some 75% of the total eurocurrency market, had reached $5000bn. These expansions of credit helped underpin a boom in all kinds of international financial deals.

Such developments should not be understood in narrow financial terms. They reflect firstly the chronic problems that capital accumulation encountered by the early 1970s, depending more and more upon credit expansion to keep the system ticking over, although this entailed more frequent financial crises. Secondly, the opening up of financial markets worldwide, promoted especially by the US, but in close cooperation with Britain, meant that the already limited scope for national-based policies had diminished to vanishing point. Hence, the minuscule differences in economic policy among political parties in all countries. Thirdly, this new financial system helped put the powers at its centre in a surprisingly strong position, at least in a position much stronger than would seem consistent with their not-so-competitive economies. The two powers at the centre of the world financial system are the US and Britain. Most analysts focus on the US as the hegemon of global finance. While this is an understandable bias, it overlooks the role played by the UK, imperialism’s broker-dealer.

2. Uptown Top Ranking

The size of the financial system in Britain compared to the national economy is far bigger than it is in the US. One measure of this is to look at the size of bank assets compared to GDP. In the UK, total bank assets were roughly four times GDP in 2011; in the US they were only a little larger than GDP. US bank assets were still larger than those in the UK in absolute terms, reflecting the much bigger US economy. However, other measures of absolute financial weight put the UK in a top ranking position. These measures are not all based on British-owned financial companies, but on financial companies with operations based in the UK. Nevertheless, this UK-based business is vital for the fortunes of British imperialism.

In summary, before giving the statistical details, the City of London is:

-         the world’s largest international money market

-         the largest foreign exchange market

-         the largest ‘over-the-counter’ interest rate derivatives market

-         the 2^nd biggest issuer of international debt securities (after the US)

-         the 4^th largest location for the listing of equities (after the US, China and Japan)

-         one of the two largest net earners of revenues on financial services

While there are diverse ways in which to measure such things, these results are persistent features that emerge in many different methods of calculation. They reflect the structural privilege that Britain has in world finance, privileges that bring significant rewards (see section 3).

Table 1 details the UK’s international banking position compared to other countries. The totals in the table are for 44 countries that report to the principal body that collates these figures, the Bank for International Settlements, based in Basel, Switzerland. Notably, the UK has by far the largest total of claims (loans to) and liabilities (deposits from) other countries. The data are for banks located in a particular country, including these countries’ so-called ‘offshore’ banking facilities. The UK has 20% of total outstanding business; the US is in second place with a 12% share. UK-owned banks do not all this business; foreign banks in the City do a large share. However, a separate table compiled by the BIS on the business done by banks according to their nationality does show that British banks have a larger volume of international business than the banks of other countries. The listed UK figures in the table exclude the separate banking business of a variety of tax havens outside the UK, including the Cayman Islands, the Bahamas, Bermuda, Jersey, Guernsey and the Isle of Man. While these islands are not technically part of UK territory, they all sing ‘God Save the Queen’ and are each given a special status by the British authorities. Together, they would rank third in the table, making up 9% of international bank business.

Table 1:           International positions of banks by country, March 2012

                        ($ billion, amounts outstanding in all currencies)

Country	Claims + Liabilities	Share of Total
UK	12,171	20.2%
US	7,147	11.9%
Germany	4,613	7.7%
France	4,602	7.6%
Japan	4,303	7.1%
Cayman Islands	3,089	5.1%
Netherlands	2,631	4.4%
Singapore	1,816	3.0%
Hong Kong	1,672	2.8%
Switzerland	1,583	2.6%
Italy	1,447	2.4%
Luxembourg	1,345	2.2%
Belgium	1,269	2.1%
Spain	1,237	2.1%
Bahamas	1,179	2.0%
Other	10,118	16.8%
Total	60,220	100.0%

Source: BIS

Table 2 details another dimension of global finance: the foreign exchange market. Banks in the UK (basically, London) have a clear and persistent lead in terms of market share. Foreign exchange dealing is not bank lending or borrowing; it is exchanging one currency for another. Banks make money on these deals by taking a dealing margin. The margin can look very small – for example, one or two hundredths of a percent of the value of the deal for widely traded currencies. However, given the huge volume of dealing – 5 trillion dollars daily in 2010 - this can add up to big earnings! In the latest BIS triennial survey, London had by far the biggest share of the global FX market in spot, forward, swaps and options transactions. This might not seem surprising, given London’s historical role that grew out of international commerce. However, Britain has twice the volume of currency dealing of the US despite being only in sixth position in world trade in goods and services, compared to the US’s top position in trade. The size of London’s foreign exchange market is the clearest sign of British imperialism’s role as the broker for global capitalism, taking a cut of more than one-third of the value of foreign exchange deals in the world economy.

Table 2:           Foreign Exchange Turnover By Country, 1995-2010

                        (Daily averages for April in each year, $ billion)

	1995	2001	2007	2010	% of 2010 Total
UK	479	542	1,483	1,854	36.7
US	266	273	745	904	17.9
Japan	168	153	250	312	6.2
Singapore	107	104	242	266	5.3
Switzerland	88	76	254	263	5.2
Hong Kong	91	68	181	238	4.7
Australia	41	54	176	192	3.8
France	62	50	127	152	3.0
Denmark	32	24	88	120	2.4
Other	300	362	735	756	14.9
Total	1,633	1,705	4,281	5,056	100.0

Source: BIS

Table 3 shows an even stronger picture of London dominance in the so-called ‘over-the-counter’ (OTC) interest rate derivatives market, which comprises direct deals between banks and their customers. OTC trading is the biggest part of the derivatives market, principally made up from trading of interest rate swaps. Other trading of derivatives takes place on exchanges, and the US is home to the biggest exchanges for derivatives, mainly based in Chicago. However, the volume of trading on exchanges is a small fraction of that in the OTC market.

Table 3:           Over-the-Counter Interest Rate Derivatives Turnover, 2010

                        (Single currency derivatives, daily average for April 2010, $ billion)

	FRAs	Swaps	Options	Other	Total	% World Total
UK	382.0	738.6	113.9	0.3	1,234.9	46.5
US	268.4	309.3	64.1	-	641.8	24.2
France	46.4	128.2	17.7	1.0	193.3	7.3
Japan	2.0	82.3	5.7	0.0	89.9	3.4
Switzerland	20.1	58.7	0.1	-	78.8	3.0
Netherlands	0.9	60.0	0.4	-	61.3	2.3
Germany	15.1	31.6	1.8	-	48.5	1.8
Canada	6.5	34.6	0.6	-	41.7	1.6
Australia	6.7	33.6	0.3	-	40.6	1.5
Singapore	4.7	28.6	1.3	-	34.6	1.3
Spain	3.6	24.8	2.3	-	30.7	1.2
Italy	8.4	17.0	1.9	-	27.3	1.0
Hong Kong	1.3	15.8	1.3	0.0	18.5	0.7
Other	24.7	70.5	16.5	-	111.7	4.2
Total	791.0	1,633.5	227.9	1.3	2,653.7	100.0

Source: BIS

UK and US financial centres together account for 70% of the world market, once more illustrating the concentration of global financial trading. The US authorities have been angered by the way that trading derivatives in London has led to big financial scandals hitting their own pockets, from the collapse of AIG in 2008 to the recent loss of $6 billion by JP Morgan’s ‘London Whale’. However, this overlooks the fact that an Anglo-American partnership designed this system, with implicit and explicit government approval, and it has been mutually beneficial to both powers. The US and the UK are also the leading issuers of international debt securities (to which a lot of this derivatives trading is linked), giving them easy access to investment funds from across the world.

Another means of getting access to global funds – and also to the revenues from trading in securities – is via the equity market. Here, the UK is less able to compete with the US in terms of equity market size, since the US economy is around six times bigger than the UK’s and nationally-owned and controlled companies tend to list their stock on national stock exchanges. Nevertheless, the market capitalisation and volume of trading on the UK stock exchange is high, and is the largest in Europe. Companies listed on the London Stock Exchange do not have to be UK-owned or controlled, and stock exchanges compete with each other as markets for attracting international funds and international company listings. My calculations indicate that around 30% of the capitalisation of the FTSE100 index is made up from companies that are principally foreign owned, eg Glencore and Kazakhmys.

Table 4 details the countries with the largest stock exchanges, ranked in order of market capitalisation. The ups and downs of share prices affect the data, but the relative sizes do not change much over time, with the exception of one country that has risen to prominence in this area of global finance: China. I have added together the two ‘mainland’ exchanges to Hong Kong to give a total for China, but even without Hong Kong, China would have the second rank in terms of global market capitalisation of companies. The London Stock Exchange ranks behind Tokyo’s, but is far bigger than the exchanges for other European countries, including the combined Euronext exchange figures for Belgium, France, the Netherlands and Portugal.

Table 4:           Equity Market Capitalisation and Turnover, 2012

                        (All figures in $ billion)

Country	Exchanges	Capitalisation1	Turnover2
US	NYSE Euronext (US) plus NASDAQ	17,503	12,588
China	Shanghai plus Shenzhen plus Hong Kong Exchanges	5,936	3,703
Japan	Tokyo Stock Exchange	3,385	1,810
UK	London Stock Exchange	3,332	1,190
Belgium, France, Netherlands, Portugal	NYSE Euronext (Europe)	2,460	853
Canada	TMX Group	1,860	672
Germany	Deutsche Börse	1,212	698

Notes: (1) Market capitalisation for end-June 2012. (2) Electronic order book volume of trades for first half of 2012. Turnover data for Hong Kong estimated by the author.

Source: Calculated using data from the World Federation of Stock Exchanges.

There are other dimensions of global finance than those noted above, including commodities trading and pricing, fund management and insurance. I will not risk drowning the reader in a further torrent of data, however, and just note that the UK ranks at the top end of these global tables too, usually second only to the US as a base for these operations.

3. How to make money by making nothing

The term ‘finance’ in this article has been used to encompass all the lending, borrowing and trading operations of financial institutions. In Marx’s theory of value, two important dimensions of such activities are identified. The first is ‘money-dealing’ activities that are part of the process of buying and selling commodities, and of providing the liquidity that may be necessary for industrial and commercial companies to continue their business. This money-dealing includes discounting bills and providing foreign exchange transaction services. The second is borrowing and lending of money by banks, especially for investment, which comes under the heading of what Marx calls ‘interest-bearing capital’. Out of this form of interest-bearing capital, capitalist financial markets also create various securities that attract forms of interest payment – bonds and equities. One step beyond this is to create derivatives, securities whose value is derived from the prices of bonds, equities and other financial instruments. The demand for derivatives initially arises out of a need for a form of insurance against the volatility in prices of these securities, but this soon builds a momentum for speculative, leveraged trading, especially when capitalist profitability is under pressure.

Issuing these financial securities (bonds, equities and derivatives) can attract investment funds from around the world – especially if pressure has been brought to bear on countries to relax any controls they may have on capital flows! Furthermore, the trading in these securities, the exchange of currencies that may be a part of such trading, and the provision of legal, advisory and custodian services that come with the investment in financial titles, all amount to the build-up of a huge financial infrastructure that can demand its cut for the ‘services’ rendered.

There is a problem, though. All these financial operations are not producing anything; they are simply dealing in titles to things that others have produced. All the costs of such operations are a deduction from social output. Even if one person’s financial deal makes a profit, that profit is offset by a market trading loss for someone else. The most that these financial services can do is to be more efficient, and so waste less money. In capitalist market terms, this is seen as being ‘productive’, and the more efficient financial services company would gain market share. Nevertheless, the financial sector is an economic burden and this fact puts a limit on how big it is likely to grow in any particular country.

However, such limits are greatly relaxed for an imperialist power like Britain that can use its privileged position in the world economy to be the banker, broker, dealer, securities trader and derivatives provider for everybody else. That is why financial services in Britain are so outsized compared to the domestic economy. Of course, having a large financial services sector does not make sense if it does not absorb money from elsewhere. But that is exactly what the UK financial services sector does.

Table 5 details the UK’s net earnings from financial services. These are the summary revenues from overseas for each sector, minus the foreign payments made by these sectors. In total, the net financial services earnings amounted to nearly £40bn in 2011. This covered almost 40% of the UK’s £100bn trade deficit in goods in that year and was roughly 2.5% of UK GDP. The UK has the second biggest surplus on financial services in the world, usually just behind that of the US. If insurance services are added to the reckoning on this account, then the UK surplus is the highest, given that the UK has steady net revenues on insurance (around £8-12bn per annum, not included in Table 5) while the US has a large deficit. These net foreign revenues are a good measure of what value is deducted from the world economy by financial operations based in Britain.

Table 5:           UK Net Earnings from Financial Services, 2009-2011

                        (All figures in £ billion)

	2008	2009	2010	2011
Monetary financial institutions	31.7	26.9	23.3	29.0
Fund managers	4.2	2.9	3.5	3.3
Securities dealers	9.0	7.1	4.9	5.5
Baltic Exchange	0.9	0.7	0.7	0.8
Other institutions	-6.2	-0.7	0.9	0.0
Total	39.6	37.0	33.4	38.7

Source: UK ONS

‘Monetary financial institutions’ are what normal people call banks, and they account for the bulk of the revenues. In 2011, the banks’ net interest income on loans made up only about a third of their net foreign income, with fees and commissions about a quarter. The bulk of their earnings, nearly half, came from dealing spreads – amounting to £14.3bn in 2011. Securities dealers outside the banks gained almost all of their income from commissions and fees, rather than from dealing margins. Fund managers based in the UK are less important in the totals, as is the Baltic Exchange, which is linked to dealing in ‘freight futures’, and is the main broker for dry cargo and tanker fixtures, including the sale and purchase of merchant vessels.

The striking thing about the earnings data on financial services is that they have shown little sign of being affected by the financial market slump. In the immediate pre-crisis years 2006 and 2007, the total UK net earnings were close to £24bn and £33bn, respectively, and in the five years before that the figures were in the range of £15-20bn. These are below the numbers seen in 2010 and 2011. The figures give one indication of the material basis for successive British governments backing financial market trading.

4. Conclusion

The legacy of the financial crash has led to recriminations against banks in the UK and elsewhere. However, in the UK the focus has been on the stupendous salaries and bonuses of the lords of finance, and on how to regulate banks in order to avoid economic trouble. There is little investigation of the system itself, and no acknowledgement that the British financial system is a parasitic leech on the world economy. It provides services for the functioning of the capitalist market, taking a cut of the value of every deal. This pays not only for the bank executives and traders, not only for those in other financial operations, but also for a myriad of other functionaries in legal, accounting and other jobs that depend on this huge financial services centre. The ‘City’ also pays the UK government tens of billions in taxes and, as the previous section showed, revenues from its services cover a large portion of the UK trade deficit.

Marx once famously summed up capital as ‘dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks’. To continue the metaphor, British imperialism has developed a financial system that acts like a blood bank for the value produced worldwide, one that takes a sip of every value flowing through it.

Tony Norfield, 3 October 2012

Ben and the Flood

The slump was nearly six years old before the flood of waters was upon the earth. And Ben went in, and his sons, and his wife, and his sons' wives with him, into the room, to discuss the waters of the flood. Of clean beasts, and of beasts that are not clean, and of fowls, and of every thing that creepeth upon the earth, there went in two and two unto Ben into the room, the male and the female, as Finance Capital had commanded them. And it came to pass on the very same day that the waters of the flood were to come upon the earth. In the 59th year of Ben's life, at the end of the ninth month exactly, were all the fountains of the great deep broken up, and the windows of heaven were opened. And the rain was upon the earth: purchases of an additional $40bn per month of mortgage-backed securities and zero interest rates until God knows when.

(with due apologies to the King James translation of Genesis)

Tony Norfield, 14 September 2012

Imperial Balances

This article reviews the balance of payments data for the main imperialist countries to highlight their economic relationships with the rest of the world. Such data will not cover everything about these relationships, for example, the way in which the UK acts as a bolt-hole for criminal money.[1] However, a close examination of the data does reveal some important aspects of the imperialist world economy today. I begin by examining the US balance of payments, and then look at two of the other powers, the UK and Germany.

1. The US: a boatload of goods for a book entry in dollars

The US may be concerned about the challenge of China as a major power in the world, but a closer look at the economic relationships between the two countries shows who is really in charge. At first sight, the huge trade surplus that China has with the US might seem to put China on top: it reached $295bn in 2011, or 40% of the total US deficit. However, when US importers buy Chinese commodities, they pay for these goods in US dollars, not in renminbi, because most international trade is priced in dollars. The Chinese exporters receiving dollars then exchange these for renminbi at China’s central bank, given China’s exchange controls. Then the central bank uses these dollars to pay for imports, and, until recent years, any surplus of dollars was added to China’s foreign exchange reserve holdings.[2] Hence the US deficit with China found its expression in a rising level of US indebtedness, though the debt is denominated in dollars - the currency over which the US has control.[3] The dollar-based pricing regime, based on US economic power, is complemented by a dollar financial regime, another consequence of this power. This enables the US to import trillions of dollars worth of goods in exchange for low yielding financial securities!

The US balance of payments is characterised by deficits in traded goods and (usually) a net outflow of funds on the foreign direct investment account. These potentially negative flows for the US dollar are offset by a surplus on services trade and investment income, and by a large volume of foreign purchases of US securities. In 2011, for example, the goods deficit was nearly $740bn, but the services surplus was nearly $180bn and the investment income surplus was another $235bn. The latter item has grown dramatically in recent years as the collapse of US interest rates reduced its payments to foreign creditors. The remaining gap in US payments was largely filled by around $250bn of net foreign purchases of US securities and short-term money flows.

The US current account deficit has now shrunk to some 3% of GDP, down from 6% in 2006, helped by stagnant growth in US demand and a decline of the US dollar. Alongside the reduction of the deficit, there has also been a reduction of the funding that came from central bank purchases of dollars for their foreign exchange reserves. This volume of dollar securities buying fell from $488bn in 2006 to ‘only’ $212bn in 2011. While the volume of US foreign debt continues to climb, the US government has benefited immensely from the near-zero level of yields. It is now paying less in total interest to foreign creditors than it did six years ago, when the volume of debt was much lower.

Such data reveal the huge financial power that the US exerts in the world economy, a power reflected in its privilege of being able to draw on global resources cheaply, essentially by selling securities that it issues on its own terms in exchange for goods and services produced by other countries. This happens on a persistent basis, and is not a function of the past few years. If anything, US economic power has increased in the more recent years of crisis as US banks have easier access to the dollar funding that is critical for international trade.[4]

2 The UK: broker and rentier

There are some similarities between the US and UK balance of payments. Each country has a large trading deficit and regular outflows of foreign direct investment that are funded by other inflows. The UK also has a surplus in services trade and investment income despite being, like the US, a large net debtor country. However, whereas the US has benefited from the role of the US dollar in the global monetary system and funding from central bank dollar purchases, the UK has a different means of using the financial system to gain economic advantage. As explained in detail elsewhere,[5] the UK has specialised in financial services. This enables it to take a cut of global financial deals, based on its role as home to the world’s biggest international money market.

In 2011, while the UK visible trade deficit was £100.3bn (6.6% of GDP), the services surplus amounted to £76.4bn, which helped lower the current account deficit to 1.9% of GDP. By far the largest component of the services figure was a £38.7bn surplus due to financial services. These items, together with a surplus on investment income – a net £17.3bn in 2011, which was more than accounted for by the £48.9bn net earnings on foreign direct investment – are stable elements of the UK balance of payments that fund the other deficits. Other items, such as portfolio investment and banking flows tend to be more erratic, but there are many and varied sources through which the UK can obtain the funds to finance its persistent trade deficit and regular purchases of foreign companies without bringing about the collapse of the sterling exchange rate.

3. Germany: Vorsprung durch Technik?

Germany’s balance of payments show a country with a more ‘productivist’ bias, compared to the financial inflows that loom large in the Anglo-American data. Germany usually registers a large visible trade surplus (€158bn in 2011), with a small deficit on services trade. With the country’s large net foreign asset position, there is a sizeable net inflow of investment income (€47bn in 2011) and these figures finance the steady outflow of funds for direct investment and bank lending. Thus Germany’s international financial strength is based much more on its productive capabilities than is the case for the US and the UK.[6]

The crisis has brought some acute problems for German imperialism, however. It is widely known that Germany has been the main paymaster for the European Union and later for the euro currency area, contributing by far the most to ‘structural funds’ and the like. These arrangements have been to its advantage, creating for it a profitable trading and economic zone. But in the recent years of crisis the bills to ‘save the euro’ have grown immensely. Apart from Germany’s large commitments to fund various rescue packages, there is also a far less widely recognised huge effective loan to the euro banking system. In 2006 the figure was minimal, but by the end of 2011 the Bundesbank reported that its outstanding claims on the European Central Bank’s TARGET2 payments system had risen to an astonishing €463bn.[7] By mid-2012, this figure had grown to more than €700bn!

This rise in claims is a function of the way the euro payments system works, reflecting net monetary flows between member countries that occur as a result of transactions in goods, services and financial assets. It comes about automatically, rather than being a deliberate loan from Germany’s central bank, and with the collapse of private interbank payments in Europe, central banks have become much more prominent. Effectively what is happening now is that the central banks in euro countries crushed by debt are the only supports for their national banking systems. They can just about provide credits to local banks (and then on to companies and individuals) because they are part of the euro payments system that operates with the ECB as the go-between. These countries still have big trading deficits, but the national central banks are continuing to finance these deficits by running up official debts with the ECB. The ECB’s accounts then record huge assets owed to it by the debtor countries - and most of its liabilities are with the Bundesbank on the other side of the balance.

Another way of expressing this point is that Germany has seen its current account surplus with many other euro countries paid for by credits at the ECB in the TARGET2 payments system. Well, it looks like something is not quite right with the populist view that Germany is to blame for having exported the goods to the debtor countries, especially when there is little sign that the country is even getting paid!

Regarding the debts now owed to Germany by other euro countries, one report has suggested that these ‘may be the largest threat keeping Germany within the Eurozone and prompting it to accept generous rescue operations such as those agreed on in October 2011’.[8] This is because Germany would bear more than 25% of the costs of a default impacting the ECB, based on its share of the ECB’s equity, quite apart from the broader economic damage that would be done to Germany’s economy and finances.

Germany, in the opposite mode to the US and the UK, has lent to export rather than borrowed to import. Its creditor position gives the country important influence and power, but it is having difficulty in deciding how to use that power because the scale of the economic trouble in Europe (and elsewhere) is so big. Yet all the indications are that Germany will come down on the side of sustaining the euro system. This is not simply because it is a political and economic project on which Germany’s (and France’s) long-term strategy of building a counter-weight to the US has been based.[9] It is also because now the more immediate financial costs of any attempt to get out have risen so dramatically.

Tony Norfield, 12 September 2012

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[1] See, for example, ‘London’s Dirty Laundry’, a Special Report in Private Eye, 10-23 August 2012. The Tax Justice Network and other groups have also done some useful work on this question with their coverage of tax havens and the links these have to major countries.

[2] China’s trade surplus has shrunk in recent years, and so has its accumulation of FX reserves, which nevertheless amount to some $3 trillion (around 60% of which is believed to be held in terms of US dollars). Surplus dollars not used for reserves include hundreds of billions to buy other currencies instead, to recapitalise Chinese banks, to finance the purchase of foreign assets and to provide finance for overseas projects. These latter items boost China’s influence and are the main factors worrying the US government.

[3] The Chinese authorities accumulated holdings of dollar-denominated assets (principally government securities) as a means of preventing, or limiting, the appreciation of their currency. To this extent China’s build up of US dollar holdings was its own policy decision, not one forced on it by the US. However, it was a policy enacted in the wake of the 1997-98 Asian financial crisis that led countries to accumulate FX reserves rather risk being subjected (again) to the dictates of the IMF and imperialist capital.

[4] See for example: ‘Citigroup sails into European bank waters’, Financial Times, 5 September 2012.

[5] See ‘The Economics of British Imperialism’ on this blog, 22 May 2011.

[6] I don’t want to go too far here! As Guglielmo Carchedi points out in his book, For Another Europe: A Class Analysis of European Economic Integration (London 2001, especially Chapter 4 on Economic and Monetary Union), Germany has used the EU and EMU to secure the position of its monopolistic companies.

[7] Deutsche Bundesbank, Monthly Report, ‘Germany’s balance of payments in 2011’, March 2012, p33.

[8] H-W Sinn and T Wollmershaeuser, ‘Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility’, NBER Working Paper No. 17626, November 2011, p6. On page 25 of this valuable report, the authors note that in the three years from 2008 to 2010, 91% of Greece’s current account deficit and 94% of Portugal’s was financed with credits from the TARGET system.

[9] See ‘Cameron, Merkozy and Europe’ on this blog 12 December 2011,for a fuller discussion of this issue.

Idealism and Debt

This is a response to some brief comments David Graeber made on my review of his book, Debt: the First 5000 Years, published on this blog on 27 August. I cover two points: the issue of an idealist conception of history and the debt the US owes to China and Asia.

Firstly, my criticism that the book is based on an ‘idealist’ conception of history. History, as Marx and Engels noted, has been a ‘history of class struggles’, but in their examination of history they showed, as Marx put it, that ‘the existence of classes is only bound up with the particular, historical phases in the development of production’.[1] Your analysis does look at class struggles through the ages, but pays little attention to their economic foundation, and it is on this basis that you can elevate concepts such as debt to an ahistorical level. Hence, in the conclusion of your chapter on ‘The age of the great capitalist empires’ you argue that the notion that capitalism would be around forever was the reason behind the credit bubble: ‘Presented with the prospect of its own eternity, capitalism – or anyway, financial capitalism – simply explodes’ (p360). Your analysis puts the evolution of the crisis down to psychology and fails to examine the underlying causes of the credit bubble, which resulted from problems of capital accumulation and profitability.[2]

I am not criticising the book for failing to explain the universe and everything in it, and, of course, I accept that the book aims to cover the issue of debt. However, it is a legitimate criticism to point out mistakes in the analysis. Another example on this topic is where you cover the setting up of the Bank of England in 1694, when a consortium of English bankers loaned £1.2m to the King and in return received a monopoly of banknote issuance and other privileges. You make the absurd claim that if the loan were ever paid back, ‘the entire monetary system of Great Britain would cease to exist’ (p49). This is just ridiculous, not least because the Bank of England is a nationalised entity. It is not a private corporation that could be wound up if the privileges establishing its position were annulled with the repayment of the loan. In any event, a country’s monetary system is not dependent on a particular institution staying in place.

Secondly, on debts the US owes to China and Asia. I did not claim that ‘most money owed in the world today is owed to China or other Asian creditors’. My point was that you argued in your book for a debt ‘Jubilee’ that ‘would affect both international debt and consumer debt’. You raised the issue of cancelling international debt, and I do claim that a large chunk of the US international debt is owed to China and other Asian countries. The total of US debt, including that owed to other US citizens/companies, is far bigger than the international, so that any other country’s proportion of that total is bound to be relatively small. But, if we focus on the international debt, the numbers are far from negligible.

The following figures, which I calculate from the US Treasury website, leave out Japan, an imperialist power, in order to focus on the debt to poor Asian countries. Total US Treasury and government agency (including Fannie Mae and Freddie Mac) debt owned by all foreign countries in June 2011 was $5,781bn, of which China (including Hong Kong) owned $1,785bn and the rest of poor Asia another $529bn. The total Asia figure of $2,315bn is 40% of the Treasury and agency debt owned by other countries.

China may not own any student loan debt, but the book did not specify only cancelling this type of debt. China and other poor Asian countries would certainly get hit pretty badly on any broad debt cancellation. The US owns less than $100bn of debt securities in Asian countries outside Japan.

There are many ways to measure debt, and the comments above refer only to official debt securities. They do not include corporate debt, nor equity holdings, nor the assets and liabilities represented by direct investment. If ‘everything’ is included, at least as measured in published statistics, then the data for 2011 show that the US economy has a net debt position with the rest of the world amounting to $4,157bn. In other words, foreign investors own this amount more of all kinds of assets in the US than the US owns in other countries.[3] Nevertheless, because of its privileged imperial position, with the role of the US dollar in particular, it was still able to earn a net revenue on this debt position of $235bn in 2011![4]

Tony Norfield, 3 September 2012

Here is a copy of David Graeber’s comments:

Just a couple notes:

I do not actually say that changes in the nature of money are the driving force of history; you just seem to conclude this because I do not provide a theory of the "motor of history" at all, but mainly describe what happened, and since the book is about money and debt, money and debt are what I focus on. However when I do suggest specific you will find, if look carefully, that it's always based in class struggle of some sort or another. Coinage comes about through the rise of professional armies and slave systems. The ban on usury in Islam comes from a shift in class alliances. Etc. Sometimes I note ironic results, such as the disaster that certain forms of debt resistance in the ancient Middle East had on the status of women, or the way that successful popular resistance in Ming China set the stage for the elite counter-offensive in 16-17C Europe. But it's always class struggle ultimately. Skim the book again with that in mind and you'll see it.

The idea that most money owed in the world today is owed to China or other Asian creditors is simply untrue. They just hold a lot of US treasury bonds, which are losing propositions economically anyway. About 74% of the US public for instance, are in debt, and 1 in 7 are currently being pursued by collection agencies, and the amount of student loan debt at all is over a trillion dollars. Close to none of that is owed to China.

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[1] Marx, Letter to Weydemeyer, 5 March 1852.

[2] These topics have been analysed on this blog in various articles, see for example ‘Anti-Bank Populism in the Imperial Heartland’, 5 July 2011.

[3] See US Bureau of Economic Affairs, ‘The International Investment Position of the United States at Yearend 2011’, July 2012.

[4] For further details of how this works, see ‘Dimensions of Dollar Imperialism’ 5 October 2011, on this blog.