Yesterday I noted that not all assets will make it through the inevitable financial re-set. ( Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”?)
Those that are easy to expropriate will be expropriated, and those assets vulnerable to soaring taxes, inflation and currency devaluation will also be hollowed out.
There are two real-time examples of these dynamics we can profitably study: “capitalist” Greece and “socialist” Venezuela. Both nations have impoverished their citizenry to preserve an oligarchy and its cronies.
I hope it won’t be too great a shock that crony-capitalism and crony-socialism function in much the same fashion and generate the same result: the wealth of the nation is funneled (or expropriated) into the ruling Elites, impoverishing the non-elites.
The mechanisms differ in appearance but they produce the same results: expropriation and impoverishment. In Greece, two Ruling Elites stripmined the nation: the big European banks and the domestic oligarchs and their functionaries in the state.
Having flooded Greece with “cheap” credit denominated in euros, the EU’s big banks demanded “austerity” so the Greek government could continue servicing its massive debt. The Greek oligarchs dodged “austerity” in the usual way: by buying political influence.
Very little of the so-called “bail-outs” actually reached the Greek citizenry, and much of what did enter the Greek economy flowed into the hands of the oligarchy.
This is what I call the Neocolonial-Financialization Model (May 24, 2012), which substitutes the economic power of financialization (debt, leverage and speculation) for the raw power of political conquest and control.
The main strategy of financialization is: extend cheap credit to nations with limited access to capital. Nations with limited access to capital will swallow the bait of cheap credit whole, and willingly agree to penalties, high interest rates, etc.
Then, when the credit expansion reaches levels that cannot be supported, the lenders demand collateral and/or favorable trade and financial concessions.
The global financial powers developed the Neocolonial Model, which turns these same techniques on one’s home region. Thus Greece and other capital-poor European nations were recognized as the periphery that could be exploited by the core, and the euro was the ideal tool to financialize the economies of nations which could never have generated credit/housing bubbles without the wide-open spigots of cheap credit flooding their economies.
In Neocolonialism, the forces of financialization are used to indenture the populace to the financial core: the peripheral “colonials” borrow money to buy the finished goods manufactured in the core economies, enriching the regional Elites with A) the profits made selling goods to the debtors B) interest on credit extended to the peripheral colonies to buy the core economies’ goods and “live large”, and C) the transactional skim of financializing peripheral assets such as real estate and State debt.
In essence, the core banks of the EU colonized the peripheral nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the core (Germany) extracted enormous profits from this expansion of debt and consumption.
Now that the financialization scheme of the euro has run its course, the periphery’s neocolonial standing is starkly revealed: the assets and income of the periphery are flowing to the core as interest on the private and sovereign debts that are owed to the core’s central bank and its money-center banks.
Neocolonialism benefits both the core’s financial Aristocracy and the domestic oligarchies/ kleptocracies. This is ably demonstrated in the recent essay Misrule of the Few: How the Oligarchs Ruined Greece.
I’ve covered these dynamics for many years:
Greece Is a Kleptocracy (June 28, 2011)
The only way the banks and domestic oligarchy can retain their grip is by stripping non-Elites of their income and wealth. As I discussed in When Assets (Such as Real Estate) Become Liabilities (December 27, 2016), raising property taxes and transaction fees is one way of accomplishing this: as taxes rise to fund “austerity” payments to the EU’s banking Elite, the costs of owning property soar.
Meanwhile, incomes stagnate as taxes increase and the economy is crushed by the euro’s asymmetry (good for Germany, bad for Greece) and the debt-serfdom of paying interest on the staggering debt.
Households have no choice but to surrender property they can no longer afford– even when they own it free and clear. That is also what happened in the late stages of the Roman Empire: taxes soared to the point that farmers could no longer feed their families and pay taxes, so they abandoned their farms and became serfs on the protected Elites’ vast estates.
The “crony-socialist” model is to centrally manage the economy to benefit the oligarchy and its cronies–a fatal mismanagement of the nation’s productive resources that exploits and stripmines the non-Elites. Venezuela is imploding not because of hyper-inflation, but as a result of policies that led to hyper-inflation: policies that generate perverse incentives while protecting the Elites, disincentives to produce goods and services and incentives to depend on government subsidies.
Venezuela has been effectively de-industrialized by its crony-socialist oligarchy.Capital that should have been invested in the electrical grid and the oil industry has been diverted to the pockets of cronies and state apparatchiks. There’s no food in the markets because government-set prices don’t make it worthwhile to grow anything. Farmers take their produce to neighboring countries if they can, where they can actually get paid for producing food.
Outlaw markets and the free flow of fact-based information, and the only possible result is The Disaster of De-industrialization (June 15, 2016), which generates a self-reinforcing feedback of high inflation and declining production.
This dynamic eventually hollows out the nation’s currency, as the currency is effectively an asset based on the collateral of the nation’s output. As output stagnates or implodes while the money being issued expands, the only possible result is a severe devaluation of the currency, a.k.a. hyper-inflation.
This is how you end up with a currency that is officially 10 to the U.S. dollar (USD) but on the black market is 3,200 to the USD. The Trajectory of Venezuelan Hyperinflation Looks Frighteningly Familiar.
You see the two stripmining mechanisms at work here: either expropriate the non-Elites’ income and property with soaring taxes, or mismanage the economy so severely that the resulting de-industrialization destroys the value of the currency, impoverishing the citizens who have no choice but to value their labor and assets in the near-worthless currency.
Neocolonial “capitalist paradise” or crony “socialist paradise”: the net result is the same: expropriation and impoverishment.
Books of related interest:
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