Category Archives: Banks/Banking

The Venezuela Myth Keeping Us From Transforming Our Economy

Modern Monetary Theory (MMT) is getting significant media attention these days, after Alexandria Ocasio-Cortez said in an interview that it should “be a larger part of our conversation” when it comes to funding the Green New Deal. According to MMT, the government can spend what it needs without worrying about deficits. MMT expert and Bernie Sanders advisor Prof. Stephanie Kelton says the government actually creates money when it spends. The real limit on spending is not an artificially imposed debt ceiling but a lack of labor and materials to do the work, leading to generalized price inflation. Only when that real ceiling is hit does the money need to be taxed back, and then not to fund government spending but to shrink the money supply in an economy that has run out of resources to put the extra money to work.

Predictably, critics have been quick to rebut, calling the trend to endorse MMT “disturbing” and “a joke that’s not funny.” In a February 1st post on The Daily Reckoning, Brian Maher darkly envisioned Bernie Sanders getting elected in 2020 and implementing “Quantitative Easing for the People” based on MMT theories. To debunk the notion that governments can just “print the money” to solve their economic problems, he raise the specter of Venezuela, where “money” is everywhere but bare essentials are out of reach for many, the storefronts are empty, unemployment is at 33%, and inflation is predicted to hit 1,000,000% by the end of the year.

Blogger Arnold Kling also pointed to the Venezuelan hyperinflation. He described MMT as “the doctrine that because the government prints money, it can spend whatever it wants . . . until it can’t.” He said:

To me, the hyperinflation in Venezuela exemplifies what happens when a country reaches the “it can’t” point. The country is not at full employment. But the government can’t seem to spend its way out of difficulty. Somebody should ask these MMT rock stars about the Venezuela example.

I’m not an MMT rock star and won’t try to expound on its subtleties. (I would submit that under existing regulations, the government cannot actually create money when it spends, but that it should be able to. In fact, MMTers have acknowledged that problem; but it’s a subject for another article.) What I want to address here is the hyperinflation issue, and why Venezuelan hyperinflation and “QE for the People” are completely different animals.

What Is Different About Venezuela

Venezuela’s problems are not the result of the government issuing money and using it to hire people to build infrastructure, provide essential services and expand economic development. If it were, unemployment would not be at 33 percent and climbing. Venezuela has a problem that the US does not have and will never have: it owes massive debts in a currency it cannot print itself, namely US dollars. When oil (its principal resource) was booming, Venezuela was able to meet its repayment schedule. But when oil plummeted, the government was reduced to printing Venezuelan Bolivars and selling them for US dollars on international currency exchanges. As speculators drove up the price of dollars, more and more printing was required by the government, massively deflating the national currency.

It was the same problem suffered by Weimar Germany and Zimbabwe, the two classic examples of hyperinflation typically raised to silence proponents of government expansion of the money supply before Venezuela suffered the same fate. Prof. Michael Hudson, an economic rock star who supports MMT principles, has studied the hyperinflation question extensively. He confirms that those disasters were not due to governments issuing money to stimulate the economy. Rather, he writes, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”

Venezuela and other countries that are carrying massive debts in currencies that are not their own are not sovereign. Governments that are sovereign can and have engaged in issuing their own currencies for infrastructure and development quite successfully. A number of contemporary and historical examples were discussed in my earlier articles, including in Japan, China, Australia, and Canada.

Although Venezuela is not technically at war, it is suffering from foreign currency strains triggered by aggressive attacks by a foreign power. US economic sanctions have been going on for years, causing at least $20 billion in losses to the country. About $7 billion of its assets are now being held hostage by the US, which has waged an undeclared war against Venezuela ever since George W. Bush’s failed military coup against President Hugo Chavez in 2002. Chavez boldly announced the “Bolivarian Revolution,” a series of economic and social reforms that dramatically reduced poverty and illiteracy and improved health and living conditions for millions of Venezuelans. The reforms, which included nationalizing key components of the nation’s economy, made Chavez a hero to millions of people and the enemy of Venezuela’s oligarchs.

Nicolas Maduro was elected president following Chavez’s death in 2013 and vowed to continue the Bolivarian Revolution. Like Saddam Hussein and Omar Gaddafi before him, he defiantly announced that Venezuela would not be trading oil in US dollars, following sanctions imposed by President Trump.

The notorious Elliott Abrams has now been appointed as special envoy to Venezuela. Considered a criminal by many for covering up massacres committed by US-backed death squads in Central America, Abrams was among the prominent neocons closely linked to Bush’s failed Venezuelan coup in 2002. National Security Advisor John Bolton is another key neocon architect advocating regime change in Venezuela. At a January 28 press conference, he held a yellow legal pad prominently displaying the words “5,000 troops to Colombia,” a country that shares a border with Venezuela. Apparently the neocon contingent feels they have unfinished business there.

Bolton does not even pretend that it’s all about restoring “democracy.” He said on Fox News, “It will make a big difference to the United States economically if we could have American oil companies invest in and produce the oil capabilities in Venezuela.” As President Nixon said of US tactics against Allende’s government in Chile, the point of sanctions and military threats is to squeeze the country economically.

Killing the Public Banking Revolution in Venezuela

It may be about more than oil, which recently hit record lows in the market. The US hardly needs to invade a country to replenish its supplies. As with Libya and Iraq, another motive may be to suppress the banking revolution initiated by Venezuela’s upstart leaders.

The banking crisis of 2009-10 exposed the corruption and systemic weakness of Venezuelan banks. Some banks were engaged in questionable business practices.  Others were seriously undercapitalized.  Others were apparently lending top executives large sums of money.  At least one financier could not prove where he got the money to buy the banks he owned.

Rather than bailing out the culprits, as was done in the US, in 2009 the government nationalized seven Venezuelan banks, accounting for around 12% of the nation’s bank deposits.  In 2010, more were taken over.  The government arrested at least 16 bankers and issued more than 40 corruption-related arrest warrants for others who had fled the country. By the end of March 2011, only 37 banks were left, down from 59 at the end of November 2009.  State-owned institutions took a larger role, holding 35% of assets as of March 2011, while foreign institutions held just 13.2% of assets.

Over the howls of the media, in 2010 Chavez took the bold step of passing legislation defining the banking industry as one of “public service.”  The legislation specified that 5% of the banks’ net profits must go towards funding community council projects, designed and implemented by communities for the benefit of communities. The Venezuelan government directed the allocation of bank credit to preferred sectors of the economy, and it increasingly became involved in the operations of private financial institutions.  By law, nearly half the lending portfolios of Venezuelan banks had to be directed to particular mandated sectors of the economy, including small business and agriculture.

In an April 2012 article called “Venezuela Increases Banks’ Obligatory Social Contributions, U.S. and Europe Do Not,” Rachael Boothroyd said that the Venezuelan government was requiring the banks to give back. Housing was declared a constitutional right, and Venezuelan banks were obliged to contribute 15% of their yearly earnings to securing it. The government’s Great Housing Mission aimed to build 2.7 million free houses for low-income families before 2019. The goal was to create a social banking system that contributed to the development of society rather than simply siphoning off its wealth.  Boothroyd wrote:

. . . Venezuelans are in the fortunate position of having a national government which prioritizes their life quality, wellbeing and development over the health of bankers’ and lobbyists’ pay checks.  If the 2009 financial crisis demonstrated anything, it was that capitalism is quite simply incapable of regulating itself, and that is precisely where progressive governments and progressive government legislation needs to step in.

That is also where the progressive wing of the Democratic Party is stepping in in the US – and why AOC’s proposals evoke howls in the media of the sort seen in Venezuela.

Article I, Section 8, of the Constitution gives Congress the power to create the nation’s money supply. Congress needs to exercise that power. Key to restoring our economic sovereignty is to reclaim the power to issue money from a commercial banking system that acknowledges no public responsibility beyond maximizing profits for its shareholders. Bank-created money is backed by the full faith and credit of the United States, including federal deposit insurance, access to the Fed’s lending window, and government bailouts when things go wrong. If we the people are backing the currency, it should be issued by the people through their representative government. Today, however, our government does not adequately represent the people. We first need to take our government back, and that is what AOC and her congressional allies are attempting to do.

• First published on Truthdig.com.

Corporate Canada Behind Slow Motion Coup Attempt in Venezuela

It’s convenient but incorrect to simply blame the USA for Ottawa’s nefarious role in the slow motion attempted coup currently underway in Venezuela.

Critics of the Liberal government’s push for regime change in Venezuela generally focus on their deference to Washington. But, Ottawa’s hostility to Caracas is also motivated by important segments of corporate Canada, which have long been at odds with its Bolivarian government

In a bid for a greater share of oil revenue, Venezuela forced private oil companies to become minority partners with the state oil company in 2007. This prompted Calgary-based PetroCanada to sell its portion of an oil project and for Canadian officials to privately complain about feeling “burned” by the Venezuelan government.

Venezuela has the largest recognized oil reserves in the world. The country also has enormous gold deposits.

A number of Canadian companies clashed with Hugo Chavez’ government over its bid to gain greater control over gold extraction. Crystallex, Vanessa Ventures, Gold Reserve Inc. and Rusoro Mining all had prolonged legal battles with the Venezuelan government. In 2016 Rusoro Mining won a $1 billion claim under the Canada-Venezuela investment treaty. That same year Crystallex was awarded $1.2 billion under the Canada-Venezuela investment treaty. Both companies continue to pursue payments and have pursued the money from Citgo, the Venezuelan government owned gasoline retailer in the US.

In 2011 the Financial Post reported, “years after pushing foreign investment away from his gold mining sector, Venezuelan President Chavez is moving on to the next stage: outright nationalization.” Highlighting its importance to Canadian capital, the Globe and Mail editorial board criticized the move in a piece titled “Chavez nationalizes all gold mines in Venezuela.”

In a further sign of the Canadian mining sector’s hostility to the Venezuelan government, Barrick Gold founder Peter Munk wrote a 2007 letter to the Financial Times headlined “Stop Chavez’ Demagoguery Before it is Too Late”: “Your editorial ‘Chavez in Control’ was way too benign a characterization of a dangerous dictator — the latest of a type who takes over a nation through the democratic process, and then perverts or abolishes it to perpetuate his own power … aren’t we ignoring the lessons of history and forgetting that the dictators Hitler, Mugabe, Pol Pot and so on became heads of state by a democratic process? … autocratic demagogues in the Chavez mode get away with [it] until their countries become totalitarian regimes like Nazi Germany, the Soviet Union, or Slobadan Milosevic’s Serbia … Let us not give President Chavez a chance to do the same step- by-step transformation of Venezuela.”

A year earlier, the leading Canadian capitalist told Barrick’s shareholders he’d prefer to invest in the (Taliban controlled) western part of Pakistan than in Venezuela or Bolivia. “If I had the choice to put my money in one of the Latin American countries run by (Bolivian President) Evo Morales or Venezuelan President Hugo Chavez — I know where I’d put my buck,” said Munk, referring to moves to increase the public stake in resource extraction to the detriment of foreign investors.

Benefiting from the privatization of state-run mining companies and loosened restrictions on foreign investment, Canadian mining investment in Latin America has exploded since the 1990s. No Canadian mining firm operated in Peru or Mexico at the start of the 1990s yet by 2010 there were nearly 600 Canadian mining firms in those two countries. Canadian mining companies have tens of billions of dollars invested in the Americas. Any government in the region that reverses the neoliberal reforms that enabled this growth is a threat to Canadian mining profits.

Corporate Canada’s most powerful sector was none too pleased with Chavez’ socialistic and nationalistic policies. Alongside Canadian mining growth, Canadian banks expanded their operations in a number of Latin American countries to do more business with Canadian mining clients. More generally, Canadian banks have benefited from the liberalization of foreign investment rules and banking regulations in the region. A few days after Chavez’s 2013 death the Globe and Mail Report on Business published a front-page story about Scotiabank’s interests in Venezuela, which were acquired just before his rise to power. It noted: “Bank of Nova Scotia [Scotiabank] is often lauded for its bold expansion into Latin America, having completed major acquisitions in Colombia and Peru. But when it comes to Venezuela, the bank has done little for the past 15 years – primarily because the government of President Hugo Chavez has been hostile to large-scale foreign investment.” While Scotiabank is a powerhouse in Latin America, Canada’s other big banks also do significant business in the region.

At the height of the left-right ideological competition in the region the Stephen Harper government devoted significant effort to strengthening the region’s right-wing governments. Ottawa increased aid to Latin America largely to stunt growing rejection of neoliberal capitalism and in 2010 trade minister Peter Van Loan admitted that the “secondary” goal of Canada’s free trade agreement with Colombia was to bolster that country’s right-wing government against its Venezuelan neighbour. The Globe and Mail explained:  “The Canadian government’s desire to bolster fledgling free-market democracies in Latin America in an ideological competition with left-leaning, authoritarian nationalists like Venezuela’s Hugo Chavez is rarely expressed with force, even though it is at the heart of an Ottawa initiative.” An unnamed Conservative told the paper: “For countries like Peru and Colombia that are trying be helpful in the region, I think everybody’s trying to keep them attached to the free-market side of the debate in Latin America, rather than sloshing them over into the Bolivarian [Venezuelan] side.”

Ottawa wants to crush the independent/socialistic developments in Venezuela. More generally, the growth of Canadian mining, banking and other sectors in Latin America has pushed Ottawa towards a more aggressive posture in the region. So, while it is true that Canada often does the bidding of its US puppet master, capitalists in the Great White North are also independent actors seeking to fill their own pockets and thwart the will of the Venezuelan people.