Derivatives, Money, Finance and Imperialism: A Response to Bryan and Rafferty

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Neville Spencer | Green Left Weekly

The different moments of primitive accumulation distribute themselves now, more or less in chronological order, particularly over Spain, Portugal, Holland, France, and England. In England at the end of the 17 th century, they arrive at a systematical combination, embracing the colonies, the national debt, the modern mode of taxation, and the protectionist system. These methods depend in part on brute force, e. But they all employ the power of the State, the concentrated and organised force of society, to hasten, hothouse fashion, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition , This process had a fractal character, occurring on many scales, and in diverse ways.

The discussion of colonialism and imperialism, its various forms and modalities, and the rivalry of different European nations indicates another important feature of the dynamics of the world market. Gerstenberger, Initially the nature of pre-capitalist states was critical for the primitive accumulation of capital through external conquest, plunder, and colonies as well as dispossession of pre-capitalist classes at home , the creation of a home market, the development of foreign trade, the relation between national monies, international currencies, and an emergent world money, and, finally, the global division of labour.

Different modes of insertion into the world market at different stages in its development are associated with quite different forms of capitalism and political regime.

There is nonetheless a crucial difference between these processes. The world market is tendentially unified and integrated through the logic of profit-oriented, market-mediated competition based on trade, financial flows, and capitalist commodity production. The world of states also involves centre-periphery and other hierarchical relations. But these states no more exist in isolation from each other than do local, regional, or national markets. The world market and the world of states are therefore subject to different logics that nonetheless interact to shape the emerging dynamic of capital accumulation on a world scale.

These aspects are closely interrelated, but one is not reducible to the other, with real scope for disjunctions. In their historical analyses, Marx and Engels provided rich and detailed studies of how this interaction unfolds in specific cases and affects the overall development of the world market.

A comment by Jung-en Woo illustrates what is at stake here. She noted that, in North East Asia and parts of South East Asia, the developmental state has attracted attention; in Latin America and, one might add, parts of North and South Africa, an important research focus has been the dependent capitalist state. This is reflected most recently in debates on extractivism and post-extractivism. To her list one might add the rentier state as an important theme in the Middle East and other resource-rich regions; and, in South Asia, Africa, and East Asia, there is important work on the commonalities and specificities of post-colonial societies.

While such analyses reflect the variegated nature of statehood, they sometimes assume an ideal-typical Western state form and neglect the variability of state formation and development that also occurs in the North. These approaches critique the false universalism of the Western canon in the humanities and social sciences and their metrocentric accounts of modernity and elision of non-European worlds and their exploitation by metropolitan centres.

In response, they privilege the standpoint of those located in the Global South or subaltern positions as somehow more authentic or valid than metrocentric analyses. Noting this, Tobias Schwarz observes:. This is important in historical analyses, studies of the path-dependent effects of past imperial or colonial encounters, and research on current relations of economic dependency and dependent states. This is one of the lessons of the Latin American dependency school and its application to other post-colonial regions locked into a dependent economic, political, and socio-cultural relationship between industrialized and peripheral countries.

Dussel then presents an account that draws on the draft manuscript for Capital to suggest how dependency can be explained starting from the fundamental categories of his critique of political economy. Variegation is an important concept for thinking about capital accumulation, political domination, and neoliberalization. It was introduced as a considered response to the risks involved in treating varieties of capitalism in mutual isolation or assuming that there is a single world system with its own master logic that governs the place and mobility of different economic spaces therein.

The notion of variegation posits a world market divided into a tangled, unevenly developing hierarchy of local, regional, national, transnational, and supranational markets corresponding to the territories associated with given states. All of this implies that local, regional, or national varieties of capitalism must be linked to the dynamics of the world market and the inter-state system taking account of the insertion of economic spaces and states into the hierarchically structured world system.

In short, the approach adopted here assumes an emerging single , but fractally organized, variegated capitalism. This is the product of structural coupling, co-evolution, complementarities, rivalries, tensions, and antagonisms among varieties of capitalism. They are coupled not only through their territorial instantiation i.

These processes set limits to compossible varieties of capitalism within a given space-time envelope—whether this be local, regional, national, supranational, international, or global. The most influential states are those that shape the parameters of competition—this was the USA in the post-war international order and, presently, we can observe rivalries between the USA, the European Union, and an ascending China.

This rivalry is also played out in interesting ways in Latin America. How varieties of capitalism are embedded in variegated capitalism affects how states shape and are shaped by the variegated global order as they seek to govern, guide or adapt to its development. For example, the Listian Workfare National State is oriented to catch-up competitiveness and the horizon for catching-up changes over time.

In turn, the Prebischian Populist National State was oriented to counteracting adverse terms of trade between primary exports and industrial imports and sought, frequently with limited success, to enhance national competitiveness through import-substitution industrialization behind tariff walls. World market integration is a contradictory process. It also weakens the capacity of organized labour to resist economic exploitation through concerted subaltern action across different fields. It also undermines the power of national states to regulate economic activities within mainly national frameworks.

And, insofar as it decreases the power of the working class, it increases inequalities of income and wealth, strengthens the potential for overproduction and weak demand, and, as is now widely recognized in critical political economy, creates the potential for financialization and finance-dominated accumulation as a driving force of even further—but destabilizing—world market integration.


It is important to reject the idea that relatively smooth and harmonious economic growth in some places could ever be generalized throughout the world market. For capital accumulation proceeds through a process of uneven and combined development that creates zones of instability and crisis as both a condition and effect of relatively crisis-free expansion elsewhere.

Increasing integration of the world market also undermines the power of national states to regulate economic activities within mainly national frameworks. As the ultimate limit to capital is capital itself, the expansion and integration of a relatively unfettered or disembedded world market enhances the scope for its contradictions to be realized as well as for resistance to become global. Variegated Neoliberalism : Neoliberalism is also variegated and for similar reasons.

Its four main forms arose as reactions to the crisis of post-World War II models of capitalist development: Atlantic Fordism in advanced capitalist economies, import-substitution industrialization in Latin America and sub-Saharan Africa, export-oriented growth in East Asia, and, in a different but related context, state socialism in the Soviet Bloc, China, and Indo-China. The most radical form was neo-liberal system transformation in the successor states that emerged from the former Soviet Bloc: Russia and Poland are two cases with contrasting outcomes.

Next in the continuum of cases come neo-liberal regime shifts. Breaking with the post-war Atlantic Fordist compromise between capital and labour, these shifts introduced liberalization, deregulation, privatization, market proxies in the public sector, internationalization, and cuts in direct taxation. These policies were intended to modify the balance of forces in favour of capital and have largely succeeded in this regard. Well-known cases are Thatcherism and Reaganism.

Whereas the second form is largely rooted in domestic politics, the third comprises economic restructuring processes and regime shifts that were primarily imposed from outside by transnational economic institutions and organizations backed by leading capitalist powers and their local partners. Whether neoliberalism originates mainly in domestic or external political processes and whether its associated policies are pursued through democratic or authoritarian political devices and measures, the policies adopted in the second and third forms of neoliberalism often overlap when they occur outside advanced capitalist economies.

Fourth, there are more pragmatic and potentially reversible neo-liberal policy adjustments. Bulletin of Political Economy, 4 2 pp. Addressing the rationality of 'irrational' European responses to the crisis: a political economy of the Euro Area and the need for a progressive alternative Sotiropoulos, Dimitris; Milios, John and Lapatsioras, Spyros In: Bitzenis, Aristidis; Karagiannis, Nikolaos and Marangos, John eds. Europe in Crisis pp. The Politics of International Political Economy.

Europa Politics of Palgrace Studies in the History of Economic Thought pp. I agree that this statement is wrong, and it does, as they say, conflate money with money of account. They declare in their reply that, [o]f course, there is no derivative currency. Good, I am glad we agree. But I must say that I did not get that impression when reading their work on derivatives! That was why I made the comment in my article. For example, part of a summary of key points in their book on derivatives says: 2.

In the context of floating exchange rates, financial derivatives now anchor the global financial system in a role comparable to that played by gold when exchange rates floated freely before the First World War.



In performing this anchoring role, derivatives take on the characteristics of global money. They are money that transcends the conventional national system of money. The foundation for derivatives-as-money is not state guarantees, but a commodity basis.

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The last hundred years has not seen a shift away from a commodity basis to money, but the re-discovery of a new commodity basis. That was one place where I found the derivative currency concept, but there are others. If all they are really saying is that derivatives have been a growing part of the mechanism for comparing, trading and hedging financial market currency values, interest rates, equity prices, etc.

However, they seem to be going much further than this with their third, related notion of how derivatives commensurate different forms of capital Norfield misses the key issue of derivatives and the analytical challenge they entail. By framing an exposure to the performance of an underlying asset as itself tradable, things which have not hitherto been priced relative to each other are now presented in a form where critical dimensions of their relative values can be mutually recognised.

The consequence is that derivatives represent a process of continual across-capital commensuration in the active process of accumulation, while Norfield can only conceive of commensuration as a static process, in exchange: in a sense after accumulation. This is heady stuff, and it left me feeling that even the particles whizzing around CERNs Large Hadron Collider would appear to be pretty static compared to the continual across-capital commensuration in the active process of accumulation that derivatives seem to perform.

However, the fact that in my original article I located the explosion of derivatives trading in the process of capital accumulation and crisis should give cause to question the validity of their argument that I had a static approach to these issues. In the following sections I will show that Bryan and Raffertys analysis confuses what is really going on with derivatives. Although in many places they make perfectly valid and useful points on how derivatives are used and the roles they play, they end up casting derivatives as the actors in the process, rather than seeing them far more simply, and far more accurately, as forms of financial transaction that have developed in response to volatility in capitalist markets and problems in capital accumulation more generally.

These are summary notes at the start of Section 2 of the book. See Bryan and Rafferty b, p. Bryan and Rafferty , pp. Special FX derivatives Much of Bryan and Raffertys analysis of derivatives is founded on their observation of the foreign exchange forward market, on a misunderstanding of this market and on an attempt to generalise this view to other financial transactions using derivatives. In this section I will explain why foreign exchange forwards are a special kind of derivative, one with characteristics clearly different from interest rate swaps, futures and options. In their book, and in other articles, they note how the unpredictable nature of foreign exchange rates and interest rates following the breakdown of the Bretton Woods system made capitalist calculations of value more troublesome.

More than this, they claim derivatives provide a valuation method that is independent of national currencies and that they were a means of overcoming the limitations of national fiat money.

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For example: Derivatives provide what nation-state fiat money could not provide on a global scale: they secure some degree of guarantee on the relative values of different monetary units. They are, in this sense, behind the scenes money, ensuring that different forms of asset and money are commensurated not by state decree e. This sounds intriguing, but it is wrong. The forward foreign exchange market does not provide a separate means of valuing assets compared to national currencies.

It is based upon a calculated link between the current exchange rate I do not underestimate the importance of this episode as a benchmark event for new forms of financial turmoil and for the growth of financial derivatives in subsequent years, but it would of course be a mistake to presume that before capitalist calculation was a simple, risk-free process.

There had already been currency realignments within the Bretton Woods system among the major capitalist powers from the late s and, with growing frequency, into the late s. The growth of the eurodollar market and the eurobond market, developments that accentuated the process by which international capital movements more easily overcame national barriers, are also dated from the late s. Bryan and Rafferty a, p. Once the latter are given, so is the forward exchange rate. A company, or bank, trading in foreign exchange might deal in the forward market, so that one could argue that it is the forward rate that drives the spot rate, but there is still a determined link between spot and forward exchange rates that is given by the interest rate differential between the two currencies.

In that case, the 1-year forward exchange rate is If the 1-year forward exchange rate were different, for example, higher at The dealer would do a forward deal at the same time as the spot deal, agreeing to sell the 1. This would give the dealer 1. Forward FX deals do provide a fixed future exchange rate for the parties involved, but one that is tied to the current spot rate of exchange of the two currencies and the interest rate differential on them.

The forward exchange rate derivative does not overcome national currencies and interest rates, nor does it stand as a separate entity. To believe that it does is like believing that a pantomime horse is really a horse, not a costume with two individuals inside. The forward FX deal in fact generates the same values as doing the transaction now, at todays spot exchange rate, and then depositing the funds e. That the forward deal is more convenient for capitalists lies in the fact that no funds euros need be advanced now, when such funds may not be available, only on the maturity of the deal.

However, there is an obligation to advance the full The example avoids precise calculations with day counts in order to illustrate the basic mechanism. This usually happens with forward deals, although the transaction can also be reversed before maturity, at a profit or loss compared to prevailing interest rates and exchange rates. Forward FX transactions are only modified forms of a spot transaction. But it is the exchange rate of the two fiat monies that is doing the commensurating, not the forward derivative.

All the derivative is doing as Bryan and Rafferty recognise, but confuse with other issues is to fix the forward rate at a particular level consistent with the prevailing spot rate and interest rates. The reason I have gone into some detail on forward FX deals is that these are not typical of other financial derivative operations, such as interest rate swaps and options. In these latter, there is no future advance of all the funds underlying the deal at any point.

This difference is multiplied by the notional amount of funds involved to result in a settlement sum. These notional amounts are not exchanged. Another type of FX derivative deal that is different from other derivatives, but in a similar way to FX forwards, is the FX swap. In this case, as the Bank for International Settlements explains, there is the actual exchange of two currencies principal amount only on a specific date at a rate agreed at the time of the conclusion of the contract the short leg , and a reverse exchange of the same two currencies at a date further in the future at a rate generally different from the rate applied to the short leg agreed at the time of the contract the long leg.

It then buys the currency it wants, handing over the currency that it owns in exchange, but reverses the deal at an agreed time later, buying back its original currency. The two deals are usually done Except in the case of actually exercising an in-the-money option, rather than closing it out at a profit. Commodity and bond futures contracts have further complications on delivery of the underlying commodity or security if the contract is not closed out, but these need not be discussed here. BIS a, p.

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There is yet another currency-related derivative along these lines called a currency swap, in which, among other things, it is usually agreed to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity. This kind of deal is common for capitalist companies that have business in foreign exchange.

It is important to stress here that the actual funds are exchanged, since that is the whole point of the deal. This is something quite different from interest rate swaps, etc. Bryan and Rafferty refer to the recent use of large-scale liquidity swaps between major central banks. These are similar to the FX swaps just noted.

They argue that these show how liquidity itself is drawing away from being defined with reference to cash or any particular stock of money, and moving towards the diversity of asset forms provided in derivative markets. Then, the other banks repaid the dollars at the agreed time, plus interest, and got their own currencies back again. These transactions were significant for illustrating the scope of the financial crisis that took place and they also show the key role of the US dollar and the powerful position of the US in the global monetary system but Bryan and Rafferty are too enthralled by foreign exchange derivatives, or perhaps the fact that foreign exchange rates are not fixed, to see that this is merely a shortterm currency loan between central banks.

Foreign exchange forwards and swaps are longstanding forms of financial dealing, predating by far the breakdown of Bretton Woods in the early s. Prior to , the BIS used to include both spot transactions and these forms of dealing under the heading of traditional foreign exchange markets to separate them from the more evidently derivative deals such as options and currency swaps, and many central banks still make this distinction. This reflected the reality that FX spot rates, FX forwards and swaps are part of the same market, linked by the relevant money market interest rates.

All that is happening in these markets is that the gap between the spot and forward exchange rate is a function of the interest rate differential between the two currencies involved. None of the rates is fixed, and all that is done is to set a particular forward FX rate today, based on the currently prevailing spot rate and interest rates. Derivatives and non-derivatives: what they do and what they do not In this section, I take issue with some other examples Bryan and Rafferty use to back up their understanding of derivatives.

I will first examine interest rate This risks getting into a debate over definitions this time for derivatives , but I hope instead that this discussion highlights further what is actually going on. Bryan and Rafferty claim that Derivatives, especially through swaps Derivatives blend different forms of capital into a single unit of measure. It confuses the degree to which foreign exchange rates measure the value of assets in other currencies with the operations of an interest rate swap and other derivatives.

Take a simple example. This value could be positive, negative or zero. In this case, the company wants to have a fixed rate for its income and agrees to pay the floating rate, for example whatever six-month LIBOR happens to be every six months for the next five years.

Derivatives such as interest rate swaps can be used to hedge against moves in financial market prices, but that does not make them a store of value. As explained in my original article, all derivatives have a time limit to expiry. During its life, the derivative will be valued in relation to the difference between the contract price and the price in the market, perhaps in a complex manner. On expiry, this difference value, plus or minus, is fixed. After expiry, this function is no longer performed.

Bryan and Rafferty obscure this by appealing to derivatives in aggregate, presumably to assert that another derivative will come along and take up the role of store of value when the first one has expired. Even during its fleeting existence in the realm of financial Bryan and Rafferty b, p. I leave out of account amortising swaps and step up swaps, where the principal is reduced or increased according to an agreed, predetermined formula. It does not store the value of the underlying asset, financial security, etc. Bryan and Rafferty flip between this erroneous store of value concept and a slightly more correct one that derivatives measure the performance of an underlying asset something that can be done because they are a difference measure.

Turning to some other financial products, Bryan and Rafferty argue that these show both a blurring of the concepts of money, commodity and capital, and the way that derivatives can become a store of value in a world without a stable unit of measure. But it is a bit odd of them to include preference shares in their list of examples, since these are not derivatives at all, only a type of equity security.

These are very similar to normal bond securities, rather than being derivatives. With CDOs, the only difference is that the interest and principal payments they offer might be based on the returns from other securities the fact that CDOs may be divided up into different tranches with different degrees of credit risk is a separate issue. This makes them a derivative only in this respect, because the CDO is still basically a bond in its payment structure, though one whose credit risk will depend on the risk associated with getting the returns from the other underlying securities.

A normal bond, by contrast, is one where the credit risk is on the company or country that floated the bond and which is responsible for the interest and principal payments. The CDO is nevertheless not a derivative security in the way that swaps, options and futures are. In the latter cases, the value of the derivative security is a function of the difference between the contract price s and market price s , which could then result in a positive, zero or negative market value.

A CDO is only worth zero if all the underlying assets have defaulted and there is no prospect of recovering any funds. With mortgage-backed securities MBS they are even closer to a regular bond, since the payments on the MBS are usually made up directly from a range of mortgage interest and principal receipts. In my original article, I was cautious about labelling securities such as CDOs and MBS as derivatives for this reason and left their status unclear.

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