RMF Discussion Papers publish high quality research on a wide range of topics principally around money and finance that adopt a political economy, heterodox economics, economic sociology or similar approach. Our aim is to accumulate a body of work that provides insight into the development of contemporary capitalism.

32. The debt as a Lever for Economic Policy Change. A Tale of Two Continents

Latin America has had repeated debt problems in the 1820’s, 1870’s, 1930’s and in the 1980’s. All of them have had an external origin that combines portfolio theory of interest rates with weak tax revenues. In the 1980’s it was a result of the sudden jump in US interest rates in 1979-81 to its highest historical record with a simultaneous depression of commodity prices that strangled the external sector. That external problem became internal as the need for fiscal resources and foreign currency for increased debt service led to reduced public sector wages and expenditures while foreign exchange policies attempted to foster more exports and put a brake on imports while generating inflation. By 1990 the entire Latin American economy had been transformed, the domestic market lost ground, the wage bill on GDP was reduced, welfare polices were substituted by anti poverty policies and social commonsense was won over by the IMF/WB argument that the economy required to be totally opened for international financial investment. The Hayekian view won over the Keynesian, or better over the Latin American structuralist. This meant the demise of the Economic Commission on Latin America and the Caribbean (ECLAC) and the surge of Washington based IFI’s as policy makers. In this article we wish to present some comparative elements between the Latin American and the current European debt crisis.

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31. Sucre: A Momentary Tool Toward Economic Complementarity

This paper seeks to understand the theoretical backgrounds that underlie the System, while raising the main issues the region faces with respect to trade and external dependency. The argument will unfold as follows: first, we discuss the main issues that need to be tackled regarding regional integration in the midst of this initiative; second, we give a theoretical account of Keynes’ proposals as they relate to SUCRE; we then summarize details of the operation of the mechanism; and finally we draw some perspectives for SUCRE in its regional environment for the discussion on economic integration.

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30. Financialization, Household Credit and Economic Slowdown in the U.S.

Three important features of the U.S. economy during the neoliberal era since the mid-1970s have been: (a) growing financialization, (b) increasing household debt, and (c) stagnant real wages for production and nonsupervisory workers. This paper develops a discrete-time Marxian circuit of capital model to analyze the links between these three features and economic slowdown. The discrete-time model is used to address two important theoretical issues of general interest to the heterodox economic tradition: profit-led versus wage-led growth, and the growth-reducing impact of non-production credit. First, it is demonstrated that both profitled and wage-led growth regimes can be accommodated within the Marxian circuit of capital model. Second, it is demonstrated that the steady-state growth rate of a capitalist economy is negatively related to the share of consumption credit in total net credit, when the total credit is large to begin with. Bringing these two results together, the paper demonstrates that the three characteristics of the U.S economy under neoliberalism can have a growth-reducing impact on a capitalist economy. Hence, this paper o ers a novel explanation, rooted in Marx’s analysis of the circuits of capital, of the slowdown of the U.S. economy during the neoliberal period.

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29. Peripheral Europe’s Debt and German Wages. The Role of Wage Policy in the Euro Area

The paper argues that the Greek debt crisis, as well as those of other Southern European countries and Ireland, has to be seen in macroeconomic context. The sum of the public sector balance, the (domestic) private sector balance and the current account deficit (or equivalently: the capital inflows) has to add up to zero. By implication in a country that has a current account deficit either the private sector or the public sector has to run a deficit. Therefore the peripheral countries can only solve their public debt problems if there is a change in German current account surpluses. The paper explores the implications of this for wage policy in the euro zone.

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28. Production and Consumption Credit in a Continuous-Time Model of the Circuit of Capital

This paper offers a characterisation of the distinctive content of production and consumption credit based on the Marxian framework of the circuit of capital and a distinctive approach to credit relations. All credit allocations contribute identically to present aggregate demand and to the timely realisation of profits, thus supporting net investment and positive rates of accumulation. Production credit uniquely contributes to capital accumulation by borrowers. Thus consumption credit effects a distinctive form of leveraging of social capital, which is shown to strengthen a series of productive, credit-risk and monetary constraints bearing upon the extension of credit. Systems with higher allocations of consumption credit will generally experience lower paces of net credit extension and accumulation or higher levels of financial risk than comparable economies.

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27. Credit Growth and Instability in Balkan Countries: The Role of foreign Banks

The present paper seeks to examine the role played by foreign banks in the credit growth in Bosnia and Herzegovina, Croatia and Serbia. Fast credit expansion was the main contributor to economic growth in these countries prior to the financial and economic crisis of 2007-2010. This development is associated with the entry of foreign banks, particularly banks from EU-15 countries. In addition, the Balkan countries faced large capital inflows from parent banks located in old EU member states. It is argued that the rising profit orientation and the increase in the risk proclivity of European banks, which have been the result of the financialisation of the European Union banking sector, was the main driver behind the fast credit growth rates in the Balkan countries. With the outbreak of the recent financial and economic crisis, concerns about the quality of outstanding loans have materialized. The global economic crisis and the increase in bad loans then led to a breakdown of the debt-led growth model in the region.

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26. The Political Economy of Public Investment and Public Finance: Structural and Institutional Regulators

From the spurring of productivity and the incubation of new technologies to its role in the maintenance of the safety and security of citizens, public investment is widely recognized to play a central role in the long-term economic and social development of society. This article will discuss the structural and institutional determinants of the financing of public investment, its evolution during the post-World War II period and its challenges faced in the current economic crisis. The discussion will revolve around the empirical fact, observed for a number of countries over fairly wide time periods, of a long-run co-trended relationship between public savings and public investment.

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25. The Socialization of Financial Risk in Neoliberal Mexico

Mexico has experienced several financial crises since the 1980s, notably in 1982, 1994-95, and 2008-09. In each case of crisis, the stability of capitalist development and its evolving neoliberal form has depended on the socialization of financial risks. I argue this is when the government and financial state managers can coordinate a response to financial crisis institutionally premised on drawing the worst financial risks into the state to diffuse the costs of risk onto society at large. Few approaches to finance and development have internalized socialization into their understandings of neoliberalism, whereas here the socialization of financial risk is shown as not only class-based but as also necessary and constitutive of the current phase of financeled neoliberalism.

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24. Financial Profit: Profit from Production and Profit upon Alienation

Financial profit is prevalent in contemporary capitalist economies, yet its nature and sources remain unclear. In classical political economy, and for Marx, profit is conceptualised in two distinct ways. First, it is a newly produced flow of value (profit from production). Second, it is a share of either money revenue or existing sums of money, accruing through transactions in financial or real assets (profit upon alienation or expropriation). Both dimensions are vital to the analysis of financial profit, but the distinction is of particular relevance to profit from trading in financial assets, which has a dual nature. In immediate terms, profit from trading in financial assets arises from redistributing loanable money capital; when mediated, it represents the accrual of future surplus value. If, however, the mediation is incomplete, such financial profit remains redistributed loanable capital and is unrelated to newly produced value. In sum, financial profit is normally profit from production, but retains elements of profit upon alienation or expropriation.

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23. The Bank of Japan’s Monetary Policy during the Global Financial Crisis

The global financial crisis forced the world’s central banks to adopt non-traditional and unconventional policy measures, in addition to lowering their policy interest rates. The Bank of Japan (BOJ), which has been seeking steps to normalize interest rates since it ended its policy of quantitative easing in 2006, has been introducing various measures to tackle the crisis. However, as part of the lesson learned from its quantitative easing policy, the BOJ instituted its Complementary Deposit Facility (a system to remunerate on holdings in excess of required reserves) so that its policy interest rate will not be at zero level. The measures adopted by the BOJ are not ambitious when compared to those implemented by the Federal Reserve Board or the Bank of England, but this is due to the difference in the magnitude of the damage suffered by financial institutions in their respective countries. The BOJ has come under criticism from some quarters for the modest expansion of its balance sheet prior to and following the Lehman shock. But, it is important to note that the BOJ’s balance sheet vis-à-vis GDP remains relatively large when compared to those of other central banks. The current financial crisis offers an opportunity to reconsider the framework of inflation targeting, the relevance of new-Keynesian type of optimal monetary policy and the relationship between monetary policy and asset prices.

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22. The Financial Crisis of 2007-9 and Emerging Countries: The Political Economy Analysis of Central Banks in the Brazilian and Korean Economies

Insofar as the global crisis of 2007-9 can be understood as a fully-fledged crisis of the financialisation era, it has presented new challenges for central banks. However, this paper argues the central banks’ interventions in key middle income countries (Brazil and Korea) have reinforced the main characteristics of financialisation and have been different from their previous foreign exchange crisis of the late 1990s. The key reasons for this sharp contrast in central bank interventions can be found firstly, in the origins of the recent crisis – in developed financial markets – which is different from the previous one which originated in emerging markets. Furthermore, the higher level of financial integration of both economies in relation to the late 1990s is a more important factor. The Korean and Brazilian experiences show that the liquidity management by central banks has been conditioned by international capital flows, and more importantly they have reinforced this trend through their operations in spite of differences in the dynamic of capital flows, in their timing of reserve accumulation and in their level of financial integration.

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21. The Theory and Empirical Credibility of Commodity Money

The recent instability in financial markets demonstrated the inadequacy of the mainstream treatment of money and the underlying production base. This has stimulated interest in the possible role of a money commodity. I demonstrate that the fundamental function of monetary theory, an explanation of the general level of prices, is provided through only two analytical mechanisms, quantity-based valueless money or a money commodity. I show that the quantity-based explanation is unsound by its own logic. I then present the theoretical argument for commodity-based money, which is analytically consistent. Theoretical superiority of commodity-based monetary theory has little practical impact because the commodity money hypothesis is considered empirically absurd. The final section demonstrates prima facie credibility of a link between gold and aggregate prices in the United States since the end of World War II. This credibility should motivate Marxists and other critics of mainstream economics to treat seriously
commodity-based monetary theory.

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20. Effectiveness of Monetary Policy Reconsidered

This paper inspects the standard policy rule that under a flexible exchange rate regime with perfectly elastic capital flows, monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the effect of an exchange rate change on the domestic price level be ignored. The price level effect is noted in some textbooks, but not formally analyzed. When it is subjected to a rigorous analysis, the interaction between changes in the exchange rate and the domestic price level significantly alters the standard policy rule. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Inspection of data from developing countries indicates the effectiveness of monetary policy under flexible exchange rates can be quite low even if capital flows are perfectly elastic.

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19. Neoliberalism, Income Distribution and the Causes of the Crisis

The financial crisis that began in summer 2007 has since turned into the worst economic crisis since the Great Depression. Its immediate causes are to be found in the malfunctioning of the financial sector: securitization of mortgages allowed for a fast growth of credit and lowered credit standards as banks believed they had passed on credit risk; this fuelled a property bubble; statistical models, that turned out to be based on short time samples, were promised to reduce risk by constructing ingenious portfolios; well-paid rating agencies decorated the new assets with triple A ratings; banks shifted credit off balance sheets into structured investment vehicles; finally, capital inflows from Asian countries that wanted to accumulate reserves provided ample liquidity for this process. Obviously the financial system needs to be fundamentally overhauled. While these mechanisms were indeed important, this paper argues, they are only half of the picture.The focus on the flaws in the financial system may hide other causes of the crisis. The polarization in income distribution, in particular, tends to get glossed over as a potential cause of the crisis. This is not to deny the importance of financial factors. The crisis erupted as financial crisis for good reasons. The underlying accumulation regime had financial expansion as one of its key building blocks. However, what is at stake is more than financial system. This paper will thus argue that the present crisis should be understood as a crisis of neoliberalism. Financial deregulation is one of the components of neoliberalism, the polarization of income distribution is another one; it is their interaction that provided the grounds for the crisis.

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18. Fiscal Crisis in Europe or a Crisis of Distribution?

We are in a new episode of the global crisis: the struggle to distribute the costs of the crisis. The financial speculators and corporations are relabeling the crisis as a “sovereign debt crisis” and pressurizing the governments in diverse countries ranging from Greece to Britain to cut spending to avoid taxes on their profits and wealth. In Europe the crisis laid bare the historical divergences. At the root of the problem is the neoliberal model which turned the periphery of Europe into markets for the core. The EU’s current policies are still assuming that the problem is a lack of fiscal discipline and do not question the structural reasons behind the deficits. The crisis calls for a major change in policy framework within Europe. This is a crisis of distribution and a reversal of inequality at the expense of labour is the only real solution.

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