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manipulation by speculators. The result was a disastrous roller coaster

Web of Debt

ride, particularly for Third World economies. Today, most currency
trades are done purely for speculative profit. Currencies rise or fall
depending on quantities traded each day. Bernard Lietaer writes in
The Future of Money:
Your money™s value is determined by a global casino of
unprecedented proportions: $2 trillion are traded per day in
foreign exchange markets, 100 times more than the trading volume
of all the stock markets of the world combined. Only 2% of these
foreign exchange transactions relate to the “real” economy
reflecting movements of real goods and services in the world,
and 98% are purely speculative. This global casino is triggering
the foreign exchange crises which shook Mexico in 1994-5, Asia
in 1997 and Russia in 1998.15
The alternative to letting the currency float is for a national
government to keep its currency tightly pegged to the U.S. dollar, but
governments that have taken that course have faced other hazards.
The currency becomes vulnerable to the monetary policies of the United
States; and if the country does not set its peg right, it can still be the
target of currency raids. In the interests of “free trade,” the government
usually agrees to keep its currency freely convertible into dollars. That
means it has to stand ready to absorb any surpluses or fill any shortages
in the exchange market; and to do this, it has to have enough dollars
in reserve to buy back the local currency of anyone wanting to sell. If
the government guesses wrong and sets the peg too high (so that its
currency will not really buy as much as the equivalent in dollars),
there will be “capital flight” out of the local currency into the more
valuable dollars. (Indeed, speculators can induce capital flight even
when the peg isn™t set too high, as we™ll see shortly.) Capital flight can
force the government to spend its dollar reserves to “defend” its
currency peg; and when the reserves are exhausted, the government
will either have to default on its obligations or let its currency be
devalued. When the value of the currency drops, so does everything
valued in it. National assets can then be snatched up by circling
“vulture capitalists” for pennies on the dollar.
Following all this can be a bit tricky, but the bottom line is that
there is no really safe course at present for most small Third World
nations. Whether their currencies are left to float or are kept tightly
pegged to the dollar, they can still be attacked by speculators. There is
a third alternative, but few countries have been in a position to take it:
the government can peg its currency to the dollar and not support its

Chapter 21 - Goodbye Yellow Brick Road

free conversion into other currencies.16 Professor Henry C. K. Liu, the
Chinese American economist quoted earlier, says that China escaped
the 1998 “Asian crisis” in this way. He writes:
China was saved from such a dilemma because the yuan was
not freely convertible. In a fundamental way, the Chinese miracle of
the past half a decade has been made possible by its fixed exchange
rate and currency control . . . .
But China too has been under pressure to let its currency float.
Liu warns the country of his ancestors:
[T]he record of the past three decades shows that neo-liberal
ideology brought devastation to every economy it invaded . . . .
China will not be exempt from such a fate when it makes the
yuan fully convertible at floating rates.17
There is no real solution to this problem short of global monetary
reform. China™s money system is explored in detail in Chapter 27,
and proposals for reforming the international system are explored in
Chapter 46.

Setting the Debt Trap:
“Emerging Markets” for Petrodollar Loans

When the price of oil quadrupled in the 1970s, OPEC countries
were suddenly flooded with U.S. currency; and these “petrodollars”
were usually deposited in London and New York banks. They were
an enormous windfall for the banks, which recycled them as low-
interest loans to Third World countries that were desperate to borrow
dollars to finance their oil imports. Like other loans made by commercial
banks, these loans did not actually consist of money deposited by their
clients. The deposits merely served as “reserves” for loans created by
the “multiplier effect” out of thin air.18 Through the magic of fractional-
reserve lending, dollars belonging to Arab sheiks were multiplied many
times over as accounting-entry loans. The “emerging nations” were
discovered as “emerging markets” for this new international financial
capital. Hundreds of billions of dollars in loan money were generated
in this way.
Before 1973, Third World debt was manageable and contained. It
was financed mainly through public agencies including the World
Bank, which invested in projects promising solid economic success.19
But things changed when private commercial banks got into the game.

Web of Debt

The banks were not in the business of “development.” They were in
the business of loan brokering. Some called it “loan sharking.” The
banks preferred “stable” governments for clients. Generally, that meant
governments controlled by dictators. How these dictators had come
to power, and what they did with the money, were not of immediate
concern to the banks. The Philippines, Chile, Brazil, Argentina, and
Uruguay were all prime loan targets. In many cases, the dictators
used the money for their own ends, without significantly bettering the
condition of the people; but the people were saddled with the bill.
The screws were tightened in 1979, when the U.S. Federal Reserve
under Chairman Paul Volcker unilaterally hiked interest rates to
crippling levels. Engdahl notes that this was done after foreign dollar-
holders began dumping their dollars in protest over the foreign policies
of the Carter administration. Within weeks, Volcker allowed U.S.
interest rates to triple. They rose to over 20 percent, forcing global
interest rates through the roof, triggering a global recession and mass
unemployment.20 By 1982, the dollar™s status as global reserve currency
had been saved, but the entire Third World was on the brink of
bankruptcy, choking from usurious interest charges on their petrodollar
That was when the IMF got in the game, brought in by the London
and New York banks to enforce debt repayment and act as “debt
policeman.” Public spending for health, education and welfare in
debtor countries was slashed, following IMF orders to ensure that the
banks got timely debt service on their petrodollars. The banks also
brought pressure on the U.S. government to bail them out from the
consequences of their imprudent loans, using taxpayer money and
U.S. assets to do it. The results were austerity measures for Third
World countries and taxation for American workers to provide welfare
for the banks. The banks were emboldened to keep aggressively
lending, confident that they would again be bailed out if the debtors™
loans went into default.
Worse for American citizens, the United States itself ended up a
major debtor nation. Because oil is an essential commodity for every
country, the petrodollar system requires other countries to build up
huge trade surpluses in order to accumulate the dollar surpluses they
need to buy oil. These countries have to sell more goods in dollars
than they buy, to give them a positive dollar balance. That is true for
every country except the United States, which controls the dollar and
issues it at will. More accurately, the Federal Reserve and the private
commercial banking system it represents control the dollar and issue
Chapter 21 - Goodbye Yellow Brick Road

it at will. Since U.S. economic dominance depends on the dollar
recycling process, the United States has acquiesced in becoming
“importer of last resort.” The result has been to saddle it with a
growing negative trade balance or “current account deficit.” By 2000,
U.S. trade deficits and net liabilities to foreign accounts were well over
22 percent of gross domestic product. In 2001, the U.S. stock market
collapsed; and tax cuts and increased federal spending turned the
federal budget surplus into massive budget deficits. In the three years
after 2000, the net U.S. debt position almost doubled. The United
States had to bring in $1.4 billion in foreign capital daily, just to fund
this debt and keep the dollar recycling game going. By 2006, the figure
was up to $2.5 billion daily.21 The people of the United States, like
those of the Third World, have become hopelessly mired in debt to
support the banking system of a private international cartel.

Web of Debt

Chapter 22

The Witch bade her clean the pots and kettles and sweep the floor
and keep the fire fed with wood. Dorothy went to work meekly, with
her mind made up to work as hard as she could; for she was glad the
Wicked Witch had decided not to kill her.
“ The Wonderful Wizard of Oz,
“The Search for the Wicked Witch”

W aves of immigrants are now pouring over the Mexican
border into the United States in search of work, precipitating
an illegal alien crisis for Americans. Vigilante border patrols view
these immigrants as potential terrorists, but in fact they are refugees
from an economic war that has deprived them of their own property
and forced them into debt bondage to a private global banking cartel.
When Mexico was conquered in 1520, the mighty Aztec empire was
ruled by the unsuspecting, hospitable Montezuma. The Spanish
General Cortes, propelled by the lure of gold, conquered by warfare,
violence and genocide. When Mexico fell again in the twentieth
century, it was to a more covert form of aggression, one involving a
drastic devaluation of its national currency.
If Montezuma™s curse was his copious store of gold, for Mexico in
the twentieth century it was the country™s copious store of oil. William
Engdahl tells the story in his revealing political history A Century of
War. He notes that the first Mexican national Constitution vested the
government with “direct ownership of all minerals, petroleum and
hydro-carbons” in 1917. But when British and American oil interests
persisted in an intense behind-the-scenes battle for these oil reserves,

Chapter 22 - The Tequila Trap

the Mexican government finally nationalized all its foreign oil holdings.
The move led the British and American oil majors to boycott Mexico
for the next forty years. When new oil reserves were discovered in
Mexico in the 1970s, President Jose Lopez Portillo undertook an
impressive modernization and industrialization program, and Mexico
became the most rapidly growing economy in the developing world.
But the prospect of a strong industrial Mexico on the southern border
of the United States was intolerable to certain powerful Anglo-
American interests, who determined to sabotage Mexico™s
industrialization by securing rigid repayment of its foreign debt. That
was when interest rates were tripled. Third World loans were
particularly vulnerable to this manipulation, because they were usually
subject to floating or variable interest rates.1
Why did Mexico need to go into debt to foreign lenders? It had its
own oil in abundance. It had accepted development loans earlier, but
it had largely paid them off. The problem for Mexico was that it was
one of those intrepid countries that had declined to let its national
currency float. Mexico™s dollar reserves were exhausted by speculative
raids in the 1980s, forcing it to borrow just to defend the value of the
peso.2 According to Henry Liu, writing in The Asia Times, Mexico™s
mistake was in keeping its currency freely convertible into dollars,
requiring it to keep enough dollar reserves to buy back the pesos of
anyone wanting to sell. When those reserves ran out, it had to borrow
dollars on the international market just to maintain its currency peg.3
In 1982, President Portillo warned of “hidden foreign interests”
that were trying to destabilize Mexico through panic rumors, causing
capital flight out of the country. Speculators were cashing in their
pesos for dollars and depleting the government™s dollar reserves in
anticipation that the peso would have to be devalued. In an attempt
to stem the capital flight, the government cracked under the pressure
and did devalue the peso; but while the currency immediately lost 30
percent of its value, the devastating wave of speculation continued.
Mexico was characterized as a “high-risk country,” leading
international lenders to decline to roll over their loans. Caught by
peso devaluation, capital flight, and lender refusal to roll over its debt,
the country faced economic chaos. At the General Assembly of the
United Nations, President Portillo called on the nations of the world
to prevent a “regression into the Dark Ages” precipitated by the
unbearably high interest rates of the global bankers.
In an attempt to stabilize the situation, the President took the bold
move of taking charge of the banks. The Bank of Mexico and the

Web of Debt

country™s private banks were taken over by the government, with
compensation to their private owners. It was the sort of move
calculated to set off alarm bells for the international banking cartel. A
global movement to nationalize the banks could destroy their whole
economic empire. They wanted the banks privatized and under their
control. The U.S. Secretary of State was then George Shultz, a major
player in the 1971 unpegging of the dollar from gold. He responded
with a plan to save the Wall Street banking empire by having the IMF
act as debt policeman. Henry Kissinger™s consultancy firm was called
in to design the program. The result, says Engdahl, was “the most
concerted organized looting operation in modern history,” carrying
“the most onerous debt collection terms since the Versailles reparations
process of the early 1920s,” the debt repayment plan blamed for
propelling Germany into World War II.4
Mexico™s state-owned banks were returned to private ownership,
but they were sold strictly to domestic Mexican purchasers. Not until
the North American Free Trade Agreement (NAFTA) was foreign com-
petition even partially allowed. Signed by Canada, Mexico and the
United States, NAFTA established a “free-trade” zone in North
America to take effect on January 1, 1994. In entering the agreement,
Carlos Salinas, the outgoing Mexican President, broke with decades
of Mexican policy of high tariffs to protect state-owned industry from
competition by U.S. corporations.
By 1994, Mexico had restored its standing with investors. It had a
balanced budget, a growth rate of over three percent, and a stock
market that was up fivefold. In February 1995, Jane Ingraham wrote


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