Governments and the Global Market.

Governments from wealthy societies, such as the United States, Britain, Japan, Germany, Italy and France have used the globalization of commerce to finance their nations.

Government investment in the global market is used to obtain a supply of capital, or money, for their nation. This money is used to pay government deficit that has been accumulated by these nations.

When governments rely on the global market for a supply of capital to their economies, nations are forced to pay higher interest rates from money that has been borrowed from central banks.

Many nations, economists and politicians believe that globalization and the money it produces, stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global trading system.

Revenues that have been accumulated by governments, in the form of taxes, are being used to invest in the global market in an attempt to turn the federal deficit into a federal surplus.

Governments have raised capital from global markets to pay off debts and to finance various government programs, such as, welfare, social security, and unemployment.

Governments seek steady rising growth to benefit national economies. Benefits from rising growth are shared with citizens and create a wealthier nation. Nations have to decide where to generate the funds.

A conflict arises as to how the growth of a nation will be funded. Governments face the decision of borrowing from the global market or using tax revenue to pay debts.

Governments have looked to the global market because nationally, tax revenues have not grown fast enough to sustain government programs, such as welfare, unemployment, Medicare, Medicaid, and other government funded programs that help their citizens.

Governments are investing taxpayer money into stocks and bonds. This investing has helped to finance poorer countries, in order to help steady the global economy.

Borrowing money from Central Banks.

Central banks are used to borrow money to pay deficits. The Federal Reserve Bank is the United States central bank.

Central banks have been established in many nations to provide a safer and more flexible monetary system.

Deficit is defined as the amount by which the spending of monies exceeds federal revenue and becomes government debt.

Capital markets, or financial markets bring together those who want to invest money and those who want to borrow money.

In today’s increasingly co-dependent global economy, economic power is shifting away from national governments. Banks are now able to impose policies on the democratically elected governments of nation-states, thereby undermining those states. The national state’s ability to control its own destiny is being limited.

The global financial market has allowed governments to borrow money for continued economical growth within their nations.

Many banks are allowed to decide how much money to lend and to whom they will lend the money too. Banks can drive increase interest rates, as well as, drive up the price of stocks and bonds in the global market.

Governments are borrowing from banks to pay interest debt, and are now being controlled by central banks that impose high interest rates. This places the concerns of banks ahead of economies of wealthier nations.

Reducing the national debt, by borrowing from capital banks and curbing government spending, does not necessarily reduce interest rates imposed by central banks.

Governments soon discovered that it was the power of the central bank that could solve financial crisis, not politicians. Power has shifted from elected governments to the unelected central bank.

High interest rates are a form of political insurance for the financial markets. Financial markets cover themselves from any losses in advance from countries that would default on loans. Financial markets can see the future and they are making any effort to protect themselves.

 

Banks will benefit from higher interest rates, because this increases the value of their money and creates more wealth for the central bank and the nation.

In 1993, the United States, ignoring problems in the bond market, experienced higher interests rates, despite a balanced budget. The demand for bonds bought on credit, increased the price of the bond. When it was recognized that these bonds increasingly had no value they were sold and the market crashed. The United States discovered that it was the bond market that had raised interest rate.

Government Debt

Debt is the primary reason governments have turned to borrowing from the global market. Governments are looking for a ways to satisfy their growing deficits.

When seeding the capital to balance their budgets, governments are faced with the decision to use global markets to finance their national debt or use tax revenue to pay this debt.

Governments that choose to use financial markets to satisfy their debt are subject to the fluctuations in these markets. Global financial markets can be unstable and are subject to many political and economical variables from nations that use the global market.

The United States has the larges deficit as federal debt as grown from 35 to 70 percent of its gross domestic product in less than twenty years. Italy’s debt is 124 percent, Belgium’s is 132 percent and Sweden’s is 95 percent, and Germany has double its gross domestic debt since the 1970’s. These governments find themselves taking on new debt each year at a much faster rate then the growth of their economies.

Every major economy has found that they have become deeper in debt and are now building up debt payments to central banks.

When rapid inflation occurred in the 1970’s, money was borrowed from capital banks in the global market to solve the problem. The harmful effect of this on the US inflation rate and trade position resulted in a further decline in the value of the dollar. After inflation was brought under control by the capital banks, another problem arose, debt. In the 1980’s public and private debt began to grow at a rapid rate.. These situations describe the underlying problem of economic chaos in the United States.

The Politicians

Governments and politicians from the wealthiest nations have been forced to choose between satisfying the needs of the people and satisfy the demand of the international market.

Politicians in an attempt to confront their deficits are forced to ignore the demands of the people, but also realize that if the demands of the people are not met with higher employment rates, tax cuts and funds for public programs, government officials will run the risk of not being elected to office.

Many politicians understand that they can satisfy government debt nationally by using tax payer revenue. If tax revenue is used, politicians will be forced reduce social security, health care, unemployment benefits and various other forms of social aid to its citizens.

Governments and elected officials, who first promoted the globalization of commerce, now find themselves being governed by capital markets, and are forced to endure, fluctuations in financial markets which can sometimes produce effects that were not expected; interest rates could be higher with very little explanation as to why.

Most politicians will avoid the problem of a weakening economy, and the people are unable to recognize that their economy is not producing enough to satisfy their needs. Citizens are concerned with their own prosperity and look to the politicians to satisfy national economic problems.

Social Concerns

Far from creating jobs, international trade has actually destroys manufacturing jobs in wealthy advanced economies such as the United States and the United Kingdom.

To repay the funds borrowed from Social Security and Medicare, the government must raise taxes, cut spending and go further into debt, or choose some combination of these actions to bring nations back to prosperity.

The conflict between using global markets and satisfying the demands of the voters are estimated to occupy the next decade. Most likely in the form of market fluctuations and voter demands, but in the end governments need to control their debts.

Governments might have to endure financial crisis before they are willing to balance their debts, but if they do not, the consequences could be severe in both individual nations and the world’s economy.

The high interest that that global investors charge to finance the growing debt of wealthy nations will threaten the modern welfare state.

When governments use the global markets to contain debt, they redistribute wealth to poor countries, by lending money to these countries, but this threatens the middle-class lifestyle.

The middle-class in wealthier nations is being force to compete with the low-wage labor in other poorer countries.

A mixture of private markets and central banks is governing many nations. This system is imposing a cycle of values on economic life. This arrangement has been called the international rentier economy, or the rentier welfare state. Economies have become dependent on the global economy to satisfy their debt and are subject to the global markets many fluctuations.

Governments are borrowing from financial institutions, more than they should, which is creating deeper and deeper debt for their nation. If the global market is stable then problems do not occur; economies are stable. If the economy becomes unstable then banks will ask for their money.

In some cases, many governments do not have the money to pay back the loan. When banks call in their loans governments will be forced to sell stocks and bond and in turn decrease their value. This will create a crash in the economy.

Governments and Balanced Budgets

Balancing federal budgets will require governments to remove billions of dollars in governments spending for social programs, and will create a loss in consumer demand nationally and in the global market.

In the United States, and other countries, politicians have attempted to solve their national debt, and balance the national budget. It has been thought that balancing federal budgets will create less government spending and allow for

economies and nations to experience low inflation and a higher wage for private citizens.

Republicans in the United States have decided that a balanced budget will solve their deficit problem. In 1981, Ronald Regan promised to balance the United States budget within three years, and in the 1990’s, in an attempt to balance the national budget and stop federal spending, republicans in the United States, along with President Clinton, made a commitment to balance the federal budget within seven years. President Clinton was successful in his attempts to balance the federal budget in the 1990’s

Governments who declare that a balanced budget will restore nations stability ignore the effects that the global market has on many national economies, and assumes that the economy is governed by what is occurring within that nation. Governments and balanced budgets do not take into account the fluctuations in a global market.

A balanced budget does not necessarily mean that a nation is out of debt.

When President Clinton devoted his efforts to deficit reduction in his first year of office, he was able to reduce debt. The United States budget was balanced for the first time in twenty years, but interest rates were still rising.

Despite a balanced budget the United States government had to borrow more money every year, approximate $200 billion, simply to pay the interest due on its old debt.

Paying debt became a major function of many national governments. Intersest cost in the United States went from $52.5 billion in 1980 to $184 billion in 1990, and by 1996 debt payments would reach $257 billion. This increase occurred despite deficit-reduction by Clinton and Bush.

Government spending in the United States was devoted to paying debt and was roughly equal to the cost of national defense or Medicare and Medicaid combined.

If the United States had balanced their budget in the 1980’s ahead of other nations, they would have still had to pay higher interest rates because higher interest rates were imposed on all nations regardless of a balanced budget.

Deficits are a shared problem between all nations, wealthy or poor. All countries that participate in global markets are subject to increased interest rates.

A national balanced budget has the potential create wide spread problems within the global market.

The Gold Standard

Governments began to create stable money in the later part of the nineteenth century. A more convenient means of financing international trade was needed. Paper currency was converted into gold on demand at a fixed rate. Gold was used as a source to determine the value of the dollar.

Governments relied on gold to maintain the value of money and determined that financial stability was the key to a stable economy and prosperity of the nation. This was known as the Gold Standard.

The problem with the gold standard was that there were no multinational institution that could stop countries from engaging in competitive devaluations. Countries could raise or lower their dollar amount to maintain the value of their currency.

Higher interest rates have help control inflation in all the major industrial economies for five years or longer, but have not led to stability, and the value of money in the global market has become more erratic. Stable money has not contributed to prosperity in society.

The Bretton Woods System was created to establish a new international monetary system and promote economical growth.

The Bretton Woods System established the International Monetary Fund (IMF) and the World Bank. Under this agreement countries were to fix the value of their currency in term of gold but were not required to exchange their currencies for gold.

In the twentieth century rising interest rates can be seen as the modern equivalent to the gold standard of the nineteenth century.

Slower growing economies verses faster growing economies.

There is a new regime controlling governments and nations. This "rentier welfare state" has shifted the concerns of governments from the economy of the nations and the nations interests to the interests of the wealth holders, or the capital banks.

The rentiers logic supposes that a slower growing economy, and higher interest rates on borrowed money is more prosperous and better for national economies. The theory behind this regime is that it is slow growth that will stimulate an economy and create prosperity.

Governments, who try to satisfy their debts nationally, can experience slower economical growth, which in turn will create unemployment and a higher inflation rate. It has been reported that slow growth will continue to hurt wealthier economies by creating an imbalance in employment.

A nations supply of money and credit is supposed to grow with the economy. This will provided the nation the ability to conduct commerce and create a stable economy.

The goal of governments is to create even money, which in turn will create zero inflation. Governments assume that this will stimulate economic growth. Sales, employment and government obligations are set aside to accomplish this goal, but governments assume that this will benefit all of society.

Modern wisdom has stated that faster economic growth was not good for the economy. It is slower growth created by higher interest rates in the national and global market that can even economies.

The slow growth of an economy affects a society by lowering wages and increasing unemployment. Governments are forced to decrease federal spending which causes unemployment benefits and welfare benefits to decrease.

The decrease in government benefits to increase economic growth has shown no evidence that employment growth will increase.

It has been reported that governments that use the global market to finance debt, will see growth in the economy. Economies will grow at a faster rate, and employment rates and inflation will be lower.

Anxieties in the global market over slow growth has increased prices in the bond market and increased long-term interest rates, which in turn, makes the bond rates increase.

Through slow growth, governments are expected to withdraw more and more benefits from the elderly, poor and unemployed, as well as the middle class, in order to pay their creditors.

Governments and politicians assumed that deficits caused the decline in private savings. Governments decided that reducing the deficit, though the reduction of government, spending would increase these savings and stimulate the economy.

Some nations have made the decision to decrease spending in order to pay the deficit, and create savings for the nation as well as the private citizen.

Government theory assumes that if there is more money in savings, then interest rates would lower and private investments would soon increase, more factories would be built and more jobs would be created increasing economical growth. Interest rates would lower and in turn nations would experience economic wealth.

Governments, politicians and economists have failed to understand the relationship between savings, investment and growth.

In an attempt to explain higher interests in the global economy, economists assume that the need for savings is driven because capital is scarce.

The Asian Economy and the contradiction to slow growth.

Economist cannot produce any proof that if interest rates are high, then that must mean the there must be a demand for capital. The problem with high interest rates is not the demand for capital, but the prices demanded by the lenders.

Economies, specifically Asian economies, have seen contrary results regarding the theory that faster growing economies create less revenue for the nation.

Savings rates did decline in the older nations but increased among the faster growing developing countries. These increases were felt very strongly in the Asian economy.

In many advanced economies savings rates fell below 20 percent of the gross domestic product, but the rate for developing countries economies rose from 19 percent of the gross domestic product in 1970 to 27 percent in 1994. East Asia experienced the highest rate of savings growth.

The industrial boom of some poorer nations did not cause interest rates to increase, as it should have because in the past twenty-five years the Asian economy was financed primarily by its own capital.

 

 

 

Capital investments in the United States were very low and were largely given to Latin America.

Asian economies and other developing countries had accumulated greater savings for investment when it was growing at a faster rate.

This discounts the assumption that when interests rates are higher and an economy is growing more slowly savings will increase. People were experiencing a rise in income from the faster growing economy.

The Asians economy has shown that faster growth can generate savings. Savings will increase investments and lower interest rates. Most Asian economies had kept tight control over capital spending.

The deregulation in the 1980’s of Western economies had loosened control over spending. This gave investors the opportunity for easier borrowing with fewer restrictions.

Investors were allowed to default on loans and seek investments where they could get more of a return on their money. Most Asian counties had not allowed deregulation into their economies.

In some wealthier nations, deregulations had contributed to higher interest rates in their slower growing economies. Rising deficits and deregulation created very different savings behavior in developing countries and in Western countries.

Slow growth had affected Western economies in a negative way, creating lower savings and higher unemployment, despite the attempts to balance federal budgets.

Deficit spending has created income sales and profits in each nation. If countries such as the Untied States, Germany, Japan, France, Italy, and Britain were to balanced their national budget it would create less demand for each nations products. This in turn would create greater unemployment, and social misery around the world. Governments would still have to pay higher interest rates.

From:

Greider, William, One World, Ready or Not: The Manic Logic of Global Capitalism. Simon and Schuster: New York, 1997.