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“ John Maynard Keynes,
Economic Consequences of the Peace (1919)

T he rampant runaway inflations of Third World economies
are widely blamed on desperate governments trying to solve
their economic problems by running the currency printing presses,
but closer examination generally reveals other hands to be at work.
What causes merchants to raise their prices is not a sudden flood of
money from customers competing for their products because the money
supply has been pumped up with new currency. Rather, it is a dra-
matic increase in the merchants™ own costs as a result of a radical de-
valuation of the local currency; and this devaluation can usually be
traced to manipulations in the currency™s floating exchange rate. Here
are a few notable examples . . . .

The Ruble Collapse in Post-Soviet Russia

The usual explanation for the drastic runaway inflation that
afflicted Russia and its former satellites following the fall of the Iron
Curtain is that their governments resorted to printing their own money,
diluting the money supply and driving up prices. But as William
Chapter 25 - Another Look at the Inflation Humbug

Engdahl shows in A Century of War, this is not what was actually
going on. Rather, hyperinflation was a direct and immediate result of
letting their currencies float in foreign exchange markets. He writes:
In 1992 the IMF demanded a free float of the Russian ruble as
part of its “market-oriented” reform. The ruble float led within a
year to an increase in consumer prices of 9,900 per cent, and a collapse
in real wages of 84 per cent. For the first time since 1917, at least
during peacetime, the majority of Russians were plunged into
existential poverty. . . . Instead of the hoped-for American-style
prosperity, two-cars-in-every-garage capitalism, ordinary
Russians were driven into economic misery.1
After the Berlin Wall came down, the IMF was put in charge of
the market reforms that were supposed to bring the former Soviet
countries in line with the Western capitalist economies that were domi-
nated by the dollars of the private Federal Reserve and private U.S.
banks. The Soviet people acquiesced, lulled by dreams of the sort of
prosperity they had seen in the American movies. But Engdahl says it
was all a deception:
The aim of Washington™s IMF “market reforms” in the former
Soviet Union was brutally simple: destroy the economic ties that
bound Moscow to each part of the Soviet Union . . . . IMF shock
therapy was intended to create weak, unstable economies on the
periphery of Russia, dependent on Western capital and on dollar
inflows for their survival -- a form of neocolonialism. . . . The Russians
were to get the standard Third World treatment . . . IMF
conditionalities and a plunge into poverty for the population. A
tiny elite were allowed to become fabulously rich in dollar terms,
and manipulable by Wall Street bankers and investors.
It was an intentional continuation of the Cold War by other means
-- entrapping the economic enemy with loans of accounting-entry
money. Interest rates would then be raised to unpayable levels, and
the IMF would be put in charge of “reforms” that would open the
economy to foreign exploitation in exchange for debt relief. Engdahl
The West, above all the United States, clearly wanted a
deindustrialized Russia, to permanently break up the economic
structure of the old Soviet Union. A major area of the global
economy, which had been largely closed to the dollar domain
for more than seven decades, was to be brought under its control.
. . . The new oligarchs were “dollar oligarchs.”

Web of Debt

The Collapse of Yugoslavia and the Ukraine

Things were even worse in Yugoslavia, which suffered what has
been called the worst hyperinflation in history in 1993-94. Again, the
textbook explanation is that the government was madly printing
money. As one college economics professor put it:
After Tito [the Yugoslavian Communist leader until 1980], the
Communist Party pursued progressively more irrational
economic policies. These policies and the breakup of Yugoslavia
. . . led to heavier reliance upon printing or otherwise creating
money to finance the operation of the government and the
socialist economy. This created the hyperinflation.2
That was the conventional view, but Engdahl maintains that the
reverse was actually true: the Yugoslav collapse occurred because the
IMF prevented the government from obtaining the credit it needed from
its own central bank. Without the ability to create money and issue
credit, the government was unable to finance social programs and
hold its provinces together as one nation. The country™s real problem
was not that its economy was too weak but that it was too strong. Its
“mixed model” combining capitalism and socialism was so successful
that it threatened the bankers™ IMF/shock therapy model. Engdahl
For over 40 years, Washington had quietly supported Yugoslavia,
and the Tito model of mixed socialism, as a buffer against the
Soviet Union. As Moscow™s empire began to fall apart,
Washington had no more use for a buffer “ especially a
nationalist buffer which was economically successful, one that
might convince neighboring states in eastern Europe that a middle
way other than IMF shock therapy was possible. The Yugoslav
model had to be dismantled, for this reason alone, in the eyes of
top Washington strategists. The fact that Yugoslavia also lay on
a critical path to the potential oil riches of central Asia merely
added to the argument.3
Yugoslavia was another victim of the Tequila Trap “ the lure of
wealth and development if it would open its economy to foreign
investment and foreign loans. According to a 1984 Radio Free Europe
report, Tito had made the mistake of allowing the country the “luxury”
of importing more goods than it exported, and of borrowing huge
sums of money abroad to construct hundreds of factories that never
made a profit. When the dollars were not available to pay back these
Chapter 25 - Another Look at the Inflation Humbug

loans, Yugoslavia had to turn to the IMF for debt relief. The jaws of
the whale then opened, and Yugoslavia disappeared within.
As a condition of debt relief, the IMF demanded wholesale
privatization of the country™s state enterprises. The result was to bank-
rupt more than 1,100 companies and produce more than 20 percent
unemployment. IMF policies caused inflation to rise dramatically, until
by 1991 it was over 150 percent. When the government was not able
to create the money it needed to hold its provinces together, economic
chaos followed, causing each region to fight for its own survival.
Engdahl states:
Reacting to this combination of IMF shock therapy and direct
Washington destabilization, the Yugoslav president, Serb
nationalist Slobodan Milosevic, organized a new Communist
Party in November 1990, dedicated to preventing the breakup
of the federated Yugoslav Republic. The stage was set for a
gruesome series of regional ethnic wars which would last a
decade and result in the deaths of more than 200,000 people.
. . . In 1992 Washington imposed a total economic embargo
on Yugoslavia, freezing all trade and plunging the economy into
chaos, with hyperinflation and 70 percent unemployment as
the result. The Western public, above all in the United States,
was told by establishment media that the problems were all the
result of a corrupt Belgrade dictatorship.
Similar interventions precipitated runaway inflation in the
Ukraine, where the IMF “reforms” began with an order to end state
foreign exchange controls in 1994. The result was an immediate
collapse of the currency. The price of bread shot up 300 percent;
electricity shot up 600 percent; public transportation shot up 900
percent. State industries that were unable to get bank credit were
forced into bankruptcy. As a result, says Engdahl:
Foreign speculators were free to pick the jewels among the rubble
at dirt-cheap prices. . . . The result was that Ukraine, once the
breadbasket of Europe, was forced to beg food aid from the U.S.,
which dumped its grain surpluses on Ukraine, further destroying
local food self-sufficiency. Russia and the states of the former
Soviet Union were being treated like the Congo or Nigeria, as
sources of cheap raw materials, perhaps the largest sources in
the world. . . . [T]hose mineral riches were now within the reach
of Western multinationals for the first time since 1917.4

Web of Debt

The Case of Argentina

Meanwhile, the same debt monster that swallowed the former So-
viet economies was busy devouring assets in Latin America. In Ar-
gentina in the late 1980s, inflation shot up by as much as 5,000 per-
cent. Again, this massive hyperinflation has been widely blamed on
the government madly printing money; and again, the facts turn out
to be quite different . . . .
Argentina had been troubled by inflation ever since 1947, when
Juan Peron came to power. Peron was a populist who implemented
many new programs for workers and the poor, but he did it with
heavy deficit spending and taxation rather than by issuing money
Greenback-style.5 What happened to the Argentine economy after
Peron is detailed in a 2006 Tufts University article by Carlos Escud©,
Director of the Center for International Studies at Universidad del
CEMA in Buenos Aires. He writes that inflation did not become a
national crisis until the eight-year period following Peron™s death in
1974. Then the inflation rate increased seven-fold, to an “astonish-
ing” 206 percent. But this jump, says Professor Escud©, was not caused
by a sudden printing of pesos. Rather, it was the result of an inten-
tional, radical devaluation of the currency by the new government,
along with a 175 percent increase in the price of oil.
The devaluation was effected by dropping the peso™s dollar peg to
a fraction of its previous value; and this was done, according to insid-
ers, with the intent of creating economic chaos. One source revealed,
“The idea was to generate an inflationary stampede to depreciate the debts
of private firms, shatter the price controls in force since 1973, and espe-
cially benefit exporters through devaluation.” Economic chaos was wel-
comed by pro-market capitalists, who pointed to it as proof that the
interventionist policies of the former government had been counter-
productive and that the economy should be left to the free market.
Economic chaos was also welcomed by speculators, who found that
“[p]rofiteering was a much safer way of making money than attempt-
ing to invest, increase productivity, and compete in an economy char-
acterized by financial instability, distorted incentives, and obstacles to
efficient investment.”
From that time onward, writes Professor Escud©, “astronomically
high inflation led to the proliferation of speculative financial schemes
that became a hallmark of Argentine financial life.” One suicidal policy
adopted by the government was to provide “exchange insurance” to

Chapter 25 - Another Look at the Inflation Humbug

private firms seeking foreign financing. The risk of exchange rate
fluctuations was thus transferred from private businesses to the
government, encouraging speculative schemes that forced further
currency devaluation. Another disastrous government policy held
that it was unfair for private firms contracting with the State to suffer
losses from financial instability or other unforeseen difficulties while
fulfilling their contracts. Again the risks got transferred to the State,
encouraging predatory contractors to defraud and exploit the
government. The private contractors™ lobby became so powerful that
the government wound up agreeing to “nationalize” (or assume
responsibility for) private external debts. The result was to transfer
the debts of powerful private business firms to the taxpayers. When
interest rates shot up in the 1980s, the government dealt with these
debts by “liquidification,” evidently meaning that private liabilities
were reduced by depreciating the currency. Again, however, this
hyperinflation was not the result of the government printing money
for its operational needs. Rather, it was caused by an intentional
devaluation of the currency to reduce the debts of private profiteers in
control of the government.6
Making matters worse, Argentina was one of those countries tar-
geted by international lenders for massive petrodollar loans. When
the rocketing interest rates of the 1980s made the loans impossible to
pay back, concessions were required of the country that put it at the
mercy of the IMF. Under a new government in the 1990s, Argentina
dutifully tightened its belt and tried to follow the IMF™s dictates. To
curb the crippling currency devaluations, a “currency board” was
imposed in 1991 that maintained a strict one-to-one peg between the
Argentine peso and the U.S. dollar. The Argentine government and
its central bank were prohibited by law from printing their own pesos,
unless the pesos were fully backed by dollars held as foreign reserves.7
The maneuver worked to prevent currency devaluations, but the coun-
try lost the flexibility it needed to compete in international markets.
The money supply was fixed, limited and inflexible. The disastrous
result was national bankruptcy, in 1995 and again in 2001.
In the face of dire predictions that the economy would collapse
without foreign credit, Argentina then defied its creditors and simply
walked away from its debts. By the fall of 2004, three years after a
record default on a debt of more than $100 billion, the country was
well on the road to recovery; and it had achieved this feat without
foreign help. The economy grew by 8 percent for 2 consecutive years.
Exports increased, the currency was stable, investors were returning,

Web of Debt

and unemployment had eased. “This is a remarkable historical event,
one that challenges 25 years of failed policies,” said Mark Weisbrot in
an interview quoted in The New York Times. “While other countries
are just limping along, Argentina is experiencing very healthy growth
with no sign that it is unsustainable, and they™ve done it without hav-
ing to make any concessions to get foreign capital inflows.”8
In January 2006, Argentina™s President Nestor Kirchner paid off
the country™s entire debt to the IMF, totaling 9.81 billion U.S. dollars.
Where did he get the dollars? The Argentine central bank had been
routinely issuing pesos to buy dollars, in order to keep the dollar price
of the peso from dropping. The Argentine central bank had accumu-
lated over 27 billion U.S. dollars in this way before 2006. Kirchner
negotiated with the bank to get a third of these dollar reserves, which
were then used to pay the IMF debt.9
That the bank had been “issuing” pesos evidently meant that it
was creating money out of nothing; but the result was reportedly not
inflationary, at least at first. According to a December 2006 article in
The Economist, the newly-issued pesos just stimulated the economy,
providing the liquidity that was sorely needed by Argentina™s money-
starved businesses. By 2004, however, spare production had been
used up and inflation had again become a problem. President Kirchner
then stepped in to control inflation by imposing price controls and
export bans. Critics said that these measures would halt investment,


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