In October 2007, when I was preparing a presentation to the board of the Bank I have been working for in the past 28 years about the business forecast to 2008 in the several areas of economy our main clients worked in – major Brazilian and foreign groups that had grown exponentially in the past seven years – I realized there was something wrong in the “reign of Denmark”. By comparing the amount of financial assets circulating around the world with the amount of dollars generated by global GDP, I realized the “fictitious capital” was about 3.5 greater that everything produced at Main Street. Finally, I have reached the conclusion the degree of global leverage was not sustainable. We had the opportunity to engage in several “financial transactions” that involved some of the main Brazilian companies at the peak of global liquidity. “Hostile bids” to the acquisition of foreign companies were multiplying, and some of them were successful. The largest hostile bid until those days was the US$ 18 billion acquisition of the Canadian mining company Inco in late 2006 by Vale do Rio Doce that, back then, had not changed its name to Vale yet. After the completion of the acquisition, in early 2008, Vale announced its interest in acquiring another major global mining company, the Anglo-African Xstrata, for the “trifle” of US$ 50 billion. Most of the banks involved in Inco operation had already agreed to provide a new “acquisition facility”, a bridge “loan” used to finance companies’ acquisitions. In general, it matures in two years and the payment is made through the issuance of a new debt instrument by the borrower through shares, debentures, bonds and other long-term credit operations that aim at increasing its debt profile. Those operations were multiplying in the market due to the high liquidity of banks and the necessity to invest these resources in new assets. Since the Brazilian company was among the most sought-after companies by domestic and international banks due to its strong growth and the fact that it became the largest producer of iron ore and the second largest diversified mining company of the world, there would not be a lack of resources to another undertaking. In order to raise part of the funds to the acquisition, Vale announces a public offering of shares. In August 2008, the company concluded the process raising BRL 19.43 billion, a result that fell below the initial expectation, since a “financial crisis” of unknown proportions was already beginning. As a result, Xstrata shareholders rejected the “hostile bid” of the Brazilian company and the deal fell through. Then the crisis came. After that, I have talked several times with the executives of the largest mining company of the world about the consequences of this process and how they were relieved that it was not successful. At that time, taking on or financing a debt of such proportion would be extremely risky, since the take-out of the new bridge loan might not have been as easy as Inco’s. Moreover, they celebrated that the company have entered the crisis with bulging coffers after the IPO, which contributed to how the company weathered the two following years after Lehman Brothers went bankrupt in September 15, 2008, milestone that divided two eras.
What happened next has already been extensively discussed and analyzed by “experts”. It seems to be a consensus that there was excessive leverage in the global economy during the years that precede the crisis, to a great extent created by the deregulation of the credit market responsible for the development of financial “operations” that could multiply the basis of financial assets unlimitedly. The effects of the credit bubble “burst” were felt immediately, plunging the world into a “financial crisis” of massive proportions. Several forecasts were made about the years to come and the impact of the crisis on local economies, increasingly interconnected. The risk of a “systemic crisis” seemed to be inevitable. Banks with liquidity and solvency problems, global credit crunch causing direct impacts on companies and on the economic growth, recession, unemployment and a reduction in investments. The 1929 crisis was back at discussion forums and the comparison seemed inevitable. However, the major difference of this crisis was the conclusion that its epicenter was the developed countries. The model that caused the imbalance was “developed” in the “North” and its consequences would have a global effect, said the experts. The monetary authorities of the United States and the European Union quickly act to try to avoid the deep recession of the beginning of the 20th century. They had learned the lesson through the basic principles of monetarism about the need to control the money supply, thus avoiding a collapse. The Federal Reserve, the European Central Bank and the Bank of England pumped large sums of money into the system in an attempt to boost global liquidity. If the crisis had culprits, they seemed to be the “complex” financial structures called derivatives, which became the “stars” of the “virtuous cycle” of global growth and ensured the necessary liquidity to promote the “miracle of multiplication” of the resources in circulation. From “heroes” to “villains”. Before these events unfolded, I have had the opportunity to talk with Brazil’s former Minister of Economy, Gustavo Franco, in an event sponsored by the Bank to which he was invited as a speaker and asked him about the “puzzle” involving the United States public debt. How was it possible to sustain a continuously growing debt and from where did the resources come to keep funding it? The economist gave me a simple answer. “From the financial entanglement caused by the growing profits of short-sellers” (hedge funds, investment banks and other speculators of the financial market) that kept feeding it through the vast mass of fictitious capital in circulation.
The sense of unease that permeated the financial market after the outbreak of the crisis, in late 2007, contrasted with the feeling that surrounded the market since the beginning of the 21st century. In a world increasingly interconnected through technological advances, which enabled the creation of a “global village” connected by a “great network”, the distances have become shorter and the concept of time was changed. In a virtual space of continuous circulation of bits and bytes, the global economies experienced a prosperous period, in which the abundance of liquidity enabled massive investments to be made since capital was flowing through the globe at an impressive pace. Circulating capital enabled several operations, from the financing of mergers and acquisitions of major corporate groups to public/private partnerships that enabled investments in different infrastructure projects, construction of ports, railways and power generation and transmission facilities. Large business groups become international, increasingly expanding to beyond their borders, and there was enough capital to fund their growing strategies, represented by investments in public and private debt titles and securities issued by companies and government. At the same time, financial institutions and investors from all over the world were seeking to increase the amount of capital in circulation through investments that often were unrelated to the projects in progress in the real economy. Therefore, the financial indexes traded in the stock market and in the counter gained a crucial importance by feeding the financial entanglement, whether working as a protection against the variation of the prices of assets in circulation or making capital more profitable through investment positions that speculated on the variation of assets’ prices in the short-term and boosted the profits of portfolios ran by assets managers, totaling trillions of dollars. The need to pay for this capital in circulation pushed investors into several markets and the impact could be seen on the strong demand of the operations related to the issuance of debt or shares. New issuance multiplied at impressive proportions and the demand of investors was surprisingly high. When mining company Vale went to market to refinance the US$ 18 billion loan through the issuance of debentures, euro bonuses and bilateral credit transactions or syndicated operations with several financial institutions, the strong demand for these bonds enabled the company to refinance the total debt owed to the banks way before the deadline set to take out the bridge loan used to the acquisition of the Canadian nickel mining company. IPOs happened on several stock markets around the globe and every project, at that time, seemed to be feasible, since there was a significant amount of capital in circulation willing to take increasingly higher risks to ensure its yield. It all would have been perfect if not for the imbalance between the amount of financial assets in circulation and the wealth generated by world economies. That imbalance showed that the degree of debt leverage had crossed a safe limit. After all, we were living in the era of capital deregulation, in which the market was considered an entity capable of correcting the distortions created in the process of global exchanges. However, what happened in practice was a gradual decoupling of Wall Street transactions from Main Street’s, especially in the United States and Europe.
In recent years, we had turned to Wall Street as a whole for advice on how to run the complex system that is our economy. Now, who is there to turn to? (Joseph Stiglitz, The World Free Fall)
The impact of the burst of the bubble caused by excessive leverage of the world financial system was not felt all at once. That happened because, although world economies were interconnected in a great network, there was a difference on how the complex economic system was managed by each country that were part of it. In the beginning, it was thought a systemic contagion was inevitable and, sooner or later, every local economy would suffer the consequences of the financial crisis that hit the United States and the European Union. However, what followed these events seemed unexpected – at least to those who insisted on saying a decoupling was impossible at that stage of the game, in a world increasingly interconnected. While governments and monetary authorities of the countries responsible for the crisis rushed to ensure liquidity in the financial system – by injecting resources into their main financial institutions to ensure their capacity to honor their commitments to the market –, the actions of the emerging nations aimed at ensuring economic growth, since it was the responsible for the level of development achieved in the past decade. Those economies felt the impacts of the crisis, mostly over the two years that followed Lehman Brothers’ collapse. However, the dynamic growth achieved by the emerging nations, leaded by “growth engine” called China, provided a rapid way out of the crisis before we could talk about a global recession. The reason the developed countries and the emerging nations had different reactions is simple, but requires an analysis that goes back in time and seeks to evaluate the dynamics of the development of a model that characterized an entire era.
On the following pages, we will try to map this process from the traces left by the events that marked the consolidation of the production model that emerged as hegemonic in an era known as “modernity”, based on the observation that we are living in a threshold between two eras. The lack of historical distance hinders the understanding of events in the exact moment of their occurrence. Therefore, it is difficult to predict any outcome without simplifying it, making gloomy predictions or even inaccurate statements. However, the certainty that we are experiencing a rearrangement of the center of gravity of the world economy led us to a journey through the events that caused the rise of a group of countries that began to run the global economic system, laying down the rules to be accepted and followed by other agents; countries that used to play a secondary role in the process. Therefore, the Rise of a New Order tells a bit of the history of the alignment of the development of the body of modern society, based on a point of view that focuses on the new role of the economies that, over the past six centuries, suffered the consequences of the actions of the developed countries, which set the pace of the changes that spread across the world during this period. Former colonies, poor and less-developed countries, periphery countries, emerging nations – the expressions have multiplied to try to define a group of agents that are seen through the ethnocentric eyes of those who developed and ran the civilization model that was established from the 15th century. Agents that, at most, were considered essential to serve the interests of the countries that focused on the project of the construction of a new world. It expanded its borders to the most remote corner of the planet and disseminated economic practices, culture, science, technology, and a political system to the rest of the world population in an irresistible way. Nevertheless, this process was not peaceful and painless, but rather took place through a long history of suffering and dominance of a great part of the civilized world, leaving a “high bill”, since the majority of the world population do not take advantage of the benefits produced by this development model.
If the turn of the millennium brought a new century concerned with the possibility of a major bug that could jeopardize computer systems throughout the planet, it also brought marks that point to the transition to a type of society in which the information digitized into bits and bytes will definitely play a role that will revolutionize the ways of “being together” and “coming into conflict”. In addition to these transformations, there is the history of a civilization that is characterized by its highly creative ability to deal with the inherent problems of human beings and the internal and exterior nature over the process of insertion in the reality that surround them. The effects of this ability can be traced from the achievements that followed the establishment of the civilization of reason, which carefully examined reality in its formulas and interpretations of the impersonal movement of the world around it. The impacts of this “development” can also be seen – from a point of view of not always positive consequences –, considering its survival in the planet it inhabits. The approach of the subjects that follow this introduction considers one of the most visible impacts of this development model: the concentration of wealth in the hands of a small minority that denies the right to share the advances produced by civilization over the past six hundred years to most individuals. The modern era achieved an unprecedented level of development in a short period with respect to the improvement of life condition of the individual on Earth; however, it failed to distribute these benefits on a global scale. The rise of a new order raises hopes that the current stage of civilization, developed by “language individuals”, promotes the necessary adjustments and expand the achieved benefits to groups of people and countries that were left out for a long time. With this in mind, setting a threshold between two eras would work as an inflection point, which holds the hope of changes and not only encompasses the development of the complex interaction processes between the human being and nature to generate palpable benefits, but also make them available to the large population that developed in the edges of the sky, oceans and continents, and is close to seven billion inhabitants in this planet called Earth.
The process of interaction of individuals in the developing threads of civilization over the battles of several forces that resulted in different forms of organization balanced the interests that were stratified in the crystallization of social bodies. Traveling through these structures requires, right from the start, a guide and markers that enable the journey through a path riddled with shortcuts, curves, climbs and disruptions. Therefore, we have chosen a brief itinerary and selected some markers to make this task easier. The choices reflected in this book come from a particular path and bring elements that coexisted along the way and were driven by a search that has never intended to provide answers but to make silent questions. This method deliberately does not preserve the impartiality of the line of argument developed in the course of the analysis of some facts since I learned some time ago how risky neutrality can be to a “cartographer” of the human sciences. However, the shame of imprecision or the concern that the words can take the reader far from the initial goal of argumentation is present in the excessive number of quotation marks in the text. They might be an attempt to partially appropriate certain meanings that expressions hold when “extracted” from mouths that so many times said them but that, at the same time, cover them with multiple meanings that were not said or just intuited when systematically repeated. The fact that I have always worked in a financial institution and that, over the past ten years, I have been directly exposed to the financial market strategies help me to discuss some subjects, however, it raised a doubt that followed me during the entire process of writing: how overly technical was I being for choosing to maintain certain “market” terminologies, extremely common “jargons” to the people from this market, but not so usual outside the professional circle. Nevertheless, with the financial crisis that hit the world in 2008, some subjects became more familiar to the general public, who is distant from derivatives and leveraged acquisitions, since it caused consequences to the daily life of consumers worldwide. Although the approach developed in the “Rise of a New Order” covers themes that are not so close to the day-to-day life of the people outside the financial market, it might serve as a compass to the reader that wants to have an overview of the constitutive process of this “model” of civilization known as “modernity”. It addresses themes related to its consolidation as an economic system, system of thought, and political system, represented by capitalism, rationalism and democracy, unraveling intricacies that can take the words to distant universes from those of the “common sense”. Moreover, I could not fail to include a philosophical reflection on this consolidation process and the possibility of a new “era” as a result of the combinations I call “over-modernity”. Although it is concentrated in the chapter entitled “Philosophical interlude”, it crosses the entire text the same way and with the same vigor of the lines of flight that take us to blank universes, where meanings were not yet defined and the sense, as an event, insists to arise.
Welcome to the “rise of a new order”.