Why the U.S. has Launched a New Financial World War

A CounterPunch Special Report

"Who Needs an Army When You Can Obtain the Usual Objective (Monetary Wealth and Asset Appropriation) Simply by Financial Means?"

Why the U.S. has Launched a New Financial World War -- And How the Rest of the World Will Fight Back

By MICHAEL HUDSON

October 11, 2010

“Coming events cast their shadows forward.”

– Goethe

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.

Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit.

U.S. officials demonize foreign countries as aggressive “currency manipulators” keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates – thereby pricing their exports out of global markets – or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.)

“Quantitative easing” is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble. But why would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation?

The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch. Yet it is to defend this system that U.S. diplomats are threatening to plunge the world economy into financial anarchy if other countries do not agree to a replay of the 1985 Plaza Accord “as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.” The run-up to this weekend’s IMF meetings saw the United States threaten to derail the international financial system, bringing monetary chaos if it does not get its way. This threat has succeeded for the past few generations.

The world is seeing a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. This financial grab is occurring without an army to seize the land or take over the government. Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. Indeed, this “currency war” so far has been voluntary among individual buyers and the sellers who receive surplus dollars for their assets. It is foreign economies that lose, as their central banks recycle this tidal wave of dollar “keyboard credit” back into low-yielding U.S. Treasury securities of declining international value.

For thousands of years tribute was extracted by conquering land and looting silver and gold, as in the sacking of Constantinople in 1204, or Incan Peru and Aztec Mexico three centuries later. But who needs a military war when the same objective can be won financially? Today’s preferred mode of warfare is financial. Victory in today’s monetary warfare promises to go to whatever economy’s banking system can create the most credit. Computer keyboards are today’s army appropriating the world’s resources.

The key to victory is to persuade foreign central banks to accept this electronic credit, bringing pressure to bear via the International Monetary Fund, meeting this last weekend. The aim is nothing as blatant as extracting overt tribute by military occupation. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets.

But the world has seen the Plaza Accord derail Japan’s economy by obliging its currency to appreciate while lowering interest rates by flooding its economy with enough credit to inflate a real estate bubble. The alternative to a new currency war “getting completely out of control,” the bank lobbyist suggested, is “to try and reach some broad understandings about where currencies should move.” However, IMF managing director Dominique Strauss-Kahn, was more realistic. “I'm not sure the mood is to have a new Plaza or Louvre accord,” he said at a press briefing. “We are in a different time today.” On the eve of the Washington IMF meetings he added: “The idea that there is an absolute need in a globalised world to work together may lose some steam.” (Alan Beattie Chris Giles and Michiyo Nakamoto, “Currency war fears dominate IMF talks,” Financial Times, October 9, 2010, and Alex Frangos, “Easy Money Churns Emerging Markets,” Wall Street Journal, October 8, 2010.)

Quite the contrary, he added: “We can understand that some element of capital controls [need to] be put in place.”

The great question in global finance today is thus how long other nations will continue to succumb as the cumulative costs rise into the financial stratosphere? The world is being forced to choose between financial anarchy and subordination to a new U.S. economic nationalism. This is what is prompting nations to create an alternative financial system altogether.

The global financial system already has seen one long and unsuccessful experiment in quantitative easing in Japan’s carry trade that sprouted in the wake of Japan’s financial bubble bursting after 1990. Bank of Japan liquidity enabled the banks to lend yen credit to arbitrageurs at a low interest rate to buy higher-yielding securities. Iceland, for example, was paying 15 per cent. So Japanese yen were converted into foreign currencies, pushing down its exchange rate.

It was Japan that refined the “carry trade” in its present-day form. After its financial and property bubble burst in 1990, the Bank of Japan sought to enable its banks to “earn their way out of negative equity” by supplying them with low-interest credit for them to lend out. Japan’s recession left little demand at home, so its banks developed the carry trade: lending at a low interest rate to arbitrageurs at home and abroad, to lend to countries offering the highest returns. Yen were borrowed to convert into dollars, euros, Icelandic kroner and Chinese renminbi to buy government bonds, private-sector bonds, stocks, currency options and other financial intermediation. This “carry trade” was capped by foreign arbitrage in bonds of countries such as Iceland, paying 15 per cent. Not much of this funding was used to finance new capital formation. It was purely financial in character – extractive, not productive.

By 2006 the United States and Europe were experiencing a Japan-style financial and real estate bubble. After it burst in 2008, they did what Japan’s banks did after 1990. Seeking to help U.S. banks work their way out of negative equity, the Federal Reserve flooded the economy with credit. The aim was to provide banks with more liquidity, in the hope that they would lend more to domestic borrowers. The economy would “borrow its way out of debt,” re-inflating asset prices real estate, stocks and bonds so as to deter home foreclosures and the ensuing wipeout of the collateral on bank balance sheets.

This is occurring today as U.S. liquidity spills over to foreign economies, increasing their exchange rates. Joseph Stiglitz recently explained that instead of helping the global recovery, the “flood of liquidity” from the Federal Reserve and the European Central Bank is causing “chaos” in foreign exchange markets. “The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy. ... It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world.” (Walter Brandimarte, “Fed, ECB throwing world into chaos: Stiglitz,” Reuters, Oct. 5, 2010, reporting on a talk by Prof. Stiglitz at Colombia University. )

Dirk Bezemer and Geoffrey Gardiner, in their paper “Quantitative Easing is Pushing on a String” , prepared for the Boeckler Conference, Berlin, October 29-30, 2010, make clear that “QE provides bank customers, not banks, with loanable funds. Central Banks can supply commercial banks with liquidity that facilitates interbank payments and payments by customers and banks to the government, but what banks lend is their own debt, not that of the central bank. Whether the funds are lent for useful purposes will depend, not on the adequacy of the supply of fund, but on whether the environment is encouraging to real investment.”

Quantitative easing subsidizes U.S. capital flight, pushing up non-dollar currency exchange rates
Federal Reserve Chairman Ben Bernanke’s quantitative easing may not have set out to disrupt the global trade and financial system or start a round of currency speculation that is forcing other countries to defend their economies by rejecting the dollar as a pariah currency. But that is the result of the Fed’s decision in 2008 to keep unpayably high debts from defaulting by re-inflating U.S. real estate and financial markets. The aim is to pull home ownership out of negative equity, rescuing the banking system’s balance sheets and thus saving the government from having to indulge in a Tarp II, which looks politically impossible given the mood of most Americans.

The announced objective is not materializing. The Fed’s new credit creation is not increasing bank loans to real estate, consumers or businesses. Banks are not lending – at home, that is. They are collecting on past loans. This is why the U.S. savings rate is jumping. The “saving” that is reported (up from zero to 3 per cent of GDP) is taking the form of paying down debt, not building up liquid funds on which to draw. Just as hoarding diverts revenue away from being spent on goods and services, so debt repayment shrinks spendable income.

So Bernanke created $2 trillion in new Federal Reserve credit. And now (October 2010) the Fed is proposing to increase the Fed’s money creation by another $1 trillion over the coming year. This is what has led gold prices to surge and investors to move out of weakening “paper currencies” since early September – and prompted other nations to protect their own economies accordingly.

It is hardly surprising that banks are not lending to an economy being shrunk by debt deflation. The entire quantitative easing has been sent abroad, mainly to the BRIC countries: Brazil, Russia, India and China. “Recent research at the International Monetary Fund has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies … since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed.” According to the IMF, “equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies.”

Borrowing unprecedented amounts from U.S., Japanese and British banks to buy bonds, stocks and currencies in the BRIC and Third World countries is a self-feeding expansion. Speculative inflows into these countries are pushing up their currencies as well as their asset prices, but. Their central banks settle these transactions in dollars, whose value falls as measured in their own local currencies.

U.S. officials say that this is all part of the free market. “It is not good for the world for the burden of solving this broader problem … to rest on the shoulders of the United States,” insisted Treasury Secretary Tim Geithner on Wednesday.

So other countries are solving the problem on their own. Japan is trying to hold down its exchange rate by selling yen and buying U.S. Treasury bonds in the face of its carry trade being unwound as arbitrageurs are paying back the yen that they earlier borrowed to buy higher-yielding but increasingly risky sovereign debt from countries such as Greece. Paying back these arbitrage loans has pushed up the yen’s exchange rate by 12 per cent against the dollar so far during 2010. On Tuesday, October 5, Bank of Japan governor Masaaki Shirakawa announced that Japan had “no choice” but to “spend 5 trillion yen ($60 billion) to buy government bonds, corporate IOUs, real-estate investment trust funds and exchange-traded funds – the latter two a departure from past practice.”

This “sterilization” of unwanted financial speculation is precisely what the United States has criticized China for doing. China has tried more “normal” ways to recycle its trade surplus, by seeking out U.S. companies to buy. But Congress would not let CNOOC buy into U.S. oil refinery capacity a few years ago, and the Canadian government is now being urged to block China’s attempt to purchase its potash resources. This leaves little option for China and other countries but to hold their currencies stable by purchasing U.S. and European government bonds.

This has become the problem for all countries today. As presently structured, the international financial system rewards speculation and makes it difficult for central banks to maintain stability without forced loans to the U.S. Government that has long enjoyed a near monopoly in providing central bank reserves. As noted earlier, arbitrageurs obtain a twofold gain: the arbitrage margin between Brazil’s nearly 12 per cent yield on its long-term government bonds and the cost of U.S. credit (1 per cent), plus the foreign-exchange gain resulting from the fact that the outflow from dollars into reals has pushed up the real’s exchange rate some 30 per cent – from R$2.50 at the start of 2009 to $1.75 last week. Taking into account the ability to leverage $1 million of one’s own equity investment to buy $100 million of foreign securities, the rate of return is 3000 per cent since January 2009.

Brazil has been more a victim than a beneficiary of what is euphemized as a “capital inflow.” The inflow of foreign money has pushed up the real by 4 per cent in just over a month (from September 1 through early October). The past year’s run-up has eroded the competitiveness of Brazilian exports, prompting the government to impose 4 per cent tax on foreign purchases of its bonds on October 4 to deter the currency’s rise. “It’s not only a currency war,” Finance Minister Guido Mantega said on Monday. “It tends to become a trade war and this is our concern.” And Thailand’s central bank director Wongwatoo Potirat warned that his country was considering similar taxes and currency trade restrictions to stem the baht’s rise, and Subir Gokarn, deputy governor of the Reserve Bank of India announced that his country also was reviewing defenses against the “potential threat” of inward capital flows.”

Such inflows do not provide capital for tangible investment. They are predatory, and cause currency fluctuation that disrupts trade patterns while creating enormous trading profits for large financial institutions and their customers. Yet most discussions of exchange rate treat the balance of payments and exchange rates as if they were determined purely by commodity trade and “purchasing power parity,” not by the financial flows and military spending that actually dominate the balance of payments. The reality is that today’s financial interregnum – anarchic “free” markets prior to countries hurriedly putting up their own monetary defenses – provides the arbitrage opportunity of the century. This is what bank lobbyists have been pressing for. It has little to do with the welfare of workers.

The potentially largest speculative prize of all promises to be an upward revaluation of China’s renminbi. The House Ways and Means Committee is backing this gamble, by demanding that China raise its exchange rate by the 20 per cent that the Treasury and Federal Reserve are suggesting. A revaluation of this magnitude would enable speculators to put down 1 per cent equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 2000 per cent profit of $20 million by turning the $100 million bet (and just $1 million “serious money”) into $120 million. Banks can trade on much larger, nearly infinitely leveraged margins, much like drawing up CDO swaps and other derivative plays.

This kind of money already has been made by speculating on Brazilian, Indian and Chinese securities and those of other countries whose exchange rates have been forced up by credit-flight out of the dollar, which has fallen by 7 per cent against a basket of currencies since early September when the Federal Reserve floated the prospect of quantitative easing. During the week leading up to the IMF meetings in Washington, the Thai baht and Indian rupee soared in anticipation that the United States and Britain would block any attempts by foreign countries to change the financial system and curb disruptive currency gambling.

This capital outflow from the United States has indeed helped domestic banks rebuild their balance sheets, as the Fed intended. But in the process the international financial system has been victimized as collateral damage. This prompted Chinese officials to counter U.S. attempts to blame it for running a trade surplus by retorting that U.S. financial aggression “risked bringing mutual destruction upon the great economic powers.

From the gold-exchange standard to the Treasury-bill standard to “free credit” anarchy
Indeed, the standoff between the United States and other countries at the IMF meetings in Washington this weekend threatens to cause the most serious rupture since the breakdown of the London Monetary Conference in 1933. The global financial system threatens once again to break apart, deranging the world’s trade and investment relationships – or to take a new form that will leave the United States isolated in the face of its structural long-term balance-of-payments deficit.

This crisis provides an opportunity – indeed, a need – to step back and review the longue durée of international financial evolution to see where past trends are leading and what paths need to be re-tracked. For many centuries prior to 1971, nations settled their balance of payments in gold or silver. This “money of the world,” as Sir James Steuart called gold in 1767, formed the basis of domestic currency as well. Until 1971 each U.S. Federal Reserve note was backed 25 per cent by gold, valued at $35 an ounce. Countries had to obtain gold by running trade and payments surpluses in order to increase their money supply to facilitate general economic expansion. And when they ran trade deficits or undertook military campaigns, central banks restricted the supply of domestic credit to raise interest rates and attract foreign financial inflows.

As long as this behavioral condition remained in place, the international financial system operated fairly smoothly under checks and balances, albeit under “stop-go” policies when business expansions led to trade and payments deficits. Countries running such deficits raised their interest rates to attract foreign capital, while slashing government spending, raising taxes on consumers and slowing the domestic economy so as to reduce the purchase of imports.

What destabilized this system was war spending. War-related transactions spanning World Wars I and II enabled the United States to accumulate some 80 per cent of the world’s monetary gold by 1950. This made the dollar a virtual proxy for gold. But after the Korean War broke out, U.S. overseas military spending accounted for the entire payments deficit during the 1950s and ‘60s and early ‘70s. Private-sector trade and investment was exactly in balance.

By August 1971, war spending in Vietnam and other foreign countries forced the United States to suspend gold convertibility of the dollar through sales via the London Gold Pool. But largely by inertia, central banks continued to settle their payments balances in U.S. Treasury securities. After all, there was no other asset in sufficient supply to form the basis for central bank monetary reserves. But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and “innovative.” It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments.

The problem is that the supply of dollar credit has become potentially infinite. The “dollar glut” has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities – thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature – for purposes that many foreign voters oppose – makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.

Contrary to most public media posturing, the U.S. payments deficit – and hence, other countries’ payments surpluses – is not primarily a trade deficit. Foreign military spending has accelerated despite the Cold War ending with dissolution of the Soviet Union in 1991. Even more important has been rising capital outflows from the United States. Banks lent to foreign governments from Third World countries, to other deficit countries to cover their national payments deficits, to private borrowers to buy the foreign infrastructure being privatized, foreign stocks and bonds, and to arbitrageurs to borrow at a low interest rate to buy higher-yielding securities abroad.

The corollary is that other countries’ balance-of-payments surpluses do not stem primarily from trade relations, but from financial speculation and a spillover of U.S. global military spending. Under these conditions the maneuvering for quick returns by banks and their arbitrage customers is distorting exchange rates for international trade. U.S. “quantitative easing” is coming to be perceived as a euphemism for a predatory financial attack on the rest of the world. Trade and currency stability are part of the “collateral damage” being caused by the Federal Reserve and Treasury flooding the economy with liquidity in their attempt to re-inflate U.S. asset prices. Faced with U.S. quantitative easing flooding the economy with reserves to “save the banks” from negative equity, all countries are obliged to act as “currency manipulators.” So much money is made by purely financial speculation that “real” economies are being destroyed.

The coming capital controls
The global financial system is being broken up as U.S. monetary officials change the rules they laid down nearly half a century ago. Prior to the United States going off gold in 1971, nobody dreamed that an economy – especially the United States – would create unlimited credit on computer keyboards and not see its currency plunge. But that is what happens under the Treasury-bill standard of international finance. Under this condition, foreign countries can prevent their currencies from rising against the dollar (thereby pricing their labor and exports out of foreign markets) only by (1) recycling dollar inflows into U.S. Treasury securities, (2) by imposing capital controls, or (3) by avoiding use of the dollar or other currencies used by financial speculators in economies promoting “quantitative easing.”

Malaysia successfully used capital controls during the 1997 Asian Crisis to prevent short-sellers from covering their bets. This confronted speculators with a short squeeze that George Soros says made him lose money on the attempted raid. Other countries are now reviewing how to impose capital controls to protect themselves from the tsunami of credit from flowing into their currencies and buying up their assets – along with gold and other commodities that are turning into vehicles for speculation rather than actual use in production. Brazil took a modest step along this path by using tax policy rather than outright capital controls when it taxed foreign buyers of its bonds last week.

If other nations take this route, it will reverse the policy of open and unprotected capital markets adopted after World War II. This trend threatens to lead to the kind of international monetary practice found from the 1930s into the ‘50s: dual exchange rates, one for financial movements and another for trade. It probably would mean replacing the IMF, World Bank and WTO with a new set of institutions, isolating U.S., British and Eurozone representation.

To defend itself, the IMF is proposing to act as a “central bank” creating what was called “paper gold” in the late 1960s – artificial credit in the form of Special Drawing Rights (SDRs). However, other countries already have complained that voting control remains dominated by the major promoters of arbitrage speculation – the United States, Britain and Eurozone. And the IMF’s Articles of Agreement prevent countries from protecting themselves, characterizing this as “interfering” with “open capital markets.” So the impasse reached this weekend appears to be permanent. As one report summarized matters: “‘There is only one obstacle, which is the agreement of the members,’ said a frustrated Kahn .”

Paul Martin, the former Canadian prime minister who helped create the G20 after the 1997-1998 Asian financial crisis, said “said the big powers were largely immune to being named andshamed.” And in a Financial Times interview Mohamed El Erian, a former senior IMF official and now chief executive of Pimco said, “You have a burst pipe behind the wall and the water is coming out. You have to fix the pipe, not just patch the wall.”

The BRIC countries are simply creating their own parallel system. In September, China supported a Russian proposal to start direct trading between the yuan and the ruble. It has brokered a similar deal with Brazil. And on the eve of the IMF meetings in Washington on Friday, October 8, Chinese Premier Wen stopped off in Istanbul to reach agreement with Turkish Prime Minister Erdogan to use their own currencies in tripling Turkish-Chinese trade to $50 billion over the next five years, effectively excluding the U.S. dollar. “We are forming an economic strategic partnership … In all of our relations, we have agreed to use the lira and yuan,” Mr. Erdogan said.

On the deepest economic lane, the present global financial breakdown is part of the price to be paid for the Federal Reserve and U.S. Treasury refusing to accept a prime axiom of banking: Debts that cannot be paid, won’t be. They tried to “save” the banking system from debt write-downs in 2008 by keeping the debt overhead in place. The resulting repayment burden continues to shrink the U.S. economy, while the Fed’s way to help the banks “earn their way out of negative equity” has been to fuel a flood of international financial speculation. Faced with normalizing world trade or providing opportunities for predatory finance, the U.S. and Britain have thrown their weigh behind the latter. Targeted economies understandably seeking alternative arrangements.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy.



CounterPunch Diary

The Soros Syndrome

By ALEXANDER COCKBURN

Weekend Edition

October 8 - 10, 2010

George Soros announced a few weeks ago that he is giving $100 million to Human Rights Watch—conditional on the organization to find a matching $10 million a year from other donors. He’s been rewarded with ringing cheers for his disinterested munificence.

The relationship of “human rights” to the course of empire is nicely caught in two statements, the first by HRW’s former executive director Aryeh Neier: “When we created Human Rights Watch, one of the main purposes at the outset was to leverage the power, the purse and the influence of the United States to try to promote human rights in other countries.”

Set this remark, startling in its brazen display of imperial self-confidence, next to Soros’s recent statement on National Public Radio PR, that in the expansion of HRW prompted by his big new donation “the people doing the investigations won’t necessarily be Americans.… The United States has lost the moral high ground and that has sort of endangered the credibility, the legitimacy of Americans being in the forefront of advocating human rights.”

Soros the international financier made his billions as a currency speculator; he could destroy a country’s reserves, hastening its social disintegration. Then Soros the philanthropist could finance HRW’s investigations into the abuses his operations helped to induce. He offers in his single person an arresting profile of liberal interventionism in our era, in which direct economic and political destabilization (mostly calibrated in concert with the US government) has easy recourse to the moral and political bludgeon of a human rights report, which is in turn used to ratchet up the pressure for a direct imperial onslaught—whether by economic sanctions, covert sabotage, aerial bombing or a blend of all three. The role of human rights NGOs in NATO’s attack on the former Yugoslavia is a prime example.

Or take a look at Soros’s meddling in Georgia. His millions and the NGOs under his control played an active role in installing the unstable and decidedly authoritarian Mikheil Saakashvili. The Foundation for the Defense of Democracies quoted a former Georgian parliamentarian as saying that in the three months before the 2003 Rose Revolution, “Soros spent $42 million ramping up for the overthrow of Shevardnadze.” Former Georgian Foreign Minister Salomé Zourabichvili was also quoted in the French journal Hérodote explaining, “The NGOs which gravitate around the Soros Foundation undeniably carried the revolution. However, one cannot end one’s analysis with the revolution and one clearly sees that, afterwards, the Soros Foundation and the NGOs were integrated into power.” Consult Human Rights Watch’s rather muffled report on Georgia three years later, and you’ll find the statement that “U.S. backing of President Saakashvili’s government has led to a less critical attitude toward human rights abuses in the country.”

Soros created his Open Society Institute, but as a CounterPuncher seasoned in the political and intellectual topography of the region put it to me, “In East/Central Europe Soros’ outfit is anything but an ‘Open Society.’ They fund a very narrow range of intellectual production and starve those at intellectual variance with them… Many of the leading figures were members of the Cold War emigres in exile. Very reactionary, or very neoliberal if younger. On the ground they have indeed ‘privatized political action’, as you put it. They have also privatized intellectual production, as the neoliberal state has drained the pool of resources from the academy leaving only the foundations to fund it. This follows the patter set by Bill Simon in 1974, who argued that the ‘funding spigot’ needed to be turned off to the ‘wrong’ people and ‘turned on’ to the right ones. This could be best enabled by privatizing policy creation after the democratic ‘excesses’ of the 1960s and 1970s and privatizing it until the state could be recaptured.”

With Soros’s extra money, HRW will be dangling big funds at its non-American recruits. Regarding the hefty salaries that will surely follow, it’s worth raising the experience of Eritrea, which immediately got into trouble with the NGO system after independence in 1991. Eritrea-based journalist Tom Mountain tells me, “For one, Eritrea won’t allow the NGOs to pay above civil service salaries. Why? NGOs come into a country and find the best and brightest and give them salaries ten or twenty times the local rate, buying their allegiance and often turning them against their country. Two, Eritrea has implemented a 10 percent overhead policy, and all the NGOs that couldn’t or wouldn’t comply with the documentation were kicked out, about the same time Eritrea kicked out the UN ‘peacekeepers’ here.”

In other words, foundations, nonprofits, NGOs—call them what you will—can on occasion perform nobly, but overall their increasing power moves in step with the temper of our times: privatization of political action, directly overseen and manipulated by the rich and their executives. The tradition of voluntarism is extinguished by the professional, very well-paid do-good bureaucracy.

I’m still not sure why Ralph Nader, in his vast 2008 novel Only the Super-Rich Can Save Us, embraced the proposition embodied in the title (unless the whole exercise was an extended foray into irony). As an international class, the superrich are emphatically not interested in saving us, beyond advocating reforms required to stave off serious social unrest.

For many decades the superrich in this country thought that the major threat to social stability lay in overpopulation and the unhealthy gene pool of the poor. Their endowments and NGOs addressed themselves diligently to these questions, by means of enforced sterilization, exclusion of Slavs and Jews from America’s shores and other expedients, advanced by the leading liberals of the day.

More recently, “globalization” and “sustainability” have become necessary mantras, and foolish is the grant applicant who does not flourish both words. NGOs endowed by the rich are instinctively hostile to radical social change, at least in any terms that a left-winger of the 1950s or ’60s would understand. The US environmental movement is now strategically supervised and thus neutered as a radical force by the Pew Charitable Trusts, the lead dispenser of patronage and money.

As for the role of Western NGOs in the third world, I recommend a glance at the great Indian journalist P. Sainath’s classic 1996 book, Everybody Loves a Good Drought:

“Development theology holds that NGOs stand outside the establishment. They present a credible alternative to it. The majority of NGOs are, alas, deeply integrated with the establishment, with government and with the agenda of their funding bodies… They also provide white collar employment. Nepal, next door, has over 10,000 NGOs -- one for every 2,000 inhabitants. Compare that with how many teachers, doctors or nurses it has per 2,000 citizens. Funds flowing in through its 150 foreign NGOs account for 12 per cent of Nepal’s GNP.

“The trouble with the word NGO, Non-Profit or whatever,” Sainath wrote to me, “ is that they can mean anything or nothing. A football club is an NGO.I think this term came up when voluntarism died in the west. Have a look at the salaries of the top execs of the Non Profits and NGOs. Voluntarism is a much older tradition - certainly in countries like ours, going back to the days of the Buddha.

“There is undoubtedly a small percentage of them that do great work and in so doing, go way beyond those terms. I respect and admire those, but they are a very small percentage. On the other hand, you will find that every big corporate house creates its own NGO - there are tax breaks involved apart from the PR and very importantly, they can help market penetration.
“Hence an NGO ‘studying water’ and drought discovers and recommends to a state government that the best solution is drip irrigation. And it just so happens that at the time, the said corporate coyly mentions that it has imported millions of drip irrigation kits from Israel or wherever for a very modest price and these are available for the salvation of humankind.

“On the other hand, I have to say again, there are some that deserve respect and admiration. Very often, these are small groups that do NOT take corporate or foreign funding but work on local initiatives -- some old Gandhian groups, some left-wing groups, people who believe in promoting self-reliance and don’t want to transfer the dependency of villagers from government to themselves. Sometimes these become movements. But the largest group are the mainstream, white-collar employment groups.

“Another phenomenon of the liberalization-privatization period are groups that openly run on semi-corporate or corporate or entrepreneurial lines -- ‘social entrepreneurs’ and what have you. The jargon would fill a lexicon. They scorn the not-for-profit stuff.”

Many of these are into micro-credit and have pretty much destroyed what began and is a legitimate tool for poor village women to make life marginally less hard for themselves. Now giant multinational banks and corporate finance outfits have moved steadily towards capturing the micro-credit sector.

Indeed, the amazing career of “micro-credit” as a strategy for “development” is very instructive. Western NGOs and their rich donors ecstatically seized on the term. For one thing, it had something bracingly austere about it: micro-loans are by definition small, and therefore obviously eschew large political ambitions, like organizing politically to force the government into serious action or, if necessary, overthrowing the government and enforcing macro-actions like land reform and economic redistribution.

In 2006,so Sainath reports, “the government of Andhra Pradesh passed a law, enthusiastically supported in the legislature, to curb the interest-gouging activities of some NGO/non-profits and other groups. The chief minister told the House that these people are worse than moneylenders. Indeed, they were charging interest rates that effectively turned out to be between 24 and 36 per cent and even higher.”

Back at the dawn of the twentieth century Lenin and Martov were organizing their international Congresses and looking for grant money to this end. Martov, the Menshevik, told Lenin he must absolutely stop paying for the hotels and halls with money hijacked by Stalin from Georgian banks in Tblisi. Lenin reassured Martov, and then asked Stalin to knock over another bank which he did, Europe’s record bank heist up till that time. It was one way, perhaps the only way, past the grip of cautious millionaires. Then as now.

“Joe Biden is subsidizing rapists!”
Yes, where could we be but in in Delaware, where JoAnn Wypijewski reports from Christine O’Donnell’s backyard. And why is the vice president thus squandering our tax dollars? But of course! Joe Biden and the Justice Department have been subsidizing rapists through the Violence Against Women Act.

It’s all in our latest newsletter. Also in this terrific issue: Patrick Cockburn reports from Kabul on the only realistic U.S. option – a deal with the Taliban and Pakistan. Moscow: Follow the money -- Boris Kagarlitsky on what the battle between President Medvedev and Mayor Luzhkov is really all about. The CIA: Steve Hendricks tracks down a renderer.