Strange Ghosts We Never Knew

Remember when Ireland gave away all her gas and oil fields to the Shell corporation? No? Well, that’s because the Irish media barely reported this dodgy deal. It went something like this: Fianna Fail politician Ray Burke decided that he’d secretly meet with the good folks from Shell and give them significant portions of the country’s natural gas and oil fields. Chairperson of the Campaign for the Protection of Resources, Padhraig Campbell put it as such:

Ray Burke, against the advice of senior officials in his department, held a meeting on his own with the oil companies after which the terms and conditions previously attached to licenses were changed dramatically in favour of the companies

Why did Burke do this? Well, that’s anyone’s guess. It might be worth noting that he was soon after charged with corruption in an unrelated case and actually served time in prison… I’m not saying anything… I’m just saying.

Anyway, it would be nice to imagine a world in which Ireland received some nice, hefty €€€s for her exploitable resources.

Maybe such imaginings are ultimately pointless, but it gives me an excuse to discuss a fine lecture transcription that Michael Hudson recently put up on his site (note: the points he makes here are essentially reiterations and clarifications of the points he made in this clip).

Hudson is discussing – apropos of Norway – what a sovereign state should do when they have excess financial assets. He points out that they certainly don’t want to hold these assets in the state’s own money – otherwise this would drive the value of this currency upwards which would kill exports. What the Norwegians have done instead is essentially what household savers do:

The money is consigned to fund managers to invest in a wide array of stocks and bonds so as to minimize risk. In effect, Norway has a big set of mutual funds.

Sure, the risk is spread around if this is done, but, as Hudson points out in his television interview, this risk is not spread in the case that the financial markets as a whole take a hit – as they did back in 2008.

Hudson points out that its probably a far better idea to follow what the BRIC countries are doing.

Being concerned mainly with their national development, they start by asking what their economies will need to import over the next half-century, and how foreign investment can best serve their long-term diplomatic aims. Singapore invests heavily in Australia, partly to help political as well as economic reciprocity. China has bought up majority shares of mineral resources (including silica mines in Norway and Iceland) and bought into the partnerships of major U.S. hedge funds. Both countries use their sovereign wealth funds to upgrade their long-term economic productivity, living standards, technology and educational levels.

Can you spot the trick here? Okay, if the financial markets take a hit wealth is simply wiped-out, right? But if the markets that some in East Asia are investing in take a hit wealth is not simply wiped-out. Even if the value of the assets invested in falls, these countries still have access to hard resources that they can use to upgrade their long-term economic productivity. In addition to this they also buy ‘political capital’ inside the countries they have invested in.

Now here’s where it gets really interesting – and where you should start taking a second look at your own investments:

The financial climate has changed radically from when Norway’s Oil Fund was established in 1990. Norway has built up its savings since then by selling enormous quantities of oil and gas, and employing many thousands of workers. By coincidence, an even larger sum of $600 billion recently has been created overnight – electronically on computer keyboards, by the U.S. Federal Reserve Board as part of Chairman Ben Bernanke’s Quantitative Easing policy (QE2). This money has been provided to spur bank liquidity, in hope that they can earn their way out of the losses they suffer from their bad mortgage loans and other gambles.

The aim of these banks is the same as that of Norway’s Oil Fund: to make money. As the financial press has noticed, nearly the entire $600 billion has been sent abroad – to the BRIC countries and raw materials exporters in strong balance-of-payments positions, whose economies are not as “loaned up” as those of the United States and Europe, where Norway invests most of its money. So while Norway is putting its money into these countries, their financial managers are jumping ship – sending electronic dollars and euros to the economies that use their own sovereign wealth funds in the opposite way from what Norway is doing.

Money has become intangible. It can be created pretty much at will by any large sovereign state. This newly created money can then be used to buy the very same financial assets that Norway is currently pumping her savings into. So, Norway have to extract and sell oil and gas to buy this financial paper – at the same time, US banks can just ask the government to create money to buy the very same paper. Seems a little unfair, right? Well, not really – that’s just how the money system works. It does have one rather obvious consequence though:

This makes Norway’s foreign exchange savings (i.e., the Oil Fund) much less valuable in terms of how much it actually costs to buy $600 billion worth of stocks and bonds. The cost is almost zero for the U.S. banking system. And that is what Norway’s Oil Fund is competing with when it puts its money into the U.S. and European financial markets.

Hudson then points out that this is part of a much broader problem in the West:

Asian economists view the West as entering a dead end – one of corporate as well as individual debt peonage. They see Iceland, Ireland and Greece as a normal result of current policies, not as anomalies. From their perspective – and from that of many of my economic colleagues at UMKC – the world has entered an era of “debt pollution.” Tax reform has favored debt leveraging and speculation (e.g., low capital gains taxes, and a tax shift off finance and property onto labor). The upshot is that savings and credit have not been invested in expanding the means of production or to alleviate the global economy’s debt overhead, but simply to bid up real estate and stock prices on credit.

This makes the financial markets, not simply a more unstable means of earning revenue, but also something of a spectral presence – gambling on gambles already gambled.  Hudson is blunt about the conclusions he and many others draw from this state of affairs:

This is not a formula for long-term growth. It is a financial distortion of real development. I believe that it is as serious as that of the environmental pollution associated with global warming and other problems. I have spoken to Asian officials and can attest to the fact that this is their perspective.

But its not all gloom. Hudson says that its actually quite easy to tear away this veil and see what a wise economic policy might look like:

Governments of mixed economies such as China and Singapore are engaged in long-term planning to improve economic well-being. Toward this end they are investing in themselves, specifically in core resources that future generations will need to control and import in decades to come. They therefore are converting their holdings of currency and financial securities into long-term control over natural resources and technology.

Okay, so Ireland isn’t exactly facing these problems right now. We certainly don’t have excess savings sloshing around looking for somewhere to invest. We’re heavily in debt – and we gave away our natural resources – but still, if we ever do seek to get our balance back this will be how we need to do it. We need to drop the speculative mumbo-jumbo that tanked the economy in the first place and start looking once more how to invest in the means of production.

About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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