Riba Free Economy and the Islamic Awakening (Long Version

8/6/2019 Riba Free Economy and the Islamic Awakening (Long Version

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Medium of Exchange: How Interest Free Monetary Reform must Contribute

to Arab Uprising

Younus Abdullah Muhammad

The position into which money and the methods by which it is controlled and manipulated have

brought the world, arises, not from any defect or vice inseparable from money (which isprobably one of the most marvelous and perfect agencies for enabling co-operation, that the

world has ever conceived), but because of the subordination of this powerful tool to the objective

of what it is not unfair to call a hidden government.

~Major Clifford Hugh Douglass in Social Credit (1933 ed.)

The events that occurred in Tunisia and Egypt recently are truly remarkable. Populations in thesecountries, where despotic regimes dominated for more than a generation, managed to overthrowdecades of authoritarianism in weeks by way of collaborative public protest. While it is true thatthese uprisings create the potential for positive institutional change in their respective societies,they also run the risk of reinstituting preexistent and prevalent authoritarian structures thus

producing cosmetic alterations that will not truly alter the social fabric within them.

As this spirit is replicated elsewhere an important distinction must be made; any social, political,or economic reform occurring in the world today must not only alter the institutional structuresdomestically but must address the broader complications associated with seeking such reform ina hostile international environment that in many ways limits the potential for successfulmodification. Any effort to break away from old networks of domination and privilege mustattend to the reality that international macroeconomic norms reify the underlying conceptualflaws of an interest-based economics and manifest them in ways that perpetuate those flawsthroughout all sectors of society.

This paper addresses a primary aspect of this reification. The use of interest to create debt

hierarchy grants an unfair advantage to a dominant minority and preserves a disproportionateportion of wealth in the hands of an elite few. There is perhaps no greater example of this then inlooking at the way the money supply of sovereign nations today operate under interest-based,independent central banking and fractional reserve structures. Under this model money is acommodity, manufactured by an elite from nothing and with power to direct and control credit ina society. As a consequence one of the most creative opportunities in the realm of policy-makingis lost and relegated to a tiny minority. Access to credit thereby becomes a privilege thatdisproportionately serves only a small segment of the society. Nearly every country in the worldhas adopted this model and this reality has broad reaching implications for all social segments.Its hidden effects is to organizes even developed, democratic nations as economic hierarchieswhich in turn has reciprocal effects that tend to counter any horizontal relationships with vertical

mechanisms of control in a community. This is true when we look at consequences internal tonations as well as when we arrange isolated national economies into a global framework whilepaying attention to the similar institutionalized norms and consequential affects that run throughthem.

In the era of globalization there is a real need to identify the role that present interest-basedstructures play in creating an uneven distribution of power and wealth not only in Egypt andTunisia but across the globe. This becomes evident when the contemporary practice of monetarypolicy under central banking, as an institutionalized global norm, is analyzed as a contributing


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factor in creating the conditions under which these recent developments occurred. This paperseeks to make that connection and then discusses the role that present monetary practice has onthe ability of all societies to develop effectively alongside the inflationary reality of thecontemporary dollar dominant order while arguing that contemporary conversation of monetarytheory as explained by either exogenous or endogenous causality fails to account for the injustice

inherent in the interest-based system altogether.In order to realize the changes protestors are demanding, namely stable prices, higheremployment, development and basic human rights, the authoritarian reality of private central banking and fractional reserve lending must be connected to these variable manifestationsinherent in nearly every national society today. This paper closes by posing the possibility thatalternative understandings of endogeinity and the use of interest-free monetary policy may beutilized to create mechanisms that contribute to the overall effectiveness of the uprisings inEgypt and Tunisia and simultaneously initiate a major step in a return to just, productive and realeconomic development. At the same time, this paper argues that absent an address of the interest-based macroeconomic order, current efforts to reform any society would be superficial no matterthe removal of regime, alteration of constitution, realignment of political organization, or other

modification. Once this is realized alternatives can be identified that promote an institutionalinterconnectedness promoting harmony between public, private and individual sectors, a viewthat refuses to separate or give preferential treatment to isolated sectors or individuals withinsociety.

Contesting the Regime: Contextualizing the Cause of Dissent in Tunisia and Egypt

On December 17, 2010 Mohamed Bouazizi lit himself on fire in an attempt at suicide his fruitand vegetable stand was confiscated by Tunisian police for selling without a permit. Hecomplained about his grim economic condition and begged the officers not to take his onlymeans of livelihood. The Tunisian public, reacting to shared frustrations and similar woes, tookto the streets hours later in organized protests that eventually led to the ousting of President Zine

El Abidine Ben Ali 28 days later on 14 January 2011. Ben Ali had ruled Tunisia for over 23years. Within days, contesting political parties, organizations, and individuals mounted similaroppositions in Egypt and after several weeks of very contentious and sometimes violent reactionsfrom the regime, Hosni Mubarek, ruler of Egypt for 30 years, was also removed. Within hours ofhis ouster protests movements were occurring in countries all over the Muslim world includingAlgeria, Jordan, Yemen, Morocco, Libya, Iran, Oman, Bahrain, and Saudi Arabia. Todaypundits, protestors, politicians and publics across the globe are certain that the Middle East andNorth Africa is being remade but no one is certain just how or what reforms will be made andwhat these societies will look like afterwards.

The protests were caused by a combination of political and economic grievances; however mostof the issues were covered as caused by domestic and not international factors. The most

common portrayal has been that the opposition movements were spurred due to nationalistambition for democratic reform. While this refrain is convenient for dominant democraticpowers seeking to downplay Western economic, military, and political support for these regimesover the years, it is a reductionist view that largely ignores the primary grievances expressed bythe opposition movements, a great many of them economic concerns like rising prices, unequalopportunity, and unfair distribution of wealth.


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The fact that these nondemocratic regimes have been in place for more than several decadeswithout facing opposition that even remotely resembles the massive mobilizations that led totheir ouster suggests that their causality has a much more complex origin. The fact that these protests have spread across a region sharing similar race, ethnicity, religion and culture alsosuggests they cannot be minimized to nationalist ambitions or desires for statist reforms. Still,

most analysis addresses each movement independently as a nationalist uprising rather than aregion-wide mobilization despite the fact that there is a very real connection between protests inthese states including similar repressive regimes funded from afar, economic factoring, historicalprocesses and easily recognized common cause.

Most contemporary analysis of international affairs, whether from the media or academy, tendsto adhere to realist perspectives: an international relations paradigm that holds the internationalarena as anarchic and places dominant emphasis on rational-acting nation states serving theirown interests in a highly competitive global playing field. The role of international institutionsand other variables is minimized in similar ways as is typified by coverage of the happenings inthe Arab world today, where broad connections have been made but coverage stillcompartmentalizes each national occurrence separately.1 This realist perspective dominates an

age that still has not altered in the post-cold war era and a victory of sort for transnationalism.The phenomenon of globalization, classified as an intensification of global interconnectedness(McGrew, 1998, pp. 300) has been proclaimed by many to quell the death of the nation state thusrejecting the concept that the nation state can any longer be considered a primary andindependent actor in the international arena. This view properly recognizes key factors like theglobal and domestic rights of capital (Panitch in Biswas, 2002, pp. 18). For example Dr.Robert J. Holton, a leading historical sociologist, says that flows of investment, technology,communications, and profit across national boundaries are the most striking symptom ofglobal challenge to the nation state (1998, pp.80). Unfortunately, most coverage has fails toconsider and account for the economic element of transnational nature when analyzing theuprisings across the Arab world.

On November 5, 2010 Ben Bernake, Chairman of the Federal Reserve in the United States,announced what has come to be called Quantitative Easing 2, inserting unlimited dollars into theglobal economy through a near zero percent interest rate policy because the pace of recovery inoutput and employment continues to be slow despite an earlier round of easing in March 2009where Americas private Central Bank purchased $1.7 trillion in government bonds and nearinterest-free emergency lending of $12.3 trillion worth of toxic securities that took most of thebad debt banks accrued during the run-up to the Great Recession off their books and placed itonto the American taxpayer2. Bernake announced the second wave of such policy saying, Inaddition, the Committee intends to purchase a further $600 billion of longer-term Treasurysecurities by the end of the second quarter of 2011, a pace of about $75 billion per month. Onemember of the Committee voted against the policy expressing concern that this continued high

1While the perspective is expected from Western media the same is predominantly true for coverage even in the

Arab world. For example, Al-Jazeera, the most popular Arab media outlet, has classified the developments as

Rabiia al-Thuraat al Arabiyy, The Spring of Arab Revolution or A Region in Turmoil on its website but still links

to sections that compartmentalize converage of each national effort (http://aljazeera.net/portal as of March 9m

2011). The second most influential Arabic news source Al-Arabiyya completely compartmentalizes each uprising on

its homepage (http://www.alarabiya.net/ as viewed on March 9, 2011)2

See http://www.federalreserve.gov/newsevents/reform_transaction.htm


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level of monetary accommodation increased the risks of future financial imbalances and, overtime, would cause an increase in long-term inflation expectations that could destabilize theeconomy.3 While an action within the sovereign nation of the United States separate fromEgypt, Tunisia or any other this policy is highly representative of a key economic element mostlymissing from current coverage.

Within 24 hours stocks jumped nearly 2 percent around the world in New York, London, Paris,Tokyo and Japan, oil rose almost two dollars per barrel, gold hit record highs, and othercommodities prepared for an inflationary push as well. The Egyptian Central Bank met inemergency as the American policy announcement sent the Egyptian pound to the largestappreciation in six years against the dollar. However, the Egyptian Central Bank decided tomaintain interest rates as foreign reserves had already increased by $3 million from June to November and by fourteen percent over the past year. In Tunisia the Central Bank alsomaintained their rates4 as developing countries all over the world denied inflationary concerns based on Household Expenditure Survey data5 that reports only highly aggregated householdexpenditure and contains no information on quantity making it virtually impossible to derive anyinformation about prices whatsoever.6

In the real world inflation became immediately apparent. The Reuters/Jefferies CRB index, aglobal commodities benchmark hit a two-year high immediately and started trekking its wayback towards highs that led to riots in Egypt in April, 2008 when a confidential study conductedby the World Bank revealed that a confluence of factors including the large increase in biofuelproduction, speculative activity, the decline of the dollar and higher energy prices.7

8

3See http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm

4See http://www.bct.gov.tn/bct/siteprod/english/actualites/evenement.jsp

5See excel data from Central Bank of Egypt here http://www.cbe.org.eg/public/MPC_InflationCoreFebE.pdf

6http://ageconsearch.umn.edu/bitstream/42251/2/08-WP_475.Fabiosa-Soliman.pdf

7http://image.guardian.co.uk/sys-files/Environment/documents/2008/07/10/Biofuels.PDF

8http://www.jefferies.com/cositemgr.pl/html/ProductsServices/SalesTrading/Commodities/ReutersJefferiesCRB/In

dexData/index.shtml


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In actuality the Federal Reserve policy is pumping liquidity into an economic environment wheredomestic investment is virtually impossible to fathom when analyzing the perplexing andpernicious private and public debt of American society. In essence this continuation in policyallows the United States, possessing the global reserve currency, to export its food inflation tothe rest of the world as the policy of easing is ostensibly to enable banks to earn their way out of

negative equity resulting from bad loans made during the real estate bubble, but the increasedliquidity is spilling over to foreign economies, putting pressure on them to increase theirexchange rates and creating international inflationary pressure affecting prices across the world.

Zero interest rates have generated a gain for stock markets and maintained asset prices that wereinflated for many years but this policy has also done little to stimulate domestic employment andlending within the U.S. and has initiated something of a currency war amongst major developedeconomies where the cheap dollars are flowing trying to purchase assets from free. The realadverse effects can be seen within developing nations that are crippled as they are forced toeither print their own currency to absorb the dollar inflows or to tighten rates to defend exportersand control for increasing inflation. This gives an unfair advantage to banks in using the carry-trade to borrow at low interest in the United States and generate arbitrage gains at high interest

overseas and also for multinational corporations that borrow at low interest rates and investoverseas buying tangible assets. Former World Bank economist Joseph Stieglitz acknowledgedon October 5, 2010 before the official announcement of quantitative easing 2 that instead ofhelping the global recovery, the flood of liquidity from the Fed and the European Central Bankwas causing chaos in foreign exchange markets. He said, The irony is that the Fed is creatingall this liquidity with the hope that it will revive the American economy Its doing nothing forthe American economy, but its causing chaos over the rest of the world.9

On December 17 Mohamed Bouazizi was self immolated and on January 6, 2011 Algerian youthprotested over high food prices shouting bring us sugar,10 within months the leaders of Tunisiaand Egypt were overthrown and protests were going global, but inflationary trends remain athighs. The Federal Reserve, for its part, is largely aware of these realities and expresses littleremorse. The current Federal Reserve Chairman of St. Louis recently defended the quantitativeeasing policy. When a CNBC talk show host inquired about the program, the question is at whatcost and did it lead directly to these skyrocketing commodity prices for things like grain andthings like copper and part of the reason that we have seen so much unrest in the Middle East?He said,

Thats not an easy story to tell actually but Ill tell you one version of it without signing onto it the Chicago vision would be that you got independent monetary policies all over theworld, you got flexible exchange rates, but that isnt really what would happen because alot of countries want to manage their exchange rates pegged to the dollar so what they aredoing is that they are importing some U.S. monetary policy when they are doing that and

so there is some leeway to say that U.S. monetary policy is affecting things around theworld, conversely that would mean that maybe what you should do is look at what is goingon globally, a global output gap instead just looking at US output gap when youre makingU.S. monetary policy.

9 http://www.reuters.com/article/2010/10/05/us-stiglitz-economy-idUSTRE6944M92010100510

http://news.yahoo.com/s/ap/20110106/ap_on_re_af/af_algeria_riots


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He continued and remarked with regard to countries experiencing unrest that, Those countrieschoose to have a flexible exchange rate and that is up to them and then ended by saying that theonly concern of the Federal Reserve is US interests denying any accountability for the potentialalternative reality aforementioned or acknowledging that the U.S. system coordinate to run aninternational financial, military, and corporate empire.

In reality of this is paradoxical. Modern international monetary policy suggests that nations areto manage exchange rates by raising or lowering interest rates. Countries that run a currentaccount deficit11 are to raise interest rates in order to attract a capital inflow of foreign fundswhereas countries with low interest rates expect that international and domestic capital will flowelsewhere borrowing at home tends to lead to investment and speculation abroad. The UnitedStates runs a persistent balance of trade and current account deficit and by all standards shouldhave to heighten interest rates in order to follow convention. However U.S. quantitative easingdirectly contradicts this decree. The net effect of such a policy is to support an astronomical asset bubble in the U.S., the result of two decades of Federal Reserve induced artificial marketmanipulation, pushing money into stocks and bonds, and lowering the dollars exchange rate inorder to help exporters in international trade. In reality it has created a new carry-trade with

cheap American dollars flowing into foreign markets and creating domestic imbalances,widespread commodity inflation, and political unrest that has the potential to dampen anyrecovery.

In reality, the Federal Reserve has been conducting contradictory policy like this for over ageneration. The financial markets are full of speculation and previous crashes were only repairedby similar, albeit not so extreme efforts at stimulus.

This culminated in what seemed to be a hyperinflationary tendency in 2008 but was mitigatedwhen the financialized manipulation spun out of control and revealed the subprime mortgagecrisis and led to the subsequent bankruptcy of Lehman brothers at the end of that year. As theReuters/Jefferies CRB index shows the process may be steadily on the return; still little to no

connection has been made with regard to this issue in serious political circles or within themainstream press. The connection between the Arab Uprisings seldom includes an analysis ofthese realities clearly understood within the Federal Reserve and the business community.However, the implications of this reality are severe. Without contextualizing the revolutions inTunisia and Egypt this financial formulation will persist alongside peoples trying to establishnew institutions, new legal frameworks and justice in their respective societies. Unfortunately,absent effort to connect these political, economic, and social factors in interconnected ways oneis incapable of posing solutions to the problem and one all pervasive and influential factorsurpasses and at the same time connects them all: the nature and role of money today.

The International Monetary System: A Ribaa-based Phenomenon

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take itaway from them, but leave them the power to create deposits, and with the flick of the pen theywill create enough deposits to buy it back againif you wish to remain the slaves of Bankers and

pay the cost of your own slavery, let them continue to create deposits."

~attributed to Sir Josiah Stamp Director of the Bank of England 1928

11Defined as the difference between the value of exports of goods and services and the value of imports of goods

and services http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm


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The decisions of the Federal Reserve system exert great influence on foreign nations, central banks, and geopolitics at large because the dollar represents the worlds dominant currency. Neglecting the magnitude of this influence represents but one of the ways that the typical perceptions and commentary today fails to account for the confluence of diverse influences between state and other global institutions of power today. As a consequence most analysis

underemphasizes the role of international finance and capital in affecting national policy via animposition of institutional norms from a global monetary order. This narrow-minded view notonly plagues those that report and study the contemporary international arena but also tends to beleaguer the proposed solutions of reformists within national boundaries by subconsciouslylimiting the scope of their analysis and preventing them from recognizing these external forces,exogenous to the statist view as well. Consequently, one in a country like Egypt or Tunisia canreduce the cause of dilemma and domestic corruption, repression, and injustice to faces andfigures while failing to recognize that the contemporary system mandates, supports and enforcesthese circumstances from afar by imposing institutional configurations that normalize structuresof authoritarianism even inside professed democracies.

At the head of these financial influences lie two institutional orders: independent central banking

and fractional reserve lending; the very systemic practices that allow the aforementionedmechanisms of direct relationship from the chief financial agency of the worlds richest and mostpowerful nation to influence the rest of the world and affect behavior in ways that are potentiallyconverse to their own interests. It is in understanding these phenomena and their relationship tonational policy today that true alternatives may be found.

The modern order of globalized finance was ushered in at the conclusion of World War II. Atthat time the United States was essentially the only productive economy in the world and theBretton Woods system of monetary management was created as, for the first time, commercialand financial relations between nations would be negotiated under transnational institutions likethe United Nations, the World Bank (WB) and the International Monetary Fund (IMF). TheBretton Woods agreement in 1944 represented a new economic order and at the same timesignified a rising role for monetary policy in the international arena. Each country was obligedto adopt a policy that tied its currency to the U.S. dollar and gave the IMF an ability to bridge animbalance of payments. The dollar was the only currency convertible to gold and this systemcontinued until August 15, 1971 when President Richard M. Nixon discontinued the conversionof U.S. dollars into gold at $35 per ounce and effectively made the monies of the United Statesand other countries into completely fiat moneymoney that national monetary authorities havethe power to issue without legal constraints.

Today the majority of nations relinquish control of the countrys currency to independent centralbanks that have a monopoly on issuance of bills. The central banks is responsible for issuing themoney supply, regulating it, and controlling the interest rates of their respective country.

However they are typically private or quasi private-public institutions that operate on behalf of private interests. It is a delicate relationship that is under increasing scrutiny across the world.The Federal Reserve in the United States undergoes extreme effort to downplay the effects of itsrelationship with power private on society claiming that it is not owned by anyone and is not a private, profit-making institution, and that the bank can best be described as independentwithin the government. By its own account however the institution admits that the FederalReserve Banks are organized much like private corporations, that they issue shares of stock tomember banks and stock that may not be sold, traded, or pledged as security for a loan;


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dividends are, by law, 6 percent per year.12 Most people know little of the implications of thisrelationship.

The casual description of the Federal Reserve system essentially documents that the worldsmost powerful sovereign nation state relinquishes control over its currency to an independentbank operating like a private corporation whose primary shareholders are owned by banks, the

very banks that are not nearly as interested in the 6 percent profit accrued each year as dividend but access to money backed by nothing tangible but (fiat) that can then be multiplied through powers of further money creation known as fractional reserve banking, placing economic planning and control over the economy in a relationship between central banks and privatecommercial operations.

This type of relationship between commercial banks and central banks has been replicated acrossthe globe today and is important for one trying to understand the source of money in any society.Central banks are not the sole issuers of money into the economic order because of fractionalreserve banking. This system is summarized misleadingly as,

A banking system in which banks hold only a fraction of their deposits in reserve, so that

the reserve-deposit ratio is less than 1, is called fractional reserve banking. Fractionalreserve banking is profitable for banks because, instead of sitting in the vault earning nointerest for the bank, a portion of the funds received from depositors can be used to makeinterest-earning loans. (Abel, Bernake and Crushore, 2008, p.532)

All economies are planned from somewhere, but this relationship places the planning of anational economy in the hands of its private banks as the power of money creation is granted tothe private central bank that issues the money supply or monetary base but mostly to commercialbanks that, through fractional reserve practices, are empowered to lend more money than theyhold on deposit, thus the equivalent of creating money from and for nothing and lending atinterest. The relationship of money supply to the monetary base depends on the reserverequirements and the currency to deposit ratio chosen by the public. With recent policy pushing

interest rates to almost zero and a long process that repealed legislation dedicated to protectingfrom financial consolidation and excessive leverage and speculation, there are virtually noreserve requirements on banks today. This reality coupled with the ability of the Federal Reserveto print dollars and purchase U.S. bonds with interest has created a system of debt hierarchy andreduced the sovereign federal government as to borrower from private banks taking away one ofthe most important components of governance. With the Federal Reserve in possession of theworlds most powerful currency, the United States has created a global financial dictatorship ofsorts.

12http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm


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These financial relationships creand internationally as long as tarranges the domestic Americaand the public at the bottom. Threlation to the cost of governmeincreases at each layer of the pyr

If we account for the powersFederal Reserve which createscan buy government debt andThereafter the private owners othe central banks of foreign coucurrency they use to buy the bo

and ultimately a gain and poweThe primary dealers of the Febanking institutions come afterstate and local government. Thistax the people to pay this debt.

It is obvious to see that theseinstitutions and the wealthy aroultimately the public ends upredistributed upwards due to thbanking with taxes and interest ponzi scheme under present c

circulation to cover all debt issuto perpetuate a process that canThe international order is organi

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Because Federal Reserve monannouncements and actions ofconcerned with economic realitibe understood and considered byworld. Today the elitist relatio

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mid, there are over 1,000 billionaires globally,n Europe and 500 are in North America. Mov0,000 ultra-high-net-worth individuals (avera). At the base of the wealth pyramid there arer adult of below USD 10,000, of which 1.1 bion are in India.14

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backed by the U.S. federal government and its political and military diplomacy and paid forcompletely with money created from nothing and added interest rates that tend to dictate policyfor other countries in the world.

The primary banks of the Federal Reserve System and Global Financial Companies get directaccess to dollars at lower interest rates and due to fractional reserve practices can invest in real

assets, currencies and the mechanisms that influence foreign countries many times over.Developed G20 nations are next in line as they are mostly traditional participants of Westerndomination or colonies of old that conformed completely and are stable enough to absorb someof the distortions of dollar dominance. Today they are still confronted by a dollar diplomacy thatpushes an influx of foreign investment for real assets and attempts to force currency appraisal ordevaluation in ways that serve the interests of the levels of the top of the pyramid and have adownward pressure on the smaller institutions and publics below.

Multinational Corporations also have preferential treatment in this model due to economies ofscale which place them as richer than many of the countries they do business in. They also canissue their own bonds typically at lower interest rates than developing nations and can borrowabroad in America as well to invest overseas. The whole international environment is dollarized;this has essentially made a fiat currency created from and backed by nothing a polytheisticgodhead of sorts with other currencies subservient to the U.S. dollar and the IMF and WBdirecting relationships in ways that serve the interest of continuing the relationships andhierarchy that defines this global dominance. Most people fail to recognize however that withoutthe people on the bottom adhering to the rules, paying taxes, working, lending and borrowing theponzi scheme would fold. This is why it is usual for regimes in developing nations to be heavilyfunded, supported and in debt to those at the top of the pyramid scheme.

The run-up to this contemporary financial empire was phenomenal and heralded by all sectionsof the debt hierarchy as an era of prosperity and essentially an end of history altogether with thetriumph of economic liberalization. One of the most famous proponents of such a view, Thomas

Friedman, calls this the Golden Straightjacket which he classified in his highly influential workthe Lexus and Olive Tree (2000) as the defining political-economic garment of thisglobalization era marked by a particular set of economic policies that opened national economicsovereignty to global capital markets, multinational corporations and the electronic herd, agroup of often anonymous stock, bond and currency traders and multinational investors,connected by screens and networks.15 This financialization of the international arena which canbe defined as a process whereby financial services, broadly construed, take over the dominant

15Friedman, Thomas. Understanding Globalization: The Lexus and the Olive Tree. First Anchor Books. (2000)

Friedman explains the comprehensive policies associated with the era as, To fit into the Golden Straitjacket a

country must either adopt, or be seen as moving toward, the following golden rules: making the private sector the

primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of

its state bureaucracy, maintaining as close to a balanced budget as possible, if not a surplus, eliminating and

lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and

domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital

markets, making its currency convertible, opening its industries, stock and bond markets to direct foreign

ownership and investment, deregulating its economy to promote as much domestic competition as possible,

eliminating government corruption, subsidies and kickbacks as much as possible, opening its banking and

telecommunications systems to private ownership and competition and allowing its citizens to choose from an

array of competing pension options and foreign-run pension and mutual funds. When you stitch all of these pieces

together you have the Golden Straitjacket. (p.107)


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economic, cultural, and political role in a national economy16 was deemed to be an end ofhistory, a triumph for a particular version of capitalism.

The view that American-led globalization was destined to conquer the entire world werepersistent from the 1980s through unto 2008 when the entire system nearly collapsed as marked by the bankruptcy of Lehman Brothers in September. The externalities of such an event

represented a form of global bank run that almost wiped out the entire international economy. Bythe time what is now termed the Great Recession actually hit interest-based leverage wasabundant and the entire global pyramid was financialized. Whether you were CitiGroupleveraged at 35 to 1 or a U.S. homeowner with tremendous debt chances were you were highlyindebted and participated in a portfolio composed of financial instruments you probably couldntunderstand with investments tied to parts of the world never visited.

After the inflated global markets almost collapsed during the recession of the end of 2007 thruJune 2009, the international monetary order returned to the very same policy that created the problem in the first place as this was the only way to defend the by now fabricated andfraudulent wealth of those at the top of the pyramid. The policy practices aforementioned by theFederal Reserve and most of the reactions of governments, banks, and institutions since havemarked a continuation of protecting a pyramid, ponzi scheme that failed with no detachmentwhatsoever from what had become normalized practices. The protests and uprisings across theworld, whether completely conscious of this or not, represent opposition to this perpetuation inpolicy practice and generate new opportunities to alter the order altogether.

Cases in Point: Egypt and Tunisia in the Run-up to Revolution

Since the revolution, nothing has changed We threw out Ben Ali, that's all." Kamid Hamdi Degree in Economics, Waiter in Tunisia March 12, 201117

The relationship between national money supply and private, fractional reserve central bankingtoday is not unlike the relationship between the dollar-dominated international banking

arrangements and developing economies. The first order is dominated by institutionalarrangements that vest the power of money creation initially to autonomous central banks andthen to commercial bankers that represent the shareholders of the former. Subsequently anexogenous relationship develops between banking institutions and the rest of society. In thesecond order developing economies are forced to hold dollar reserves due to the nature of thefiat, floating exchange system ushered in by the collapse of Bretton Woods in 1971 and othermechanisms like the sale of oil from OPEC nations in dollar denominated amounts, the pricingof most commodities in dollar bills and the threat of military intervention in the event one tries tobreak from convention.

In the international arena these relationships are manifested in many ways including exogenousinputs of foreign capital and aid, and technical know-how from institutions like the World Bank

and International Monetary Fund that act as the central banks and planners of developingnations. These institutions provide assistance, oftentimes following natural economic or politicalcrisis (Klein, 2007), by extending loans if countries accept structural adjustment polices. Thepolicy set implemented as a result represents an ability to dictate key aspects of monetary and

16Phillips, Kevin. American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the

21st

Century. Viking Books (2006)17

http://www.npr.org/templates/story/story.php?storyId=134482424


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fiscal policy directly and indirectly and creates conditions where the interests of the upperpyramid are not affected.

As a consequence of such exogenous relationships, less developed economies tend to adoptpolicies that not only preserve the interests of foreign influence but that replicate similar bankingmodels for domestic banking practices and create a relationship indigenous to nations where

bankers exert immense control over populations as well. However where quantification ofcentral bank independence can be somewhat verified in stronger, developed nations, quantifyingthe relationship and autonomy of banks versus the government has proven difficult in developingcountries since, laws are often incomplete, ambiguous, or simply not respected (Farraq andKamaly, 2007). The banks are usually embedded with a regime and thus help to perpetuateauthoritarianism via central bankings compatibility with the existent political structures. In thedeveloping world there tends to be little need to portray a veneer of democracy. As aconsequence, developing nations have proven to be the host of parasitical operations that allowthose on the top of the pyramid scheme to continue the order. Tunisia and Egypt are primeexamples.

Tunisia and Egypt were the World Banks poster children for economic success. On October 27,2010, a few weeks before the protests, World Bank commentary on economic progress inTunisia embellished the state of society there claiming,

Through a range of development policy loan programs with IBRD, Tunisia has boosted itsglobal competiveness and seen exports double over a little more than 10 years. The bestillustration of Tunisias improved competiveness is its total factor productivity growth,which often drives investment Furthermore, exports of goods doubled in value between1996 and 2007, while annual foreign direct investment flows increased steadily, averaging2.2% of GDP in 1996-00, 2.6% in 2002-05 and 5% in 2006-08. Tunisia ranked as Africasmost competitive country in Davos 2009 Global Competitiveness Report.

Egypt was not so far behind. The IMF reported in its summary of the Executive Boards yearly

meeting with Egyptian officials that,

Egypt made significant progress in wide-ranging structural reforms that accelerated after2004. This spurred rapid output growthaveraging 7 percent a year during FY2005/06FY2007/08underpinned by foreign investment-driven productivity gains and thefavorable external environment. Reforms also reduced fiscal, monetary and externalvulnerabilities, leaving some room to maneuver on macroeconomic policies in the event ofnegative shocks18.

The World Bank concurred explaining that,

Since the appointment of a reformist Government in July 2004, Egypt has embarked on areform path. The reforms have been sustained until now (until the global crisis) and theGovernment has established a solid track record as one of the champions of economicreforms in the Middle East and North Africa region (MNA).19

18 http://www.imf.org/external/np/sec/pn/2010/pn1049.htm 19http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EGYPTEXTN/0,,menuPK:287166

~pagePK:141132~piPK:141107~theSitePK:256307,00.html


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In reality, reforms were not reaching the majority of the populations. Tunisian reform began in1986 when the country adopted structural adjustment policies associated with the Washingtonconsensus and the golden straightjacket, and the North Atlantic Treaty Organization (NATO)covertly ushered Ben Ali to power so that the reforms could be implemented wholeheartedly. In1999 Fulvio Martini, former head of Italian military secret service SISMI, declared to a

parliamentary committee that "In 1985-1987, we (in NATO) organized a kind of golpe ( coup)in Tunisia, putting president Ben Ali as head of state, replacing Burghuiba,20" in reference to thefirst president of Tunisia.

Ben Ali was an avid adherent to the Golden Straightjacket throughout his 23 year ruleimplementing every recommended reform coming from the IMF, World Bank and internationalorder. The actual outcome of the reform programs was the privatization of essentialinfrastructure and industries, removal of tariffs on imports, easing of export restrictions,devaluation of the currency, and the opening up of the domestic labor market to foreigninvestment so that corporations could employ Tunisians at cheap labor in the textile and autospare parts industries. These economic reforms, professed as documentation of the liberalizationof society altogether, actually made those on the bottom of society, worse off economically and

older forms of clientelism reappeared, undermining the prospects for political democratization.Socioeconomic conditions (increasing inequality and a shift of power away from subordinateclasses) and the habits of single-party rule were much more important to regime outcome thanthe stated choices of political elites well rehearsed in the language of democratic transition(King, 2003, p.6)21. Inflation, high unemployment, and a low quality of life for those at the bottom of society meant little to World Bank and IMF analysts as profits at the top weresubstantial enough to promote the notion that the Tunisian economy was growing, reforms wereworking and that there was an economic miracle in action.

Egypt followed the norm as well and started implementing IMF and World Bank reformsaround the same time as Tunisia. However, the implementation of the golden straightjacket wasreally increased in 2004 with the appointment of a new government who adopted everyrecommended adaption. Egyptian growth remained above 6 percent from 2004 thru 2010 andthe international community touted Egypt as a bastion of successful reform. The economy wascontinuously deregulated and open to further foreign investment and privatization as politicalpower was decreased for unions at the hands of a repressive state. In reality aggregate growthabsent inclusion of distribution hid costs to the general population as inflation, unemployment;widespread poverty and malnourishment were ignored. This was expressed by Kamil Abbas,General Coordinator of the Center for Trade Union and Workers Services in Egypt in aninterview in August 2010 with the Wall Street Journal. In it he explained, The gains touch onlycertain segments of the population the upper crust of society You have employees making$20 a month in some new businesses. What kind of reform is that?22

The Egyptian and Tunisian economies were wearing the Golden Straitjacket as prescribed:opening up to foreign investment, manufacturing industries and infrastructure developmentwere neglected in favor of low-end manufacturing, tourism and other menial and low payingjobs. In Tunisia land privatization and agricultural reforms still rendered it incapable of feeding

20http://www.repubblica.it/online/fatti/afri/tuni/tuni.html

21King, Stephen J. Liberalization Against Democracy: The Local Politics of Economic Reform in Tunisia. Indiana

University Press, 2003.22

http://blogs.wsj.com/economics/2010/08/03/egypt-critical-take-on-a-model-reformer/


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its own population as in Egypt which before the protests imported 6 million tons of mostly U.S.wheat a year in order to feed its people despite having ample arable land and being foodindependent as early as the 1960s. Military support and foreign aid in each nation from abroadcreated a dependency that allowed dictatorial relationships to persist from the United States andEuropean nations to the regimes and as a consequence from the regimes to the populace. Barack

Obama, right before his much touted speech in Cairo in June of 2009, referred to HosniMubarak as a "stalwart ally of the United States" and a "force for stability and good". In similarways Nicolas Sarkozy had to excuse Frances positive regard for the Tunisian economic miracleEurope had touted for many years. He portrayed ignorance exclaiming, "Behind theemancipation of women, the drive for education and training, the economic dynamism, theemergence of a middle class, there was a despair, a suffering, a sense of suffocation. We have torecognize that we underestimated it.23 Still, the United States and European nations supportedthese regimes to the end and only recently have come out with rhetorical support of the internalalterations as they prepare to force the perpetuation of policy and influence new political allies.

The policies manifested in both Egypt and Tunisia were those of the now-deposed dictators andtheir regimes and were only possible with the complicit support of the international monetary

order that kept them in power. The success stories ignored the ravaging effects these policies hadon the poor majority, the repressive political circumstances in which they occurred and thepossibility that short term reforms coincident to the international order could create instabilityand eventually lead to replacement of the regime altogether. For the first time in the hyper-acceleration of international globalization unforeseen potential collapse seems near and theuprisings are part and parcel of reaction to that system. However, the normalized institutional practices have not been removed from the Egyptian and Tunisian situations and despite awarranted celebration in favor of political reform any alteration will prove cosmetic unless itaddresses the larger macroeconomic practices that undermine advancement for all sectors ofsociety and continue practices that conform to the order of the dollar dominant debt hierarchy.

It already seems as if there will be no serious or complete effort to break away from the norms offinancialized globalization as induced by the global order. Immediately after Bin Ali wasdeposed Tunisia's Central Bank Governor Mustapha Nabli said in Washington at a conference atthe Carnegie Foundation for International Peace that in the next months the country will needfunding from the international community stating that, "It is possible that our needs for financingmay increase at both budgetary and external levels.24 "We will need financing and we areworking with the World Bank, the IMF, the African Bank, the European Union and Arab Funds,"he said. Standard & Poors lowered Tunisias currency rating to triple B+, while Moodysdowngraded its foreign debt to Baa3, the lowest investment-grade rating25 since the removal ofBen Ali.

In Egypt the financial consequences are similar; Egyptian currency reserves declined by a billion

dollars due to the political unrest, a need to prop up the Egyptian pound against the dollar and adecline in tourism.26 The stock market remained closed for over a month and Egypts central bank put 4.5 billion Egyptian pounds on the market and only sold 3 billion of them due to

23http://www.guardian.co.uk/world/2011/jan/24/nicolas-sarkozy-tunisia-protests

24http://en.ce.cn/World/Africa/201102/26/t20110226_22249802.shtml

25http://www.ft.com/cms/s/0/21b42d54-23f3-11e0-bef0-00144feab49a.html#axzz1GVHEou9b

26http://www.bloomberg.com/news/2011-03-07/egypt-s-february-foreign-reserves-decline-to-33-3-billion-1-.html


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expectations that the pound would depreciate in the near term.27 It is expected that the balanceof payments at the end of the third quarter of the current financial year which ends on March 31,will register a deficit of more than $3 billion," the central bank said in a statement. And onMarch 10 the Monetary Policy Committee of Central Bank (CBE) decided to keep the overnightdeposit rate and overnight lending rate unchanged at 8.25 per cent and 9.75 per cent respectively

while inflation was rising steadily. Egypts stock market seems ready to be exposed to acomplete bargain sell off as it resumes. Egypts stock market regulator recently eased rules onmargin calls requiring investors to pay margins or present more collateral when the clients debtreaches 70 percent of the shares value at the end of trading each day. Claiming these effortswere to develop mechanisms to resume trading with the aim of limiting the volatility that mayhappen in the market when trading starts, and to mitigate the negative impact on investors,especially those dealing in margin trading, as well as to spur demand.All of these indicatorssuggest that absent any radical alternative these economies, despite being new democraciesmotivated by regime change, will be at the mercy of the international financial order.

When countries like Tunisia and Egypt run deficits they are expected to raise interest rates toattract foreign investment and further indebt their populations. The IMF also dictates that they

impose privatization and austerity measures that further decrease government intervention andthat deflate stock markets and assets long enough to induce foreign buyouts and ownership of theeconomy. No efforts are made to prevent the electronic heard from conducting a speculativefrenzy on every aspect of the Egyptian and Tunisian economy thus rendering the possibility thatany and all effective political reform is rendered null and void as well.

The developed countries responded accordingly. At a two day meeting in France held shortlyafter the ouster of Mubarek and Ben Ali finance chiefs from the G20 nations issued a jointstatement claiming, "We stand ready to support Egypt and Tunisia, with responses at theappropriate time well coordinated with the international institutions and the regionaldevelopment banks, to accompany reforms designed to the benefit of the whole population and

the stabilization of their economies," and International Monetary Fund chief Dominique Strauss-Kahn said his global lending institution stood ready to help Egypt and Tunisia if asked, but thathad received no request so far.28

In response to the Tunisian downgrade Central Bank Governor Nabli declared that external debtwould be honored. Tunisia will pay back its debts, estimated at 1120 million dinars for 2011($800 million), on the due dates. Some 820 million dinars ($584 million) will be paid back inApril 2011 and 300 million dinars ($213 million) in September 2011,29 he said. Egypt owes EUmember states $9 billion and the country's total foreign debt at about $34.7 billion withgovernment debt accounting for roughly $29.8 billion, or slightly more than 11 percent of GDP.Still, despite this debt being run up by rapacious dictators and despotic regimes there has been

very little talk of default suggesting they will continue to play by international standards.These internal situations exist alongside a global macroeconomic reality of continuedquantitative easing and subsequent commodity inflation. If the economic dimensions of thismovement are not understood and included in analysis then there is little hope that the uprisings

27http://af.reuters.com/article/egyptNews/idAFLDE7250C320110306

28http://www.reuters.com/article/2011/02/19/us-g20-mideast-idUSTRE71I2MG20110219

29http://www.bct.gov.tn/bct/siteprod/documents/20110125.1.ang.pdf


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in Egpyt, Tunisia and any other countries that may successfully depose their dictatorial servant tothis international order will be either revolutionary or effective whatsoever. Unfortunately, anycompetent address of the issue requires that contemporary economic phenomenon are understoodthrough the lens of elitist domination contemporary norms create. Absent an address of therepressive nature of money as debt control mechanism in the international arena, there can be no

change.

Monetary Policy Today: Interest Rate Relations and the Real Economy

Inflation is always and everywhere a monetary phenomenon.

~Milton Friedman

By the agency of power vested in banking institutions, namely to control the issuance and cost ofcredit, monetary policy is perhaps the most important dimension of governance today. Whereasmonetary and fiscal policy are the two primary tools of affecting macroeconomic behavior, it isimportant to note that the relinquishment of decision-making capability to the financial sectorlimits the role of government to fiscal matters. The argument that independent central banks

function as independent judiciaries is nearly nonsensical when recent policies are weighed inrelation to underlying constitutional principles and the notion of a social contract that suggestsgovernments and all arms of governance act on behalf of their citizens.

As austerity measures and fiscal restrictions follow monetary policy that failed the real economyand instead socialized the losses of banks, it should stimulate recognition that something isfundamentally wrong with the nature of this relationship. The cumulative experience and currentstate of the post-Bretton Woods fiat, floating exchange rate system created an international arenathat utilized central banking, fractional reserve underpinnings and perpetual debt servitude tousher in a financialized form of globalization that constitutes a domination by financialinstitutions, multinational corporations and an array of elitist arrangements based largely on theability to leverage excessive debt. As a result economic indicators and analysis have grown

increasingly reliant on financialized denominations to support the notion that the global economyis still growing. Similar to the way in which financial, real estate and insurance sectors overtookmanufacturing and real economic production in the United States during the rise of globalization,today the real economy and real people all over the world are being exploited to feed aspeculative debt parasite that is destroying the real world yet reporting profits and growth due toan array of financial products and speculative activity.

What the world seems to have embarked upon now, as one analyzes the consequences ofpolitical upheaval across the world and what that means for economic recovery, is the potentialend of an international monetary order altogether although. It would be hard to tell whenisolating economic variables however, this time away from the political realm. No matter thecontinuation of monetary interventions seeking to stimulate an economy, the international order,

clearly denominated in fiat U.S. dollars, has become increasingly reliant on fabricated growth viamonetarist manipulation. Nearly all of the economic data whether measuring unemployment,inflation, aggregate growth or other has been deliberately distorted in order to defend a systemand to honor debt that is increasingly reliant on political, economic and military intervention.Everywhere these interventions are failing however but traditional policy and practice sustainsabsent any alternative.


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This order is maintained by several hundred years of imperialist practice. The development oftodays economic order is largely a byproduct of a philosophical worldview rooted in usuriousmanipulation, conquest, competition and private triumphalism: a worldview that necessitates selfseeking behavior as productive and the pursuit of profit absent moral judgment as ultimatelybenign. Thus contemporary monetary policy has evolved inside an environment that necessitates

a justification for imperial patriarchy over people, cultures, nations and today the world. AsThomas Friedman put it, Unfortunately, this Golden Straitjacket is pretty much one size fitsall It is not always pretty, gentle or comfortable. But its here and its the only model on therack this historical season30. These philosophical roots, manifested in the structures of moneycreation and interest-based relations are patronizing and degrading and thrust upon real peoplethe notion that actors from above should dictate to those below. No greater example of this existsthan in an analysis of monetary policy today.

Current monetary policy gives a monetary authority control over the supply and availability ofmoney and its cost by setting interest rates. Monetary practice has grown increasinglysophisticated and complex but is largely derived from a body of monetarist theory that precededthe study of macroeconomics and stems from discussions about the relation between prices and

money traditionally classified as the Quantity Theory of Money.

The quantity theory of money explains inflation as the reduction in the value of money that musttake place if an increase in the money supply is to be demanded thus holding that there is a directproportionate relationship between money and prices. It is interesting to note that the quantitytheory of money has its roots in deliberations about the effects of new money, then intrinsicgold and silver coming from the new world and thus introducing an increase in the price ofmoney after an influx due to conquest from afar.31 The theory has been successively andsuccessfully sophisticated over several generations and served as the backbone of monetarypolicy for most of recent history having appeared to receive a clinching verification during theGreat Inflation of 19691983 (p.3). The adherence to monetarist doctrine was heralded as a

period of triumph for central banking due to a targeting of the money supply which, it wasclaimed, had effectively managed inflationary periods. This was attributed to monetary practicethat emphasized shifting perceptions with respect to the importance of price stability (Volker,4).

The victory for concentration on money supply and central banking specifically was short-livedhowever. Soon after the ultimate influence and determination for the money supply underfractional reserve systems was proposed to be endogenous, coming from the conventional banksand demand for money in the system and not stemming from the lofty exogenous decisions ofindependent central banks. Ample evidence documented that efforts of central banking to controlthe money supply were futile and disconnected from reality. Instead the increase of money wassomething that was not looked at as having caused a proportionate inflation but that the monetary

policy itself was explained by inflation or alteration in prices inside the system.

As a consequence of such fluctuating perspectives it becomes evident that consensus in the realmof monetary policy is in no way shape or form existent. Still, the peculiar notion of todaysmonetarist practices is a complete eradication that money supply is connected in any which way

30Friedman, Thomas. Understanding Globalization: The Lexus and the Olive Tree. First Anchor Books. (2000)

31See Nicolaus Copernicus (1517), Memorandum on Monetary Policy or Jean Bodin, Responses aux paradoxes du

sieur de Malestroict(1568).


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to price. The argument for the endogenitiy of the money supply completely eradicated virtuallyany referral whatsoever to the LM curve (quantity of money versus money demand) in monetary policy and instead placed emphasis on the role for central banks in setting short term interestrates, representing a virtual dismissal of the centuries old quantity of money belief altogether.Primary evidence of this reality lay in the fact that the Federal Reserve in the United States no

longer publishes data affiliated with the M3 measure, the measure showing the fastest growth inmonetary supply, after claiming that the monetary aggregate has not played a role in themonetary policy process for many years32. This reality is an indication of the now prominentmonetarist notion that money supply and inflation are not directly related and that setting shortterm interest rates is the mechanism by which inflation and deflation can be controlled.

These alterations are important for a few reasons. First, the quantity theory of money has playeda predominant role throughout the history of monetary and macroeconomic analysis, as recentlyas the 1970s-80s the quantity of money and thus a focus on monetary base had been consideredof utmost import. Secondly the debate around the exogenous or endogenous nature of moneydemand and supply is a haphazard argument of circularity. Central banks are exogenous actors but so are conventional banks under a fractional reserve system that places money at the

exogenous hands of banking institutions that characteristically lend for speculative investmentand are not interested nor obligated under their private, profit creating foundation to allocateresource to the productive real economy or for the needs of society at large. It is the nature ofthis relationship that suggests that much monetarist theory and practice is based on blindacceptance of faulty underpinning ideology, an ideology that unquestionably acknowledges themerits of independent central banks influencing a monetary base and fractional reserve practicesthereby granting authority to commercial banks to control the who, what, and how much ofmoney entering into the economy. It is this control and these relationships that must accompanyany social reform today if there will be any fathom of economic justice.

It is not just developed countries that ace such threats. The triumph of central banking as a meansof creating price stability birthed widespread adoption of the practice. The IMF reported in 2010that,

Over the past twenty years, almost all advanced economies and many emerging marketeconomies central banks adopted monetary policy frameworks with price stability as theprimary objective. These monetary policy frameworks often have the following features:(i) central bank independence to achieve price stability together with strong policyaccountability; (ii) policy formulation based on a strategy that makes use of all availableinformation; and (iii) an operating framework based on a single policy interest rate targetimplemented with market operations. 33

Both endogenous demand and exogenous behavior are actually representative of exogeneity in sofar as they place banks as dominant external actors in society. The dangers of such an exogenous

relationship and the conflict of interest inherent in such institutionalized relinquishment of powercannot be understated. Efforts to belittle the relationship of money supply and inflation may verywell be deliberate manipulation designed to prevent an acknowledgement that the dollardenominated system is dead and that monetary policy as practiced is incapable of effecting

32http://www.federalreserve.gov/releases/h6/discm3.htm

33 http://www.imf.org/external/np/pp/eng/2010/052710.pdf


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results as low interest rate policy over a 20-year era has only stimulated asset bubbles of growthbased on inflation at the cost of drastic debt expansion. The underlying structural collapse in thereal economy went by unnoticed for most of a 20-year run but today as low interest ratescontinue to try to stimulate the economy it becomes evident the flawed nature of contemporarymonetary effects.

A Financial Crisis Inquiry was recently completed in the United States and documented thatFrom 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to$36 trillion, more than doubling as a share of gross domestic product. The report concludedthat, this financial crisis was avoidable. The crisis was the result of human action and inaction,not of Mother Nature or computer models gone haywire. The captains of finance and the publicstewards of our financial system ignored warnings and failed to question, understand, andmanage evolving risks within a system essential to the well-being of the American public. Still,today after billions in loans and trillions in troubled asset relief, the relationship that placesdominant control of the nations money supply and credit issuance in the hands of bankers is notdiminished. In fact, it has only grown and seeks today to export the inflationary consequencesand the practice and adoption of that very policy to the rest of the world.

Thus monetary policy is a process that takes economic planning away from governments andplaces it into the hands of large financial institutions deeming that the control of money is bestleft in the hands of the private sector as a check and balance away from the pernicious evils ofgovernment. History documents that private power can be as equally pernicious and it has beenshown, contrary to the touted historical reconstructions that place money as a creation of Neolithic individualism, that the use of money for providing a general unit of account,developing exchange economies, and even for lending at interest is a public phenomenon thatoriginated within the public institutions of ancient Mesopotamia34. This awareness has graveimplications for the proper positioning of monetary practice in society, namely that control overmoney stems from and should be a public endeavor.

If the design of the contemporary monetary system does little more than allocate access tomoney in the hands of an elite; the problem is exasperated by the very use of interest itself as anadditional component. This use of interest in this model not only vests money creation in thehands of a private cartel but also creates conditions where a perpetual pursuit for principal pay-down is not only impossible, but creates institutionalized debt slavery by way of cost for moneyplus interest and by way of issuance of money as debt leading to taxation. Today a countryscurrency is nothing more than a floating debt instrument controlled by banks and because theorigin of any currency under independent central banking is issued to the government withinterest and then multiplied throughout the society by way of the fractional reserve model thetotal money supply in circulation is insufficient to pay down money supply plus debt. Thus wemay say M < Cumulative Debt or M < M + I, where M is money supply and I is interest. This

equation effectively means that cumulative debt always exceeds money in circulation and thisequation, albeit completely rudimentary, has grave implications for both the makeup of theeconomy and the inability to control for both inflation and deflation.

34 http://michael-hudson.com/2003/03/the-creditarymonetarist-debate-in-historical-perspective/)


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As interest continues to multiply debt in greater portions throughout a society, greater portions ofcurrency in circulation go to service debt thus leaving a greater drag on currency available forproductive consumption or investment. This reality is hardly ever accounted for with relation tomonetary policy and actually explains a great deal as to why the economies of the world havebecome increasingly financialized and why monetary policy has grown increasingly reliant on

targeting interest rates to maintain a rate of investment that can feed its all pervasive need foradditional stimulus to honor an ever-growing speculative debt thus inducing a drag onproduction in the real economy. These relationships are completely unnecessary.

In seeking equilibrium monetarists seek to make the demand for money equal to supply ofmoney. A better method of controlling inflation would be to make the demand price of creditequal the supply price of credit yet still the laborious process in both theoretical and empiricalinvestigation to attain such an outcome is easily remedied when interest itself is removed fromthe equation altogether and monetary policy vis a vis inflation can concentrate on creating anarena where the price and supply for credit is zero and the demand and supply of money can thenremove itself from any and all argumentation as to root causality of exogenous or endogenous purport and money supply, creation and issuance can be directed in ways that allow for true

equilibrium, represented by a necessary collaboration and horizontal structuring betweengovernments, banks, and the population. Such allocation eliminates the disequilibrium whenmoney is created as debt, spreads risk across the social spectrum, creates the opportunity forprofit and loss application, and creates an arena where money is a measure of exchange and notacting as a commodity in and of itself devoid of backing representative of real value.

It is quite unfortunate that the consummate body of evidence and theory in the realm ofcontemporary monetary policy utterly accepts the root institutions of contemporary monetary practice and the use of interest as a given. In similar circular argumentation as to cause ofinflation, as long as interest is included in the equation there is no potential for equilibriumwhatsoever and so as variables of causality are altered, models are built to account and explainnew phenomenon and monetary theory is altered. Nonetheless the end result will always remaindisharmonic until interest is completely removed from the equation and the relationships ofmonetary authority are altered.

The fact that interest represents a tax associated with price due to the reality that most economictransactions include purchases involving interest suggests that it should be considered whendealing with monetary policy. The inability to account for the tax of interest and the distortionscreated with regard to circulation in relation to debt may also account for distortions thatdiscredit the proportionate relationships that the quantity theory of money suggests should hold.Contemporary analysis of the theory has shown that while there is a proportionate relationshipbetween money and inflation in the long run there is no correlation between the growth rates ofmoney and real output35.

The quantity theory of money holds that MV = PY, where money supply (amount of currency)multiplied by velocity (number of times each denomination of currency changes hands in a year)is equal to prices (average price of all goods and services in a society) multiplied by output(quantity of assets), with PY representative of nominal GDP. Thus each variable is an identitywhere each term is defined by the values of the other three. However, when M is considered in

35http://www.minneapolisfed.org/research/QR/QR1931.pdf


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disequilibrium as M + I, then the identity relationship between variables is altered as (M + I) * V= GDP or M * V = GDP (I * V) thus accounting for an actual drag on total output. Solving forP = (M + I)(V)/ Y thus creating a added inflationary inducement and with Y = (M + I)(V)/Pcreating inflated output levels with an additional boost from the nominal value of debt. Thesedistortions should be considered as potential causes behind the reality that assets, goods, and

services, once an aggregate measure associated with nominal GDP, are no monger reliable due tothe rise of financial transactions and a heavier role for interest (I) in the economy. Thus today itis virtually impossible to separate growth associated with real production from financialaggregates. As a result, monetary policy is increasingly reliant on the manipulation of interestrates to influence prices and especially today to maintain a false asset price inflation preventing amassive correction that would lead to widespread global depression.

While rudimentary in rationale, it is necessary to recognize the effects of interest on economicand thereby social conditions today. Calculations tend to accept the nominate contributioninterest gives to an economy without recognizing the overall consequences, as society ismonetized and access to credit determines station and prosperity. These artificial distortions,manifest in increasing financialization, imbalanced economies of scale, uneven distribution of

wealth, and a reliance on interest to influence variables like growth and price, manufacture astate where the real economy becomes detached from the role of interest in society. Themonetarists enter a terminal phase the Federal Reserve seems to be embarking upon now wherethe financialized dependence breeds a complete disconnect from the real economy and policy isakin to pushing on a string, trying to get out of a liquidity trap where the distortions start toshow.

The call for a monetary system absent interest is largely foreign to dominant macroeconomictheory and practice today. The time value of money is viewed as a necessary component in orderto give reward for savings and thus investment but the very nature of money creation, lesseningreserve requirements and increasing debt leverage in the system documents that there is an

obvious distortion inherent in the contemporary order. The agent of that distortion is interest andas a consequence of income derived by interest inside the conventional fiat money there are nocompetent measures of productive economic activity. The sole agent of debt multiplication isinterest, and it is the very variable that creates distortions in the economic measures of inflation,growth, financialized transactions versus productive activities and etcetera. With total cumulativecurrency plus debt exceeding total currency in circulation, the inability to pay down principalplus debt makes the growth of debt exponential and pushes economic activity into the realm ofmoney manipulation and away from real productive development. As a consequence, the systemis failing and facing collapse, monetary policy has entered a zero sum game of unlimited moneyfor virtually free yet absent any real net productive effects.

If there is a positive aspect of this position it is the reality that talk of an interest free monetary

policy need not seem so foreign anymore. The Bank of Japan has effectively had a near zerointerest rate since October 1995 and in the United States the federal funds rate has been reducedto near zero since September of 2008 with no end in sight. However in both Japan and the UnitedStates there has been little to no consequential growth. Conventional theory suggests that it istime for monetary stimulus, but with interest rates at zero there is little room for maneuveringunder present practices. The insertion of money into the global economy through banks cannotgarner productive economic activity as borrowing continues to be used as an arbitrageinvestment opportunity to create profit for free. The once popular yen-carry trade is now the


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dollar carry-trade and the refusal of the United States to follow traditional rules for countrysrunning deficits has put a gun to the head of economies all over the world. It is only in seriousdeparture from the norms of central banking and fractional reserve lending along with efforts tomove towards an end of interest altogether that proper monetary reform can occur.

Immediate Solutions for Egypt, Tunisia and the Rest of the World: Sovereign Credit and

Endogenous Loans

The government should create, issue and circulate all the currency and credit needed to satisfy

the spending power of the government and the buying power of consumers..... The privilege of

creating and issuing money is not only the supreme prerogative of Government, but it is the

Government's greatest creative opportunity. By the adoption of these principles, the long-feltwant for a uniform medium will be satisfied. The taxpayers will be saved immense sums of

interest, discounts and exchanges. The financing of all public enterprises, the maintenance of

stable government and ordered progress, and the conduct of the Treasury will become matters ofpractical administration. The people can and will be furnished with a currency as safe as their

own government. Money will cease to be the master and become the servant of humanity.

Democracy will rise superior to the money power.

~Abraham Lincoln

The uprisings of Egypt and Tunisia and the spark they have created across the globe for activismand opposition that stretches from Wisconsin to Bahrain represent an outcry of those mostaffected by the international monetary order. They also mark an indication of potential political,social, and economic disintegration in the event they are unable to render any comprehensivechallenge to both the latest wave of monetary domination initiated by the Federal Reserve andthe continued efforts of America to lead and advance the causes of globalized imperialism.

While it may be impractical and unrealistic to call for comprehensive alternatives at this juncture, there is a documented need for awareness that connects political repression to the

general monetarist macroeconomic order and that at least contributes in significant ways to thelack of concern foreign powers held with regard to repression in light of the norms offinancialized globalization and debt hierarchy. The ideal manner for creating productivepathways towards making these necessary broader connections, working toward an interest-freeorder, and returning monetary practice to its proper role as servant of sovereign peoples is in theutilization of what have been termed Islamic endogenous loans36.

Deliberation along the terms of exogenous and endogenous nature of money supply and demandneglect the most important aspects of money supply theory where they accept the a prioriassumptions that money creation is best left to private and financial hands and overlook theunderlying axiomatic contradictions and contemporary empirical evidence that suggests thisrelationship represents a massive conflict of interest. The root of exogenoity is the central bank,

endowed with the ability to create money, organized like a corporation with shareholders thathappen to be private banks, and able to charge interest on money theyve done very little to earnwhile the root of endogenity is from banks and money demand from the public. These banks alsocreate money through fractional reserve practices, can charge interest on money acquired

36http://islamiccenter.kau.edu.sa/7iecon/Ahdath/Con06/_pdf/Vol1/14%20Rodney%20SHAKESPEARE%20Non-

interest.pdf


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through very little effort and are profit producing institutions many of whom are shareholders inthe very independent central bank claims suggest they are influencing. Under these conditionsefforts to pinpoint the source of causality completely ignore the reality that this relationshipentwines profit seeking institutions in a collaborative endogenous affiliation while creating anexogenous relationship between banks and the rest of society, both the public and government.

Causality hardly matters when the intention and inevitable outcome is the same.The incentive to hold money for speculative purpose has taken any possible connection betweenmoney and physical production away. The process and possibilities of speculation based profitmotives were exasperated with the complete disintegration of the gold reserve system in 1971.The contemporary market for derivatives, credit default swaps, currency speculation, complexsecurities and other exotic financial instruments has naturally developed as a fundamentalconsequence of the complete monetization of the global economy. These natural byproducts ofthe axioms underlying a privatized fiat system can only further consolidate power in the hands ofcentral banks and the private banks they provide money too. The relationship between central banks and commercial banks manifests itself similarly in almost every country while therelationship between the Federal Reserve and foreign central banks creates an international order

much the same.

In the contemporary era of globalization the U.S. produces dollars through its central bank atinterest and the rest of the world produces goods, services and natural resources that those dollarscan buy. Trade is no more a quest for comparative advantage and utility as everyone needs toacquire dollars. IMF debt is valued in dollars, between sixty to seventy percent of global foreigncurrency reserves are held in dollars37, oil is sold in dollars and due to the potential of speculativeattacks in a floating exchange rate environment every country has to acquire and hold dollars inamounts that can withstand any speculative pressure on their currencies. These factors create theconditions under which the Federal Reserve can act alone and completely contradictory to thenormal rules of macroeconomic behavior. The U.S. continues to flood the world with itscurrency despite running massive deficits that would usually mandate tightening and austerity.

The term endogenous stems from the Greek and means coming from within; a trulye

Riba Free Economy and the Islamic Awakening (Long Version

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