Crash Course

Author(s): Andre Gunder Frank

Source: Economic and Political Weekly, Vol. 22, No. 46 (Nov. 14, 1987), pp. 1942-1946
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4377724
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REPORTS
Crash Course
Andre Gunder Frank
After Black Monday, October 19, it was observed that the stock
market crash was the alarm, not the fire and the question was
posed whether the events in the financial sector could be
prevented from spreading to the real economy of jobs, income and
production. Such speculation, however, betrays a serious lack of
historical perspective. The present world economic crisis in fact
began in the real economy with the decline in the rate of profit in
the mid-1960s and the recessions of 1967 and 1969-70. The fifth
recession in the development of this economic crisis since 1967
was approaching anyway in the natural course of events. Black
Monday was one possible response to this development and it is
now likely to accelerate and aggravate it still further.
The underlying economy remains sound
-Herbert Hoover, October 1929
All the economic indicators are solid
-Ronald Reagan, October 1987
The fundamental conditions of the country
are sound
-Millionaire John D Rockefeller, October
1929
None of the fundamentals are sound
-Billionaire H Ross Perot, October 1987
IN October 1987 under the helicopter
blade of Damocles, an irrelevant emperor
without clothes, living an economic fan-
tasy in a looking glass world that he was
unable to comprehend or control, was
yelling befuddled Hooverisms (to make a
collage of commentary from Time
magazine and the International Herald
Tribune or Trib for short, which also
publishes editorial and other material
from the New York Times and The
Washington Post). In the meantime
money talked as Carl Gewirtz noted in the
Trib, citing the Morgan Guaranty Trust
Bank's Rimmer de Vries, who observed
that the markets were imposing what
politicians are unable to do (or even to
comprehend?). As a result, Ronald
Reagan's favourite magic of the market
itself was writing what John Kenneth
Galbraith called the last chapter of
Reaganomics. This was, in other words (of
New York Times columnist Anthony
Lewis), the turning point to the end of the
Age of Reagan. Some months before
already, reviewing The Wall Street Jour-
nal columnist Alfred Malabre's book
"Beyond Our Means: How America's
Long Years of Debt, Deficits and Reckless
Borrowing Now Threaten to Overwhelm
Us", 'Adam Smith' had already foreseen
in The New York Review of Books that
president Reagan "will be seen like
Hoover, a nice fellow who blew our
patrimony and who presided over a great
fall". Yuppie young urban upward mobile
professionals are transformed into poor
urban professional Puppies instead.
On Black Monday, October 19, 1987,
the Trib published The Washington Post
editorial commenting the previous Friday's
108 point decline of the Dow Jones Index
on the New York Stock Exchange: "Don't
Panic, but Act Now. Comparisons with
1929 are inevitable. But ... there will not
be another crash a la 1929. . . Since then
the American financial system has been
substantially panic-proofed" That day ap-
parently, Yuppies and others had suddenly
become illiterate. The Post batting average
was about 100: It was doubly right (200)
on the first score, since that very day the
Dow Jones crashed 508 points, or double
its October 1929 percentage decline. Un-
fortunately, the Post batted only .001 on
the second score: After 90 stocks had
stopped trading altogether for lack of
buyers at noon, the Big Board's chairman,
John Phelan, himself nearly shut down
the market entirely for fear of a "melt-
down", from which it was only saved by
the temporary shutdown of the stock
futures exchange in Chicago. Not panic-
proof confidence, but chaos. American
Roulette became more like its Russian
counterpart.
CONFUSED COMPARISONS
Confusion worse, confounded com-
parisons between with the years before
and after 1929 now abound. Many are
willing to go to any lengths to find sup-
posed differences. On October 30, the Trib
printed the Washington Post editorial to
the effect that the differences between
then and now are night-and-day because
the US and world economy were already
in recession before the 1929 crash, while
now in contrast the economy is expanding
rapidly. On October 23, the frib had
informed that in 1929 stocks had fallen
before the recession. Both times unfor-
tunately, they had neglected to read the
Trib of October 20, which cited the
general manager of the central bankers'
Bank for International Settlements to the
effect that the 1929 crash followed a
period of excessive economic boom that
is nowhere apparent today. So there is no
reason to fear any resultant decline of
business investments, he said, because
there are hardly any to begin with! From
the Financial. Times and elsewhere we
learn that stocks recovered significantly in
1930, but economic growth turned in-
creasingly negative in the depression until
1933; and by then stock prices had declined
to a small fraction of the level to which
they had fallen in the 1929 crash.
Other supposed saving grace differences
between then and now are that the bank-
ing system has been shatterproofed by
FDIC Federal Deposit Insurance Cor-
poration and the Glass-Steagall Act in the
US, which bars US banks from the security
business. Moreover, monetary and fiscal
policy has supposedly become much more
sophisticated and effective: While then the
US Federal Reserve (Central) Bank
squeezed credit and liquidity, on October
20, 1987 its new chairman announced
himself "ready to serve as a source of
liquidity to support the economic and
financial system" (thereby confirming,
contrary to Milton Friedman's monetary
gospel, that central banks' monetary
'policy' really accommodates to economic
events rather than determining them).
Finally, world economic integration and
co-ordination is much greater and
facilitated by round-the-clock computer
communication. Indeed, the truth, albeit
not necessarily the virtual protection or
protective virtue, of this last proposition
was demonstrated by the round-the-world
domino-like chain reaction to the October
19, 1987 Wall Street crash.
After Black Monday, the New York
Times correctly observed that the market
crash was the alarm, not the fire; and the
Washington Post and others posed 'the
crucial question' whether events in the
financial sector can be confined there
withQut spreading through the fire walls
to the real economy of jobs, income and
production. All these metaphors, however,
reflect a serious lack of depth, vision and
historical perspective. Beyond the chicken-
and:egg debate over crash and recession,
reflected in the TRib, the interactions bet-
ween the financial and real economies are
much more complex and longer lasting.
Last time, real economic crisis conditions
already prevailed during the 1920s, parti-
cularly in the previously leading economy
of Britain and the upcoming one of
1942
Economic and Political Weekly November 14, 1987
Germany. Indeed, some students of long
economic cycles date the downturn from
1913.
By that reckoning, 1929 was 16 (or 9)
years into the development of the econo-
mic crisis. As in previous economic crisis
developments (including that observed
after 1762 by the real Adam Smith, whTo
published his "Wealth of Nations" in
1776), the rundown of profits and growth
rates in the real economy, as well as its in-
creasing sectoral and regional imbalances,
generated the flight into financial specula-
tion characteristic of the 1920s. By the late
1920s, real growth rates were down, and
commodities and agriculture were de-
pressed. Germany was obliged to make
war reparations payments of 2 to 3.5 per
cent of GNP, which in his "The Economic
Consequences of the Peace" John
Maynard Keynes had already pronounced
unsustainable for Germany and counter-
productive for the world. The political
agreements of the Young and Daws plans
were unable to reduce Germany's pay-
ments sufficiently. They were financed by
the inflow of American capital while it
lasted; but in 1929 the market stopped the
flow, the increased hardships in Germany
helped bring on Hitler in 1933, and he
stopped the unsustainable reparations. In
the meantime, all other international
economic co-operation had broken down,
and depression had engulfed the world.
ORIGIN IN REAL ECONOMY
The present world economic crisis also
began in the real economy with the decline
in the rate of proft in the mid-1960s and
the recessions of 1967 and 1969-70. In the
United States, President Johnson's Great
Society and Vietnam War were financed
with inflation and foreign capital. Grow-
ing real and financial competitive im-
balances and refusal of Europeans to sus-
tain them obliged President Nixon to un-
peg the dollar from go2d and devalue it
in 1971 and led to the breakdown of the
post-war Bretton Woods Agreement (and
the failure of the Smithsonian Agreement
intended to replace it). Exchange rate pegs
were sacrificed to allow floating exchange
rates to act as shock absorbers of economic
imbalances and other disturbances; but
instead they acted as coil springs, which
have transmitted and magnified economic
shocks. The 1973-75 recession, which
turned growth rates and world trade
negative and doubled unemployment,
shocked analysts into attributing it to an
'exogenous' oil shock, instead of analysing
it as the further development of the world
economic crisis. The markets, however,
responded with the historically normal
solution to the real problem: debt financed
financial speculation. In 1974, Business
Week dedicated a special issue to 'The
Debt Economy' and in 1978 to 'The New
Debt Economy' which it found to have
more than doubled in the four years past.
By 1985, the same Business Week devoted
another special issue to ringing the alarm
bells about the 'Casino Society. Tight
monetary policy notwithstanding, Robert
Thiffin observed that world financial
reserves had grown over tenfold in ten
years (confirming again that monetary
authorities only accommodate financial li-
quidity to real needs if even that, since in
this case much of the money was created
by the Eurocurrency market beyond the
control of any monetary authority).
In the 1970s, in direct response to the
1973-75 recession and in support of the
1975-79 'recovery' much of the financial
speculation was directed at the debt
finance of 'export led growth' in the Third
World South (in the Newly Industrialising
Countries and OPEC surplus countries)
and 'import led growth' in the Socialist
East. The debt financed import demand
of both sustained Western industrial ex-
ports and bank earnings, which replaced
the inadequate investment demand and
profitability in the West itself during the
still growing crisis. Unfortunately as had
to be, this apparent speculative 'solution'
to real problems ceased to work in the
South and the East after the 1979-82 reces-
sion. The 1975-79 recovery had been even
weaker and less solidly based than the one
preceding the 1973-75 recession. Now the
1979-82 recession was much more severe
(doubling Western unemployment once
again) compared to the preceding one.
third world and socialist countries ex-
perienced an acute liquidity crisis as first
the recession drove down raw material
commodity prices and therewith their ex-
port earnings. Then the US monetary
'authority' responded by raising the dollar
and the rate of interest, and suddenly
western banks dried up their voluntary
flow of loan capital to the South and East,
which brought on their debt crisis in
1981-82.
To prevent illiquidity from turning in-
to insolvency, the third world had to
generate much more foreign exchange just
to service the interest on their debts. This
obliged these countries to start slashing
imports (thereby reducing Western in-
dustrial and agricultural exports), produce
more for export (thereby driving com-
modities prices even further down), and
become capital exporters on a massive
scale. Compared to Germany's annual
capital export for war reparations of 2 per
cent of GNP in the 1920s and a maximum
of 3.5 per cent of GNP between 1929 and
1931, some third world countries today are
being drained of 5 to 6 per cent of their
GNP just to service their foreign debts.
Since the debt crisis erupted in 1981 in
Poland and in 1982 in Argentina, Mexico
and Brazil, the poor third world has been
bled dry of over $ 500 billions of dollars
of capital exports to the richer West ($ 200
bn in debt service, over $ 100 bn in capital
flight, $ 100 bn in terms of trade loss, and
$ 100 bn in normal profit and royalty
remittances). 'Growth' rates were negative
for severl years; investment shrivelled into
disinvestment, especially in productive in-
frastructure and social services; unem-
ployment multiplied; real wages and ear-
nings tumbled, especially for the poorest;
and GNP per capita declined by over 10
per cent in Latin America and Africa on
the average, and in some countries in-
cluding Poland and Bolivia by over 25 per
cent. In other words, the 'fire wall' bet-
ween financial speculation and the real
economy became the flood gates through
which rushed onto Latin America and
Africa (and parts of Eastern Europe and
Asia), a depression that for them is
already more severe than that of the 1930s.
US VOODOO ECONOMICS
Under these circumstances, which also
compromised recovery of export depen-
dent western industry, of course specula-
tion and cyclical recovery since 1983 had
to seek greener pastures. They were found
in the United States. There, in Vice Presi-
dent George Bush's terminology, Voodoo
Economics reigned supreme in the form
of Reaganomics. With an unstable
amalgam of Laffer's laughable supply side
and Friedman's frivolous monetarism,
Ronald Reagan innocently tried to square
the circle even more than his predecessor
Lyndon Johnson: Reagan sought to in-
crease defence spending, cut taxes, and
eliminate the budget deficit simultaneous-
ly (when only a combination of any two
of these was mathematically possible) and
he wanted thereby to make America
Number One Again to boot. Of course,
the whole enterprise was doomed to
failure, and the preliminary results are well
known. The budget deficit became a gap-
ing hole and the trade deficit became a
spawning gap. The United States became
the world's largest foreign debtor (soon to
match that of all Latin America and then
of the third world), and domestic debt of
all kinds-federal, state and local public
debt, corporate debt, and private con-
sumer debt, not to mention the stock
market and junk bonds-rose 15 to 20 per
cent faster than GNP. However, Reagan's
Military Keynesianism in the American
Casino Society permitted Europe, Japan,
and the East Asian NICs (but not the rest
of the third world, which was forced to
place its losing bets) to play American
Roulette. Their cyclical recovery and
growth since 1983 was sustained by ex-
ports to the American market. In turn
American 'Living Beyond Our Means'
consumption, investment, defence expen-
ditures-, budget deficit, trade deficit, US
Economic and Political Weekly November 14, 1987 1943
freasury bonds, junk bonds, Wall Street,
and the dollar itself were all sustained only
by the inflow of speculative European and
Japanese, and debt-bondage-forced third
world, capital. The supply side turned out
to be the supply of foreign capital.
Moreover, American Reaganomics, but
also Thatcherism in Britain, Socialism
and then cohabitation in France, Conser-
vative-Liberal Alliance in Giermany.,
Nakasone in Japan, and other Westerrk
governments have had to exhaust virtually
all their readily available accommodating
monetary and deficitary fiscal policy in-
struments just to sustain their speculative-
ly based domestic cyclical recoveries. With
gaping budget deficits and sky high debts
already, what economic policy instruments
remain for them to face-the next recession,
let alone depression, when anti-cyclical
monetary and fiscal policy will really be
needed? Furthermore, if the major econo-
mic powers failed in their feeble efforts to
co-ordinate these monetary and fiscal
policies on the easy street of speculatively
based recovery, what prospect can they
hold out when bursting speculative bub-
bles, capital flights, recessionary or
depressionary dangers, protectionist
threats, defence and other conflicts make
political agreement and economic co-
ordination even more necessary and dif-
ficult in the hard times to come?
A collage of some more serious press
commentary on Black Monday and its
aftermath is that the stock market is one
of the best leading indicators (Trib)
(previous post-war declines have preceded
recessions; including those of 1967, 1969,
1973 and 1979). People voted with dollars
instead of ballots (Journal) in response
to threatening long-term fundamentals
(Economist) of which Europeans see
adrift US economic policy and political
power vacuum as the root cause (TRib). As
a result, all previous forecasts are out of
date (Economist), and indeed many
growth rate forecasts were immediately
revised downward by a third to a half
(Financial Times). Thus, there is no return
to business as usual (Financial Times),
because things will never be the same
again and caution is the new watchword
even if the stock market recovers (Econo-
mist). While 60 per cent of Americans
polled expressed unconcern, the Chrysler
Corporation treasurer warned that "you
ain't seen nothing yet" as it reduced its
pension fund equity exposure by nearly
half (Financial Times). While the oil
millionaire Rockefeller declared all sound
in 1929, his oil billionaire successor Perot
finds nothing sound in 1987.
GLOBAL IMPASSE
Indeed already before Black Monday,
many observers had long since diagnosed
the serious illness of the American
economy, exposed financial system, inept
monetary and fiscal policy, deficitary
foreign trade even in high tech, un-
competitive industry, oversubsidised
agriculture yet bankrupt. farmers, and
general down fall from highway bridges
to space Challenger. Outstandingly
qualified and responsible analysts of these
ills at home included among others the
Democrat controlled Joint Economic
Committee of the US Congress, the Presi-
dent of the New York Federal Reserve
Bank Gerald Corrigan, the New York
financier Felix Rohatyn, the MIT School
of Management Dean Lester Thurow, City
University of New York Economics Pro-
fessor Robert Lekachman, Fortune, and
Business Week. Abroad repeated alarms
came among others from the former Ger-
man Prime Minister Helmut Schmidt, the
President of the European Economic
Commission Jaques Delors, The Finan-
cial Times, and also the present author.
After the Crash, the TRib and the Post
observed that reality is more serious than
its greatly communicated image, and in
the face of it US policy is not indepen-
dent but immobilised.
The United States and its partners are
also trying to square the circle around the
world. They seek simultaneous balance in
domestic (especially American) domestic
budgets and foreign trade, European and
Japanese export surpluses (as well as third
world ones to finance their debts), stable
interest and exchange rates, and economic
growth without inflation or recession to
boot. Such Globonomics would require
even more political economic alchemy
than Reaganomics. This is all the more the
case since Black Monday condemned the
contribution of the latter's magical now-
you-see-it-now-you-don't hat trick to its
last chapter and pious verse.
LOUVRE ACCORD
An immediate illustration of this
globonomic impasse is the G (Group of)
7 Louvre Accord and the resulting
American-German economic warfare
threat, which sparked Black Monday.
According to modern mythology, the
September 1985 Plaza (Hotel) Agreement
in New York was responsible for the
managed devaluation of the dollar. In
fact, the dollar decline had been begun by
market fprces in February 1985, and the
Plaza agreement only rode on the underly-
ing market stream (an earlier agreement
had proved unsuccessful, because it had
sought to devalue the dollar against the
market). Even so, efforts to put teeth into
the Plaza agreement by co-ordinating
monetary and fiscal policies failed at
subsequent London and other ministerial
meetings, and were not even attempted at
the 'Economic' Summits, in which Reagan
preferred to talk about political terrorism.
Then the decision was taken at the Louvre
in Paris to halt the decline of the dollar
and to lend it Central Bank support near
its 1986/87 exchange rates. (This decision
proved to be analogous to that of Paul
Volker at the Fed in 1979. He decided to
abandon his predecessor Miller's moneta-
rist policy of controlling the interest rate
price of money and letting the demand
and supply of money seek its market level.
Instead Volker sought to control the supply
of money and let the interest and dollar
exchange rates seek sky high levels.) At the
Louvre, 'policy makers' sought to control
the dollar exchange rate at an unsus-
tainable (non)market level, and had to pay
higher interest rates to do so. Moreover,
the lower dollar, let alone its intervention
support, failed to evoke the hoped for
reduction of the US trade deficit.
The Louvre Accord has been variously
pronounced premature, unsound, a
failure, and a success which must be and
has been reaffirmed. In fact if it ac-
complished anything at all, it unleashed
a renewed round of real competition for
financial capital and real investment bet-
ween the United States on the one hand
and Germany and Japan on the other. The
chosen weapon in this economic warfare
was a repetition of competitive interest
rate hikes, which among other things
depressed bond values and fuelled infla-
tionary fears (in a deflationary market!)
and stock prices. US Treasury Secretary
James Baker III, "blew it" (in the words
of a commentator) when he publicly
threatened the Germans to let the dollar
slide in contravention of the Louvre Ac-
cord. A Washington Post columnist cor-
rectly identified this conflict not as a
misunderstanding in an irrational debate,
but a serious "financial combat for real
assets" of capital. The market took the
cue and lost confidence to the tune of
stock market declines ranging from 10 to
50 per cent. Interest rate hikes were quick-
ly rescinded, and a week later the dollar
began to go down again, hasty but ill-
considered reaffirmations of the Louvre
Accord notwithstanding. A former
member of President Reagan's Council of
Economnic Advisers counselled a "clean
break from the Louvre Accord...
[because] there is no way to maintain both
a stable domestic economy and a stable
exchange rate" (Trib, October 29).
The financial market and its political
interpreters had pronounced that the
United States now must inevitably reduce
its twin budget and trade deficits. If policy
makers would not do it 'voluntarily', the
market would do it ruthlessly. But how,
and with what consequences? Now lower
budget deficits would be recessionary, and
1944 Economic and Political Weekly November 14, 1987
The Economist argues that at least dou-
ble the $ 23 billion scheduled by Gramm-
Rudman are a necessary minimum. Either
gov.ernment tax increases or spending
cuts, let alone both together, to reduce the
US federal budget deficit would be reces-
sionary per se, and they could contribute
to a deeper depression in an already
market generated recession. Even Herbert
Hoover offered tax reductions and new
public works
spendin,
and Franklin
Delano Roosevelt's New Deal carried
them even further. Unlike Ronald Reagan,
they had not already wasted these anti-
cyclical munitions before the real battle
began.
NARROW OPrIONS
The next recession-the fifth in the
development of this economic crisis since
1967-was approaching anyway in the
natural course of events. Black Monday
was one possible response to this develop-
ment; and it is now likely to accelerate and
aggravate it still further. The TRib October
21, anticipates downward pressure on jobs,
pensions, savings, spending, investment,
and real estate prices. The Economist, the
Financial Times and others see not only
a decline in consumer and investor con-
fidence. The effect of lower asset values
and wealth (after a $ 1 trillion loss in the
United States alone) reduce the capacity
of particularly Yuppie consumers to spend
and business to invest, with higher costs
to raise equity capital, smaller cash flows
and less collateral on which to borrow. In
other words, the deflationary trend begun
in 1980 during the previous recession is
now aggravated by the Crash, which is
both an instance and an instrument of
further deflation, wE.ich now feeds on
itself as inflation did before. The well nigh
universal obsession with inflation in-
herited from tne 1970s and earlier, of
course, tie policy-makers' hands in coni-
fronting the real danger of a massive
deflation and thereby make it even more
dangerous. Domestic inflation with a
devalued currency is not incompatible
with generalised deflation, as the 1980s ex-
perience of many third world and socialist
countries with rampant inflation in their
own currencies and deflationary dollarisa-
tion (and soon markisation and yenisa-
tion) of their economies demonstrates.
On the trade front, a much lower dollar
will be necessary-but by no means suf-
ficient, as its past decline demonstrates.
America must reduce its foreign subsidis-
ed consumption 'beyond our means' by
reducing imports or expanding exports or
both. In the short run, this American belt
tightening will be forced by the failure of
as much foreign capital to flow into the
United States (and its flow already declin-
ed in the three months before Black Mon-
day and will surely decline much further
now as "Japanese investors [are] likely to
decide there's no place like home" as the
October 22 Financial Times reports and
the Journal surmises), without even the
increasingly threatened capital flight out
of the United States. In the medium run,
recessionary reduced American consump-
tion and investment will also cut imports.
In the long run, uncompetitive American
industry (steel, auto, etc), agriculture
without farm support, and McDonald ser-
vices must undergo agonising restructur-
ing in response to the market exigencies
of recession or depression. A gasoline or
oil import tax and similar proposed
measures, while necessary and useful, are
only palliatives. Lower interest rates would
drive the dollar down, and higher ones
would drive investment and consumption
down. Increased instead of reduced
deficits would drive foreign and domestic
confidence down. This, as well as other
shocks, could drive the dollar down in a
free fall. Thus, the choice of economic op-
tions in the United States has narrowed
dramatically, as The Economist observes;
and all of them point down. No wonder
American policy-makers are no longer in-
dependent and immobilised instead, as the
Washington Post observes.
It is less clear on the other hand what
related foreign policy options Washington
still has. The temporal, though not
necessarily causal, coincidence of Black
Monday and the sharpening of the Gulf
crisis with Iran is reminiscent of the
scenario in ex-financier Paul Erdman's
"The Crash of '79", in which political
crisis in the Gulf and financial crisis
elsewhere were intertwined. It is not in-
conceivable that dependence and im-
mobility on the domestic and interna-
tional economic front may lead
Washington into new Grenada type adven-
tures in foreign political policy in the Gulf
or elsewhere. However, it is also less than
certain whether nmore military adven-
turism, particularly in the Gulf, would
lend temporal support to the dollar and
suddenly drive it up as in the past, or
whether it would only exchange a boost
in domestic Rambo-Olliemania con-
fidence for a further run on foreign con-
fidence in the United States-and on the
dollar. So does the new debtor positiol
of the United States adventurise or com
promise its military foreign policy-and
how does it in turn reverberate back onto
debt, finance and economy?
CATCH 22 SITUATION
Indeed, if America were ever to pay
even the interest, let alone the principal,
of its still growing foreign debt, it would
have not only to eliminate its trade deficit.
The United States, like the third world
debtors before it, would have to convert
its present massive import surplus into an
export surplus instead. This would mean
an enormous turn around in US and
world trade. Either US imports would
have to dwindle to less than exports, or
US exports would have to increase enor-
mously, or some of both. Who would ab-
sorb such US exports in an economic
crisis, which would itself be aggravated by
them? Certainly not the poor and still
debt-overburdened third world, as long as
it is obliged to run an export surplus itself.
Only Western Europe, Japan, and the
socialist countries remain, but not likely
as potential importers of such American
export surpluses. Alternatively, Americans
could reduce their debt service by reduc-
ing or devaluing their foreign debts. One
mechanism is through deflationary write
downs and bankruptcies or renunciation
of part of the debt, presaged by the Wall
Street crash. Another way to devalue
dollar denominated debts is to devalue the
dollar itself, as in the recent past and the,
foreseeable future. A third way, would be
through domestic inflation, which would
reduce the real value of the debts directly,
as well as indirectly by contributing to fur-
ther devaluation of the dollar itself. Of
course, each of these or any combination
of these possible American responses to
its foreign debt also has important defla-
tionary effects on America's European
and Japanese creditors. Thus, any attempt
to square the international financial and
economic circle of interest and exchange
rates, and budget and trade deficits at-this
juncture must fail in something and entail
serious costs in terms of economic growth
and welfare. What is to replace the United
States as the global borrower and spender
of last resort, especially when it is most
needed? Total irresponsibility during the
Reagan Recovery since 1983 has created
a Catch 22 whatever you do. Damned if
you do and damned if you don't.
Moreover, the fuses on the third world
and other debt bombs- are getting shorter.
No serious effort has been made to defuse
them, other than to put in loss reserves
at some major metropolitan banks. Lower
dollar exchange and interest rates reduce
the third world debt burden, as their rise
increases them. However, third world and
some other debt service will be rendered
altogether impossible by any recession in
the West and/or any real reduction of the
American budget and trade deficits, not
to mention any further American or in-
deed other Western protection of the
home market and/or any new export of-
fensive. Therefore, a chain reaction of
various debt bomb explosions, bankrupt-
cies, and other declines of asset values still
poses a real, and perhaps ever growing,
deflationary threat to the world economy.
Economic and Political Weekly November 14, 1987 1945
Thus, we must ask what effects and
possible responses closing or even refor-
ming the US casino would have elsewhere
after all these years of playing American
roulette. We observed above how this
game has so far drowned most debtors (in
the third world and in the commodity and
agricultural sectors of the US itself), while
it has maintained afloat the Japanese and
West European creditor economies and
the American debtor economy (which has
not so far had to actually pay for its
debts). However, any reduction of the
budget and trade deficits and/or reces-
sion, not to mention growinlg protec-
tionism, in America must have a power-
ful recessive effect also in Western Europe,
Japan and the NICs, and an even more
depressive effect in other third world
countries, as long as all depend on exports
to the US. Any American export offen-
sive, especially through a further devalua-
tion of the dollar, into any of these or
third country markets would only ag-
gravate such recessive consequences
elsewhere. As it is, Japanese domestic
growth is weak and real investment almost
flat. That is why Japanese capital prefer-
red first to play American roulette and
then to speculate in the stock and property
markets at home. With stock price/earn-
ings ratios over three and property values
even more times comparable American
ones, these were ard so far remain even
more overinflated than in the United
States. Crash alarm bells in Japan are
ringing ever louder, and the 33 to 50 per
cent Hong Kong crash may make them
more perceptible. Recent West German
and European domestic growth and in-
vestment did better. However, neither's
continued growth or expansive monetary
and fiscal policies, as insistently and
unreasonably demanded by US Treasury
Secretary Baker, can reasonable be ex-
pected to replace the American market
and growth.
AMERICAN RoULETTE
If demands for better domestic mone-
tary and fiscal policies offer no way out
of the coming debacle, demands for their
international co-ordination offer less hope
still. Of course, recent events and par-
ticularly the stock market crash have in-
creased demands for international poli-
tical co-ordination of national economic
policies. Unfortunately, however, the more
such co-ordination is necessary, the less
is it likely-or even possible. The Americans
have not learned the meaning of co-
ordination except on their own dictatorial
terms. The United States already torpe-
doed the London Economic Conference
in 1933, which had been called at its own
initiative, when it proved impossible to get
its own way. So far since then, American
economic power and political dominance
was able to impose the American will.
However, the relative American economic
decline and particularly its recent conver-
sion into a debtor have eroded this
American capacity. Black Monday and
American paralysis in the face of it
threaten to erode it even more. Yet the
United States is becoming increasingly
unilateralist, not to mention protectionist,
and threatens international economic
agreements for which its trading partners
already have less than total enthusiasm
even among themselves. Americans have
been exporting the costs of their own
economic irresponsibility. How can the
Japanese and west Europeans be expected
to expose their economies to the ravages
that a real deflation of the American (or
indeed their own) bubble will impose 6n
them-and still continue to dance to the
American tune?
For the same reasons, however, the
European and Japanese political in-
sistence and now the apparent world
financial market demand that the
Americans bring their roulette wheel and
the golbanomic casino into order seem
equally short sighted. For it is European
and Japanese money, and their domestic
monetary and fiscal policies, that have
permitted the American Roulette and the
Globonomic Casino to continue operating
as long as it has. But if the Europeans and
Japanese really wish to stop playing
American roulette-and oblige the
Americans themselves to come down to
earth from their financial Disneyland-
then what? The world is likely to wake'up
in a full scale economic depression. Its real
basis is the development of the real
economy through four past and a fifth
successively more severe cyclical reces-
sions. The intervening recoveries were
based on financial speculation, whose
apparent solution will become an addi-
tional real problem as the bubble is finally
deflated in the next or even succeeding
recession and depression.
The post-war system of international
finance and world trade as we know it
may therefore become unsustainable as
American hegemony over it declines in the
still deepening present world economic
crisis. Yet no other power is ready to
replace the United States, and interna-
tional-let alone supernational-co-
ordination appears beyond immediate
reach. Therefore, in a previous article, this
author has examined some of the alter-
native developments and in particular the
possible resurgence of neo-mercantilism
and the reemergence of financial zones or
even economic blocs. Recent losses at
American roulette and the present trou-
bles in the globonomic casino now make
these possibilities all the more likely.
Deadly Politics of the State and Its
Apologists
Imrana Qadeer
Zoya Hasan
The ghastly incident of 'sati' in Rajasthan is one more crime
against women, but it also reflects a dramatic upsurge of
obscurantism and communalism. The responses to this
phenomenon of the state, of the, ideologues of revivalism and of a
section of intellectuals are worth examining within the structure of
class politics.,
THE responses to the burning of Roop
Kanwar have been as varied as the reasons
for silence. The statement and articles that
have appeared in the national press repre-
sent two types of positions. Taking a
positive position are those who condemn
the act as barbaric and inhuman, hence,
demand the resignation of the Rajasthan
government for its culpability in the crime,
and the punishment of the guilty and have
called for forging social reform
movements. The second type of response
come from the Indian state and its
apologists. It is the bizarre ramifications
of this response which, we believe, requires
some attention. No doubt there are im-
portant differences between the spokesmen
of the state and the apologists, as indeed,
there are differences among the apolo-
gists. but, there are also important points
of convergence inspired by a common and
politically convenient commitment (ad-
mittedly from different standpoints) to the
Great Indian Tradition. For this reason,
we have chosen to discuss three dimen-
sions which constitute significant elements
in the structure of class politics. These are
represented by the position taken by the
state;
toe
revivalist position and the so-
called intellectual response.
Among these, the most important is the
position of the state, reflected in the hesi-
1946 Economic and Political Weekly November 14, 1987