RamaaVasudevan
Colorado State University
Public Debt, Finance and
Imperialism
Political Economy of Public
debt
 Intersection of state and financial markets
 State-credit standard: basis of monetary system
 Key currency system: instrument for extending
and preserving imperial power
 Draw on two lines of analysis in Marx:
 Fictitious capital
 Primitive accumulation
Public Debt as Fictitious
Capital
 Contradictions of the money form: general equivalent
and financial asset
 Separation of finance from commerce: development of
an artificial system of settling payments
 Fictitious capital:
 Valuation on the basis of capitalization of future earnings
 Transformation of claim on future earnings into a tradable
asset
 Wealth accumulates from such capitalization relatively
autonomously from from real investment
 Public debt is fictitious capital:
Public Debt as lever of
primitive accumulation
 Public debt depends on and fosters the growth
of financial markets
 The emergence of financiers, speculators …
international credit system
 Social relation between finance and enterprise
 Management of public debt and class relations
 Evolution of the monetary base of the financial
system from bullion to state credit - fictitious
capital
Monetary Roots of financial
system
 Development of credit and financial system
 Basis of “two price model”: distinct form of
valuation of money
 Money as a financial asset comes into
contradiction with its role as a general equivalent
 Crisis: Collapse to monetary roots
 Public debt as a successful ponzi scheme?
 Enrichment simply through the accumulation of
public debt?
 subject to volatile logic of finance.
Role of Central Bank
 Significance of the role of the central bank in managing public debt
assumes greater significance.
 Pivotal organ or an ally of the state playing an important role in
shaping the changing balance of class forces within a country.
 Equally important in managing relations between countries
 Hoarding of reserves: “Measure of power between nations”
 Autonomy of central banks - monetary power of state – constrained
by that of other states
 Key currency system: monetary liability of a dominant state becomes
the basis for the international financial system.
 Instability inherent in this two –price framework are resolved and
extended
 Elasticity of international credit system, Export of fragility
UK Public Debt
Sterling Standard
 Divergence between financial evolution in France and England


Increasing role of public debt in war financing ( 250% of GDP at the end of the
Napoleonic Wars)
Thriving bond markets alongside growing public debt: growth of financial elite
 Strengthened central role of London and sterling bills (precursor to modern
securitization)
 Expansion of international liquidity beyond metallic basis of gold reserves
 Transcend deflationary consequences of an international monetary system
based on gold reserves
 Bank of England played pivotal role in calibrating international capital flow
 Power was not absolute…
 Increasing engagement of Bank of England in the market for bills


Liquidity and depth and breadth of markets
Class basis of commitment to convertibility
Debt and Dominance
 Role of military interventions in sterling dominance
 Napoleonic Wars and the Franco-Prussian Wars
 National rivalries not abolished: came to head with
First World War
 Rise of the US: debt as an instrument of power
 Inter Ally debt payments and German reparations
 Lend Lease agreement and imperial preference
 Suez crisis
 Bretton Woods: establish dollar standard
 Marshal and Dodge plans, Korean War
Problem of Willing creditors
 Britain drew on the resources of the colonial
empire and special depositors like Japan.
 Dollar crisis and the collapse of Bretton Woods
 Rival capitalist countries- France, Germany.
 The floating dollar standard:
 OPEC
 Japan and the Plaza Accord
Debt and the Periphery
 Debt used to incorporate developing countries
and emerging markets into the international
financial system
 Sterling standard: colonies and primary exporters
in the periphery
 Safety Valve: Export of crisis to periphery
(Argentina, Brazil, Australia)
 Gunboat diplomacy and sanctions for debt
default
 Egypt 1882, Venezuela 1902
 Barings and Argentina 1890
…Debt and the Periphery
 Current context: IMF conditionality deployed to
integrate emerging markets ( Not that different!)
 Debt crisis in Latin America: enforcement of
neoliberal program
 Asian Crisis: similar enforcement
 United States as the world banker: taps into the
surpluses of creditor countries in the periphery and
recycles surpluses through financial markets to
emerging markets in the periphery.
 Emerging markets have borne the brunt of
speculative attacks : safety valve role
Banker to the World
 The state credit standard is linked to imperial policy and
helps sustain tremendous growth of liquidity
 However this role entails the generation of growing global
Imbalances: shift of production base
 Hegemony of finance is the outcome of the inherent logic of
use of debt as international money
 Pre War Britain: No longer workshop of the world
 Competition from Europe, US and Japan
 Growth of finance with London and Bank of England as the
“center of gravity”
 Investment income from foreign investments critical to current
account surpluses
British Balance of Payments
£ millions
250
200
150
100
50
0
-50
-100
Interest and Dividends
Current Account Surplus
Trade Balance
Banker to the World: Dollar
standard
 Global imbalances linked to Floating Dollar
standard
 Outsourcing of manufacture and dominance of
finance
 US is in a peculiar position: positive net earnings
from foreign investments despite being a net debtor
country
 Return premium: The exorbitant privilege of being
banker to the world (Venture Capitalist? Ponzi
scheme?)
 Securitization machinery
Current Account Balances
($ billions)
USA: Net International Income
Receipts (Share of GDP)
0.016
0.014
0.012
0.01
0.008
0.006
0.004
0.002
0
1973
1978
1983
1988
1993
1998
2003
2008
Tensions in the Dollar
standard
 Changing structural position of Latin America and Asia
 Current account surpluses: and accumulating war chest
of reserves
 Less vulnerable to capital flight: breakdown of safety
valve mechanism
 Reversal of recycling pattern- capital was drawn from the
rest of the world to the US markets: including to the sub
prime markets
 Debt fuelled bubble: weak link in international financial
system
 Collapse of international credit system: financial
disintermediation
USA: Capital Flows, Current
Account Deficit
2000
1500
1000
500
0
1973
1978
1983
1988
1993
1998
-500
-1000
-1500
-2000
U.S. private assets abroad
Privately held Foreign assets in the United States
Current Account Balance
2003
2008
The credit crisis
 Paradox: Crisis caused by Implosion of US financial markets
precipitated a flight to safety to US treasury bills
 Monetary roots of crisis: clamor for “money” : US treasuries at apex of
credit pyramid
 Federal Reserve and Treasury have to deal with changing financial
landscape
 Quantitaiveeasing: taking on more toxic assets in the Fed balance
sheet
 Market maker of last resort:
 Assert control over market
 Fostering another bubble
 Glut of treasuries - Management of public debt:
 State hostage to finance
Federal Reserve Assets
2500
Other
2000
Repurchase
Term auction Facility
1500
Term Asset-Backed Securities Loan
Facility
1000
Mortgage-backed securities
500
Agency debt
2008-01-02
2008-02-20
2008-04-09
2008-05-28
2008-07-16
2008-09-03
2008-10-22
2008-12-10
2009-01-28
2009-03-18
2009-05-06
2009-06-24
2009-08-12
2009-09-30
2009-11-18
0
Commercial Paper Funding
Facility
Central bank liquidity swaps
Treasury securities
Federal Reserve Liabilities
2500
Other
2000
Currency in circulation
1500
Reverse repurchase
agreements: Foreign
1000
Reverse repurchase
agreements: Dealers
500
Treasury, general account
2008-01-02
2008-02-20
2008-04-09
2008-05-28
2008-07-16
2008-09-03
2008-10-22
2008-12-10
2009-01-28
2009-03-18
2009-05-06
2009-06-24
2009-08-12
2009-09-30
2009-11-18
0
Treasury, supplementary
financing account
Reserve balances with Federal
Reserve Banks
US Public Debt
Sovereign debt Crisis
 Distinctive nature of US public debt: fiscal backing
of US state
 Asymmetric response to crisis in other deficit
countries
 Iceland, Baltic countries, Hungary. Greece, Ireland
 Severe fiscal cutbacks and austerity measures
 Euro-zone crisis:
 Fragmented market for Euro-zone debt
 ECB does not have the same tools as the Fed to
manage public debt.
 Bailout Mechanism, ECB purchases of sovereign debt
Currency war
 Dollar remains anchor of the system
 Quantitative easing: fuelling capital flows to emerging
markets
 Appreciation of currency in Brazil, Korea…
 Defensive policies: capital controls, currency interventions
 Relapse to protectionism?
 Also reflects the constraints facing the US state
 US –China relations
 Global reserve currency
 Quantitative targets for current account balances
The present juncture
 Mountain of debt
 Power of finance
 Recovery through new asset bubbles?
 Beyond the question of sustainability of debt to
investigate the political economy of debt
 Relation between US state and private finance
and the balance of class forces within the US
 Relation between US and the rest of the world,
the manner in which US exercises its hegemony
US: International income
receipts and payments
500
400
300
200
100
0
1970
-100
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
-200
-300
-400
-500
Direct investment receipts
Other private receipts
Direct investment payments
Other private payments
2003
2006
Latin America and Asia: Trade
and Reserves ($ billions)