Thailand, 2 July 1997. After spending billions of dollars of its foreign reserves to defend the Thai baht, the central bank of Thailand finally gave-in to the market pressure and had no other option than to float their currency, breaking the Prime Minister's vow few days earlier on not to devalue the baht.
Malaysia was the first to intervene their currency sell off on 8 July 1997, while three days later Indonesia widened its trading band for rupiah at the same day the Philippine peso devalued. But Indonesia's attempt to keep its currency peg to US dollar failed, and on 14 August 1997 Indonesia too was forced to abandon rupiah's trading band and devalue the currency. In the next 2 months, along with the panic selling of its stock market, Indonesia's rupiah fell more than -30%.
Meanwhile, as Singaporean dollar and South Korean won had started their gradual decline, on October 1997 Hong Kong raised its bank lending rates to 300% to safeguard the Hong Kong dollar from speculators regardless of the devastating effects the high interest rates would cause. Sure enough, this move triggered a sell off of its stock market with -10.4% fall on 23 October 1997. Rattled by the spreading of Asia's crisis, on 27 October 1997 the Dow Jones Industrial Average dropped 554 points, which prompted the exchange officials to suspend the trading in US stock markets.
Devastatingly, in just 1 year duration of the crisis (June 1997 - July 1998) Thai baht lost its value by -40.2%, Indonesian rupiah by -83.2%, Philippine peso by -37.4%, Malaysian ringgit by -39% and South Korean won lost its value by 34.1%. During the same period of June 1997 - July 1998 these countries' GNP also dropped significantly, with Thailand sank by -40%, Indonesia by -83.4%, Philippines by -37.3%, Malaysia by -38.9% and South Korea by -34.2%.
Malaysian Prime Minister Mahathir Mohamad was quick to blame currency speculators as the cause of the crash. He even singled out George Soros as the scapegoat, for an understandable reason. In July 1997 Soros Fund Management returned 11.4% mainly from shorting the Thai baht, while another prominent hedge fund manager Julian Robertson made in total of $7 billion in profit from trading across currency, commodity and equity markets during the Asian Crisis. However, to say that they and other speculators caused the crisis would be over simplifying the situation, as nobody - not even Soros and Robertson - have large enough capital to single-handedly crash the Asian markets.
Hence the enigma remains, if speculators were not the main cause of the Asian market crash, then what actually happened?
The Enigma of Market Crash
It was first occurred in the 17th century Netherlands. After their independence from the Spanish Habsburg Empire, and after the exodus of skilled traders from Spanish-occupied Antwerp to Amsterdam, the Netherlands established the first modern financial market in the world in 1602. The new exchange marked the hallmark of the Dutch Golden Age, which made Amsterdam not only the financial capital of Europe but also the financial capital of the world.
By the 1630s the Dutch's commercial activities were at its best: profitable quest around the globe by its merchants, booming textile trade, profitable settlement in Batavia by the Dutch East Indian Company (VOC), and climbing house prices as well as healthy economic growth as its citizens had become a consumer nation.
Along with this growing economy, Dutch citizens with their disposable income started to look for luxury goods and declaration of status, and found their fond of beautiful display in tulip flowers. Imported from the Ottoman Empire in the middle of 16th century, tulips was first introduced to Europe by Ogier Ghislaine de Busbecq, the Imperial Ambassador to Ottoman's Suleiman the Magnificent. At first tulips was only available among the nobles, the wealthy and specialist botanists. But in 1573 Busbecq presented some tulip bulbs to the famous Dutch botanist Carolus Clusius who began to harvest and sell them at a very expensive price.
As tulip prices rapidly increase, more herd of people began to join the Tulipo Mania in a speculative quest to gain excessive money, which turned the tulip business from selling flowers to selling tulip futures, since none of these speculators really wanted the flower. Overtime, the price of tulip had risen to a level so ridiculously high that nobody wanted to buy anymore, and on the other hand those who had the futures were starting to sell drastically at lower prices, in a fear of a price collapse.
On 3 February 1637 that fear became a self-fulfilling prophecy, where tulip prices collapse drastically with both speculators and genuine buyers were all panic-selling the futures and the physical tulip flowers, making this day the first ever modern market crash in history.
In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay provided the first accounts of the history of Tulipo Mania, in which he commented: "men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
This view is also shared by British economist John Maynard Keynes who in 1936 described the herding behaviour in speculative euphoria through the analogy of beauty contest, where in guessing the outcome of a pageant we will have a better chance to pick the winner by guessing what the judges think about the contestants, instead of defining our own opinion about beauty. Keynes then elaborate by saying "professional traders prefer to devote their energies not to estimating intrinsic values, but rather to analysing how the crowd of investors is likely to behave in the future."
Moreover, Austrian economist Joseph Schumpeter later added that the herding behaviour over this speculative euphoria are normally based on an underlying new trend, industry, or technology where people often overvalue the potential gains and leading to an over-excessive flow of capital towards this new trend.
Just as the arrival of Tulips from the Ottoman Empire brought a new trend into the Netherlands, the same new trend syndrome occurred in most market crashes such as Mississippi bubble in 1716 on the share price of Mississippi Company and in South Sea bubble 1720 on the share price of South Sea Company, where the South Sea Company's share price skyrocketed from 131% of par in February to as high as 950% in June 1720, and then dropped back to 200% in December 1720.
Furthermore, John P. Calverley in his book Bubbles: And How to Survive Them explained that in each market bubble the increasing price of the new trend usually started for a good reason, which on the way up would encourage more high level of investments, boost prosperity and increase economic growth. Tulips became the symbol of wealth in 17th century Netherlands, while the mania in the US for railway stocks in the 1880s, radio and motorcar stocks in the 1920s were also new trends during their time and were all breakthrough inventions that changed the way we live.
On 3 February 1637 that fear became a self-fulfilling prophecy, where tulip prices collapse drastically with both speculators and genuine buyers were all panic-selling the futures and the physical tulip flowers, making this day the first ever modern market crash in history.
In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay provided the first accounts of the history of Tulipo Mania, in which he commented: "men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
This view is also shared by British economist John Maynard Keynes who in 1936 described the herding behaviour in speculative euphoria through the analogy of beauty contest, where in guessing the outcome of a pageant we will have a better chance to pick the winner by guessing what the judges think about the contestants, instead of defining our own opinion about beauty. Keynes then elaborate by saying "professional traders prefer to devote their energies not to estimating intrinsic values, but rather to analysing how the crowd of investors is likely to behave in the future."
Moreover, Austrian economist Joseph Schumpeter later added that the herding behaviour over this speculative euphoria are normally based on an underlying new trend, industry, or technology where people often overvalue the potential gains and leading to an over-excessive flow of capital towards this new trend.
Just as the arrival of Tulips from the Ottoman Empire brought a new trend into the Netherlands, the same new trend syndrome occurred in most market crashes such as Mississippi bubble in 1716 on the share price of Mississippi Company and in South Sea bubble 1720 on the share price of South Sea Company, where the South Sea Company's share price skyrocketed from 131% of par in February to as high as 950% in June 1720, and then dropped back to 200% in December 1720.
Furthermore, John P. Calverley in his book Bubbles: And How to Survive Them explained that in each market bubble the increasing price of the new trend usually started for a good reason, which on the way up would encourage more high level of investments, boost prosperity and increase economic growth. Tulips became the symbol of wealth in 17th century Netherlands, while the mania in the US for railway stocks in the 1880s, radio and motorcar stocks in the 1920s were also new trends during their time and were all breakthrough inventions that changed the way we live.
Calverley's Checklist: Typical characteristics of a bubble
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However, overtime as expectations grow stronger, overvaluation of the potential gains from these new trends starting to become irrational. Just as George Soros explained in his book The Alchemy of Finance: "when events have thinking participants, the subject matter is no longer confined to facts but also includes the participants' perceptions. The chain causation does not lead directly from fact to fact but from fact to perception and from perception to fact."
In other words, more often than not the facts of the new trend are usually overlooked when the euphoria has created an overvalued or over optimistic perception towards this new trend among the herd, despite the overwhelming evidence. Soros' view echoes Keynes' beauty pageant analogy, and this overvalued perception becomes the fuel that turns optimism in the new trend into speculative market bubble, where the still potential rise in price begins to attract speculators to jack up the price sharply into a highly overbought territory.
For instance, at the height of the 1920s bubble Bernard Baruch described the scene of his bubble days vividly: "Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929." Another prominent financier of that era, Joe Kennedy (the founding chairman of the SEC and John F Kennedy's father), famously sold his stocks positions just before the crash in autumn of 1929 after a shoeshine boy gave him stocks tips.
When the euphoric bubbles finally burst or crash, people who bought railroad stocks in the 1880s lost a substantial amount of money in the Panic of 1893, since the stock prices never came back to as high as they were during the euphoria. People who bought RCA stocks and stocks on the hundreds of motorcar companies in the 1920s also lost their money in the 1929 Crash. Likewise, after tulip prices slumped in the 17th century people lost a great deal of money almost in a blink of an eye, punishing everyone from rich to poor, men and women, young and old, without mercy. Even world renown genius Sir Isaac Newton famously lost a fortune in the South Sea bubble 1720, in which he then commented "I can calculate the motions of the heavenly bodies, but not the madness of the people."
But among other things, Livermore is arguably most remembered as the guy who famously made a huge fortune from shorting the stock market during the Panic of 1907 and the Crash of 1929. However, unlike John Law who phenomenally fabricated the Mississippi Bubble 1716 and those who manipulated the South Sea Bubble 1720 using Law's "methods", Jesse Livermore - despite of his tricks - was by no mean the cause of the market crashes of his time, just as George Soros was not the cause of the Asian market crash 1997. Instead, Similar like Soros, Livermore was a master in spotting the symptoms of a peaking bubble, and had the knack for good timing and the guts to take huge positions to capitalise from the inevitable crashes.
In other words, the main problem with market crashes is not speculators or traders who are capitalising the market situation, but the main problem is the fundamental gap between the peak of the bubble and its much lower fair/real price, as well as the trigger that makes the crash inevitable.
In Britain this translated to artificially high interest rate and currency, and it caused failing businesses, housing market crash and eventually led to a recession. In the market, this situation was seen by traders and speculators as weak economic indicators, with pound maintained in an artificially high price, and thus must fall over time to reach its right price level. And so on September 1992 the pound started to take a hit, with traders and speculators frantically selling pounds against marks, pushing down the currency to approach the lower end of the 6% trading band. This move forced the Bank of England to intervene and buy unlimited amount of pounds, to maintain the currency within the 6% trading limit in accordance with ERM rules.
On 16 September 1992, the sell-off continued, and UK chancellor Norman Lamont then raised interest rates from 10% to 12% to discourage traders and speculators from further selling the pound and encourage them to own the currency. However, this action would further worsen their economic problems, and thus sent alarming signal that the British government was beginning to act desperately. Traders and speculators kept on selling, and later in the day the interest rates was once again raised to 15% with no effect. Finally, by 7 o'clock in the evening, Britain announced that it would no longer defend the trading band and bitterly withdrew the pound from the ERM system.
Over the next few weeks, the free-floating British pound fell approximately 15% against Deutsche mark. And on 24 October 1992 The Daily Mail newspaper revealed that during the pound sell-off George Soros shorted $10 billion worth of currency and earned about $1 billion of profit in the process, which instantly made him the scapegoat for the crash, and gave Soros the nickname "The Man Who Broke the Bank of England."
This is exactly what happened with Julian Robertson. After making a huge fortune in the Asian crash 1997, Robertson correctly predicted the inevitable crash of the Dot Com Bubble 2000 but shorted the tech market just a few months too early, hence shorting against the still upward market trend. The short position wiped out all of his capitals and forced him to shut down his legendary Tiger Fund, where he then vanished from the market till this day. Meanwhile, as described in the book Inside the House of Money, during the same Dot Com Bubble George Soros also shorted the tech market a bit too early, but after realising his wrong timing Soros flipped his position from short to long in late 1999, and converted a 19% loss into a 35% gain for the year.
Therefore, although oftentimes framed as the scapegoats of the crash, people like Livermore, Soros and Robertson can only utilise their large capital and even larger leverage to exploit the fundamental gaps that have already existed in any given market bubble, and can only start to capitalise by shorting it when the bubble has peaked and about to burst. The real question then becomes this, who has the power to control these fundamental gaps in market bubbles and who has the trigger to burst it? The financial market, as it turns out, is only the tip of a very large iceberg.
The making of a new world order: the Wall Street coup
Therefore, although oftentimes framed as the scapegoats of the crash, people like Livermore, Soros and Robertson can only utilise their large capital and even larger leverage to exploit the fundamental gaps that have already existed in any given market bubble, and can only start to capitalise by shorting it when the bubble has peaked and about to burst. The real question then becomes this, who has the power to control these fundamental gaps in market bubbles and who has the trigger to burst it? The financial market, as it turns out, is only the tip of a very large iceberg.
The making of a new world order: the Wall Street coup
After 20 years of shaky existence, populist sentiment at that time prevailed when during the presidency of James Madison the charter for the First Bank of the United States failed to be renewed by a single vote in congress, on the ground that the central bank was unconstitutional and benefited investors and merchants at the expense of the majority of the population. The charter then expired in 1811, and one year later a war broke between the US and the British Empire.
The war lasted for 2 years and 8 months, and it created an economic dislocation and chaos in the US financial system. Some conspiracy theory believes that the British was backed by the money from the Rothschild banking family, who was one of the masterminds behind the First Bank of the United States. Hence, the theory suggest, Rothschild's backing for the British was a direct reaction for the abolishment of the central bank, in which the resulting economic chaos in the US was intended to pressure politicians to think of the need for a central bank.
The debate then escalated into a Bank War in 1832, where Biddle and his allies attempted to renew the charter for the Second Bank, with the members of the Congress (a lot of which substantially trapped in Biddle's debt) voted to renew the charter, but was then vetoed by President Jackson. Due to his strong stance in the Bank War, an assassination was attempted on President Jackson but failed, in which he then said to his running mate Martin Van Buren "the bank is trying to kill me, but I will kill it." Andrew Jackson eventually won against Henry Clay in the 1832 presidential election, and Jackson held up his stance against the Second Bank. In 1836 the charter for the Second Bank of the United States then expired.
By late 19th century, this economic innovations also changed US political landscape, where in the absence of entrenched aristocracy and in the lightly regulated corporate and banking environment the innovative corporations began to buy out politicians to gain political leverage, a practice that was considered normal. As a result, while the Senate became known as the 'Millionaire's Club', the openness of the US political system made it possible for the business elite to use their political leverage to shift the economic playing field in their favour.
Moreover, the late 19th century also witnessed the birth of the Trust system, where these corporations consolidated with each other to effectively create a monopoly power in their respective industries. According to historian Thomas McCraw between the period of 1897-1904 as many as 4227 US corporations merged into 257 combinations, with around 318 Trusts were estimated to control two-fifth of US' manufacturing assets by 1904. Investment banks played a central role in this rise of the Trust system, where they became the middleman that brought disparate industrial interests together and also provided the funds required to buy shares and rearrange shareholdings. Among the pact of investment bankers, JP Morgan and his army of bankers emerged as the leader, with his empire handled as high as 40% of total capital flowing into American industry, giving him an economic power unmatched since Nicholas Biddle.
But then came Theodore Roosevelt. Vice President Roosevelt stepped up to power after the assassination of President William McKinley in September 1901, and made "Trust busting" and improved supervision of large corporations as the major theme of his presidency. He pushed through major legislation to tighten regulations, and pioneered the use of the Sherman Antitrust Act of 1890 to break up large Trusts, with Northern Securities Company (a JP Morgan-engineered railroad Trust) as the first victim. Roosevelt administration's success in prosecuting antitrust cases became the benchmark and inspiration for "trust busting" cases under Presidents William Howard Taft and Woodrow Wilson, including the famous court-ordered break up of Standard Oil in 1911.
Nevertheless, for the financial elite the "trust busting" policies did little to change the concentration of money and power that they dominate. In fact, their power would soon escalate beyond their wildest dream when an opportunity appeared during the Panic of 1907.
It was in the era where the US was on a depression, after a massive earthquake that hit San Francisco in April 1906 brought down the market and the economy. During this bleak period, F. Augustus Heinze and Charles Morse attempted to corner the stock of United Copper Company. With the financial backing from Knickerbocker Trust Company (New York City's 3rd largest Trust) the two men tried to push up the stock price using various brokers' name, and then "park" the stocks that they bought in each broker's account (still not illegal in those pre-SEC days).
But then the scheme began to fall apart when speculators and their brokers themselves took a counter position against them and short sell the stocks, though the brokers did not admit it to the two men. Calling the brokers' bluff, Heinze and Morse then requested for the "parked" stocks to be delivered to them, because if these brokers have short positions they would have to cover their positions in order to meet delivery and driving the stock price higher in the process.
However, two things happened. Firstly as the men drove up the stock price earlier many other investors took profit and sell their stocks to eager brokers. Hence, when Heinze and Morse requested for the stocks to be delivered these brokers were able to meet the delivery. In other hand, however, the two men now have to pay to the brokers for all of these delivered stocks and they did not have the money to pay them. Secondly, the short sellers were able to borrow more stocks to short than previously estimated by Heinze and Morse, thus while Heinze and Morse scrambled to raise enough cash by forcibly selling the stocks, the short sellers were driving the stock price down even more. The cornering attempt failed, and one of their brokers Gross & Kleeberg subsequently went bankrupt.
Upon hearing the news of their failure, mass number of people started to withdraw money from any financial institutions associated with these men (they have between them at least 12 banks, all acquired with borrowed money), then spread further to their affiliated banks and Trusts and eventually led to the collapse of Knickerbocker Trust Company. The collapse of the Knickerbocker spread a contagion of fear across the country, where regional banks then withdrew their reserves from New York City banks as quickly as retail customers withdrawing deposits from their regional banks. This classic bank run eventually led to the mass bankruptcies of local banks and businesses, and further fuel the panic-selling of the stock markets (where Jesse Livermore made his short-selling move).
In the midst of the Panic of 1907, JP Morgan stepped up to effectively act as a central bank and organised the [strategically selective] bailouts with his banking cartel to save the market and the economy. JP Morgan famously locked the bankers in his library, and would not let them out until they come up with a plan to stop the panic. And they did stop the panic, with the whole US financial system finally under their control.
Three years later on November 1910 a highly secretive meeting was held at Jekyll Island, an island partly owned by JP Morgan, to discuss a plan to prevent a panic like in 1907 to ever happen again. The meeting was attended by top government officials and New York banking cartel, including Frank. A Vanderlip of the Rockefeller-controlled National City Bank of New York, Charles D. Norton of the Morgan-controlled First National Bank of New York, Paul Warburg of Kuhn Loeb and Henry P. Davidson, the second in command at JP Morgan. The meeting gave birth to the US' third central bank, with the structure of 12 privately owned regional banks under the Federal Reserve system (or simply called the Fed) where the private sector banks were given the power to appoint as much as two-third of the Fed's directors.
According to Simon Johnson and James Kwak, the creation of the Fed finally provided the market with a safety net that theoretically could prevent a panic like in 1907 to ever occur again. However, after a series of government deregulation conducted by Republican administrations during World War I, and the ultimate decision to keep the laissez-faire (roughly translated as let them do) capitalism system by President Warren G Harding, the environment where lightly regulated market combined with cheap money (low interest rates) and safety net from the Fed inevitably encouraged banks to take speculative risks. And it took only 16 years for this flaw in the system to turn into a disaster.
With lightly regulated market the 1920s became an orgy of rampant speculation driven by investment banks (similar like in the bull market of the 2000s), where investors were unprotected from the luring of complex financial vehicles that they didn't understand. Furthermore, investors were also able to enhance their positions through margin loans that they can obtain cheaply, thanks to low interest rates set by the Fed. The result is a massive bubble, dominated by the new trends such as radio and automotive stocks and followed by practically every stocks, which ended in a spectacular crash in 29 October 1929.
Some prominent figures like Louis T. McFadden (then Chairman of the House Banking and Currency Committee) argued that the October Crash 1929 was fabricated by the Fed and international bankers to "bring about a condition of despair, so that they might emerge as rulers of us all." Liaquat Ahamed in his book Lords of Finance identify the bankers in brilliant elaboration as Benjamin Strong (New York Fed), Montagu Norman (Bank of England), Hjalmar Schacht (Reichsbank) and Émile Moreau (Banque de France).
This fabrication was evident in August 1929. While the Fed began to tighten money supply by buying more government bonds to slow down the bubble, at about the same time JP Morgan and John D Rockefeller divested from the stock market and put all their capitals into cash and gold. And soon enough, on 24 October 1929 large Wall Street brokers simultaneously called in their 24 hour "call loans", which forced investors to sell their stocks at any price to cover their loans, and thus became the trigger for the massive sell-offs few days later.
In yet another painfully similar episode like in the bubble of the 2000s, its subsequent crash in 2008 and the aftermath we're still experiencing now; the same New York financial firms that were largely the cause of the bubble received a generous bailout, on the ground that they were too big to fail and their failure could led to a total systemic collapse.
The Crash of 1929 not only destroyed billions of dollars worth of paper assets, but also triggered a domino effect of deleveraging where investors, financial institutions and companies were selling anything they could to pay their debts. These actions depressed prices even more and eventually led to the Great Depression. Massive unemployment led to food riots in US cities, factories workers went on numerous strikes in Britain, while in Continental Europe the Great Depression produced a chain-reaction that led to the rise of fascism. Gyula Gömbös became the Prime Minister of Hungary, Benito Mussolini's grip on Italy got stronger, General Francisco Franco seized power in Spain, while in Weimar Republic (Germany) the economic chaos gave rise to the "populist" National Socialist (Nazi) Party with its leader Adolf Hitler, which gained popularity among the people by blaming the economic wound to bankers and speculators (many of whom were Jewish).
But it was not until the World War II when the Great Depression was finally over, with the war (ironically fought against the fascist power whose rise to power was made possible by the Great Depression) provided mass job opportunities within the line of the military and its equipment, implementing the full extend of the Keynesian remedy.
The making of a new world order: the rise of king dollar
World War II was the bloodiest chapter ever recorded in human history, with the estimated of 40-72 million people died, more than the 15-65 million casualties in World War I. The war shook the foundations of international economics, and near the end of World War II a meeting took place in the United States (largely came out as the winner of the war) in Washington Hotel in Bretton Woods, New Hampshire, with the purpose of to rebuild the international economic system, under US terms.
On July 1944, 44 allied nations signed the Bretton Woods agreement that gave birth to International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (today part of the World Bank Group), which the US have the only veto power over the two organisations. Masterminded by John Maynard Keynes and his American counterpart Harry Dexter White, the two organisations began to operate in 1945 with the primary goal of exchange rate stability among the member states.
To achieve this, the Bretton Woods allied nations were required to peg their respective currencies to the US dollar in which every imbalances of payments were to be stabilised by the IMF. US dollars was then backed by gold, with the gold standard was set at $35/ounce, making the dollar convertible with gold at that price. This in effect gave the Fed and the US government a great deal of power over the economies of the allied nations since they control the US dollar.
By late 1960s gold outflow from the US and dollar accumulation outside the US had increased, while at the same time US' fiscal deficits from overseas spending (mainly the Vietnam war, as well as the secret bombings of Cambodia that gave rise to the brutal regime of Khmer Rouge) had made the value of US dollar against gold shrink. This situation made the pledge to keep the dollar convertibility price at $35/ounce increasingly difficult for US government. Hence, on 15 August 1971 US president Richard Nixon used prime time television slot to uniterally announce his New Economic Policy (also known as the Nixon Shock), which consist of 3 points: wage and price freeze, a 10% increase on import tariff and the termination of the gold standard.
Moreover the third point of his New Economic Policy, the termination of the gold standard, effectively ended the original Bretton Woods system and marked what general consensus believe as the beginning of the era of dollar fiat currency. However, in his well-researched book A Century of War, F. William Engdahl implied that US dollar's fiat currency status was short-lived, because since Nixon abolished the gold standard it only took 2 years for US dollar to become a currency backed by oil, or also known as the Petrodollar system.
The Petrodollar system was created in a meeting on May 1973 in Saltsjöbaden, Sweden (the secluded island resort owned by the Swedish Wallenberg banking family) by a group of 84 of the world's top financial and political insiders that made The Bilderberg Group. The objective of the meeting was to revitalise the declining power of dollar and to tilt the balance of world power back to the advantage of Wall Street and London financial interests using their most prized weapon, the control of the world's flow of oil.
In the original copy of the official discussion of the meeting (that was obtained by Engdahl), The Bilderberg group plan to achieve this objective firstly through masterminding a global oil embargo to force a dramatic increase in oil prices. They did this through the central role of US Secretary of State Henry Kissinger, who was able to create a rift between Israel against Syria and Egypt that eventually led to the October 1973 Yom Kippur war. When the war started US decided to re-supply Israel with arms thus prompted an oil embargo by the Arab nations, which immediately increased oil price from the average of $1.90/barrel in 1949-1970 to $3.01 in 1973, and reached an increase of 400% by January 1974, a target outlined by an American participant in the Bilderberg meeting Walter Levy.
The oil shock created a devastating impact on world industrial growth and world economic growth symbolised by long lines of queues at petrol stations. And the Arab nations was the perfect scapegoat for it, while the real masterminds of the war - the Wall Street banks, London banks and the seven sisters oil corporations (Exxon, Texaco, Mobil, Chevron, Gulf, British Petroleum and Royal Dutch/Shell) - stood quietly at the background and gain enormously from the shock.
Thirdly, in a process what Henry Kissinger later called "recycling the petrodollar flows", with the majority of the oil surpluses in Wall Street and London, the financial institutions then re-lent the money as loans or Eurodollar bonds to the developing countries that are desperate to borrow dollars to finance their oil imports. This created a huge stream of dollar circulation in the world, with dollar backed by the flow of oil trade. In effect, this gave the Fed the control over the oil market since the value of oil is denominated in a currency that they controls, and it also give the Fed an unparalleled ability to create credit and expand the money supply. The ever growing usage of US dollars in oil trade then slowly spread to other commodities as well as bilateral and multilateral trades, making the dollar the undisputed currency for trade and business worldwide.
As described by William R. Clark in his book Petrodollar Warfare, the use of US dollar as the sole currency for oil trading combined with the dollar-denominated debts issued by the IMF and World Bank had allowed the Fed and US government to inject an unprecedented amount of liquidity into their economy, as seen in the immediate effect of the bull market of the 1980s (the decade of greed). Clark argued, however, that without the Petrodollar system the US economy would collapse in a pile of debt, therefore making this system extremely vital. This explains why the US has been formulated an aggressive foreign policy to safeguard their interest on oil, with Henry Kissinger publicly stated in 1975 that the US was prepared to wage war over [the control of] oil. This also partly explains US invasion in Iraq in 2003 and the current pressure towards Iran, with both countries' problems can be rooted, among several other issues, to their decision to trade oil using euros.
Moreover, the implementation of the Petrodollar system and its Kissinger-engineeded Oil Shock triggered the Kuwaiti Souq Al-Manakh bubble in the early 1980s, where substantial oil profits were used for speculation in the shares of local Gulf companies. Over 3500 million shares changed hands in the first 8 months of 1982, promting the market value up to a staggering $6 billion compared with book value of only $200 million. The bubble was eventually burst when in August a female speculator asked for her cheque to be chased early, thus breaking the spell and triggered a spectacular market crash.
Meanwhile, as the Petrodollar system took effect not long after the Nixon Shock, the collapse of the Bretton Woods system had made the role of IMF and World Bank to drift away from the original Keynesian orientation that emphasised market failures and the role for government in job creation. But it was not until the 1980s when the most dramatic change occurred, during the time when US President Ronald Reagan and his British counterpart Prime Minister Margaret Thatcher were preaching about Chicago School economic ideology.
While Keynes' ideas were widely implemented in the period from 1949-1973 (also known as the Golden Age of Capitalism) that marked a steady economic growth, the longest stretch without banking crises and even growing income per capita for developing countries (all of which provided the environment for the Baby Boom); the battle of economic ideas slowly shifted in favour of Hayek and Friedman after the oil crisis of the 1970s created a stagflation in the Keynesian model. Perhaps the one single defining moment of the shift arguably occurred when the newly-elected British Conservative Party leader Margaret Thatcher slammed Hayek's book The Constitution of Liberty down the table in a visit to Conservative Research Department and pronounced "this is what we believe."
Under the command of "political soul mate" of Reagan and Thatcher, the IMF and World Bank along with the US Treasury were transformed into Washington Consensus, a missionary vehicle to push the free market ideology to the world in which the US government in the next 3 decades or so would gradually be dominated by Wall Street bankers and multinational corporations more ever than before. In the words of former chief economist at the World Bank, Joseph Stiglitz: "Keynes would be rolling over in his grave were he to see what has happened to his child."
Washington Consensus, Economic Hit Men and the rise of globalisation
In his book Globalization and its discontents, Joseph Stiglitz, a neo-Keynesian and a constant critic on the way IMF and World Bank operates, wrote that the Washington Consensus policies were originally designed in response to the so-called Lost Decade of Latin America in the 1980s, during the time when a debt crisis in the Latin American countries caused high inflation, high unemployment level and stagnant economic growth.
Stiglitz argued that the intentions of the Washington Consensus policies made considerable sense, as losses in inefficient state-owned-enterprises (SOEs) contributed to the huge deficits that the Latin American governments amassed. Insulated from competition by protectionist regulations, these SOEs were able to force customers to pay high prices, which combined with the government's loose monetary policy eventually led to out-of-control inflation. However, this view, as we shall see, barely scratch the surface of what was really going on in the region.
In theory, most countries would arguably be better off if their government are focusing on providing essential public services, and leave the running of the businesses to the private sectors. In addition, trade liberalisation - the lowering of tariffs and other protectionist measure - if implemented in the right way and at the right pace would eliminate inefficient local jobs, attract healthy foreign competitors and create new efficient jobs as a mean to more equitable and sustainable growth for the country's economy.
The problem occurs, however, when in practice many of these policies not implemented as a mean towards more efficient economy but became ends in themselves, where these policies were often imposed too fast, too harshly, and without first including essential regulatory framework (or preconditions that have to be satisfied) before privatisation and liberalisation can contribute to the economy. This is what the Washington Consensus are known for, with scorecard attitude where high marks given to the countries making the faster transition towards the free-market ideology, regardless of their precondition economic fundamentals, thus wrecking the economy in the process.
Stiglitz provided a simple example from his days at the World Bank, when he visited some poor villages in Morocco in 1998 to observe the impact of the projects implemented by the World Bank and other Non Governmental Organisations (NGOs). While irrigation projects have successfully increased farm productivity enormously, one project, an enterprise for village women to raise chickens, had failed. Originally, the village women obtained their seven-day-old chicks from a government-owned enterprise. However, when the IMF entered the country the IMF told the government that they should not be in a business of distributing chicks, and thus the enterprise stopped selling them and closed down.
While Keynesian ideology believes government activities such as supplying chicks to villagers arise because the market have failed to provide the essential service, the new Chicago School view that the Washington Consensus adopts assumes that the more able private sector would immediately fill the gap.
And sure enough a new private supplier did emerge to provide the villagers with newborn chicks. However, the new private company was far from able, as the death rate of chicks that they supply was high. And because there were no consumer protection, no regulation for monopoly and other precondition policies before the privatisation, the sole private enterprise in the industry was unwilling to provide a guarantee to their buyers and can get away with it. As a result, as the villagers could not risk buying chicks that might die in large numbers, they stop buying altogether. And subsequently, the nascent industry that was built to improve the lives of these poor villagers eventually collapsed.
While unregulated privatisation could cause such harm like in the Moroccan village, unregulated market liberalisation could potentially make the market worse off. This happened in Cote d'Ivoire. Due to privatisation and liberalisation before an adequate regulatory and competition framework was created, in late 1990s a French firm France Telecom was able to penetrate into the country's telecommunication industry by purchasing the government's assets, and managed to persuade the government to grant them a monopoly both in the telephone services and in the cellular services. Because there is no regulatory framework to protect the market, the private French firm then raised prices very high thus widening a huge gap in digital access between the rich and poor even further. In other words, the telecom industry just changed hands from inefficient government owned enterprise into a private enterprise abusing the exact same monopoly power, or even worse.
This is not an uncommon sight in the countries that the Washington Consensus "helps", where strong regulatory framework are not their main concern. Instead, they often focus only on the big macroeconomic picture of a country's economy such as reducing the size of the government's deficit, and just leave the liberalised market to take care of itself (to a devastating effect). Indeed, Chicago School style austerity, privatisation and liberalisation could really reduce government's burden and deficit, but they are often doing so at the expense of a huge social cost, where austerity measures such as cuts in budget for health, education, pensions and infrastructure are complemented with the closing down of SOEs and mass layoffs that creates instant unemployment.
Astonishingly, they often see this social cost as a collateral damage, a much needed shock therapy for the future of the economy, and hoping for the trickle down effect to take place in the newly installed economic system. In reality the free market economic system seldom trickled down to the poor, instead it often benefits only the rich, the politically connected, or in what becomes a major trending problem for the globalised world, the corporations whose purpose are to intentionally exploit the country's market for a huge profit. Cambridge economist Ha-Joon Chang summed this trickle down delusion in a sentence: "making rich people richer doesn't make the rest of us richer."
Like the Social Democrats in their European counterparts, the Developmentalists were able to boast impressive success stories, especially in the southern tip of Latin America such as Chile, Argentina, Uruguay and parts of Brazil. During this period of rapid expansion, the gap between the rich and poor narrowed, and these countries began to look like Europe and North America. Uruguay had a 95% literacy rate and offered free health care for all of its citizens, while Argentina had the largest middle class on the continent.
Indeed, the Keynesian revolution prevailed in Latin America. However, while it was a great economic period for these countries, it was an unsettling time for US multinational corporations seeking to penetrate the high barriers of entry towards the booming markets. Something needed to be changed, and according to Naomi Klein's phenomenal book The Shock Doctrine that's when the Chicago School stepped in.
Sponsored heavily by multinational corporations, the Chicago School began a counter revolution against Keynesianism across the world, with the objective of a move towards free market capitalism for the countries in which these corporations can benefit from (a disclaimer: of course, not all corporations are evil and not all Foreign Direct Investment intended to harm the country). To achieve their goal, University of Chicago and its global network of right-wing think tanks created a smear campaign movement in American and British foreign policy circle to discredit Developmentalist into the logic of Cold War, where "Third World nationalism" was largely portrayed as the first step on the road to totalitarian Communism.
Two chief architects of this smear campaign were John Foster Dulles, the Secretary of State in the Eisenhower's administration, and his brother Allen Dulles, the de facto head of the newly-created CIA. Before they entered public offices, the Dulles brothers had worked at New York's legendary law firm Sullivan & Cromwell, where they represent multinational companies such as JP Morgan, United Fruit Company, the International Nickel Company, National City Bank of New York and the Cuban Sugar Cane Corporation - the companies that had the most to lose from Developmentalism.
The first casualty of the Dulles brothers' ascendancy was Iran, where in 1953 the democratically-elected Mohammad Mosaddegh, a Prime Minister who identified far more with Keynes than Stalin, was overthrown in a coup d'etat. The coup was a direct response to Mosaddegh's nationalisation of Iran's oilfields, which, according to the book Rise to Globalism, after CIA handed the power to Shah Reza Pahlavi the puppet leader divided Iranian oil production to suit the West: the British and American oil companies got 40% each, the Dutch got 14%, with the remaining 6% was given to the French. Interestingly, up until 1979 when Reza Pahlavi was overthrown by the Iranian people, the entire financial empire of his regime was operated from top to bottom by Rockefeller.
One year later in 1954, the CIA staged another coup in Guatemala, after the democratically elected Jocobo Arbenz tried to give back the Guatemalan land to its people by snatching up lands "owned" by United Fruit Company. After the successful coup CIA then installed a puppet dictator, Colonel Carlos Castillo Armas, who made sure that United Fruit Company's interests were serve above the national interests, making Guatemala the first so-called Banana Republic.
CIA-sponsored military coups were not uncommon in Latin America, where one by one democratically-elected Developmentalists were thrown out and friendly dictators were installed. However, according to a former Economic Hit Man John Perkins all-out military coup is normally the last resort option used by the US to conquer a country. Instead, firstly they will send an Economic Hit Man (EHM) to the target country. If they fail, a secretive group of men called the Jackal will step up to the task, where violent "accidents" or even death of heads of state would normally occur. And if the jackal also fails, as they did fail in Afghanistan and Iraq, only then the task being conducted by the military.
As the front men of globalisation foot soldier, EHM closely resembles the Mafia. Formally disguised as an international consultant representing the like of Monsanto, Nike, Chevron, Wal-Mart, and nearly every other multinational corporation in the world; EHM provide favours to the target country. The favours take the form of loans to the country, usually for infrastructure projects with a condition that all the engineering and construction jobs goes to a US corporation. Hence, in a way most of the money never leaves the US, it is simply changed hands from banking offices in Washington to construction companies in New York or San Francisco.
However, despite the fact that the money come back to the US almost immediately after it comes to the country, the government of the country still required to pay all of the loan back, principal plus interest. If an EHM is successful, the loan is so huge that the recipient country got stuck in an unpayable debt and eventually after several years forced to default. When this happens, then just like the Mafia the EHM demand their pound of flesh, usually in a form of access to vital resources like oil or the Panama Canal, control over UN votes, or the installation of US military bases in the country.
According to a legendary Uruguayan journalist Eduardo Galeano in his book Open Veins of Latin America: five centuries of the pillage of a continent, when Lenin wrote Imperialism in 1916 of all the Foreign Direct Investment (FDI) in Latin America less than one-fifth was from the US. However, by 1971 nearly three-quarters of all FDI in Latin America was from the US, where the profits from US corporate investments in these countries were 5 times greater than the infusion of new investments. Galeano then elaborate, in return for the "investments" these corporations were able to break through customs barriers originally erected to prevent foreign competition. And they even can take over the internal industrialising process, where they handpicked the key controlling sectors that are important for determining the course of economic development, and leave the less significant industries to those "inefficient" SOEs Chicago School blamed so much.
Understandably, there are those national heroes who tried to defend their country and fight back, such as Jaime Roldós Aguilera of Ecuador and Omar Torijos of Panama, but both men were mysteriously assassinated, presumably by the Jackal. Some like Fidel Castro succeeded in taking back Cuba from US puppet dictator Fulgencio Batista, but Fidel's right hand man Che Guevara eventually killed by CIA in Bolivia's Sierra Maestra and just like the story in George Orwell's Animal Farm, Fidel Castro himself shamefully turned into a dictator. Meanwhile, with all the destructions "capitalism" seems to bring, a growing number of Marxist movements were born (a self-fulfilling prophecy for Dulles Brothers' smear campaign) such as Colombia's anti-imperialist FARC rebel which remains in arms struggle against the "US-ally" Colombian government since 1964 till this day.
Inevitably, unlike in South East Asia decades later where EHM work prevailed, with all the resistant movements occurred in Latin America, all-out coups were needed to "protect US interests" in the region. Hence by the 1970s, the southern cone of Latin America that looked like Europe in the 1950s was completely changed. Brazil was under the control of US-supported junta, with several of Milton Friedman's Brazilian students held key positions. Chile experienced a brutal coup on 11 September 1973 where democratically-elected President Salvador Allende was assassinated and replaced by CIA-sponsored General Augusto Pinochet, who appointed the so-called Chicago Boys in key ministerial posts. In Uruguay the CIA-backed military also staged a coup in 1973, which then changed the country's Developmentalist system to Chicago School system. As a consequence, real wages dropped by 28% in Uruguay, and horders of scavengers started to appear for the first time in the streets of Montevideo. Argentina also joined the Keynesian counter revolution in 1976, when a military junta seized power from Isabel Perón.
The impact of these Keynesian counter revolution was very apparent. While multinational corporations thrives in the region, between 1975 and 1982 Latin American debt increased at an annual rate of 20.4%, with external debt increased from $75 billion in 1975 to $315 billion in 1982 (50% of the region's GDP), and repayment of principals + interest also quadrupled from $12 billion in 1975 to $66 billion in 1982.
It was within this context that the Fed Chairman Paul Volcker raised their interest rates, from the average of 11.2% in 1979 to a peak of 20% in June 1981. As Latin American debts were denominated in US dollar and issued with a floating-interest-rates, the US interest rates rise increased the debt level of these countries up to an unpayable point. As a result, in 1982 Mexico decided that they cannot possibly pay their debts and chose to default. The Mexican default triggered a liquidity dry up across the Latin American countries where international banks stop lending altogether to the battered region. As Latin American loans were mostly short-term, the lending freeze led to a crisis, as a result economic growth became stagnant, unemployment rose to high levels, inflation reduced the buying power of the middle classes, and real wages dropped between 20-40%; resulted what since then known as the Lost Decade of Latin America.
In a first glimpse, Paul Volcker's rate hike decision was implemented to fight off the unintended imported inflation into the US economy as the effect of Petrodollar recycling of the 1970s. But more specifically, according to F. William Engdahl in his another well-researched book Gods of Money, Volcker's shock therapy was aimed to prevent the dollar value from collapsing (due to the rising amount circulating worldwide) and was also implemented to make investing in US bonds very attractive.
This however, was intentionally done at the expense of the borrowers of US-dollar denominated debt, from the Latin American countries, to African countries like Nigeria and Congo, to European countries such as Poland and Yugoslavia; which had fallen victim to the debt trap. In a mafia-esque EHM manner, the IMF was then brought in by the Washington Consensus masters to "rescue" the misnamed Third World Debt Crisis with their conditional loans (the conditions of Chicago School trinity of austerity, liberalisation and privatisation), while in reality the IMF practically forced the indebted countries to surrender their national sovereign control over their economy, where the banks and corporations then proceeded with the exploitations.
In a first glimpse, Paul Volcker's rate hike decision was implemented to fight off the unintended imported inflation into the US economy as the effect of Petrodollar recycling of the 1970s. But more specifically, according to F. William Engdahl in his another well-researched book Gods of Money, Volcker's shock therapy was aimed to prevent the dollar value from collapsing (due to the rising amount circulating worldwide) and was also implemented to make investing in US bonds very attractive.
This however, was intentionally done at the expense of the borrowers of US-dollar denominated debt, from the Latin American countries, to African countries like Nigeria and Congo, to European countries such as Poland and Yugoslavia; which had fallen victim to the debt trap. In a mafia-esque EHM manner, the IMF was then brought in by the Washington Consensus masters to "rescue" the misnamed Third World Debt Crisis with their conditional loans (the conditions of Chicago School trinity of austerity, liberalisation and privatisation), while in reality the IMF practically forced the indebted countries to surrender their national sovereign control over their economy, where the banks and corporations then proceeded with the exploitations.
The end of the Cold War completed the development for the so-called "dollar hegemony", with US dollar cemented its position as the most important reserve currency, in the world where US' free market capitalism system triumphed over Soviet communism. The spread of globalisation then hit full gear, with a lot of multinational corporations were seeking to relocate their basic manufacturing operations to developing countries in a search for low cost, high return and low risk business operation. As a result, in just 7 years FDI flows from developed to developing countries increased sevenfold, with 1 year worth of cross-border investment equal to what previously occurred in a decade. The world became more interconnected than ever, and between 1980s and 1990s almost half of that total capital inflow into the developing countries went to South East Asia.
To be continued in Part 2
To be continued in Part 2
