The US-Turkey stand-off in context: the US and the weaponisation of global finance
Turkish Treasury and Finance Minister, Barat Albayrak, son-in-law of President Recep Tayyip Erdogan, holds press conference as Turkish lira plunges to new low against the dollar. August 10,2018. Mustafa Alkac/Press Association. All rights reserved.
Mainstream
pundits and media commentators see the crisis in US-Turkey relations and the
collapse of the Turkish currency as a result of Turkey's refusal to hand over
to the US an American Evangelical priest. The analysis here shows that the
roots of the conflict in times of crisis, uncertainty and hegemonic instability, go far beyond political epiphenomena.
Turkey
was thrust into a full-blown currency crisis when Donald Trump hoisted tariffs
on Turkey’s steel and aluminium exports to the USA, the country’s most serious
crisis since Erdogan’s AKP came to power 16 years ago. The Lira lost more
than 40 percent of its value, albeit its most recent humble recovery. The
pretext for Trump’s punishing attack on Turkey is the continued detention of
the evangelical American Presbyterian missionary
Andrew Brunson, described by Trump as a “fine gentleman and Christian
leader”, who was arrested in October 2016 on
charges of espionage accused of involvement in the
attempted coup of July the same year.
At
first sight, the US-Turkey stand-off appears to be a uniquely Turkish problem
triggered by a very public confrontation between two leading members of the
“ring of autocrats” of the twenty-first century,
Donald Trump and Recep Tayyip Erdogan, and worsened by the idiosyncratic
and often misguided economic approach of both
leaders. This is not the case.
In the
first place, the roots of the conflict are domestic. Public agitation over the
fate of Brunson serves Trump’s domestic political agenda, appealing to his
Christian right base that considers Brunson a martyr: Trump is using it for its own political benefit
for the forthcoming US mid-term elections, where evangelical turnout will be
crucial for Republicans holding on to the Senate. Similarly, Erdogan aims at
strengthening his domestic support base by appealing to Turkish pride and
nationalism at a moment when Turkey and the US have diverging agendas in Syria
and other conflicts in the greater Middle East, witness the rapprochement
between Turkey, Russia and Iran. Evangelical
turnout will be crucial for Republicans holding on to the Senate.
However, the
underlying motives for the drive to bring the Turkish economy to its knees lie
in the bid by the US hegemon to displace and off-load its own crisis onto the
back of emerging economies, by means of trade restrictions, economic sanctions,
direct confrontation, and most importantly using the dollar’s reserve currency
status to hit the currencies of all emerging economies and beyond.
This is
not rooted in the personality or psychology of Trump or Erdogan, and this is not just Turkey’s problem. It is a global problem
carrying substantial risks of contagion, and hence conflict and war, in Asia,
Latin America, Africa and Europe. Currently, the Turkish crisis looks the
most vivid but, as we shall see below, there is much more going on between the
US and the rest of the world.
The global financial crisis and shifts
in the global power system
As the
tenth anniversary of the collapse of Lehman Brothers approaches, it seems that none
of the underlying contradictions of the world economy have been resolved. Rather,
they have only intensified. Soon after
the 2008 crisis hit the major economies, governments and central banks took off
the books of the banks the worthless, or so-called toxic, assets, which were then
transferred onto the states’ budgets rendering legal responsibility to the
taxpayer to pay the debts of the banks (what in the relevant jargon is called
"deleveraging"). The bailout operation and other similar measures, such
as widespread "quantitative easing", has cost more than 25 percent of
global GDP, the landmark operation being the Greek case. This large-scale
bailout has increased the volatility of the system without solving the problem. Ten years after, it is becoming increasingly
clear that a new period of intensified crisis is gripping the global
economy.
Every
national economy, whether big or small, seems to be locked in a perpetually
escalating cycle of economic warfare. US sanctions against Iran, Russia,
Turkey and Venezuela; and US trade war with China, the EU, Canada and
Mexico. These acts of economic warfare, reminiscent of the inter-war
period[1], are not only affecting
the countries directly targeted, but indirectly also affect a long list of
other countries which have close economic links with these targeted countries.
For instance, Chinese producers buy iron ore for steel from Australia,
Brazil, India, Iran, South Africa, and Ukraine, and bauxite for aluminium from
Australia, Brazil, and the poor West African nation of Guinea. All are being
affected, some very seriously.
It
seems that global trade and the US dollar are used as a weapon by the American
President, who sees trade sanctions and tariffs, such as the onslaught he
launched against Turkey, as an integral component of his drive to secure US’s
geopolitical and economic interests at the expense of the others, even if this
hurts its own close allies. Trump's "America First" policy is just
this and configures its strategy as a response to the structural crisis of
globalisation/financialisation.
Trump
is fully aware of the impact of his policies. The US's “aggressive unilateralism”,
which first emerged in the 1980s under Reagan, is now pushed to its limits. Trump
is not some bizarre abnormality, but rather the genuine face of the vital
interests of a declining superpower that is prepared to initiate a major crisis
and huge devastation worldwide in order to stop its eventual
decline. Trump’s coming to power itself is but an epiphenomenon of the
deeply embedded structural and historical changes and trends taking place in
international political economy and the global system of power.
All such shifts are the results of
an increasingly more volatile and chaotic international situation, which is the
direct consequence of a
process that Giovanni Arrighi, drawing from Gramsci, called hegemonic transition. During that
period, systemic chaos is rather unavoidable. The late twentieth century saw
renewed great power rivalry, system-wide financial excesses and bursting
bubbles centred on the declining superpower, the US, and the emergence of new
loci of power in Eurasia, in particular China and India. So, the core logic of
this shift can be analysed properly within the context of major global
structural changes and re-distribution of power, which have been affecting the
world system for the last 30 years or so.
Hegemonic transition
When the authority of a global superpower is on
the wane, this affects the entire world order and leads to instability. Even
though the US still represents the largest and strongest economic and military
power in the world, it is nevertheless struggling with severe weaknesses
resulting from low economic growth and the protracted decline of its industry.
The most important structural transformation that took place in the US-led
global economic system after WWII was a massive crisis in manufacturing
manifesting itself as stagflation (economic stagnation accompanied by
double-digit inflation). Falling
profitability and weakening competitiveness led to the erosion of the production-led
mode of accumulation in the United States (the twin crisis of Fordism and the
Keynesian management of aggregate demand). When the productive power (and capacity) of the
US started to decline, financial speculation began to play a major role in order
to compensate the loss of profit rates in production and trade. One of the most
striking features of the US economy has become the rise of the rentier and the
money capitalist. This was further reinforced with the massive upsurge of the
US bond markets and, from the late 1980s in particular, of the junk bond
market. This vast financial sector expansion
greatly advanced speculation. This vast
financial sector expansion greatly advanced speculation.
The decline in productive capacity and the
ever-widening gap between productive and financial accumulation led to
recurrent financial and economic crises in every corner of the world. The
global chain of extreme financialisation and speculative profiteering broke in
2007-09, only to be transplanted into the euro-zone via the over-leveraged
banking sector.
From QE to QT, and the Turkey conundrum
Even if the US economy is in
decline in terms of its productive capacity and the share of global trade, one
aspect of it still dominates the global economy: dollar seigniorage, or the dominant role of the US dollar in international trade
and finance. This is the privilege to profit
from the usage of the dollar by the rest of the world as international reserve
currency in global trade. All states have to
acquire funds of the internationally acceptable money in order to be able to
pay for goods and services in global trade. A state first has to earn an
international currency from abroad before it can buy anything from abroad. This
constraint does not exist for the US because the international currency since
1944 is the US dollar. The US does not
need to earn dollars abroad. The US simply prints dollars at home, which gives
the United States an “exorbitant privilege”.
As a result, the US Federal
Reserve could dictate the level of international rates through moving the US
domestic interest rates, thus determining the costs of credit internationally.
Today
America borrows from practically the entire world without keeping the reserves
of any other currency. Because the dollar is the de facto global reserve
currency, America does not have to compete with other currencies in interest
rates, and even at low interest rates capital flies to the dollar. The more
dollars are circulated outside the US, or invested by foreign owners in American
assets, the more the rest of the world has had to provide the US with goods and
services in exchange for these dollars. The US even has the luxury of having
its debts denominated in its own currency. Let us
be more analytical.
When international credit is cheap
economic operators with access to cheap international credit borrow money and
invest in projects which seem viable, given the level of low interest
rates. However, when the US decides to
make credit expensive (sometimes very expensive) in order to gain competitive advantage
or for political reasons, suddenly, such "normal"
and "sound" investments may find themselves going bankrupt because of
this sudden contraction of cheap credit. As
in real war, so in economic warfare: surprise is the thing to do in order to
win.
Because only the American state
can issue the international reserve currency, the US dollar, the Wall Street, the hub of
global financial activity together with the City of London, can swing
international economy between oversupplying credit at one time and contracting
it at another without even providing a reasonable time of notice. As in real
war, so in economic warfare: surprise is the thing to do in order to win. This
is exactly what is happening today.
Another 2008?
Since the 2007-08 global financial
crisis the reliance of financial markets on policy decisions taken by the
American Fed has expanded to unprecedented levels. Immediately after the
global crisis hit the US in 2007, the Fed began what was called Quantitative
Easing, a type of Keynesian generation of money – in force buying up bonds to
revive the flow of credit to a shrinking economy. The Fed bought a
staggering sum of bonds from the struggling banks, which
increased up to 4.5 trillion dollars from the modest range of $850 to $900 billion in 2010. Since then, four global central
banks: the US Federal Reserve, European Central Bank (ECB), Bank of Japan and
Bank of England have been engaged in QE programs. The
result of this QE was that the central banks flooded markets with an
unprecedented flow of funds through auctions and lending facilities, approximately creating 4 billion dollar new
money a day, and thus financial
markets were saved.
This operation plunged the
interest rates to zero in
an effort to prevent an economic collapse. These
sums of money were in turn invested in any part of the world offering high
returns as US bonds paid near zero interest. The hope was that lenders go
on to pass that liquidity along as credit to companies and households, thus
stimulating anaemic economies. A large
amount of this liquidity went into junk bonds in the shale oil sector, which
subsidised in reality high-cost US shale production, despite the fact that only
a few shale companies were generating enough cash to pay for their
spending and dividends, and into the US housing
market which experienced a mini boom, both of which played a key role in the initial
recovery of the economy from the 2007-08 financial crisis. Private
investors, who were looking for new and more profitable avenues to park their
investments, low interest new money they borrowed from the Fed, started pumping
large amounts of this into emerging markets, such as Turkey, Brazil, Argentina,
Indonesia, India and China, where the economies are booming and the US bonds
could potentially bring back high returns.
Thus, the corporations as well as
private individuals in emerging markets had access to a large amount of cash at
their disposal. Even the Russian market received some
liquidity dollars until the Trump initiation of the US sanctions in early
2018. As a result, during the last ten years, the supply of cheap dollars
to the global system has risen to unprecedented levels, exacerbated by the US,
British, German and Japanese QE programmes. Total global debt (the debt of households, governments, corporations and the financial
sector) soared
to a record $233 trillion in the third quarter of 2017, according to a report from the Institute of
International Finance in Washington.
As long
as the emerging markets were growing and earning export dollars at times of low
interest rates, this debt was manageable. Because of near-zero interest
rates, combined with a weak dollar, this level of debt was not difficult to pay
for consistently growing emerging economies. However, even though this
low-interest credit has helped boost economic growth in the short-term, heavy
reliance on this has made the economies of emerging countries vulnerable to
sudden financial changes and surprise economic warfare. If the interest
rates begin going up quickly, as is currently the case, then many debtors will
not be able to pay their debts and the world will again be facing a 2008-style catastrophe. The
emerging market economies’ massive dollar debt is the key vulnerability even
for still expanding emerging economies, such as Turkey. Turkish companies
now owe an estimated $229 billion in
foreign-denominated debt, which is more than one-third
of the country’s GDP. Turkish companies
now owe an estimated $229 billion in foreign-denominated debt, which is more
than one-third of the country’s GDP.
Quantitative tightening ( QT)
Recently,
everything began to change. The US Federal Reserve ended its programme of QE late
last year, and started to reverse it, i.e. selling off the financial assets it
had purchased, and hence effectively taking dollars out of the financial system,
given the relatively stable performance of the American economy. Now
the Federal Reserve is retreating from markets by reducing the amount it
reinvests after the bonds in its portfolio reach maturity. Global finance has now de facto been in the new era of Quantitative
Tightening (QT). The Federal Reserve raised its policy rates five
times, from 0.25 to 1.5 percent. The Bank of England raised its policy rate
once, back to 0.5 percent. As a result the dollar’s value has begun to
rise.
The
rise in the value of dollar, accompanied by two successive interest-rate rises
by the USA Fed, has made debt payments for countries, corporations and
individuals far more difficult. This is direct US financial policy which
is deliberately precipitating a major new economic crisis across the emerging
world, especially in Iran, Turkey, Russia, South Africa and China.
One of Turkey's top businessmen Ferit Sahenk listens to Berat Albayrak, Aug.10,2018. Depo Photos/Press Association. All rights reserved. The
stronger dollar means that emerging markets in particular are facing uncertainties:
for companies, and individuals, in these countries that have issued
dollar-denominated bonds, their interest payment burdens just got a lot
heavier, and investors worry about the ability of emerging
market debtors to pay off their dollar-denominated debt. The Institute of International Finance
(IIF) estimated in July 2017 that global debt amounted to 327 percent of the
world's annual economic output (GDP) by the first quarter of 2017 and the rise
was driven
principally by emerging market borrowing. According
to estimates, by the end of 2018, there will be approximately 1 trillion dollar
less global QE than in 2017, and the peak for total emerging market dollar debt
falling due comes in 2019, with more than 1.2 trillion dollars maturing.
In other words, there will be an equivalent of 1.2 trillion less dollars in the
world in 2019. This is simply to choke off dollar supply.[2]
Bankrupting the global South
The
motivations for this trade and currency war are also political: the US punishes
Turkey, Iran and Russia for having a divergent geo-political agenda in Europe,
the Middle East and Central Asia that clashes strategically with that of the
USA. However, whereas it is clear to us that the economic warfare between the
USA and Turkey (as well as other emerging powers) has structural causes, it
remains to be seen whether this can be translated into political divergence,
something which would have serious implications as regards Turkey's NATO
membership and global peace. Political and security dynamics have a relative
autonomy and cannot be reduced to financial economics alone. Political and security dynamics have a relative autonomy
and cannot be reduced to financial economics alone.
The
ability of the US government to control the global supply of money through its
global reserve currency, the dollar, is considered to be the most effective
weapon of the US, far more deadly than its grand military machinery. The
value of US dollar is now rising strongly against all other currencies, in
particular the currencies of emerging economies. The Trump regime is also
initiating provocative trade wars and sanctions against Russia, Iran, China and
Venezuela. Turkey is not alone in this: it suddenly has a lot in
common with Iran, Russia, and China. The US seems
to be aiming at a domestic economic advantage via pushing the global South into
bankruptcy. This global financial and trade offensive, launched by the Trump
administration, has already created huge uncertainty in Asia, Latin America and
the EU. Peter Gowan, in his seminal work,
The Global Gamble, noted that “the US
economy depends not only upon constantly reproduced international monetary and
financial turbulence. …” and “Wall Street” in particular “depends upon chaotic
instabilities in ‘emerging market’ financial systems”[3].
Dangerous interregnum
This is
yet another clear manifestation of the fact that the world is currently going
through a dangerous interregnum.
Interregnum, here, as elaborated by Gramsci, can be understood as a period
where one arrangement of hegemony is waning, but prior to the full emergence of
another. It is poised between inward-looking old hegemonic powers, and
reluctant new emergent ones. The US is a declining superpower, with a
crumbling infrastructure and a shrinking share of the global economy. China
is an ascending superpower, with a burgeoning industrial and technological
infrastructure, a growing share of world trade and increasing self-confidence,
but not ready yet to lead the world. The post-WWII arrangements that centred
power on the Euro-Atlantic hub and Japan under the primacy of the USA were
shattered first by the stagflation of
the 1970s and then by the global financial crisis of 2008, and currently are fast
losing ground in the midst of economic nationalism, trade wars and sanctions. This is what… forces the ruling elites in many countries to
unconstrained economic and political nationalism and authoritarianism.
A new
international system is in the making by the arrival of new dynamic actors that
demand a redistribution of power. This is basically what causes the breakdown
of the global order and forces the ruling elites in many countries to
unconstrained economic and political nationalism and authoritarianism. Leadership,
order, and regional and global governance are no longer assured. With the
breakdown of the key economic and financial structures put in place after the
WWII, every major power, especially the declining hegemon, the US, seems to be focusing
on the protection of its own interests, leading to financial and economic
warfare and extending the possibilities for a new real global war.
We do
not know with certainty yet what the ultimate impact of the current stand-off
between Trump’s America and a number of emerging powers, from Turkey to China
and Russia, will be. However, it is almost certain that our world is, once
again, entering a historical moment where uncertain global circumstances and the
authoritarian populist agenda of unpredictable political leaders have coincided
to initiate a major shift in the way world economy and finance are
organised.
[1] Hawley-Smoot
Tariff of June 1930, that raised
already high import duties on more than 20,000 goods to their highest level in
100 years in American history, was considered by some historians as a
contributing factor to the start and severity of the Great Depression and also
fed political extremism helping to push Adolf Hitler into power in Germany.
[2] William
Engdahl, “Washington’s
Silent Weapon for Not-so-quiet Wars”, New
Eastern Outlook, 20 August 2018, and Dan Glazebrook, “Trump
just triggered a new financial crisis. Here’s why”, RT, 17 August 2018.
[3] Peter
Gowan, The Global Gamble: Washington's
Faustian Bid for World Dominance, London and New York: Verso, 1999, p.124.