Interview with Fernando Sanchez of Cemla (Center for Latinamerican monetary studies) in Mexico : on the links between the Dollar and the Euro and the dominance of neoliberalism and the financial sector:

Francine Mestrum: Before starting to reflect on South-America and the financialization of the economy, it could be useful for our readers to just say a word on where Mexico stands in this context.

Fernando Sanchez: Mexico is more or less ‘de-linked’ from South America and, historically, this has always been so. Mexico depends very much on the United States of America. Even in periods where political autonomy seemed to be very important, economically Mexico was tied to the USA. Trade was for 70 % with the USA and today it is even up to 90 %, due to the North-American Free Trade Agreement (NAFTA).

Business has no problem with this state of affairs, obviously. But it does lead to a very strong concentration of wealth and a growing social inequality.

The drugs trade is now very important and has to be seen as an instrument of that concentration of wealth. In fact, it would be relatively easy to stop it, but no one wants to. It would help if one could abandon bank secrecy and control the arms trade, but the arms lobby in the USA is extremely strong and does not even want to talk about it. In México, some people in government as well as in the military, the church and the judicial system are, directly or indirectly, involved in this business. The logic behind it is profit making.

fm: The situation in South America is different. Several political, social and economic initiatives are being taken to ‘de-link’ the subcontinent from the North and from Europe. I think of Unasur, Alba, Banco del Sur, the Sucre, etc. Is there a real political will to make an end to the dependency of the subcontinent?

FS: I think there is a real political willingness to break with neoliberalism. Several governments, one being more enthusiast than the other, try to create mechanisms in order to offer a possibility to the countries of the region to decide for themselves on how to use the available liquidities.

This is the objective: create the mechanisms which will allow governments to use their surpluses for development and for society, because at this moment, revenues are rather important thanks to new investments and the export of natural resources.

One of the problems that make an alternative use of these surpluses impossible is the institutional context, whether the surpluses were created by export or by investment. A third element that has contributed to the expansion of liquidity is capital flows invested in the financial system.The latter are converted into national currency, via the central bank. And they become part of the national reserves. If political authorities want to use the money, they have to confront the power of the central bank. Central banks want to fight inflation and want to avoid that too much liquidity is poured into the market. But that means that reserves are not used at all and are in fact useless. Reserves are very expensive because the interest rate is very low. But at the same time governments are borrowing money and the central bank issues debt certificates against a rather high interest rate.

Profits are really interesting in this way! Reserves do not yield much but debt certificates do and are placed on international capital markets. At the same time, the real economy, which creates jobs, cannot use that capital. This is how the huge concentration of wealth comes about.

The interesting initiatives of South America will be faced with this logic and this financial dynamic. It is very difficult to break this logic. Even today, different institutions exist which would be able to fund development projects, but as long as the governments cannot mobilize the reserves without clashing with the central bank, it will be very difficult. Central banks are too afraid of inflation.

Nevertheless, these are interesting times to think of alternatives. The crisis has made people question the dominant economic logic. Stiglitz is fighting European policies which want to stop monetary expansion, again in the name of fighting inflation. We now even witness the absurdity to limit fiscal deficits and write this in the constitution, as Spain recently did! Of course, Merkel and Sarkozy are behind these measures, but this is really very serious.

fm: Fighting inflation is not a valid argument then?

FS: Economists had a very serious debate in the 1970s, when monetarism was emerging. Orthodox economists wanted rules in order to make sure that every monetary expansion would be covered by a counter-value in foreign currency. The crisis did not make it possible at that time.

But in the 1980s, the idea was launched again. And what they want to achieve right now even goes beyond it. They want to write into the constitutions that fiscal deficits are not allowed! This means governments have their hands and feet tied and have no policy autonomy anymore, they cannot freely use the resources they have.

There is a fundamental reasoning behind all this. Aggregate demand is consumption + investments + public expenditure. Resources can be used in many different ways, but the neoliberal logic says that aggregate demand has to be limited. Inflation, so it is said, is a monetary phenomenon and a consequence of an imbalance between supply and demand. But that does not mean automatically that demand is the key factor. The reason can also be insufficient supply. If you reduce demand at a moment that supply is declining, the demand will further decline and supply will also decline. You then enter into a downward spiral and you end up with a shrinking economy.

This does not help to solve the problem. This focus on inflation is fundamentally wrong.

fm: Are economists not supposed to know this?

FS: Of course they know. But there are other – hidden – interests which explain their asking for a constitutionalization of a ban of fiscal deficits.

The point is that today most surpluses around the whole world are converted into US Dollars, the global currency.

The US is issuing too many US Dollars, causing in this way excessive global inflation. You have to wonder, then, following the logic of financial capitalism, who is going to decide on this money and who will be allowed to use it. Clearly, it is the financial sector which decided that it was going to have the monopoly of decision-making.

If a central bank issues a national currency, buys foreign currencies in order to put them in the reserves, and, at the same time, uses debt instruments of the treasury in order to attract national currency and buy more foreign currencies, there is a huge capital that never makes its way to the real economy. Everything goes to the financial sector.

It is a profoundly perverse logic.

Instead of guaranteeing stability and having money available for economic sectors which can provide jobs and create income, it is the speculators who decide when and how much money they need. Free movement of capital is sacred now. This is the logic promoted by the IMF and others.

If you want to consume, there is no problem, you will be given a credit card. The company issuing the credit card gets a commission from the company where you buy goods. And you pay for the rights of using the credit card. In this way the whole of society is bound by this financial logic.

What it means, in the end, is that the financial world is now very powerful. It governs the world. The whole economy is trapped into this logic.

In the past the optimal level of reserves was linked to imports. Today, the 'necessary' reserves are determined by criteria related to financial stability. If reserves are not meant to guarantee stability, then what is much and what is not enough?

Nowadays, the financial world can attack the strongest economies, after Spain a warning was sent out to France. The message is simple: no one can stop us.

In fact, the United States are very good in defending their interests. They even have the military power to do it. They use the logic of the Federal Reserve, the IMF, the World Bank…

fm: This sounds like being a kind of new  Washington Consensus?

FS: Exactly. It is.

And it is this logic one wants to avoid in South-America. Asian countries as well have several initiatives, like the Chiang Mai initiative, meant to develop a regional decision-making process with monetary cooperation and an exchange policy.

fm: Will the Banco del Sur be enough to resist this logic?

As development bank, the Banco del Sur could be an alternative for the very neoliberal Inter-American Development Bank. It should be able to fund projects at a reasonable and sustainable interest rate, so that projects can remain profitable.

The second point concerns conditionality, since loans never can work without conditions. A bank is not a charity. But again, the conditions should not threaten the profitability and the success of the projects.

The Banco del Sur does not work yet. It has quite some problems in order to get started. Brasil is the main funder and even if the Brazilian government wanted to follow the proposed logic, pressure comes from Parliament. Brazil has its own development bank with enough capital to help the whole of South America. So if the advocates of the Banco del Sur want to promote an egalitarian approach, some forces in Brazil will stress that the capital input is far from being egalitarian. This makes it rather hard to decide on good rules of the game.

fm: There is a second and very interesting project in South America: the ‘Sucre’

FS: Yes indeed, but its use is still quite limited. The ‘Sucre’ cannot be compared to the Euro, it will never be a single currency, only a ‘unit of account’ allowing to pay for trade and to put in common reserves. If it will ever really exist, it surely will be able to help the region.

The fact is that the Dollar has no longer any solid basis in order to function as a global currency. But all natural resources have to be paid in Dollars! Those who sell resources, stock Dollars in their reserves and those who buy resources, need Dollars to pay for them. There is enormous pressure from the US in order to maintain this system.

Saddam Hussein tried to make a change, and financially, he certainly was right to do so. He proposed OPEC to price their oil in a solid alternative currency. And the only real alternative was the Euro.

The consequence was a military invasion. Today it is the Iranian Ahmadinejad who is threatened. One wants to avoid these things can ever happen again.  

fm: Does this mean you see a link between the Dollars and what is happening to the Euro?

FS: Absolutely, yes, because the measures which were taken were clearly insufficient.

The Americans are terrified by the idea of an alternative currency which may threaten the Dollar. And migration to the Euro clearly is the only thing which could cause the fall of the Dollar.

Of course the Euro-crisis is also linked to internal problems of European economies, but the biggest problem is speculation. The reasoning is that if one currency declines, the other one is rising, since the rate of exchange is a relative price. Speculating against the Euro means the Dollar keeps its value.

Again, the United States of America are the country which best defends its interests and those of financial capitalism. They have no problems with speculative attacks. London and New York just have to remain the financial capitals.

Of course there is a political dilemma for progressive political forces in Europe. How can they defend the Euro? On the one hand, the European Union has recently adopted a neoliberal logic, on the other hand there are other social struggles which cannot be ignored. The financial logic is really dominant, but one cannot sacrifice everything to it. There are social demands which cannot be frustrated. One cannot ask the people to just wait for the victory over financial capitalism.

fm: Does South America have more room for alternatives then?

FS: There are serious efforts being made in South America in order to tackle all problems. And there is a lot of criticism on the extractive industries, on productivism, etc.

Evo Morales, the president of Bolivia, has difficult choices to make. On the one hand there is financial capital which has to be tackled. The initiatives we already talked about should help to solve these problems. But on the other hand there is the question of natural resources. Morales is obsessed by a logic of industrialization, and I am afraid he makes a mistake. The future of humankind cannot be industrialization. Even the industry is now in crisis. We really have arrived at the last cycle of capitalist expansion.

But the question is how to analyze this and how to link these two problems, productivism and financial capitalism, in one programme?

What we are faced with today is not a short term or middle term crisis, it is a systemic crisis of capitalism. Accumulation today follows the logic of financial capitalism.

fm: How do you see the resistance which is now slowly emerging in European countries?

FS: When I look at what is happening in Spain, I see that it is not workers who are reclaiming the streets. It is young people, it is middle class and what they want is more democracy and a good welfare state. They are not asking for system change.

But the question I have is whether capitalism is able to put steps backwards. Is it possible for new welfare states to emerge? I have no elements which allow me to given an answer to that question. But I do know that it is extremely difficult to harness financial capitalism. Governments should be able to use their financial resources, in order to help the real economy. It will be very difficult to re-impose this logic.

But what is interesting is the fact that in the USA, the most powerful State in military terms and fully within the logic of financial capitalism, there are members of Congress who ask the re-introduction of the ‘Glass-Steagall Act’. This means that even at the highest level, there are people who want to undo the financial liberalization of the 1980s and 1990s. Some people have understood that the financial logic can destroy capitalism.

I often have to think of this amazing book of Susan George, ‘the Lugano Report’. She explained so very well how powerful people come together and decide on how the world has to change in order to preserve capitalism. And her descriptions have proven to be very right.

Unfortunately, in order to change anything you have to break the material basis of financial capitalism. This is needed in order to build a new balance of power.

fm: Can we say that capitalism is threatened by two powerful but separate forces? On the hand the ecological crisis, on the other hand the financial sector?

FS: Absolutely, yes, that is what it is all about.

fm: Are there any solutions?

FS: We have to be careful to not fall into the trap and not make social movements fall into the trap. Because there is a Leninist logic which says that you have to develop your revolutionary forces first, and act later.

But the question is, I think, if capitalism has any future?

Look at what many groups of people are doing at the local level. It is much more than a pure subsistence strategy, it is also self-governance. This certainly is a way to arrive at a new balance of power, not by taking power but by building power and creating a new dynamic.

Even our democracy is no longer fit to the needs of our societies. We will have to reflect on the kind of State we need. In Latin America leftwing forces are really working on this.

Maybe a huge crisis, like the one of the 1930s, can be an opportunity to make all people reflect on how to change the world, on how too much can really be too much. Unfortunately, in Europe, it would probably mean a shift to the right and even more xenophobia.

fm: You seem to give a lot of attention to the hegemony of the USA. But can the military hegemony be maintained when the Dollar and the economy in general are declining?

FS: Every shadow cast over the Dollar will be immediately resisted with a speculative attack from the financial capital. This is what the Warren Buffets and others are doing. Even the media play an important role in this. They are the ones who say the Euro is weak, the Euro might disappear, and so on. So people sell their Euros and buy Dollars. It is a very psychological game. And of course there is a kind of herd instinct on the stock exchange. It is very costly to maintain hegemony, though very often it is not missiles you need for it. You can count on Soros to launch a speculative attack… And as long as the USA can play that game, they are in power.

But it also means they are buying time, and the question is: what for? Because they cannot change the material basis of their economic crisis. One cannot see the slightest strategic thinking behind what is happening.

The logic could possibly be revealed by the energy stocks. We all know that oil is near depletion and we are slowly moving towards a transition. What we do not know is where this will take us.

Of course this transition can be controlled by those who are controlling the current stocks. This is the place where new conflicts will arise. And this is why the economic cycle of all possible rivals can be closely monitored.

Today, China has a very intelligent policy in order to avoid an economic crisis. In fact, China could survive with only its domestic market, it is large enough. This is what they are now working at, but not for 100 %. They also continue to invest in Africa, clearly to ensure their access to natural resources and to avoid any dependency on the USA. Their reserves in Dollars did decline however; it is now only half of what they have.

But the major question we are faced with is this: how long this hegemonic logic and this struggle for power can be maintained in a context of peace?