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Guest Post: The E.U., Neofeudalism And The Neocolonial-Financialization Model

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Submitted by Charles Hugh Smith from Of Two Minds

The E.U., Neofeudalism And The Neocolonial-Financialization Model

To fully understand the Eurozone's financial-debt crisis, we must dig through the artifice, obfuscation and propaganda to the real dynamics of Europe's "new feudalism," the Neocolonial-Financialization Model.

Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone.

In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire.

In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the "core" countries exacted enormous profits from this expansion of debt and consumption.

Now that the financialization scheme of the euro has run its course, the periphery's neofeudal standing is starkly revealed: the assets and income of the periphery are flowing to the Core as interest on the private and sovereign debts that are owed to the Core countries' commercial and central banks.

This is the perfection of Neofeudalism. The peripheral nations of the E.U. are effectively neocolonial debtors of the Core countries' banks, and the taxpayers of the Core nations are now feudal serfs whose labor is devoted to making good on any bank loans to the periphery that go bad.

To fully understand the Neocolonial-Financialization Model, we need to establish some basic characteristics of the Eurozone system. Do to that, let's start with the Eurozone and the euro.

The European Union established a single currency and trading zone for the classical Capitalist benefits this offered: a reduction in the cost of conducting business between the member nations and a freer flow of capital and labor.

From a Neoliberal Capitalist perspective, such a union consolidated power in a Central State proxy (The E.U.) and provided large State-approved cartels and quasi-monopolies easier access to new markets.

From the point of view of the citizenry, it offered the benefit of breaking down barriers to employment in other Eurozone nations. On the face of it, it was a “win-win” structure for everyone, with the only downside being a sentimental loss of national currencies.

But there was a flaw in the structure that is now painfully apparent. The Union consolidated power over the shared currency (euro) and trade but not over the member states’ current-account (trade) deficits and budget deficits. While lip-service was paid to fiscal rectitude via caps on deficit spending, in the real world there were no meaningful controls on the creation of private or state credit or on sovereign borrowing and spending.

Thus the expansion of the united economy via the classical Capitalist advantages of freely flowing capital and labor were piggy-backed on the expansion of credit enabled by the Neoliberal Capitalist structure of the union.

The alliance of the Central State and its intrinsic desire to centrally manage the economy to benefit its fiefdoms and Elites and classical free-market Capitalism has always been uneasy. On the surface, the E.U. squared the circle, enabling stability, plentiful credit creation and easier access to new markets for all.

But beneath this beneficent surface lurked impossible-to-resist opportunities for exploitation and arbitrage. In effect, the importing nations within the union were given the solid credit ratings and expansive credit limits of their exporting cousins, Germany and France. In a real-world analogy, it’s as if a sibling prone to financing life’s expenses with credit was handed a no-limit credit card with a low interest rate, backed by a guarantee from a sober, cash-rich and credit-averse brother/sister. Needless to say, it is highly profitable for banks to expand lending to credit-worthy borrowers.

Credit at very low rates of interest is treated as “free money,” for that’s what it is in essence. Recipients of free money quickly become dependent on that flow of credit to pay their expenses, which magically rise in tandem with the access to free money. Thus when access to free money is suddenly withdrawn, the recipient experiences the same painful withdrawal symptoms as a drug addict who goes cold turkey.

Even worse--if that is possible--free money soon flows to malinvestments as fiscally sound investments are quickly cornered by State-cartel partnerships and favored quasi-monopolies. The malinvestments are masked by the asset bubble which inevitably results from massive quantities of free money seeking a speculative return.

The E.U.’s implicit guarantee to mitigate any losses at the State-sanctioned large banks-- exemplifies the Neocolonial-Financialization Model. In effect, the big Eurozone banks “colonized” member states such as Ireland, following a blueprint similar to the debt-based one which has long been deployed in developing countries.

This is a colonialism based on the financialization of the smaller economies to the benefit of the "core's" big banks and their partners, the Member States governments, which realize huge increases in tax revenues as credit-based assets bubbles expand.

As with what we might call the Neoliberal Colonial Model (NCM) as practiced in the developing world, credit-poor economies are suddenly offered unlimited credit at very low or even negative interest rates. It is “an offer that’s too good to refuse” and the resultant explosion of private credit feeds what appears to be a “virtuous cycle” of rampant consumption and rapidly rising assets such as equities, land and housing.

Essential to the appeal of this colonialist model is the broad-based access to credit: everyone and his sister can suddenly afford to speculate in housing, stocks, commodities, etc., and to live a consumption-based lifestyle that was once the exclusive preserve of the upper class and State Elites (in developing nations, often the same group of people).

In the 19th century colonialist model, the immensely profitable consumables being marketed by global cartels were sugar (rum), tea, coffee and tobacco—all highly addictive, and all complementary: tea goes with sugar, and so on. (For more, please refer to Sidney Mintz’s book, Sweetness and Power: The Place of Sugar in Modern History).

In the Neocolonial-Financialization Model, the addictive substance is credit and the speculative and consumerist fever it fosters.

In the E.U., the opportunities to exploit captive markets were even better than those found abroad, for the simple reason that the E.U. itself stood ready to guarantee there would be no messy expropriations of capital by local authorities who decided to throw off the yokes of European capital colonization.

The “too big to fail” Eurozone banks were offered a double bonanza by this implicit guarantee by the E.U. to make everything right: not only could they leverage to the hilt to fund a private housing and equities bubble, but they could loan virtually unlimited sums to the weaker sovereign states or their proxies. This led to over-consumption by the importing States and staggering profits for the TBTF Eurozone banks. And all the while, the citizens enjoyed the consumerist paradise of borrow and spend today, and pay the debts tomorrow.

Tomorrow arrived, but the capital foundation of the principal—housing and the crippled budgets of post-bubble Member States—has eroded to the point of mass insolvency. Faced with rising interest rates resulting from the now inescapable heightened risk, the citizenry of the colonized states are rebelling against the loss of their credit-dependent lifestyles and against the steep costs of servicing their debts to the big Eurozone banks.

Now the losses resulting from these excesses of rampant exploitation and colonization by the forces of financialization are being unmasked, and a blizzard of simulacrum reforms have been implemented, none of which address the underlying causes of this arbitrage, exploitation and financialization.

Understood in this manner, it is clear there is no real difference between the monetary policies of the European Central Bank and the Federal Reserve: each seeks to preserve and protect the “too big to fail” banks which are integral to the Neoliberal State-cartel partnership.

Both are attempting to rectify an intrinsically unstable private-capital/State arrangement-- profits are private but losses are public--by shoving the costs of the bad debt and rising interest rates onto the backs of the core-country taxpayers (now indentured serfs). The profits from the euro arbitrage and Neocolonial exploitation were private, but the costs are being borne by the taxpaying public of both core and periphery.

The Power Elites are attempting to set the serfs of the periphery against the serfs of the Core, and this is necessary to keep both sets of serfs from realizing they are equally indentured to the Core's pathological Financial Elite-State partnership.

 

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Thu, 05/24/2012 - 11:50 | 2459064 ArrestBobRubin
ArrestBobRubin's picture

"The Power Elites are attempting to set the serfs of the periphery against the serfs of the Core, and this is necessary to keep both sets of serfs from realizing they are equally indentured to the Core's pathological Financial Elite-State partnership."

Well gosh Chuck, if it's so serious, why aren't you naming names? The "Power Elites"???? Oh please, that's just mealy-mouthed chicken shit.

Who's the High Command of The Fouth Reich of The Rich? How do we stop Public Enemy Number One without names and faces?

Thu, 05/24/2012 - 12:15 | 2459152 MrButtoMcFarty
MrButtoMcFarty's picture

http://www.opensecrets.org/

First we kill all the lobbyists....

Thu, 05/24/2012 - 12:29 | 2459182 Ahmeexnal
Ahmeexnal's picture

"Power Elites" == German Imperial family, English monarchy, Nordic royal families, Bourbons of spain, Vatican.

Thu, 05/24/2012 - 13:40 | 2459438 falak pema
falak pema's picture

Oh you mean Karl heinz Rumminge and Kaiser Frank Beckenbauer and David and Vicky Beckham and Bjorn Borg and Ingmar Stenmark and Carolina Kluft and Ikar Casillas and Rafa Nadal and Frederica Pelligrini....Very powerful people. 

Thu, 05/24/2012 - 13:52 | 2459491 Ghordius
Ghordius's picture

LOL - made my day. Silly me, and I thought the true "rulers" of Europe

are the commercial & industrial interests...

Mon, 05/28/2012 - 13:55 | 2469710 monad
monad's picture

+imperial Islam

Thu, 05/24/2012 - 16:06 | 2460027 Polonius
Polonius's picture

Your handle and avatar imply greater understanding than your comments, ABR.  Cut CHS some slack, he's basically nailed it.  Face it, THEY have cleverly outmaneuvered us for centuries using the same strategy with different tactics for different eras.  We now have the ability to 'splane it to the folks via the internet and CHS has done just that.  Question: which willl now precede, widespread understanding of the present feudal model or internet censorship?

Thu, 05/24/2012 - 11:50 | 2459072 CrashisOptimistic
CrashisOptimistic's picture

Worthless article. What is this, academic babbling about historical this and that from a world where any precedent took place prior to communication speed faster than horseback carried messages? Don't pontificate about these matters unless you are going to talk about overnight lending and German/Austrian refusal to accept Eurobonds.

You're wasting our time, otherwise.

Thu, 05/24/2012 - 12:44 | 2459238 taraxias
taraxias's picture

I gave you a green arrow just for sparing us your usual "cheap oil is gone......FOREVER"

Thu, 05/24/2012 - 12:05 | 2459110 Village Smithy
Village Smithy's picture

In other words the core prints money then loans it to the periphery and charge interest on something that they created out of thin air. The periphery uses the money to buy the cores' industrial output and pays the interest. Brilliant con but like many con artists they pushed it too far and got caught. It's pretty obvious that the loans were mostly made up of printed 1's and 0's otherwise all hell would have broken loose when the bonds became worth pennies on the dollar. Easy come easy go.

Thu, 05/24/2012 - 12:06 | 2459111 Portugal
Portugal's picture

Charles

Europe is someting that you do not understand. I'm Portuguese by birth and law, but Greek, irish, Italian, Spannish, French.... German.... and Finnish by culture and identity.  You should try to see things appart from the world where you live. We have our wars here. And they were recent. I know. But we are all Socrates, Leonidas, Plato, Leonardo da Vinci, Picassos, Nietsches, Monets, kierkgards... you name it. Thats something you are not. Will never be. Will never feel.

Regards

 

Thu, 05/24/2012 - 12:28 | 2459189 Ahmeexnal
Ahmeexnal's picture

I'm Portuguese by birth and law, but Greek, irish, Italian, Spannish, French.... German.... and Finnish by culture and identity.

And idiot by your own merit!

I know. But we are all Socrates, Leonidas, Plato, Leonardo da Vinci, Picassos, Nietsches, Monets, kierkgards... you name it.

You are all Mussolini, Hitler, Napoleon, Stalin, Ceausescu, Borgia....you name it.

Thu, 05/24/2012 - 12:50 | 2459260 TheGardener
TheGardener's picture

Tyler is right to leave some editorial space for seemingly leftist agitators that have some good thoughts and lesser arguments against imperialism and colonialism. But this Two Minded Marx is short on logic, analysis and worst of all : poorly worded.

He might improve just here and in time .

Thu, 05/24/2012 - 14:57 | 2459760 TheGardener
TheGardener's picture

Cheap Charles has a record of junking his challengers, or is it just me , watching traffic anomalities for a living ?

Thu, 05/24/2012 - 12:09 | 2459123 sudzee
sudzee's picture

Eh Germany - fuck you.

Thu, 05/24/2012 - 12:20 | 2459167 Piranhanoia
Piranhanoia's picture

Freedom is always for sale.  The buyer never realizes what the seller is offering.  Freedom is never for sale.

Thu, 05/24/2012 - 12:22 | 2459178 orangegeek
orangegeek's picture

Yep - meet the new Germany.

Thu, 05/24/2012 - 12:23 | 2459179 Joe A
Joe A's picture

Except that nobody forced the periphery to borrow money. They wanted things without having to produce them themselves. And hey, which country would refuse if someone wants to borrow money from you in order to buy the stuff you make? Subsidised export is nothing new. But borrowing money, costs money. Don't live above your means if you don't want to be faced with bills later.

Thu, 05/24/2012 - 12:29 | 2459200 brooklynlou
brooklynlou's picture

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro

You make it sound like its a bad thing .,.

;-)

Thu, 05/24/2012 - 12:47 | 2459249 denny69
denny69's picture

Seems that the elites' plan to get it all and to get it any way they can has entered the smooth running phase. All of the propaganda (Re: Bullshit) concerning the 'madness of the markets and financial sector' is achieving their goals: We want it all and will do anything to get it. The more talk and effort to prove and maintain an 'uncontrollable' situation merely indicate that the money is flowing and it's flowing away from us and into their waiting craws. The more 'unstable' the situation becomes, the more money we lose. While everyone talks about this, they are very busy reaching in and taking that (our future). I noticed the above piece on Corzine - "John, we have to give them something to wanker on about. Just sit in the hotseat for a few months and you'll be amply rewarded. Oh, by the way, where did you say you put the money?" The war of the elites against the rest of us has taken a turn into the realm of psyops (psychological operations) and it disractingly manifests itself in an ongoing reality show concerning pawns like Corzine, Madoff, ad nauseum and their felonies against just us normal folks. I trust everyone understands that those 'think tanks' on the Potomac just don't exist to play "Battleship". Sit back and enjoy the show, ladies and gentlemen! You're paying for it - bigtime!

Thu, 05/24/2012 - 12:48 | 2459250 dcb
dcb's picture

send it to the financial times

letters.editor@ft.com and esp their chief economist

martin.wolf@ft.com

Thu, 05/24/2012 - 12:55 | 2459272 Ranger4564
Ranger4564's picture

Finally, the truth is oozing out of every fucking pore.  Thank the courageous among us who investigate, remember, expose and retell the information so we can all know who the bastards really are.  It's not teh poor slob, it's the rich scumbag.

I was just writing about this type of thing in my notes... chicken or egg, trickle down or trickle up.  Egg came first, no chicken evolved from another creature that was alive still to become a chicken.  Similarly, the wealth the wealthy weild was not born with them, they took it from the poor long ago, and keep taking it every damn generation.  First you have theft / heist / oppression, then you can have trickle down if they feel like enabling it mockingly.  So the people rightfully own most of the wealth and it's not being redistributed to the poor... it's being returned / restored to the rightful owner.

Thu, 05/24/2012 - 16:20 | 2459352 sockratte
sockratte's picture

its not only the banks, its the exporting industry as well, that profits from this arbitrage system. since the system won't be changed due to TPTB, the key factor to profit from this system is competitiveness. i think it was around 2004, when in germany the social democratic party started some labour market reforms, that made germany the most competitive country within the eurozone (by the way putting millions into low wages...). of course, some argue that other countries should also have made their economies more competitive, but that could not be the intention, since one wants to export into these countries... so the neoliberalism is more a neolobbyism in favour of the banks giving credit to countries that consume goods being exported from the more competitive countries' businesses. thus also arguments saying the borrowing countries should have invested more into their economy can not really be considered legitimate, since most of credit was intended for consumption. of course the smallest economy within the euro system, i.e. greece, is hit first. proportional to the size of the economy (and of course duration of membership to the eurozone) one econonomy after the other would be hit. now, that this system is understood, it will be interesting what will happen next. currently we have some sort of reset putting greece and other countries under austerity. so we can start again from the beginning and after ten years another country will be hit. in order to profit from this system, the member states could also commence a race for competitiveness. this will result in masses of people being put from middle class into lower class, a vicious cycle. probably not all people will participate, thus leaving the eurozone.

but of course we could also have a transferunion where germany feeds all...

Thu, 05/24/2012 - 13:22 | 2459362 hbkshivamgoel
hbkshivamgoel's picture

I think the solution will be to actually allow  Germany/France/European Union to control/govern Greece if it doesnt implement the austerity measures and wants to stay in the Eurozone as well..Lets face it Grexit will do the Germans/French a lot of harm( wrt exports), so maybe an alternate solution is that they govern it and implement austerity and get the delta, theta and vegas( the greeks I mean) to work...

Thu, 05/24/2012 - 13:23 | 2459365 hbkshivamgoel
hbkshivamgoel's picture

I think the solution will be to actually allow  Germany/France/European Union to control/govern Greece if it doesnt implement the austerity measures and wants to stay in the Eurozone as well..Lets face it Grexit will do the Germans/French a lot of harm( wrt exports), so maybe an alternate solution is that they govern it and implement austerity and get the delta, theta and vegas( the greeks I mean) to work...

Thu, 05/24/2012 - 13:28 | 2459388 malek
malek's picture

You missed to mention one requirement of working Neofeudalism: disallow bankruptcy.

At the same time it is the remedy.

Thu, 05/24/2012 - 15:36 | 2459925 headless blogger
headless blogger's picture

His last paragraph is most important.

You can see this happening; people are pointing at Greeks saying "lazy!" and the constant pounding on the people who took out Subprimes etc. They have to keep everyone pitted against each other, and have even started pulling the Race Baiting Cards.

Smith tends (or did in the past, at least) to write about the masses that feed off the system, lazy etc. At least he is seeing how that is part of the game. Michael Hudson has been talking forever about the Neo-feudalism being created and debt peonage, and Smith now seems to understand that (and has gotten off his high horse against the vulnerable).

 

Thu, 05/24/2012 - 16:33 | 2460120 gwiss
gwiss's picture

I understand what Charles is saying, but I reject the implicit view of the world that underlies it.  This implicit view can be summed up as follows:

"People are not capable of handling many things, and the solution to this is to remove those things from within their grasp.  When people are handed tools that they can't handle, the fault lies with those who gave them the tools."

This is a fundamentally disempowering view of humanity, and it is completely at odds with the reality of individual hegemony that is the basis for a belief in individual freedom.  You cannot have "some" freedom, because depriving someone of freedom makes them weaker as they don't exercise individual responsibility.  Just like astronauts who return from space have weak muscles and bones from disuse, individual responsibility must always be exposed to the gravity of freedom if it is to remain robust and strong.  When you remove individual responsibility, freedom withers.

The Greeks are suffering because they have not as of yet gotten up enough national courage to break loose from their chains of dependence.  These chains are voluntarily tolerated. 

 

As Etienne de la Boetie said in his 1577 discourse "The politics of obedience: The discourse of voluntary servitude":

 

Poor, wretched, and stupid peoples, nations determined

on your own misfortune and blind to your own good! You let

yourselves be deprived before your own eyes of the best part

of your revenues; your fields are plundered, your homes

robbed, your family heirlooms taken away. You live in such a

way that you cannot claim a single thing as your own; and it

would seem that you consider yourselves lucky to be loaned

your property, your families, and your very lives. All this

havoc, this misfortune, this ruin, descends upon you not from

alien foes, but from the one enemy whom you yourselves render

as powerful as he is, for whom you go bravely to war, for

whose greatness you do not refuse to offer your own bodies

unto death. He who thus domineers over you has only two

eyes, only two hands, only one body, no more than is possessed

by the least man among the infinite numbers dwelling

in your cities; he has indeed nothing more than the power

that you confer upon him to destroy you. Where has he

acquired enough eyes to spy upon you, if you do not provide

them yourselves? How can he have so many arms to beat you

with, if he does not borrow them from you? The feet that

trample down your cities, where does he get them if they are

not your own? How does he have any power over you except

through you? How would he dare assail you if he had no

cooperation from you? What could he do to you if you yourselves

did not connive with the thief who plunders you, if you

were not accomplices of the murderer who kills you, if you

were not traitors to yourselves? You sow your crops in order

that he may ravage them, you install and furnish your homes

to give him goods to pillage; you rear your daughters that he

may gratify his lust; you bring up your children in order that

he may confer upon them the greatest privilege he knows—

to be led into his battles, to be delivered to butchery, to be

made the servants of his greed and the instruments of his

vengeance; you yield your bodies unto hard labor in order

that he may indulge in his delights and wallow in his filthy

pleasures; you weaken yourselves in order to make him the

stronger and the mightier to hold you in check. From all these

indignities, such as the very beasts of the field would not

endure, you can deliver yourselves if you try, not by taking

action, but merely by willing to be free. Resolve to serve no

more, and you are at once freed. I do not ask that you place

hands upon the tyrant to topple him over, but simply that you

support him no longer; then you will behold him, like a great

Colossus whose pedestal has been pulled away, fall of his

own weight and break into pieces?

 

Fri, 05/25/2012 - 10:03 | 2462031 Winston Smith 2009
Winston Smith 2009's picture

"I understand what Charles is saying, but I reject the implicit view of the world that underlies it.  This implicit view can be summed up as follows:  People are not capable of handling many things, and the solution to this is to remove those things from within their grasp.  When people are handed tools that they can't handle, the fault lies with those who gave them the tools."

I don't think you do.  As usual, Charles brilliantly described very clearly and simply something that on the surface appears to be extremely complex: if you give people and nations free money and unlimited credit, they will invest/spend it foolishly; if the lenders know they are "TBTF" and can count on taxpayer bailouts and what is effectively government sponsored resource confiscation when those debtors can't pay back the money they should not have been loaned in the first place, there's a great incentive to continue the practice and no real disincentive.

And he did not provide a solution.  He simply described, correctly in my opinion, the mechanism of the problem.  However, the solution is very simple and obvious and is merely a return to something that was once a given.  If a bank lends money to a person or a nation, the bank and those who hold a financial investment in it are alone responsible for the issued debt and any default on it.  If that is not the case, what disincentive does a bank have against lending money to anyone or any nation they can find who will accept it even if that person or nation has no chance of ever paying it back or even paying the interest on the loan?

Fri, 05/25/2012 - 15:46 | 2463172 gwiss
gwiss's picture

Perhaps I have presumed something that Charles was not saying.  I admit that he did not suggest any remedies.  I also must admit that I look forward to reading his pieces each day, so it's not like I reject his world view.

However, when I hear the phrase "if you give people and nations free money and unlimited credit, they will invest/spend it foolishly", I presume that implicit to this view is the expectation that extension of credit is therefore to blame.  I don't believe it is.  Instead, extension of credit is a tool.  Like a gun or alcohol, it can be used foolishly or wisely.  Barring people from the experience of using tools does not make the people safer.  Instead, it actually makes them less capable and therefore less independent, and because we live in a world where such tools cannot be permanently eliminated, creating a population of less capable and less independent people does not decrease systemic risk but increases it.

You finish by saying "If a bank lends money to a person or a nation, the bank and those who hold a financial investment in it are alone responsible for the issued debt and any default on it", and I wholeheartedly agree with this.  Seen in this way, the catastrophic experience western society has recently had with debt is an investment in experience.  We must learn that when debt is used incorrectly, it destroys society.  And thus, society must learn to repudiate the concept that society can and should be built upon debt.  We do this by refusing to take responsibility for debts that others have incurred.  Voluntarily choosing to remain responsible for others debts is slavery chosen voluntarily, which is why I added the quote from Boetie.

Freedom is just waiting for the Greek people to choose it.  Choosing freedom means choosing to stand on their own two feet.  In the process they shed their debt, but the price for this freedom is surrendering their claim to State dependence.

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