Free Trade and Unrestricted Capital Flow: How Billionaires Get Rich and Destroy the Rest of Us

Yves here. This post highlights an issue that gets far too little attention: how the “free trade” agenda has been used to promote a capital mobility agenda, and why that works to the detriment of ordinary citizens.

As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high international capital flows are strongly correlated with more frequent and severe financial crises. A very important BIS paper that has not gotten the attention it deserves, “Global imbalances and the financial crisis: Link or no link?” Claudio Borio and Piti Disyatat, discusses how the crisis was the direct result of what they call excess financial elasticity. That means having a banking system that was way too accommodating to the pet wishes of bank customers. From Andrew Dittmer’s translation of the paper from economese to English (the numbers are page references):
The idea of “national savings” or “current account surplus” refers to the total amount of exports sold minus the total amount of imports sold (more or less). The “excess savings” theory holds that this excess had to have been financed somehow, and so presumably by countries in surplus, like China.

However, for the US in 2010, the total amount of financial flows into the US was at least 60 times the current account deficit (9), counting only securities transactions. If this number were correct, then inflows would be 61 times the current account deficit, and outflows would be 60 times the current account deficit. The current account deficit is a drop in the bucket. Why would anyone assume it had anything to do with the picture at all?

Moreover, if the “savings glut” theory was correct, we would expect there to be certain historical correlations between the following variables: (a) current account deficits of the US, (b) US and world long-term interest rates, (c) value of the US dollar, (d) the global savings rate, (e) world GDP. There aren’t (4-6, see graphs).

You would also expect credit crises to occur mainly in countries with current account deficits. They don’t (6).

Suppose we look at a more reasonable variables: gross capital flows (13-14). What do we learn about the causes of the crisis?

Financial flows exploded from 1998 to 2007, expanding by a factor of four RELATIVE to world GDP (13), and then fell by 75% in 2008 (15). The most important source of financial flows was Europe, dwarfing the contributions of Asia and the Middle East (15). The bulk of inflows originated in the private sector (15)….

So what caused the crisis? Clearly, the shadow banking system (mainly based around US and European financial institutions) succeeding in generating huge amounts of leverage and financing all by itself (24, 28). Banks can expand credit independently of their reserve requirements (30) – the central bank’s role is limited to setting short-term interest rates (30). European banks deliberately levered themselves up so they could take advantage of opportunities to use ABS in strategies (11), many of which were ultimately aimed at looting these same banks for the benefit of bank employees. These activities pushed long-term interest rates down. Short-term rates remained low because the Fed didn’t raise them as long as inflation didn’t appear to be an issue (25, 27).
The post focuses on the real economy side of the free-flowing capital experiment; we’ll discuss next week how the Trans-Pacific Partnership is an alarming advance in this process of grinding down what is left of the middle class to benefit of the rich.

By Gaius Publius. Cross posted from Americablog

Paul Krugman makes a point in this post about Cyprus that I’d like use to make a broader and more important point. His point is that Cyprus is already off the euro and has created its own currency, the Cyprus Euro, which at the moment is pegged to the other euro at 1:1. Why is a euro in a Cyprus bank different from other euros? Because you can’t move it freely, so it has less real value. (Read here to see why he thinks that; also here.)

My point, though, is a little different. My point is about unrestricted free trade and capital flow in general and why understanding both is crucial to understanding:

▪ The neoliberal free-trade project, and
▪ Wealth inequality in America
But don’t let your eyes glaze over; this is not hard to understand. It just has a few odd terms in it.

Please stick with me.

There’s a straight line between “free-trade” — a prime tenet of both right-wing Milton Friedman thinking and left-wing Bill Clinton–Robert Rubin neoliberalism — and wealth inequality in America. In fact, if the billionaires didn’t have the one (a global free-trade regime) they couldn’t have the other (your money in their pocket). And the whole global “all your money are belong to us” process has only three moving parts. Read on to see them. Once you “get it,” you’ll get it for a long time.

What does “free trade” mean?

In its simplest terms, “free trade” means one thing only — the ability of people with capital to move that capital freely, anywhere in the world, seeking the highest profit. It’s been said of Bush II, for example, that “when Bush talks of ‘freedom’, he doesn’t mean human freedom, he means freedom to move money.” (Sorry, can’t find a link.)

At its heart, free trade doesn’t mean the ability to trade freely per se; that’s just a byproduct. It means the ability to invest freely without governmental constraint. Free trade is why factories in China have American investors and partners — because you can’t bring down manufacturing wages in Michigan and Alabama if you can’t set up slave factories somewhere else and get your government to make that capital move cost-free, or even tax-incentivized, out of your supposed home country and into a place ripe for predation.

Can you see why both right-wing kings (Koch Bros, Walmart-heir dukes and earls, Reagan I, Bush I and II) and left-wing honchos (Bill Clinton, Robert Rubin, Barack Obama) make “free trade” the cornerstone of each of their economic policies? It’s the song of the rich, and they all sing it.

I’ve shown this video before, but it bears repeating. When you think about “free trade,” you probably think of the Walmart heirs (or Apple owners) wallowing in wealth from the world’s slave factories. But it’s a joint project by all of our owners (sorry, major left- and right-wing campaign contributors and job creators).

This is Barack Obama making his case for campaign funding to Robert (Hi “Bob”) Rubin and others in 2006:

At 1:20: “The forces of globalization have changed the rules of the game,” and at 5:52: “Most of us are strong free-traders.” (His “yes-but” to Rubin in that second segment is an appeal to actually do the worthless retraining for non-existent jobs that Clinton earlier supported but never did. See? Pushback. Independence.)
Three things to note:

1. The “forces of globalization” he refers to are not acts of god, whether Yahweh, Juno or Joxer. They were created by the Clinton- and Rubin-crafted CAFTA and NAFTA treaties. If a god did it, that god also caused a certain blue dress to need a dry-cleaning it never got.
2. If Obama doesn’t say what he just said in that room, he doesn’t get a Rubinite dime for his next political campaign. Period. This is his application speech.
3. Never forget that if Oklahoma knuckle-dragger Sam Walton were in that room, or not-America-first Steve Jobs, Obama would say those same words. “Most of us are strong free-traders.” It’s the tie that binds the left and the right. Bind yourself to Obama economically, and you’re tied to the Waltons. Period.
Bonus points for noting that the push to roll back social insurance is part of the NeoLiberal agenda, for example at 1:30 and elsewhere. It’s why we have the Obama Grand Betrayal, the Catfood Snack That Won’t Go Away (do click; there’s a kitty inside).

Finally, listen again to his opening praise of “Bob” Rubin and the others in the first 30 seconds or so. When Obama says that the men he’s praising have “put us on a pathway of prosperity,” what he means is that they’ve put themselves on a path to prosperity. This is wealth inequality in action, wealth inequality on the hoof. Those slave-wage jobs in China (or Indonesia or the Philippines) replace the unionized, high-paying wages you don’t have and will never get back; the men in that room, including Obama, are the reason; and “free trade” is both the cover story and the tool (more on that duality below).

Never forget — “Free trade” is a bipartisan, hands-across-the-aisle screwage of American incomes and wealth. It’s the necessary cornerstone of both left-wing and right-wing economic policy. Period.

The three tools of wealth extraction

Free trade is a primary tool of wealth extraction. What are the others?
Recall that corporations aren’t actors per se, they are machines by which wealth is vacuumed from workers and consumers into the hands and pockets of the corps’ true owners, the CEO and capital class. As we’ve said before:
(1) Corporations are not people, and they don’t have ideas or will. They are empty vessels. If you took a neutron bomb to the home office of and let it rip, the building, filled to the brim with inventory and IP, would be empty of humans and a dead thing. You could wait for weeks for the offices to act; they wouldn’t.
(2) This is especially true today, since the corporation now serves a different function than it was designed for. At first, a corporation served to make its stockholders moderately wealthy — or at least wealthier.

Modern corporations serve one function only — to make the CEO class obscenely rich.
The looting of global wealth into the hands of the capital and CEO class is a simple two-step process: Corps use free trade to loot the world. CEOs then loot the corps and live higher and better than the kings and presidents they control.

Yes, “kings and presidents they control.” The only thing needed to make the looting worldwide is government protection. If the capital class doesn’t control government, they can’t institute … global free trade regimes. And there you have it. So what are the three tools needed by the capital-controlling class?

■ CEO capture of corporations
■ Wealth capture of government
■ A global free-trade regime
And that’s all it takes. With those three tools in your pocket, you can loot and own the world, literally.

Hmm, we have all three now. “Mission accomplished,” as they say in private jet circles.

Free trade keeps the rest of the world in crisis

And now we come back to Krugman. A direct consequence of a world in which capital flow is completely unrestricted is constant economic crisis. The Professor explains that well in the context of the Cyprus problem (my emphasis and some reparagraphing):
Whatever the final outcome in the Cyprus crisis … one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. …
That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world. …
Then he compares the era of capital control to the era of capital freedom:
It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.
But like all good things, that changed:
Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.
What marks the difference between those two eras, the era of capital control and our current free-trade era? Near-constant economic crisis:
[U]unrestricted movement of capital is looking more and more like a failed experiment. It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened.
Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
Notice the date of change? “Since 1980, however…” Him again. This is not just a coincidence. The Reagan era didn’t just initiate national looting, but international looting as well. Krugman ties these crises, here and elsewhere, to large and unrestricted inflows of capital, followed by large and unrestricted outflows that create economic bubbles, then leave them thoroughly deflated:
[T]he best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.
The rest of the piece shows that this idea doesn’t originate just with The Professor; it’s widely held by many not paid by Money to represent it in the court of public opinion.

There’s an opportunity in Spain, let’s say, to take advantage of cheap labor and prices. Money flows in, builds huge capacity, then flows out as soon as it finds better opportunity elsewhere. What’s left behind? The Spanish in a crashed economy, and in a world in which the holders of their debt (German bankers et al) are using the EU (remember, capture of government) to make sure that creditors are made whole at the expense of whole populations.

Kind of like how Walmart comes into a town, builds a huge store, drives all the other retailers out of business, then leaves as soon as the low-wage-earners in that town can’t keep the store more profitable than other stores in the state.

What’s left? The wreck of an economy. Where’s the money? In the pockets of the Walton family, ‘natch. Win-win for someone (but not for you).

Your “economic crisis” is just their “cost of doing business”

Keep in mind, the purpose of unrestricted “free trade” is to advantage the holders of capital over everyone else on the planet. Great wealth insulates these men and women from crises, so even global economic crisis is just the externalized price (that we pay) for their wealth extraction enterprise — just like a burdened health care system is the externalized price (that we pay) for wealth extraction by billionaire owners of tobacco companies from the constant stream of lung cancer patients.

What’s “a world in constant crisis” to them? Just the cost of doing business. Nothing personal. It’s just business.

Is free trade an ideology or a tool?

One last point. Framing free trade as an ideology may be technically correct in a few cases — there are true believers in almost anything (I believe in kittehs) — but if “free trade” weren’t a money machine for the wealthy, you’d never hear of it. Crickets, as the kids say.

Put simply, the reason you heard Barack Obama tout “strong free trade” with Robert Rubin in the room, is that bankers like Robert Rubin grow obscenely wealthy by financing billionaire store-owner Billy-Bob Walton’s slave factories in Asia.

And non-millionaire Barack Obama wants millionaire Bill Clinton’s post-presidential money — $80 million and counting. (Click the link for a stunning connection between public policy — in this case, the repeal of Glass-Steagal — and a post-presidential payday.)

Obama may not say he wants “Clinton money.” He might even know it, in that self-blind sense of “know.” But I’ve met lots of drunks who’ve explained themselves so long, they really do “know” they’re just “prone to be ill in the morning.” Right. Occam’s Switchblade, Upton Sinclair edition:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
“I’m doing it for the kids,” Obama edition.

Bottom line

The bottom line is simple: A “free trade” system is a regime in which capital always wins, everywhere. It’s the tool by which global wealth is extracted. It’s supported by both parties. The Democratic Party version is called NeoLiberalism. “NeoLiberal” means not-FDR-liberal in the same way that Tony Blair’s “New Labour” means not-Clement Attlee-Labour. Because, framing counts on CNN, and it’s always opposite day there.

And Barack Obama, Bringer and Betrayer of Hope and Change, is the lead NeoLiberal warrior, the point of the spear until 2016, at which point he’ll pass the torch to another testosterone-branded neoliberal, retire into the sunset of global acclaim, create his Foundation for NeoLiberal Love and Global Kittens, and collect his checks. (Or not.)

My suggestion, given the above — don’t help him. You have enough on your conscience, if you’re at all like the rest of us. Unless, of course, you like your economic crises served always on tap. In which case, do sign up.



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