During the Cold War, military propagandists frightened a generation with the “domino theory”: the concept that one by one, Global Communism, eminating from Moscow, would topple countries and bring untold misery to its people. Never happened. Instead, decades later, Moscow itself is another domino, with the Russian people being hammered by the abuses of global capitalism.
You know the world’s economy is on the skids when stockbrokers breath a sigh of relief that China is still isolated from the global economy, so they won’t have to devalue their currency any time soon…well, at least not until next year.
Russia, however, hasn’t been so lucky. Recent developments have left a lot of people scratching their heads and wanting to know how currency fluctuations can destabilize a whole government. It’s not the devaluation of the ruble that’s causing the problem. That’s just the most obvious symptom of a bigger problem: a global deflationary spiral and recession brought on by too much borrowing, wild speculation that’s driven national stock markets to unsustainable highs, and the increasing concentration of wealth in the hands of fewer and fewer people worldwide.
One of the main features of a deflationary cycle is that prices fall, usually for one of two reasons: either people and companies don’t have enough income to pay for the products or raw materials that they need, or there’s an oversupply of products (or both). In the distant past, in order to avoid deflation and recession, it was important under capitalism for companies to pay their workers a decent wage to keep them spending freely, which kept the economy growing at a modest pace. But in recent years, with the onset of the high-tech “global economy,” which can move money around in the form of electronic transactions at the speed of light, is managed by investors doing business over satellite phone-links, and is monitored by a global mass media, no one feels bound to play by the old rules. “Inflation” has become the evil to avoid at all costs, while “modest” growth isn’t enough for the MTV generation of investors.
Today, companies avoid paying their workers more by offering them stock options instead (which, more often than not, turn out to be worthless), while enormous, predatory, monoline banks offer credit cards to an ever poorer population to keep consumption levels high. On a global level, large banks like Chase Manhattan, BankAmerica, and Wells Fargo do the same for corporations, foreign banks, and foreign governments: extending short-term credit at high interest rates to fund risky enterprises.
In turn, high interest payments have boosted the growth of these banks enormously. But, all this outstanding debt also means that the debtors pay enormous amounts of money to service their debt, instead of using it for productive ends. And the money that was borrowed has been going to build speculative real estate, privatize national industries, lay off workers (thereby destroying their buying power), and increase production of the few items that Third World countries can export (primarily commodities like oil, coal, copper, coffee, and other cash crops). Increasing the production of a few commodities produces a worldwide oversupply of those items, and drives prices down–the beginning of the deflationary cycle.
One example of this is the continued downward slide of oil prices, which has been key in bringing Russia to its knees. When a company or country can’t get a decent price for its main product or export, it can’t make its debt payments on time and it has to either borrow more money to make interest payments, or default on its debt. After borrowing $23 billion from the IMF in July, the Russian government still couldn’t pay its debts (or even its own workers), so it defaulted on $40 billion in short-term debt two weeks ago. That $40 billion is owed mostly to foreign banks, especially German and Swiss banks (who, in turn, owe money to U.S., British, and French banks).
The Russian default set off a chain reaction: without that income, Western banks had to sell off other investments to get enough cash to meet their own short-term debts, and the massive sell-off sent stock markets plunging from Russia to Taiwan to Venezuela (another oil-exporting country).
In the coming days, investors will cry about the devaluation of their stocks, but the people who will really suffer are average Russians, who’ve seen the ruble lose over 50% of its value in just one week. Many Russians (miners, teachers, health care workers) are still waiting for back wages and pensions that have been overdue for anywhere from several months to several years. And most Russian banks have refused to let depositors withdraw their savings, because the banks need the money to pay their own debts (proving that banks serve investors before depositors).
While the IMF and Western banks screw with the Russian economy, Russian people are starving–literally standing in line at grocery stores just to look at the foods stocked on the shelves, so they’ll know what to buy as soon as they get their hands on some money. It’s no wonder they want Boris Yeltsin to resign; it’s a wonder they haven’t kicked him out by force. (We go to press on Monday.)
Yeltsin, of course, did what the IMF and Western investors wanted him to do, and what any desperate politician would do in his place–he’s fired his entire cabinet twice this year, in an effort to place the blame on them. Increasingly, it’s becoming obvious that the real problem is the system itself. No one is in control, either in Russia or in the West…and the magnificent soap bubble of the U.S. stock market may be the next one to burst.