Public Planet Books

A series edited by Dilip Gaonkar, Jane Kramer, Benjamin Lee, and Michael Warner

Public Planet Books is a series designed by writers in and outside the academy-writers working on what could be called narratives of public culture-to explore questions that urgently concern us all. It is an attempt to open the scholarly discourse on contemporary public culture, both local and international, and to illuminate that discourse with the kinds of narrative that will challenge sophisticated readers, make them think, and especially make them question. It is, most importantly, an experiment in strategies of discourse, combining reportage and critical reflection on unfolding issues and events-one, we hope, that will provide a running narrative of our societies at this moment. Public Planet Books is part of the Public Works publication project of the Center for Transcultural Studies, which also includes the journal Public Culture and the Public Worlds book series.

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Financial Derivatives and the Globalization of Risk

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Financial Derivatives and the Globalization of Risk

Edward LiPuma and Benjamin Lee

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DUKE UNIVERSITY PRESS Durham & London 2004

Printed in the United States of

© 2004 Duke University Press

All rights reserved

America on acid-free paper @l

Typeset by Tseng Information Systems, Inc, in Bodoni Book Library of Congress Cataloging-in-

Publication Data appear on the

last printed page of this book.

Contents

Preface IX

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1 Global Flows and the Politics of Circulation 1 2 Derivatives, Risk, and Speculative Capital 33 3 Historical Conjunctures 67

4 The Institutional Basis of Derivatives 85 5 Deriving the Derivative 107

6 The World of Risk 141

7 Derivatives and the Stability of the State 161 Glossary 191

Notes 195

Bibliography 201

Index 207

Preface

This book is the result of a collaboration that began more than twenty-five years ago, although it was then only perceived as a conversation among friends wanting to make sense of the incandescent and incipient changes that would eventually be labeled globalization. Increasingly, the conversation could not but foreground two questions that seemed, quite significantly, to merge into one, or, minimally, to possess a common center of gravity. The first question concerned what appeared to be an extraordinary reorganization of the place of developing and transitional economies within a rapidly (if not rabidly) globalizing economic system; the second question concerned the demise or at least the slow dissolve of manufacturing and industrial production in the metropole and the corresponding rise of circulation -what we would call the cultures of circulation. And indeed, everywhere we looked there was evidence of the ascension of the culture and sociostructures of financial circulation.

Nonetheless, there was very little in the way of theories or methods to deal with these problems. On the one side was the universe of financial analysis, which although sprawling, technologically amplified, and technically intricate had little aptitude for the social issues surrounding the emergence of

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a global financial circuitry. There was little or no interest in or appreciation for the social and economic conditions that might engender and sustain the emergence of a global system. On the other side of the intellectual divide was a universe of social theorists who, though deeply concerned with the transformations occurring globally, especially in the developing and transitional economies, had very little familiarity with finance, let alone a financial system that had become a powerful agent and institution of the encompassment of others. The tools of the trade developed to deal with the expansion of a production-centered system of nation-state-based capitalism did not seem to illuminate the transformations taking place.

x This book can thus be understood as a down payment on bridging this gap, an attempt to familiarize social theorists with the global culture of financial circulation now in ascension, and to illuminate for the financial community the social grounding and political implications of the transnational flow of capital.

The touchstone of our account is what we consider a new and emerging interrelationship between speculative capital, a more abstract notion of risk, and financial derivatives. Although the collapses of Long Term Capital Management and Enron brought derivatives into public consciousness, the literature on what happened, and why, and what were the implications, has been divided between popular accounts and an often forbiddingly formal technical literature. We quickly realized that part of the problem was the separation between the technical discussions of derivatives and their perceived effects on social and cultural processes. What we have tried to do in this short introductory work is show that the cultural and economic dimensions of contemporary financial globalization cannot be separated; any account of how derivatives work in the contemporary world must locate them in the so-

cial and historical contexts from which they have risen and which they affect.

We would like to acknowledge the help of two working groups at the Center for Transcultural Studies. The Social Theory Group, directed by Moishe Postone and William Sewell, has provided an intellectually generous "holding environment" that helped nurture the book in its initial phases. The supportive criticism of the Cultures of Finance Group that one of us, Ben Lee, co-directed with Mary Poovey convinced us that our approach was not too far off the beaten track to be interesting to a wider audience.

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Financial Derivatives and the Globalization of Risk

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1 Global Flows and the Politics of Circulation

There is a rising tide of discontent about the implications of globalization, a disturbance audible to anyone willing to listen. Among even the most moderate moderates in places such as China, India, Russia, Indonesia, Brazil, and southern Africa there is a growing, gnawing, and amorphous feeling of unease that there is something out there, something happening that is robbing people of a genuine semblance of control over their own destinies. They can see and feel the gyrations of their national currencies, the uncontrollable oscillations in the prices of commodities and capital, and the apparent powerlessness of their governments to influence the course of economic life-or even to understand the jet stream of circulatory forces unleashed by globalizing processes. More and more, frustration contorts the faces of those who reside outside the metropole, people who, however much they may appreciate, sometimes emulate, and frequently enjoy things Western, from technology and music to concepts of freedom and human rights, also realize that there is an unnamed force that is undermining the relations between the economy, civil society, and the state. There is something profoundly disturbing about people's escalating disenchantment with the results-or at least the aftermath-of all the intro-

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ductions and returns to democracy that they have only recently won. So much is this the case that there is sometimes a nostalgia, at once genuine and insincere-not, as is sometimes mistakenly thought, for ousted and discredited authoritarian regimes, but for the certainties that they brought to everyday life. Not the least of these certainties was a foundationallogic that once seemed to bind work to wealth, virtue to value, and production to place.

The contrast with the contemporary globalization of finance capital could not be more striking. Technologically driven derivatives detach the value, cost, and price of money -manifest in exchange and interest rates-from the fun-

2 damentals of the economy, particularly the state of production, the social welfare of the producers, and the political needs of citizens for self-determination, dignity, and the creation of identities. The economic power of the capital markets also threatens the right of popular dissent against those who govern the economy. Although this right, helped immeasurably by advances in communication, only reached its maturity in the twentieth century, its contemporary roots now run deep and worldwide. But the forces of circulation offer up no address or even an identifiable object. How does one know about, or demonstrate against, an unlisted, virtual, offshore corporation that operates in an unregulated electronic space using a secret proprietary trading strategy to buy and sell arcane financial instruments? The mass media can disseminate the visions and voices of dissent, almost instantaneously and worldwide (and usually at a profit); but without a recognizable object, such as that provided by the national state or a corporate headquarters, the dissent seems meaningless, impotent, orworse, some entertaining spectacle. The question that is both concealed and that matters concerns the economic powers and global reach of financial derivatives.

One way of posing the question is to collect the news head-

lines and to ask what the collapse of Argentina and the Enron Corporation, the demise of hedge funds such as Long Term Capital Management, and the accounting scandals at Arthur Andersen have to do with high and rising interest rates in Johannesburg, Kuala Lumpur, Istanbul, and other locations on a multipolar periphery. Are these phenomena also connected to the sudden and severe devaluation of currencies and then the ascension of interest rates, to levels of cross-currency volatility that confound any possibility of economic planning, to the concomitant escalation in global impoverishment, and to the increasingly intense and pervasive forms of indigenous unrest and regional disquiet, and the decline in the capacity

of national states to provide social welfare? The short answer 3

is that they are all tethered to the umbilical cord of circu-

lation. They are directly defined by global streams of capi-

tal and critically configured by the buying and selling of the financial instruments called derivatives. So though financial derivatives are cloistered and complex, their character mat-

ters because they inform the course of capital that informs the

course of people's lives worldwide. The singular result is that globally, government officials, the academic community, and

the news media are beginning to appreciate the extraordinary

power and reach of these flows of capital. To assume, as some commentators have apparently done, that derivatives cannot

be influential because they exist in virtual space and there-

fore do not produce anything material or real is as unsound as assuming that religion must be historically inconsequential because, after all, God doesn't really exist.

Derivatives have episodically captured the world's attention because of a number of spectacular failures and crises that threaten entire economies and regions. These examples of catastrophe matter in themselves and because they identify the fault lines along which key transformations are taking place. Catastrophes also open an unexpected window into the

inner clockwork of financial transactions that would otherwise be closed to public scrutiny. On this accounting, the Asian currency crisis of 1997, the collapse of firms such as Long Term Capital Management and local governments such as Orange County (California), the introduction of financial risks so systemic that they threaten a global implosion of the banking system, and the accelerated and economically disabling devaluation of currencies such as the Turkish lira and Argentine peso all confirm that electronically amplified flows of capital have become instrumental in compromising the sovereignty of national economies, and thus the extent to which politics, democratic or otherwise, can regulate circula-

4 tory capitalism. There is a growing concern that the international order is disintegrating because the global economy is on the edge of crises whose shape and symptoms are different from past and more familiar ups and downs.

Though it is the regional crises and spectacular corporate failures that periodically put derivatives on the front pages and internet banners, their social and economic effects are more pervasive and difficult to determine. They infiltrate the economies of weak and developing nations through their effects on the price of money, which in turn greatly affects its availability for housing, education, and the other social goods whose provision is necessary to advance the economy. At least as important is that financial derivatives not only are designed specifically to deal with short-term fluctuations in the price of money but also tend to exaggerate the oscillations in exchange and interest rates. For manufacturers this makes it extremely difficult to synchronize on the one hand the time horizon of commodity production, which to be successful must be measured in years, and on the other hand short-term fluctuations in the cost of the money necessary to purchase their plant and equipment and guarantee them a profit on the goods they export. The impact of the fluctuations is hitting developing

nations particularly hard, causing business failures that have little to do with the demand for the product or the efficiency of the producer. The result is often increasing poverty for the already poor and further weakening of already weak states. The most salient feature of our times is that contrary to the buoyant optimism of the early postwar period (1945-73), most "developing" nations are regressing economically if not also politically.

Especially because of its wide-ranging impact on the developing world, the financial turbulence of the past decadesexemplified by one currency and debt crisis after anotherhas convinced most serious observers (though certainly not

all) to abandon the assumption that liberalization of the capi- 5

talist financial markets was destined to bring about a new regime of unparalleled global economic benefits. Also left by

the wayside has been the overly optimistic imaginary that liberated economies of liberated peoples would bury their

pasts and launch a progressive process of planetary integra-

tion. In its place is a troubling realization: unregulated flows

of capital are engendering a turbulence that is undermining

the lives of even peoples who inhabit territories incompara-

bly distant and different from the landscape of metropolitan capital. Whether anyone understands what is happening or

not, irrespective of political consent, arcane financial mar-

kets and instruments-encoded in the most mathematical of terms-appear to be determining the fate of those who re-

side in what the metropolitan literature, such as that issued by

the International Monetary Fund (IMF), identifies as economi-

cally emerging and transitional nations-the concept of the "Third World" apparently rendered senseless by the demise

of the Second and dissolution of the First into the image of

the planetary market. It is becoming increasingly clear that

since the early 1970s, the cultures of circulation, especially

that defined by speculative capital and the risk-based deriva-

tive, have unceremoniously begun to displace production as the leading edge of capitalism. This transformation accelerated through the 1980s and then exploded in the 1990S into the new millennium. The bankruptcies and currency crises that punctuate the transformation destroy the perception that it is possible to attend to politics independent of the economy, thereby undermining the celebration surrounding the resuscitation of democracy and civil society after the cold war in the post-colonial and once communist universe.

So a continuing refrain in both academic and popular works on globalization is that transnational capital has become instrumental in defining every aspect of the present

6 economic environment, from the climate for interest and exchange rates to the topography of global redistributions of labor. These works see these streams of capital as mobile, muscular, and speculative, moving in a self-created and selfcreating terrain lying beyond the perimeter and thus the regulatory power of the state. In the metropole as much as the post-colony, commentators have become progressively aware and worried that these global flows of finance capital will, in the words of the historian Eric Hobsbawm, gradually reduce "older units, such as 'national economies', defined by the politics of territorial states" to mere "complications of transnational activities" (1994, 573). Arjun Appadurai (2000) contends that circulation's most "striking feature is the runaway quality of global finance which appears to be remarkably independent of traditional constraints of information transfer, national regulation, industrial productivity or 'real' wealth" (3; our emphasis). Saskia Sass en observes that such flows are leading to a "denationalization of domains once understood and/or constructed as national" (2000). Eric Peterson (1995) warns that continuation of contemporary trends will lead to the inevitable "hegemony of global markets" and the power of circulatory capital to determine the conditions of produc-

tion; Jean and John Comaroff (2000) underline the degree to which "the explosion of new markets and financial instruments" gives the financial order an autonomy "from 'real production' unmatched in the annals of political economy" (300-301), while the geographer David Harvey (1989) claims that emerging circulatory forms are fracturing the history of capital itself.

In concert with this concern for circulation and its capacity to efface the forces of regulation, there is a growing emphasis on the social character of markets, particularly the ways in which the creation and distribution of wealth have to do with more than technological advancement and unfettered

competition. There is a growing realization that modern mar- 7

kets rely on governance and cultural institutions that they

are also partly responsible for creating. Fligstein (2001) notes

that the social structures, social relations, and institutions underlying the market are the works in progress of a long-

term historical project, and that in many cases they repre-

sent the fruit of sometime desperate experimentations in the

face of market turmoil and economic depressions (4). In a parallel vein, Perez (2002) and Brenner (1998) attempt to understand how the social and political economy of globaliz-

ing capital absorbs, assimilates, and deploys great upsurges

in wealth generated by technological advancements and the over-accumulation of capital that so often follows them. They

argue that the social and institutional framework, includ-

ing governance, developed to deal with the previous set of technologies (such as those of Fordist production) are invari-

ably inadequate to enframe the new technologies, in this case

the globalizing forms of financial circulation. There is a mis-

match both across geoeconomic spaces, as exemplified by the relationship between the metropolitan nations and those of

the periphery, and between the techno-economic and socioinstitutional spheres, such that the economic system at least

temporarily decouples finance capital from the organization of production. In that respect, our argument is that the globalizing process now in motion is engendering a decoupling on a scale more encompassing, more powerful, and also perhaps more permanent than anything that has gone before.

From a historical perspective, the capitalist circulation of money and commodities that began in earnest in the nineteenth century appears to be taking a new direction. Though this expansion was long in the making, dating at least as far back as the sixteenth-century Low Countries (Schama 1988), and its eventual trajectory was far from ordained, its dominant and world-dominating form only fully

8 emerged at the start of the nineteenth century. Its developmental logic animated a process of perpetual expansion, punctuated by rounds of amplified globalization, with the result that capitalism engineered an increasingly interdependent worldwide political economy based in production and founded on a single, self-universalizing division of labor. While financial and mercantilist capital were present from the outset, and importantly so, this form of capitalism valued production over circulation, labor over risk, investment capital over its more speculative cousin, and the territorialized state over both more local forms of sociopolitical organization (especially world cities) and supranational forms. In what is probably a far too mechanistic metaphor, the swing of the economic pendulum that began with mercantile capital and then shifted toward production-centered, state-based capitalism is currently in the process of returning, albeit in a profoundly different way, to a more circulation-centered paradigm. This circulatory regime is less strongly tied to state and territory, more culturally diffusive, violent in ways that are both more abstract and more tangible, and above all, founded on a reorganization of the interrelationship between production and circulation. In this respect, the current round of

globalization is so significant because it is transforming the blueprint for restructuring a global political economy that has been dominant for two centuries. The touchstone and animating force of the contemporary global transformations is the reemergence of circulation as the cutting edge of capitalism.

Circulation is the cutting edge of capitalism in a variety of senses. First, circulation is rapidly becoming the principal means of generating profit, absorbing the capital formerly direct toward production. The contemporary trajectory is that the surplus value attached to commodity production is declining while that attached to the circulation of knowledge,

money, entertainment, and technology is increasing. Indeed, 9

there is only one interpretation of a host of recent economic statistics (such as statistics of equity capitalization): capital

is flowing out of and away from things tied to production and

into those related to circulation. Second, the global expan-

sion and power of capitalism are now bound up with its ca-

pacity to organize cultures of circulation. What is a new, consistent, and determining feature of these circulatory systems

is the geopolitical redirection of flows away from the periph-

ery of capitalism and toward its metropolitan core. Few things exemplify this more than the flow of capital itself. Third, circulation is the cutting edge of capitalism because the driv-

ing impulse behind technological innovation is the shift from production to circulation. The transmission of voice, image,

data, and money, globally, accurately, and instantaneously,

has become the primary mission, the business plan, of a large

and increasing number of companies worldwide. Fourth, the cultures of circulation now in ascendance are the principal factors in reorganizing the functions of the state. More gen-

erally, they are leading to the reconfiguration of superim-

posed spatial scales, including and especially the emergence

of "global cities" -new urban imaginaries that are emerg-

ing as sites or platforms for these globalizing circulatory systems. And finally, these circulation systems are leading to a transformation in the habitus of culture itself. Culture is moving away from singularity and territorial attachment, and toward "glocalization" and plurality, meaning that each site or locality internalizes other sites as a characteristic of its position and repositioning in the global marketplace. These transformations are concurrent and conjunctive, but not only are they not coordinated, the absence of coordination is one of their most distinctive features, leading to a present that is being defined by multiple and overlapping globalizing pro-

cesses.

10 Not surprisingly, there is escalating concern that these

planetary circulations of capital will only exacerbate and further structurally entrench the already deep disparities between the economic fortunes of rich and poor nations, helping to worsen a global economy in which so many countries are in an ever-deepening crisis. George Soros, the financier who is both a participant in and a self-reflective observer of the economy, argues from experience that understanding the architecture and appreciating the power of the capital markets is crucial to understanding the present, both the economic politics of the metropole as embodied in the policies of the IMF and the political economy of despair (Soros 2002). The Nobel laureate Joseph Stiglitz seconds Soros's argument (Stiglitz 2002), criticizing the economics of the IMF and noting along the way the complete absence of evidence that capital market liberalization spurs economic growth or helps to consolidate democracy.

Outside the metropole, in places like the southern cone of Africa, the Islamic Mediterranean, much of south central Asia (especially Pakistan and Bangladesh), and increasingly more of a once more prosperous Latin America (especially Argentina, Bolivia, Venezuela, and Colombia), a deepening

economic crisis is coupled with a rapid deterioration in the ability of already enfeebled states to control their borders, quell violence and terrorism, deal with the AIDS pandemic, regulate markets, and provide answers to a generation of dispossessed youths who insistently ask why the world appears to resemble a slot-machine tilted against them. Why have so many nation-states continued to lose ground economically over the past quarter-century, and what is causing even those countries that not long ago seemed on the threshold of success (Argentina, Ghana, Egypt) to fall back? At least part of the answer has to do with the ascension and power of unregulated circulatory capital. Indeed, rapidly accumulat-

ing evidence more than suggests something transformative 11

about this present, a quality that has made history again come

alive even as the character of capital and the relationship be-

tween polity and economy resemble nothing in their pasts.

The result is widespread agreement that these global streams

of capital are transforming the economic and political land-

scape.

But acknowledging the presence and power of finance capital as a defining feature of the contemporary landscape only underscores those concerns that have garnered far less analytical attention. What are commentators referring to when they talk about global flows of finance capital, transnational capital markets, or more specifically the power of financial derivatives? What are the images and institutions, the concepts and contradictions, the agents and agendas that organize these global flows of capital in a world-space that is virtual, transversal, and asymmetric? There is clearly an argument to be made that these features, by decisively transforming the space of events, shape the way in which state politics and governance can manage or domesticate the global money markets. This space is a true world-space because it transcends the distances and differences that once mattered, meaning

that it can just as easily map life in the hinterlands of Mauritania and Laos as in the urban capitals of the United States or the European Union. This compression does not reflect the dissolution of space into promiscuous global flows, but rather its redefinition through the creation of new channels of connectivity. These lines in the world -space are virtual in that the capital accounts have no fixed physical address or home, existing only in an electronic idiom. This is critical because the oxygen of collective democratic governance is contestation and consensus between addressable agents and institutions interacting in a public political sphere. Without an addressee, the driving democratic ideals of the public good

12 and accountability have little purchase, making it hard to insure that these processes of financial circulation do not degenerate into processes of beggaring one's neighbors, especially those developing countries which, having fragile economies and weak banking systems, are unable to defend themselves.

This world-space is also transversal in that the circulations of capital breach national boundaries as though they did not exist, money and credit flowing from one nation to another in unprecedented amounts. Certainly a chief characteristic of the recent period is that while the transnational trade of commodities has continued to inch up gradually, the transnational flow of capital has skyrocketed. And more than being simply a matter of economy, the circulation of capital translates into power. The space is asymmetric in that the flows continually cede power to institutions (such as money center banks) and individuals who define themselves from a Euroamerican perspective - a perspective that simply assumes the rest of the world to be a financial appendage to the West. These qualities suggest that the question of what global circulations of capital are flows into the question of how the character and culture of these circulations are implicated in the evolution of politics, globally. How, for example, does the emergence of

markets driven by speculative and mobile capital influence the stability of governments? One possibility is that localized politics, including the national politics of former colonies, will no longer be a critical site for the governance of the economic life of their citizen-subjects. Early signs also point to the possibility that these citizens will increasingly experience the state's role in enhancing social welfare through its absence in the face of global financial markets that dismiss social and moral concerns.

Metropolitan Responses

In terms of a theory of economy, there is an ongoing debate 13

over the character of contemporary capital, focusing on how

the structure of capital changes when it goes global. Deriva-

tives and their culture of circulation go to the core of the controversy: for what precisely is it to risk, invest, or otherwise

deploy free (not production-directed) capital in the produc-

tion and circulation of capital itself - and to do so in ways that appear to be socially and historically specific to contempo-

rary capitalism? To build on Schumpeter's insight that the

very success of a regime of capitalism creates the conditions

for its own disruption, what would revolutionize the mod-

ern regime founded on an industrial, production-centered,

model of capitalism? What would transform a regime of capi-

talism whose reality had become bound up with the sover-

eignty of the state? There is a rather compelling argument, explicitly endorsed here, that locates in the emerging cul-

tures and sociostructures of circulation a critical source of

the disruption, and a seismic force contributing to it (Lee

and LiPuma 2002). Indeed, the implication of our central argument is that speculative capital, circulated through risk-

driven derivatives, is currently restructuring the relationship between production and circulation by accelerating and ex-

pan ding the spatial reach of the reproduction of capital. In looking at the rise of circulation, we are witnessing the rise of a transformed form or new phase of capitalism in which production is (and remains) a crucial, indispensable, but now encompassed moment of a globalizing system that is striving toward a different type of totality. This newly evolving totality appears more cosmopolitan than national in nature, though the ultimate response of nation-states to this challenge is still a work in progress.

An initial reading of the growing number of commentaries on the global politics of the liberalization of capital markets underscores that they generally fall into three camps. For

14 neoliberals, the trope of the free market is the centerpiece in the celebration of the open, universal, and triumphant circulation of capitalism's essence-money capital itself in all its numerous forms. This ideology, which influences the way its adherents investigate international movements of capital, pays fleeting attention to their social implications and even less to their sociostructural foundations. Their main argument is that empowered capital markets are the touchstone of capitalism, that nowhere is the disparity between the metropole and the postcolony greater than in the development of capital markets, that this disparity is the dominant cause of the problems facing former colonies, and that accordingly they should liberalize their capital markets as quickly as possible. The neoliberal premise is that well-functioning markets eventually and inevitably produce better social results than any government social engineering, "better" being defined as tending to maximize individual preferences and prerogatives. According to neoliberal economics, a key solution to the social problems facing former colonies is the opening of their markets to Euroamerican global capital flows. From the distance and difference of the postcolony, this viewpoint could hardly be more neocolonial or ethnocentric, for it presup-

poses, inaccurately, that former colonies have the infrastructure, resources, and political stability to compete in the capital markets on an equal footing.

For Marxists and critical theorists, capital flows are the trope that is invoked to characterize a skewed world where the epicenter of wealth generation seems to have seismically shifted from productive labor and the processes of turning raw materials into useful commodities to cultures of circulation built up, rather ominously, around intricate, omnivorous networks of technologically enabled financial instrumentation. The fear is that this species of capital, freed of political constraints imposed by state regulation, will redesign the

world in its own distorted and alienated image, thus exag- 15

gerating already horrific disparities in wealth and health be-

tween the metropole and the lands that lie mostly to the

south. Those on the left see in the specter of these flows

of speculative capital a new means of advancing the west-

ern economic domination of others, as transnational nuclei

of concentrated financial political power crystallize in spaces

so virtual and electronic that their only addresses are encrypted web pages. This etherealness complicates the analysis

for those who study domination: for with the rise of deriva-

tives not only do the underlying social relations of domination appear to be abstract, but the surface relations now have their

own form of abstraction.

The rise of circulatory capitalism appears to have thrown orthodox Marxists and critical theorists into a tailspin, because each passing day's news seems to emphasize that the traditional analytical tools of their trade - concepts like class relations, private property, material production, and also surplus value-may no longer be contemporaneous with themselves. The culture of financial circulation does not appear to concern or pivot on these concepts in any meaningful way, and recourse to them is distinctly unproductive. One way

of dealing with this concern is to argue, with some traditional Marxists, that these new financial and speculative transactions signify nothing more than a new phase in exactly the same labor- and production-centered capitalism that Marx described. But this view only sidesteps rather than confronts the growing autonomy and authority of financial circulation and the sociostructures that make it possible. Whatever the theoretical posture or position, any attempt to theorize the present needs to explain why the market for financial derivatives mushroomed from virtually nothing in 1973 to become the world's largest market in less time than it took Marx to publish volume one of Capital.

16 Lying between neoliberal and Marxist views is a mushy

middle ground manned by neo- Keynesians, who contend that capital markets operate efficiently only when the political process regulates them effectively. The understanding- endorsed and practiced by the U.S. Federal Reserve-is that state regulation should be sufficiently light and deft that it produces market efficiencies without producing sociological distortions (read: redistribution of wealth). The neo-Keynesians tend to share several key assumptions with the neoliberals, importantly that the economy is the hub of society and that well-tuned markets are effective means of producing and distributing social goods (such as education). When, as is increasingly the case, the neo-Keynesian perspective surfaces in reports written for agencies concerned with advancing economic development, it focuses less on the character of global flows and the structural foundations of circulation than on coming up with institutional solutions to stop the economic bleeding in the postcolonial world. In this brand of economics, the emerging global financial markets are like great rivers that the world must harness to capture their true benefits.

None of the tropes are, of course, entirely wrong: the financial markets for capital do epitomize modern capitalism,

they certainly do intensify existing forms of domination and lead to new forms, and some form of regulation is surely a necessary counterweight to the threat of state destabilizations and systemic risk. Nonetheless, if the notion of global circulations of financial capital is to have real value analytically, it is necessary to theorize and thematize their instrumentation, the social ontologies that underwrite their production and circulation, and the visibility of financial instruments in the public political sphere. The magnified scale of these transnational financial flows in concert with the ever-increasing abstraction of the relations mediating them (in terms of both their central concepts and their quantification) foregrounds

the question of what is at stake, politically and economically, 17

in the ascension of a system of cosmopolitan circulation. As

things currently stand, there appear to be trillions of dollars

of empirical evidence that do not fit any established analytical paradigms.

To put the issue politically, what kinds of politics and political culture are possible and permissible when capitalism shifts out of alignment with its surface-level segmentations, most notably the democratically governed nation-state? What kinds of domestic disturbances and instabilities start to appear when transnational agents and markets begin to exert control over economies once managed in and through the national state? Each day brings fresh evidence that transnational markets and institutions have begun to impose their will on nationally imagined economic spaces and the communities of economic interests that they once followed. Indeed, one can easily read the history of late-twentieth-century capitalism as a sustained attempt by financial capital to emancipate itself from the political system and its regime of regulation. It no longer seems realistic to think that we can adequately grasp the economy and culture of a globalizing world-space, the international reorganization of industrial production and

labor, the rescaling of functions once within the office of the state, the faces of disorientation and discontent with the ascending global order, or the new forms of symbiosis and domination that inscribe the metropole in the realities of Others if we do not come to terms with the rise of circulatory capital.

The Genesis of a Culture of Financial Circulation

Since the early 1970S there has evolved a global culture of financial circulation. This culture is being set in motion by the forms, particularly the many and varied types of derivatives, that circulate through it, and defined by a financial commu-

18 nity willing to speculate on the risks associated with globalization - or, more precisely, the forms of connectivity brought about by globalization. Accordingly, however scholarly publications, trade journals, or the mass media sometimes portray it, the explosive rise of speculative capital, nowhere more evident than in the presence of the risk-bearing derivative, is not a historically short-lived economic aberration. Rather, the embodiment of speculative capital in the risk-driven derivative seems to reflect, amplify, and be determined by the ongoing transformation in the foundational sociostructures of a globalizing economy. Present-day financial derivatives might better be conceptualized as a primary stage in a new economic trajectory whose ultimate direction and implications will depend on how the global community, particularly the metropolitan nation-states, responds to their effects. So much more than simply economic, this transformation turns on the evolving relationship between the rising import of circulation and the development of the financial institutions and instruments that are currently reshaping the global circulations of capital.'

This observation gives rise to a structural and historical argument that draws upon but also extends the insights of an ensemble of globalization analysts, from fields as diverse

as accounting, political economy, postcolonial anthropology, and urban geography. The basic or founding argument is that the internal dynamic of capitalism compels it to perpetually and compulsively drive toward higher and more globally encompassing levels of production. This directional dynamic has engendered such progressively ascending levels of complexity that connectivity itself has become the significant sociostructuring value, leading to the emergence of circulation as a relatively autonomous realm, now endowed with its own social institutions, interpretative culture, and socially mediating forms." Though it went mostly unnoticed at the time, beginning in the early 1970S Euroamerican capital-

ism was compelled to reorganize itself in the face of growing 19

competition from South Asia (the "Asian tigers"). Industrial manufacturing of all types needed to discover newer ways to incorporate more marginal regions (particularly South Asia

but also Latin America) to shore up contradictions created by

its compulsion to overproduce commodities and over-accumulate capital. Within the metropole, finance capital flowed

out of the old economy and into technology, eventually so indiscriminately that it fomented a technology bubble that

burst just as the millennium closed.

Beyond the metropole a global restructuring began to unfold, in which Euroamerican firms began to outsource an increasing share of the production of industrial materials and component manufacturing to the more advanced regions of the more advanced developing nations, such as Thailand, India, and Brazil. The hinterlands of the advanced periphery (parts of India and Mexico) as well as whole nations such as Pakistan, Guatemala, and Mauritania became outsourcing centers for raw materials and manual labor production. Photographs and reports of ecologically insensitive logging operations and dilapidated, airless factories cramped with young women sewing apparel for mass metropolitan markets seem

to exemplify that reality. Still other countries, particularly those in sub-Saharan Africa and remote parts of Asia (such as Cambodia), are participating in this restructuring in only the most marginal and episodic sense, isolated from all but the most exploitative aspects of the global economy. No nation has so come to embody and exemplify all three dimensions of outsourced production, and on such a profoundly grand scale, as China, with a vast, determined, and rapidly growing manufacturing industrial sector, huge urban encampments of sweatshops, and far western regions that are economically isolated from changes happening elsewhere. China and to a lesser extent India appear to be the complex microcosms and

20 chief beneficiaries of this restructuring of production. Moreover, from a financial standpoint, the over-accumulation of capital throughout the metropole inflicted a serious blow to the banking sector in particular and financial institutions generally because it could not but depress margins on forms of traditional lending-that is, lending to the declining industrial sector. In simple terms, the demand for capital has grown slowly while the supply has sprinted ahead, thus motivating the financial sector to seek out newer sources and streams of profit, such as teaming up with international agencies (such as the World Bank) to underwrite outsourcing operations and, not least, creating a derivatives market.

The confrontation between a metropole redirecting capital and nation-states wedded to Fordist regimes of production created problems of connectivity immune to more traditional solutions. The proliferation and institutionalization of contractual outsourcing (an agreement to supply a product over a defined period) increased existing risks, such as counterparty and interest rate risks, even as it spawned new ones, such as currency and sociopolitical risks. What these newer risks had in common was that they could not be handled or offset by the conventional forms of insurance (such as hedging). For many

corporations doing business globally, the problematic and uncontrollable consequence of outsourcing was that exogenous events beyond their control or corporate intelligence, such as a steep shift in cross-currency rates due to the election of a socialist-leaning president, could seriously harm or destroy the profitability of an enterprise. Connectivity thus produced a demand for ways to deal with the effects of outsourcing.

To help their corporate clients hedge against these risks, financial institutions developed derivatives and their markets. Because of their experience in similar markets, they recognized that for derivatives to function effectively, their markets needed to be liquid, the principals able to pur-

chase and sell securities as their needs demanded. The need 21

for liquidity provided a new avenue and opportunity for absorbing the over-accumulation of capital in the metro-

pole, giving birth to institutions, such as hedge funds and

new banking divisions, that specialized in managing what

"the street" would call "speculative capital" (Saber 1999). Furthermore, as these pools of risk capital grow, as financial technicians craft new derivative contracts to expand the reach

and maximize the leverage of speculative capital, and as new technologies permit instantaneous, around-the-clock trading worldwide, the power of such circulatory capital grows exponentially. The metropole's need to deal with industrial overproduction motivated producers to develop newer and

less expensive sites of production overseas, which in turn

led to what at first glance appeared to be no more than a straightforward extension of existing commodities markets

but quickly took on a life and evolutionary trajectory of its

own because of its unprecedented capacity to absorb the capi-

tal over-accumulation. Production's most important product

is rapidly becoming the production of connectivity itself-

that is, the logistics, communication networks, global finan-

cial instruments, and technologies used to assist and amplify

connectivity. Programmable microchips, wireless communications systems, high-speed data transmission, and real-time inventory assessment are only a few of these technologies.

The institution and implications of these financial instruments epitomize the way in which the circulatory process is redefining the production and possibilities of value itself. This process connects and separates localities and, more critically, compels other nations to globalize themselves by implementing what amounts to structural adjustment policies (especially exchange rate liberalization); such policies allow these nations to compete globally for capital and outsourcing contracts but also render them vulnerable to the interests of

22 speculative capital. The new form of connectivity is both an instrument and an example of the reproduction of global economic asymmetries on terms so new, so materially different from anything that has gone before, that peoples, states, and movements the world over are searching for the sites of power and for the identity of those who exercise control. While it is unclear whether national states can create a supranational agency to rein in circulation, it is clear that any action will entail a newer and more cosmopolitan understanding. So whatever action the world may take, the first task must be to develop a socially critical conversation on what we are dealing with.

Derivatives and Their Implications: A First Look

Financial derivatives do not operate in a vacuum, but as one cog of a larger culture of financial circulation that has many moving parts. The story line shaping our analysis has three principal linked elements. They are introduced here in some detail as a way of enframing the discussion of why this circulatory structure of finance has become so significant that

it is now instrumental in determining the wealth of nations. The first of these elements is called speculative capital. This is a huge, not production-directed, and continually expanding pool of mobile, nomadic, and opportunistic capital that resides in the hands of private hedge funds, leading investment banks (lP. Morgan Chase), and the financial divisions of major corporations (GE Capital). These funds, banks, and firms are located in the cultural and mental if not always geopolitical landscapes of Europe and the United States. The second element is the financial derivative products. The institutions participate in global markets in many ways, and use of these products is the most significant. Such derivatives are

the main instrument that speculative capital uses in the global 23

marketplace. Financial derivatives are essentially wagers on changes in the cost of money (that is, interest rates) or the relationship among national currencies. From the viewpoint of

the market, they appear necessary and natural because they

are motivated by the risks associated with the connectivities

lying at the heart of globalization. The final element is a newly minted and determinative conception of risk, new because

risk has here become abstracted from the relatively concrete universe of uncertainties, and determinative because it constitutes the basis for the production and pricing of derivatives.

The construction and combination of these elements are the molecular structure of what we call the culture of financial circulation.

Although none of the three elements are themselves new, their combination, redefinition, institutionalization, and technological amplification are producing a fundamental shift in how the world economy works, characterized by the growing power and autonomy of the sphere of circulation. What makes this ascension of circulation more than economically significant is that it seems to be engendering what amounts

to a planetary shift in power away from national state political systems, or perhaps political systems of any kind, and toward the global financial markets.

Financial derivatives matter for two reasons. First, they are "the functional form that speculative capital assumes in the marketplace" (Saber 1999, 128); and second, they are the structural form that circulates and globalizes risk. Speculative capital takes this form because derivatives unify in a single instrument the objectification of various types of risk, the almost extraordinary leveraging of those risks, and the possibility of being used for both hedging and speculation. The process of objectification is central because derivatives

24 are not concrete but socially imaginary objects that use the classifying powers of language to tie together sets of distinct and separate relations. So objectification denotes the process by which the contemporary financial community, operating much like an orchestra without a conductor, concretizes a complex amalgamation of social, economic, and political relations into a single recognizable object (like a derivatives contract) that then appears to be independent of these social relations because they are not part of the manifest appearance of the object or instrument. The derivative appears to be simply a contract that permits buyers and sellers to speculate or hedge. As the investigation unfolds, it will become clear that this appearance conceals a more complex phenomenon.

Derivatives are also an optimal vehicle for speculative capital because they allow for extraordinary leverage, which confers two potential advantages. The first advantage is that a given amount of capital can control a significantly larger amount of an underlying asset. An investment bank can, for example, collateralize its control over ten billion Mexican pesos by putting up only a fraction of that amount, meaning that its wagers can have enormous economic reverberations. The leveraging of risk thus refers to ways in which the as-

sumption of risk through the derivative is subject to a multiplier effect because the amount invested is only some small percentage (as little as 1 percent) of the contract's value. By using derivatives speculative capital can effectively chase the profits gained from assuming the risks associated with global connectivity.

The second key advantage is that leverage can permit speculative capital to make bets so large (as on a specific currency) that it influences and sometimes determines the outcome of the bet. Although speculative capital's use of risk-bearing derivatives has antecedents in the long history of international finance, it is also an economic technology whose reach and

power are greater than anything that has come before-cap- 25

tured in the statement by John K. Galbraith that "no eco-

nomic development of our time is so threatening as to its effect

and so little understood as the great and unpredicted move-

ments of financial capital between countries" (2000). Gal-

braith is alluding to the reality that the ascension of circula-

tory capital generates a double movement in which new forms

of financial progress and freedom, as defined by the West,

are inseparable from the rise of a new form of domination

and disenfranchisement, generally and most visibly visited on others.

To appreciate why this is so it is necessary to understand what happens when speculative capital, riding the back of and geometrically exaggerating the effects of corporate hedging strategies, is used in conjunction with the power of leverage to precipitously devalue the currency of countries such as Turkey, South Africa, Indonesia, and Argentina, to cite some recent examples. Almost overnight the cost of repaying debt denominated in dollars or European Currency Units (ncus) spirals upward, as does the cost of oil, technology, and new capital, igniting inflation, draining the nation's exchange reserves, and a short while later causing numerous

businesses to fail, unemployment to escalate, and the standard of living to fall. This is not an imaginary or overwritten scenario. It is simply the logical outcome of the Western logic of a globalizing culture of circulation, which maintains that in a competitive capitalist world there will be those who triumph and those who suffer." In the middle months of 1997, the world currency markets depressed the Thai baht by 30 percent, with the result that banks stopped lending, interest rates became exorbitant for those who could borrow while bankruptcy consumed those who could not, unemployment climbed to its highest level in twenty years, and workers took to the streets of Bangkok to protest their plight, leading to

26 an IMF agenda that forced Thailand to replace its constitution with one more adapted to global flows of transnational capital. The reformed constitution dramatically deregulated the national capital markets, opening them to foreign speculation. The economic debacle in Thailand-one of the dominos in what metropolitan commentators have repeatedly referred to as the Asian debt crisis but which is much more accurately described as the Asian U.S. dollar shortage-and the more recent currency crises in Turkey, Argentina, and Brazil have confirmed what many already suspected: that circulatory capital had already gone a substantial way toward subjugating production and manufacturing capital to its dynamic.

There seems to be no way to characterize the real effects of speculative capital on Latin America, Africa, and other points on the economic periphery other than as violence. There is, indeed, mounting evidence that speculative capital is producing what people on this periphery experience as abstract symbolic violence. The violence is symbolic in the sense that it is not accomplished physically by means of military force or colonialism, though it may, of course, engender the conditions (such as impoverishment) that precipitate violent crime and warfare. The violence is also abstract in the sense

that it never appears directly; rather it mediates and stands behind local realities- such as interest rates, food costs, and the price of petroleum. In everyday life, people experience the effects of the market only through the products they can no longer afford, interest rates that make buying a home or improving a business impossible, the retrenchment of social welfare projects (such as electrification for rural settlements), and a decline in the standard of living. The violence is also more fundamentally abstract because it arises from abstract forms that are themselves constitutive of globalization relations, as we now know them. It is expressed as a conflict between local communities and a global system whose dynamic

and trajectory lie beyond the reach of local insight and con- 27

trol. The appearance of a globalizing culture of financial circulation standing in opposition to the local communities that

make up the globe is an expression of the underlying abstract

basis of this modern form of violence. The violence is thus ab-

stract in terms of both its opacity at the level of everyday exis-

tence and the oppositional character of the sociostructural relationship between the global and the local.

The double abstraction of violence begins to articulate new forms of harm, terrorism, and absolutism; by detaching violence from sovereignty, it creates a new relation between the objective structures of the production of violence and its subjective internalization in the form of fear and anger. Violence is no longer linked in any simple way to the desire of states to monopolize it as one means of controlling the space of the nation and, correlatively, developing a narrative of mastery over that space. Rather, violence is becoming economically systemic in the sense that it is external to politics, law, or any claims shaped by the state or its citizen-subjects. It also differs from the economically motivated violence of the past, such as colonialism, in that it does not involve the inscription of new spatial relations, the subversion of local indige-

nous property arrangements, forcible resource extraction, or the conscription of labor. Space is no longer the raw material of international violence, in that the violence of finance is so far-removed and remote from both the spaces of everyday life and the sovereignty of the states that it profoundly affects.

All this suggests that abstract violence is intrinsic to the financial circulatory system, appearing in the covenants of World Bank loans and, more often, in the structural adjustment policies of the IMF. Its effects are violent because it damages and endangers the welfare and political freedoms of those in its path, and does so without ever revealing itself.

28 Lacking any sensible qualities, the harm brought about by, for example, exchange rate volatility seems to materialize out of thin air. The economic power that this violence confers on speculative capital in no way depends on popular awareness, let alone political consent; rather, the power is so abstracted and transverse that those in its path mostly intuit the existence of the derivatives market and speculative capital from the effects that it produces on their lives and livelihood. The violence that this power produces is not the result of an immediate, direct, or concretely social relationship, like that found on the Fordist factory floor. This violence acts covertly on the primary conditions of national economic existence, eroding citizens' faith in the worth of their currency, the continuity of the economy, and the ability of those elected to provide for their social welfare. So it is surprising only to those cloistered within the metropole that throughout much of Africa, South Asia, the Middle East, and other southward locations there is a deepening anxiety and anger stemming from the power of the emerging derivatives markets to determine the quality of people's lives, although these markets are unregulated, veiled, and beyond their political control.

The Direction of Analysis

Understanding the culture and sociostructures of financial circulation must begin self-reflexively; for the power of the financial system depends greatly on its power to produce the categories through which it is grasped. Most of the academic and all of the professional trading community use these categories. These categories, including those of risk, volatility, capital, and the derivative, define the objects and circumscribe the limits of insight by seeing financial circulation as a play of decontextualized and naturally occurring market surface forms. This cannot but lead to a naturalization of

its conventions, an essentialization of its socially created on- 29

tology, and an externalization of its manifest social implica-

tions. The social and political power of financial derivatives

are grounded in great measure on their appearing not to be

social or political at all, but to simply express the mechanisms

and profit goals of the market. The basic models for pricing options have a history that stretches back to the foundations

of theoretical physics: investigations of Brownian movement,

later applied to market practices. One consequence of this use

of mathematical physics is that a decisive line is drawn be-

tween the conceptual foundations and social institutions presupposed by the market and the objects of economic analy-

sis. Analyzing the market for the global flows of finance and speculative capital thus entails deconstructing the analytical

work already done under the names of business economics, finance, and accounting. The grounding of the analysis is also complicated by the reality that derivative products and mar-

kets continually mutate to overcome whatever political de-

fenses governments throw up in their path. In other words,

the object of analysis is both moving and often socially misunderstood.

To get a better appreciation of how financial derivatives work and what is at stake politically, we provide a social and critical account of circulation. By analyzing the role of financial derivatives in the imbricated networks of global circulation that channel the movements of capital, we seek to illuminate the socio-structural character of financial circulation, deconstructing the ways in which derivatives encapsulate, quantify, and speculate on conceptualizations of risk created in the very processes of circulation. The analysis will show that derivatives represent a new means of objectifying economic reality because they seek to capture and mediate the entire ensemble of relations that create the social through the

30 concept of quantifiable abstract risk. They are relations about the relations of capital-a metalevel that steers the transnational circulation of finance capital. The metalevel arises from the creation of a doubly abstract notion of risk-that is, one that is abstract not only in the conventional sense of being removed from immediate ordinary reality (such as the risk of nuclear war or air pollution) but in the historically specific sense of objectifying different, globally distant, and incommensurable social relations as a single priced thing. Not only monetarily large -any transaction less than ten million dollars is referred to as a "skinny" trade- but enlarged through leverage and hidden from ordinary oversight, the derivatives financial markets exert extraordinary influence over the value of money and the cross-temporal relationships between economic and political action. This ascendant culture of financial circulation, the evidence suggests, coincides with the emergence of cross-border relations that compel states to redefine the terms of economic governance and is also a critical determinant of that redefinition.

Through these concerns, we address a key dimension of the transforming and transformative articulation of economy and polity in contemporary capitalism. We take it as axiom-

atic that we must orgamze our methods to illuminate the relation between culture and economy, thus refusing to separate, as has been the practice, the operational and mathematical techniques of the derivatives markets from their social implications. The reason we refuse to disconnect social reality from economic technique is, as will become evident, that the mathematical processes are intrinsic to forms of objectification, concealment, and power through which these new financial tools are determined. The term "cultures of financial circulation" is intended to convey that the imbrication of the sociocultural and economic is so intrinsic to the reality at hand that any separation is a failure of theory and

method. And of insight as well, for accounts that fixate on 31

either side of the divide between socioculture and economy cannot but reify and misrecognize their object of study. We

also take it as axiomatic that the analysis cannot reduce the re-

lation between the culture of financial circulation and the cul-

tures of governance to an elementary confrontation between market and states. Quite the reverse. Our understanding is

that the sphere of circulation draws upon and reconfigures the underlying sociostructural relationships between capitalisms

and cultures, in particular the socially structuring ontology of Euroamerican capitalism with respect to the political culture

of governance.

In the succeeding chapters, we provide a sociocultural account of the fast-evolving political and economic contexts surrounding the development of financial derivatives, highlighting the ascension and centrality of speculative capital and the notion of abstract risk. The account then locates derivatives by specifying their metric and temporal structures, especially with respect to a production-oriented, labor-based conception of the economy; and finally we suggest some of the hegemonic implications of this culture of circulation for the ongoing construction of democratic governance across the

postcolonial divide. Indeed, it is becoming clear that the construction of connectivity is grounded in, and presupposes, a set of scalar asymmetries. We thereby raise a question we do not begin to answer, a question raised by those such as Jurgen Habermas (1996) and John Rawls (1993) who wonder and worry whether contemporary capitalism will coercively remake the world in its own image: What if the next hegemon, after Britain and the United States, is not a nation-state at all but the deep and misrecognized structures of capitalism itself? To phrase the problem politically, given the cosmopolitan character of global flows of finance capital, on what terms is it possible to have governance without state govern-

32 ment? How will the modern state, designed to deal with the conjuncture of production-centered capitalism and the nation, have to reinvent itself to be functionally adequate to a highly transversal circulatory capitalism? What happens, Paul Virilio (1995) wants to know pointedly and pessimistically, when the circulatory forces now in motion instigate a form of corruption that exists beyond the purview of politics as we know it and eludes all democratic oversight, thus exposing us to, setting the stage for, a yet-to-be-known and unprecedented fatal calamity, the planetary "circulation of the generalized accident" (90)?

2 Derivatives, Risk, and Speculative Capital

It now seems well established that though derivatives are complex and virtual, and circulate almost exclusively in the cloistered world of investment banks, hedge funds, transnational corporations, and specialized global trading firms, it is impossible to grasp the character and influence of global flows of capital without a knowledge of how they operate within a culture of financial circulation. Derivatives have come to the foreground because they are the chosen instruments of a speculative and opportunistic capital that circulates globally, with worldwide implications, but is controlled by a rather small coterie of socially interconnected, mutually aware Euroamerican agents and institutions. The heart of globalization - or, better perhaps, "glocalization," which captures the simultaneously large and intimate quality of its processes-is the ways in which the financial community organizes the money markets to pump capital through the global circulatory system.

On the surface, derivatives seem to be extensions of wellknown financial vehicles, though at a deeper level they turn out to be considerably more complex than is generally acknowledged by conventional economic accounts. A derivative is a species of transactable contract in which (1) there is no

-

movement of capital until its settlement, (2) the change in the price of the underlying asset determines the value of the contract, and (3) the contract has some specified expiration date in the future. There is no movement of capital or exchange of principal in the sense that neither party to the transaction makes a commitment to lend or accept deposits. These financial instruments are called derivatives because their value derives exclusively from an underlying asset rather than from any intrinsic economic value. Historically, the most common kinds of derivatives were futures contracts on bulk goods, such as corn, coffee, and cattle, where the value of a contract at any point was determined by the relationship between the

34 cash price of the specific underlying commodity, the strike price of the contract (the agreed-upon price at expiration), and the time remaining until expiration. From their inception during the waking moments of capitalism until the end of the twentieth century, futures contracts were used mostly to hedge and speculate on the risk associated with agriculture and mining.

These kinds of contracts, pioneered by seventeenthcentury Dutch merchants and subsequently refined by first the English and then the Americans, have provided the conceptuallaunching point for contemporary derivatives. Today, for example, foreign exchange rates, performative indexes (such as the NASDAQ 100), government bonds, and credit risk can all serve as underlying "commodities" upon which contracts are written. What are considered relatively straightforward actively used derivatives, such as the Eurodollar contract, are traded directly on recognized exchanges (such as the Chicago Board of Trade). Beyond this, banks and other financial institutions devise and market more complex (sometimes one-of-a-kind) derivatives especially designed to meet the individual and evolving needs of their corporate clients. The financial community refers to this latter market as the

over-the-counter or OTe market. Where exchange-traded derivatives are public and regulated, this larger and more rapidly expanding derivatives market is private and unregulated.

Although the underlying asset can be almost anything that could be bought and sold in discriminated units, the most common derivatives are commodity futures, stock options, and currency swaps. A future is a promise to buy or sell an asset at some determined price at some specific time in the foreseeable future. To take a well-known example, a farmer who decides to hedge against a possible decline in the price of his crops at harvest could prospectively agree to sell them at a fixed price at some future time. The farmer is thus willing to

forgo the prospects of higher prices and hence higher profits 35

in exchange for a certain reduction in the risk of lower prices (especially prices lower than the costs of production, which

would imperil the process of reproduction). While the farmer

is hedging his risks and thus guaranteeing a rate of profit, the counterparty to the trade is speculating that the price of the commodity will be higher at the expiration date. One side of

the same trade may be the soul of prudence, the other pure speculation.

Options differ from futures in that they afford the buyer the right, but not the obligation, to buy or sell some underlying asset at a fixed price at a future date. For example, someone might purchase an option on a stock, such as IBM or even a firm that specializes in derivatives trading. This kind of option, referred to as a "call," might give the buyer the right to purchase one hundred shares of the stock at $50 a share anytime over the next six months. The price of the option on that stock might be $5 a share, or $500 for a contract on one hundred shares. If at the end of six months the price of IBM had risen to $60 a share, the options buyer could exercise his or her right to buy 100 shares at $50, thereby realizing a profit of $5 a share (the $60 value of each share minus the $50 pur-

chase price minus the $5 cost of the option), or $500. Ignoring transaction costs, the original $500 investment in buying the options would yield a profit of $500 and a rate of return of 100%. If, alternatively, the buyer had instead purchased 100 shares of IBM at $50 and then sold them at $60, he would have made $1,000 on his original $5,000 investment, for a rate of return of 20%. Conversely, if the price of the stock did not rise to $60 but instead fell to $49, the buyer in the second example would have lost only $100 of his original investment of $5,000. But the buyer in the first example would have lost his or her entire investment, the option to buy shares at $50 having become worthless. Thus options offer not only much

36 greater potential rewards but also much greater risks. The difference in rates of return represents the leverage that the option provides. The pricing of an option turns out to depend on the riskiness or volatility of the underlying stock, asset, or instrument.

"Swaps" exchange one asset flow for another, such as floating interest rates for fixed rates. In a now typical hedging scenario, a financial institution saddled with a large pool of fixedrate loans, such as thirty-year mortgages, can offset the risk associated with rising interest rates by transforming the payments into a variable rate loan with a fixed-for-floating rate swap. In foreign exchange markets, swaps entail buying a currency at the spot price and simultaneously selling it forward. Swaps are thus financial instruments that attempt to price the risks of connectivity itself, though they are not the only instruments for doing so. Derivative products are built up by combining futures, options, and swaps in innovative ways with respect to the underlier. Anything from currencies and interest rates to broadband and electricity can serve as underliers so long as they are volatile, produce risk, and can be given a pnce.

The argument that underpins our analysis and differenti-

ates it from others is that the concatenation of these basic derivatives does not simply produce more complex and quantitatively different financial instruments, but engenders and represents a qualitative transformation in the way that speculative capital conceptualizes and globalizes the types of risk associated with globalizing processes. The explosive expansion of derivatives is due to their ability to be used for (and legitimated by) hedging but also to be open to almost unlimited speculation, to provide leverage, and to be adaptable to different kinds of connectivity.

What particularly distinguishes derivatives from their underlying asset is their short-term perspective. Since deriva-

tives have a fixed expiration date, to make a profit one must 37

exercise them on or before that date. In contrast to the long-

term perspective of production-centered manufacturing or industrial capital, derivatives are oriented toward maximiz-

ing short-term profits. The ideal is thus to discover pricing irregularities allowing for the arbitrage opportunities that are

a speculator's dream: the realization of riskless and instanta-

neous profits. These irregularities can and do arise because of distances and inefficiencies across markets, causing the same

asset (or nearly the same asset) to be priced differently in dif-

ferent markets. For instance, if the Japanese yen is trading at

¥ 100 = $1 U.S. in Tokyo but at ¥ 100.1 = $1 U.S. in New York,

a riskless profit could be made by simultaneously buying yen

in New York and selling yen in Tokyo. Since these arbitrage-

able differences are small and fleeting, capitalizing on them requires the use of leverage and speed; speculative capital has

to be mobile, nomadic, short-term, and flexible. Speculative capital can reduce risk not only by pricing the derivative accu-

rately, but also by compressing as much as possible the time

span of the transaction. Thus one of the basic principles of speculation is that the faster capital moves, the less risk is incurred. It should not be surprising, then, that derivatives

have become the financial instrument par excellence for the development of circulation-centered speculative capital.

Currency Derivatives: An Example

Whether measured by dollar volume or the number of contracts executed, currency derivatives are a significant dimension of global finance, a point stressed in a manifesto from the International Monetary Fund (1995). The report indicates that corporate and institutional hedging enhances the translatability of currencies and capital while the speculative use of derivatives increases both the quantity and velocity of capi-

38 tal. From a purely functional viewpoint, the availability of speculative capital is necessary and helpful because it provides liquidity to the currency markets, allowing those who hedge to find someone to take the other side of the transaction. It also prompts the financial community to lobby for the unregulated mobility of speculative money. Though it is not immediately visible, at the core of the process is a selfgenerating and self-perpetuating circularity, a treadmill-like effect that as we advance the argument about the growing autonomy of circulation will turn out to be even more critical. The treadmill effect occurs because corporations doing business trans nationally employ derivatives to offset the repercussions of currency volatility; the provision of sufficient market liquidity requires the participation of speculative capital which tends to amplify volatility; the amplification of volatility both increases the need for the corporations to hedge their currency exposure and the profit opportunities for speculatively driven capital. From this perspective, financial derivatives do not simply exploit price fluctuations around the mean (as conventional economics would have us believe) but actively create them; thus they do not simply express economic reality but are central to the creation of circulatory

capital. Historically, financial derivatives markets have expanded so globally and exponentially because they produce the conditions of their own necessity.

As noted, for capital to be mobile it must be convertible across currencies, which in turn increases the necessity for hedging. Because virtually all "domestic" manufacturing depends on transnational outsourcing (for components, technoknowledge, assembly, financing, and so on), the shifting relative values of currencies have become critical determinants in the success of any venture. To deal with this the global market designs and circulates an extraordinary variety of derivatives, from simple "vanilla" to complex "hybrid" ones. A complex

derivative might come about in the following way. 39

A corporation that calculates its revenues in U.S. dollars signs a contract to provide ten million cellular phones a year for five years to a Brazilian subsidiary of a South African corporation at a unit price of three hundred rand. To fulfill the contract the American corporation agrees to license the interior architecture of the cell phone from a German-Italian corporation at twenty Euros per phone. The American firm also enters into an agreement with a Mexican manufacturer to provide casings for the phones at fifty thousand pesos per hundred and a contract with a Japanese firm for a package of components at two thousand yen each. The American firm will then assemble the cell phone, using parts that it manufactures through the licensing agreement with the European company and others acquired from the Mexican and Japanese suppliers. To finance the five-year contract, the American corporation draws upon a secured revolving line of credit that it maintains with its money center bank, essentially taking out, at least from a manufacturing standpoint, five separate loans over the life of the phone contract. The American company calculates that at current exchange rates for the currencies involved and at the prevailing interest rate, it can anticipate

anywhere from 20 to 25 percent margins on deliverable cell phones.

The American company projects that it can successfully arbitrage labor costs (because of the state and stability of the labor market), arrange to buy the phone's components and rent the licenses at profitable rates, and borrow capital on reasonable terms. The caveat is that the profitability of the contract, and thus the health of the company, depends on having exchange and interest rates remain relatively constant for five years. This was a reasonable gamble when the metropole fixed or pegged cross-currency rates and domestic interest rates barely fluctuated, and then only very slowly. During

40 the 1950S, for example, it is likely that a firm in the United States would have considered that the costs of hedging its positions canceled out the possible advantages from reducing its risk. This was because rates were stable and transaction costs were high. However, in the contemporary global economy it is improbable that exchange rates will remain constant for five days, never mind five years. Corporations that participate in international transactions must either accept uncertainties that could potentially wipe out future profits or offset their risk by dipping into the derivatives market.

There are two ways to accomplish the objective. The first is to have the financial arm of the corporation make a coordinated set of individual transactions on the established exchanges, such as GLOBEX or EUREX. The firm would then establish a position that would swap variable rate debt for fixed, thereby guaranteeing the cost of money, as well as opening positions that froze the exchange rates of rand, yen, pesos, and Euros in respect to the U.S. dollar. The price of the contracts would reflect the risks that the markets ascribe to the individual transactions over the specified time. Marked to the full value of the cellular phone contract hypothesized above, the American firm might need $250 million in currency con-

tracts to hedge fluctuations in the rand, and $200 million in contracts for Euros, pesos, and yen, plus a contract to offset the amount borrowed to finance the process. In other words, a manufacturing contract worth $250 million could easily motivate more than half a billion dollars in derivatives trades.

For the corporation, derivatives trading itself may generate a risk, because on established exchanges the liquidity and duration of currency contracts are inversely correlated, meaning that to hedge its exposure to foreign currencies for five years the corporation in the example above would have to roll over or renew a series of shorter contracts. The strategy of rolling over contracts may result in losses if the nearby price

settles below that of temporally deferred contracts. So as an 41

alternative to initiating multiple coordinated or linked con-

tracts, the corporation might enlist the service of an invest-

ment bank that would construct an OTC derivative. Rather

than let the pooling and distribution of different risk pro-

files take place at the level of the market, specialists in derivatives would integrate all forms of risk into a unified instrument valued at about $500 million. In exchange for a fee,

the intermediary would create the instrument and guaran-

tee both sides of the transaction. The bank's derivatives specialists would identify the types of risk likely to be encoun-

tered (such as currency and interest rate), quantify their level

of potential risk or volatility, determine a price or premium predicated on these calculations, and then market pieces of

the derivative to hedge funds and other subscribers, includ-

ing other divisions of the same bank. In practice, banks often warehouse one side of the transaction as they line up potential buyers. Exchange-traded derivatives and the OTC versions are themselves often linked because the investment house may

well initiate contracts on the exchange to balance its risk posi-

tion until it completes the sale of the derivative.

The example underlines the extent to which the universe

of financial derivatives is an expanding and generative set of strategies for dealing with connectivity-that is to say, a financial situation which brings different and distant entities into conjuncture. In the example outlined above, there is no intrinsic or social connection between the architecture of the cell phone, the semiconductors, the plastic casing imported from Mexico, and the kinds of money used in the transactions except that all these elements are incarnations of the commodity form. The use of derivatives is an attempt to mediate these forms of risk-producing difference and distance. Moreover, the derivative creates a form of connectivity not only quantitatively greater but qualitatively different from that

42 generated at the level of production.

There are numerous permutations of the example presented here and no formalized limitations on the range of possibilities. Indeed, as customers' needs in the derivative markets ramified, many financial concerns scoured the university system to enlist those fluent in mathematics, and then gave the "quants" -as these mathematicians are called-a free hand in engineering new hybrid derivatives. An absence of codification and steering mechanisms in the virtual, transnational, and unregulated environs where derivatives thrive opens the door to improvisation and the construction of derivatives whose circulatory complexity is so great that analysts can model the behavior of the financial instruments only by discounting precisely those causes of volatility that might eventually prove lethal (chief among these are counterparty and country risk).

In this environment, derivative dealers typically represent their practices and the organization of the derivatives market in the language of what might be called intuitive quantification. Those who buy and sell take it as axiomatic that their exposure to the market predisposes them to sense, to anticipate, what is quantitatively correct even before it is mathematically

confirmed, just as the regular and institutionalized circulation of quantitative analyses of the market serves to train their senses. The way in which dealers estimate the "right" price for a contract assumes that their experience of what happened to similar past contracts translates into an accurate prediction. While the market appears to be based solely on contractto-contract relationships objectively guided by statistical calculations, it also includes an entire culture of speculation, guided by an inculcated sense of the playing field or market, through which those who trade and market derivatives intuitively assess the riskiness of a given contract. Pragmatically, no matter the math, neither the designers nor buyers of a

customized (OTC) derivative product can ever positively deter- 43

mine or predict the eventual riskiness of an individual, situationally specific instrument; buyers must depend on their

trust and confidence in the intuitive quantification abilities of designer-sellers as expressed in their accumulation of knowl-

edge and know-how. So although the market has no language

for it, the derivatives market has a kind of quasi-objective aim-

ing. Translated onto the global stage, this creative presence is

one of the unspoken ways in which the most powerful political economies impose their presence on others.

Analyzing Derivatives

Who uses derivatives and why? To protect themselves against interest rate, currency, and other forms of risk, a wide range of corporations who do business globally use derivatives to hedge their position, essentially buying a kind of insurance. International agencies such as the World Bank and the Asian Development Bank also use derivatives to hedge their loan portfolio positions. While transnational corporations are generally interested in reducing their exposure to risk, an increasing number now have financial divisions that actively

speculate in derivatives markets. A second group of principals are investment banks (or bank-like firms) that fabricate and market derivatives for their corporate clients and augment liquidity by making an aftermarket for derivative products. Traders for these investment firms often seek to hedge their positions but also speculate, usually in the interbank market. In addition, the financial arms of transnational corporations that hedge have also become active in fabricating and marketing derivatives products. The third type of principal is hedge funds that pool the investment contributions of wealthy clients: fund managers seeking opportunities for both arbitrage and directional bets on any market, from

44 the stock market to foreign currency exchanges. Since hedge funds are primarily engaged in speculation, the investment community imagines their market role as that of providers of liquidity.

From the perspective of political economy, there are a handful of critical realities or dimensions to the organization of financial derivatives. The first is that derivatives are functionally indifferent: the same instruments that agents use to hedge or manage risk can also be used for speculation. This functional indifference exists because there is only a pricing relationship between the underlying asset and the derivative contract. The second reality is that while in theory any company, person, or state anywhere in the world can buy and sell in the derivatives markets, in practice only those in the metropole have the socio-financial contacts, technical knowledge, and requisite capital to participate on any significant scale. The result is that the creation and control of the globally influential derivatives market rests almost entirely in metropolitan hands. The third reality is the growth and spread of a culture of speculation throughout the metropole (Strange 1986; Harvey 1989). This growth and spread do not indicate that market professionals have somehow become much more will-

ing to rely on good luck or fortune. Instead, the motivating force is a culture of speculation centering on a matrix of beliefs, dispositions, and institutional acceptance that encourage participants to focus on risk-reward ratios rather than on absolute risk-this focus being part of an understanding of what today's portfolio management is all about.' The result is that banking firms, corporations, and hedge funds have come to envision speculation as an essential component of a well-balanced portfolio. The fourth reality is that these principals now control somewhere in excess of a trillion dollars in nomadic and mobile capital. Edwards (1999, 192) estimates that hedge funds alone oversee approximately $300 billion of

capital. In practical terms, the enormous size of this pool of 45

capital available for speculative purposes means that if trad-

ing in one direction, such as shorting of a particular currency

(that is, betting against it), gains momentum ("momentum trading" is itself an established strategy), it can overwhelm

the reserves of even large and economically sound nation-

states. The final reality is that the fundamental structural features of the derivatives market favor economies of scale.

And the consequence is control concentrated in the hands of

the ten largest Euroamerican institutions. Current wisdom is

that this select group of firms makes the market for approximately 90 percent of all financial derivatives traded. Their overwhelming institutional and technical advantage, which

lies at the heart of circulatory capital, breeds a new form of vascular control over the extremities of the global capital net-

work.

Because derivatives are designed to deal with the risks produced by connectivity, and because these risks continually change in response to the evolution of globalizing process, derivatives are themselves constantly changing. The participants of this ascending and virtual financial community imagine, quantify, circulate, and also continually discard

newly fashioned derivatives in a kind of experimental practice aimed at creating connectivity. In this respect, derivatives are forms of innovation and improvisation designed to generate new possibilities of interconnectivity and translation across politically maintained economic frontiers." This is particularly true with respect to the over-the-counter market. The OTe market has no location or address, and the contractual parties can be anywhere in the world; it has no defined membership and thus the identities of the contracting parties need not be known; there are no requirements to trade and thus no rules or regulations; the market has no standardized products and thus no securities boundaries-derivatives can be

46 traded simply or embedded in other (frequently less arcane) securities. The only recognized way to impose rules on what is currently the planet's largest market is to aim at market participants in each national jurisdiction; but this is exactly what most central bank regulators now recognize as an all but impossible task.

The compelling point is that conceptually and operationally, state-based solutions are inadequate in principle because it is not the relationship between states that is at issue, but transversal relationships between forms of capital whose modes of valuation deny their socio-political character. If, as many suggest, capitalism is beginning to slough off the shell of the nation-state and matriculate to a more cosmopolitan expression, this process is inseparable from the development of circulatory structures. What is sometimes misunderstood is that though the new communication technologies, exemplified by satellite-linked internet cafes in small cities in Africa and South Asia, create an equality of access to information at the level of the subject, the socio-structures and cultures of circulation also, and at the same time, engender an objective dependence that inhabits the very conditions of connectivity itself, so that individuals' acts of su bjective freedom are

always self-annulling at another and higher level. The conditions of connectivity, which permit someone, living almost anywhere, to download medical information to help diagnosis for a relative in need of medical care, to read a report on human rights and political detainees that the state would better like unread, or to correspond regularly with a friend living overseas, are also the conditions of encompassment and domination by circulatory capital and the infrastructure of the metropole generally.

Why Derivatives Matter Globally

Why should arcane financial practices and products, espe- 47

cially those confined to spheres of circulation, matter glob-

ally and to those who have never even heard their name? One

might respond first simply by noting the size and growth of

the market. In the beginning no one kept exact score be-

cause founders and first followers never imagined that they

were launching a new era in the history of capitalist finance,

and that they were the moving parts in a reinvention of the financial field. In 1970 the yearly valuation of financial derivatives-principally those devoted to interest rates and for-

eign exchange - was probably only a few million dollars. The

sum swelled to about $100 million by 1980, to nearly $100 bil-

lion by 1990, and to nearly $100 trillion by 2000, when about

1,500 million derivatives contracts were traded (BIS 2000).

By 1999 bulk commodities, for centuries the mainstay of the futures market, accounted for no more than 0.6 percent of

total contracts, whereas financial derivatives had risen to approximately 90 percent of all contracts (Taylor 2000, 11).

There is more to this $100 trillion than the number 1 followed by fourteen zeros. Consider that according to the crystals of economic history, it is approximately the same as total global manufacturing product for the last millennium.

Or that deposits and transfers of that magnitude must be electronic, notional, and virtual because the amounts being circulated exceed the total quantity of the world's physical currencies. A determining feature of derivatives and their circulation is that they do not involve property, either in physical or fetishized form (such as a stock certificate}." The purchase of a derivative grants the buyer an electronically registered future claim in trade for the seller's "right" to electronically transfer and register a notional credit equal to the quantity extinguished in the buyer's account. The trade is mediated by money in a newly created self-mediating form, engendering, as it were, a currency not directly tethered to

48 any national economy or regulatory structures. In contrast to manufactured commodities, human labor and materials are inconsequential in the creation and valuation of derivatives. The gargantuan size of the derivatives market, especially for derivatives devoted to interest rates and currencies, creates a culture of circulation in which no nation-state, not even the United States, can regulate the exchange value of its currency, the character of its reserve assets, or the transnational movements of capital. The term "globalization," which entered the glossary of the metropole in the 1990S, acknowledged the power and autonomy of the forces of circulation unleashed worldwide in the 1970S, which were now able to turn on the West the same transformative forces that had already been unleashed on the multipolar periphery. For the metropolitan nations, the derivative markets came to function as a kind of auto-imperialism, displacing more national, recognizable, and regulated forms of financial commerce.

The second reason why the financial derivatives markets have taken on a global importance stems from their effects on the former colonies and more generally what we have called the multipolar periphery (the regional clusters, such as those in central Africa, of marginalized nations). The character of

financial circulation directly tilts and distorts the world economy in favor of the metropole (Soros 2001). This leads the economist Joseph Stiglitz to observe that anyone who thought that "money would flow from the rich countries to the poor," that the metropole would assume "the lion's share" of the deep systemic risks associated with currency and interest rate volatility, or even that "the global markets were efficient," would be sadly mistaken (2001, 24). A growing body of evidence suggests that the culture of financial circulation is more than incidentally responsible for the expanding disparities between rich and poor and that understanding its global dynamics is essential to understanding the underlying causes of

immiseration and conflict, the conditions for the rise in the 49

postcolonial world of non-state, militia-like fundamentalisms

and war machines.

The clearest effects are the ways in which a derivatives market of this magnitude can influence exchange rates between hard and soft currencies and thus the global purchasing power of a country's currency, a relation that becomes especially crucial when its economy is struggling and the state is weakened. The telling question is what happens when speculative capital uses the power of leverage to sell or short a given currency on a significant scale, or, conversely, uses the same power to purchase large quantities of a given currency. The effect of the first tactic is to dramatically reduce demand for the currency. So as momentum builds and more capital speculates on the short side, thus betting against the currency, the currency undergoes a precipitous, and sometimes enduring, devaluation. Such has been the economic fate of Turkey, Thailand, Malaysia, Indonesia, South Africa, Brazil, and Argentina, to cite only the most recent examples on an ever-expanding list. These devaluations are not simply technical events but social calamities that cost businesses, jobs, and lives. The effect of the second tactic, especially when specu-

lative capital is closing out its short positions, is to continue to induce volatility in the currency, making it all but impossible for local export producers to organize their production schedules and central banks to manage the supply of money in response to the needs of the domestic economy.

The threat of devaluation is perhaps more important, because it is more general, than instances where precipitous devaluation has actually occurred. Especially across the postcolonial world, the persistent reality that a nation's currency may suddenly come under attack all but compels it to maintain substantial dollar reserves, often amounting to a significant proportion of total national assets. Holding these liquid

50 reserves is inherently deflationary and anti-growth, not only because they represent money not used to stimulate the economy but also because they prevent nations from investing in those areas, such as education and business loans, that boost future economic output. Global circumstances, over which these governments exercise no control, compel them to remove local capital from food processing, manufacturing, and other commercial activities to appease the gods of circulation. This creates a ripple effect through the economy, because depressed economic activity frequently leads to overwhelming numbers of underemployed, directionless youths who, in many of the large and swelling cities of the postcolonial world, gravitate toward violent crimes and theft. The threat of violence in turn motivates local owners of capital to direct their expenditures to guarding existing output, such as hiring a private police force to protect their businesses and homes, rather than investing in new output. The result of high volatility in transnational markets is that in many parts of the world, people can only look at the wealth of the global economy from its "immiserated exteriors" (Comaroff and Comaroff 2000, 315).

Moreover, the investment by the periphery in the curren-

cies of the center also has the effect of underwriting the valuation of the dollar and Euro. The negative repercussions of having highly valued metropolitan currencies are more numerous and widespread than the benefits, in part because the governments of the United States and the European Union offset the advantage that peripheral economies gain from their low cost of labor, as measured in dollars and Euros, by subsidizing American and European producers and erecting complicated trade barriers on agricultural goods, textiles, steel, and other products. Two examples of the problems encountered will be sufficient to make the point.

The first concerns the production of knowledge itself. For

the intellectual communities, universities, and research insti- 51

tutions throughout the postcolonial world, the current cost of books, journals, computer programs, laboratory equipment,

and other scientific goods is so high as to impair the possibility of conducting research. Throughout the developing

world, libraries, scholars, and institutes can no longer afford

to purchase the scientific materials that are needed to facili-

tate research, including the kinds of studies that aid these nations in dealing with their immediate economic and politi-

cal problems. When young professors find that membership

in a professional organization such as the American Political Science Association or the American Economic Association

eats up almost an entire week's paycheck, they are marginal-

ized, their voices censored, no longer able to challenge (and enrich) the ideological content of mainstream Euroamerican

ideas.

An equally telling, certainly more immediate, and potentially more disastrous impact is that nations poor in dollars and Euros cannot afford to buy the medical equipment, surgical instruments, supplies, and pharmaceuticals necessary to maintain, let alone improve, their health care systems. What is more, the metropolitan nations are now using

their exchange rate advantages to lure the best health personnel, especially experienced nurses, from the advanced developing nations. (Exchange rates are relevant because nurses and other workers use their earnings in dollars to send some money home, as well as to accumulate a nest egg that they will eventually repatriate.) An example: according to the U.S. Immigration and Naturalization Service, American hospitals recruited over two hundred South African nurses in 2001, although South Africa already suffers a serious shortage of experienced nurses worsened by the AIDS pandemic (INS Statistical Yearbook for 2001). The logic is devastatingly simple. When people become ill but lack adequate health care, their

52 productivity and thus the productivity of their nation as a whole declines, as does their overall standard of living and quality of life.

There is a deeply disturbing quality to the directional dynamic engendered by the social structure of financial circulation. To guard against a downdraft in the value of their currency, the world's marginal economies must maintain reserves in metropolitan currencies, particularly the dollar. This is in effect a transfer of wealth or subsidy from nations that are southern, struggling, and peripheral to the metropolitan center. The funding of these reserves added to the cost of debt service generates net capital outflows that exceed direct external assistance by some $50 billion a year (Held 1995, 256). Moreover, the metropole does not distribute these inflows of wealth equally to all its own income classes; on the contrary, the wealthiest 1 percent receives a disproportionate share. Then, seeing a dearth of economic opportunities in the local equity markets, this group increasingly turns around and invests its new capital in hedge funds, these funds made attractive partly because of their success in the speculative trading of financial derivatives (Edwards 1999). The general metropolitan view is that this directional dynamic is simply

the logical unfolding of a globalizing culture of circulation, a competitive capitalist world in which there are those who triumph and those who suffer. Yet seen from the dark side of globalization, can anybody in the United States or the European Union seriously still wonder why those in the developing world should harbor anger or resentment toward them?

Financial derivatives in all their technical sophistication matter because although they may appear too cloistered and arcane to have anything to do with great and burgeoning disparities in wealth between the metropole and the developing countries, in reality derivative markets are instrumental in producing these disparities. In attempting to offset

the local forms of risk engendered by a circulation-centered, 53

post-Fordist economy, the globalization of a financial regime shaped by speculatively driven flows of capital threatens sys-

temic risk to the banking system and, more generally, the uni-

versal risk that the changes being imposed on the nation-state

by these circulatory structures will generate a gap between

the rich nations and poor so chasmic that the twenty-first cen-

tury will witness even more violence and political instability

than the twentieth did.

The Character of Risk

Connectivity breeds and multiplies risk. So the very process of globalizing finance is inseparable from risk's globalization. Speculative circulatory capital can exist only because derivatives can be created to price risk. So a foundational concept of the culture of financial circulation is risk, as abstracted from context and then concretized in the social form of the derivative. However, while the financial community delves deeply into the operational and mathematical aspects of risk, producing an extraordinary array of studies, it has very little to say about the concept of risk itself because this community

sees risk as a natural object. For the most part, those who base their calculations and global strategies on this conception of risk, both in financial circles and in much of the academy, see it simply as the contemporary elaboration of a universal confrontation with uncertainty. The idea is that humans everywhere, from time immemorial to the present day, have sought to master and manage risk, attempting to offset uncertainty and forecast the future to increase the chance of economic success. This perspective treats economic interests and risk as wholly natural, universal, and mutually corresponding dimensions of human behavior. The epistemological premise underlying this perspective is that though risk is inherently

54 connected to a time and a place and inherently circumscribed by the here and now, it is an acultural and ahistorical species of knowledge. The present is different only in the sense that science is providing new technologies to tackle the problems of risk prevention, calculation, and pricing-that at least is the standard narrative endorsed by mainstream texts on derivatives.

This view of risk derives from the natural sciences. So it assumes that the financial community can grasp risk by using natural science models, such as, literally, the equations that capture the collisions of atomic particles. This natural science view of risk is extremely appealing because it allows for the use of mathematical statistics, which, in turn, allows the financial community to price derivatives precisely. But precision is very different from accuracy, and however appealing the natural science model may be, using it is a disabling mistake. From the start, this view can never grasp the social character of the risks that derivatives attempt to mitigate because it unquestioningly brackets twin issues: the social embeddedness of risk and the process by which agents construct risks as social facts. More specifically, the natural science view elides the social ontology underwriting its objectification of

risk. The issues of specificity and objectification will turn out to be important, because the risks that derivatives objectify and their socio-structural functions are historically specific to the emerging culture of financial circulation. The financial derivatives now in use are based on a notion of abstract, monetized risk that organizes the circulation and pricing of derivatives and thus the activity of speculative capital. Yet the very process that prices and commodifies also conceals its own social character, making more difficult the task of visualizing the systemic risk of having a system based on abstract, monetized risk.

The people and institutions that participate in the deriva-

tives market, as well as the market itself, embody the per- 55

spectives and promote the interests of Euroamerican capitalism. They generally believe in conservative politics and neoliberal economics, a world where capital circulates with a minimum of political intervention. They hold the view that

as a result of economic competition, some individuals, institutions, and national economies are successful and become

richer, others tread water, while still others, indeed the ma-

jority, lose and are further impoverished. This economistic

and empowered worldview has no place for concepts such as market failure, economic equality, and social justice; and so it

has a jaundiced response to a government's efforts to achieve

these goals. The economistic worldview that flows from the character of derivatives trading takes it as axiomatic that be-

cause capital market liberalization has proven to be the best

policy for the metropole, as exemplified by its economic domi-

nance, then it must be the best for even the most slowly devel-

oping nations. The agents and institutions that trade deriva-

tives almost universally subscribe to a conservative reading of

the political economy derived from their deep immersion in

the Euroamerican neoliberal culture of capitalism and gover-

nance. Their view of governance embodies the social ontology

of a procedural perspective (as articulated and exemplified by mainstream American political science) that narrows the social role of government to a politics of personal choice, individual rights, and safeguarding institutions. This economistic view is so deeply inscribed, shared, and accepted by the members of the financial community that it constitutes their basic template or model for behavior. And it leads those who control the capital markets to devalue the currency, jeopardize the economy, and in this way undermine the government of any nation that has an alternative vision of what governance can and should be.

The technical reason for this is that the pricing of a de-

56 rivative must always take into consideration what the market refers to as counterparty risk-that is, the likelihood that one of the parties to a contract will default or restructure the terms of its execution, thereby damaging or destroying the contract's value. While the market always prices derivatives exclusively in terms of stochastic probabilities of movement in the value of the underlying asset, it must at an earlier stage also include an assessment of the totality of risks associated with a particular sociopolitical context. This assessment is done under the rubric of political or country risk. It reflects the reality that not only can either party to a transaction default, but the market can interpret political changes (such as the election of a leftist party) as compromising the authority that guarantees the integrity of the underlying asset. Financial derivatives thus always include an assessment of the sociopolitical and economic conditions of the government that issues the currency or bonds. The market pricing of such contracts internalizes a probabilistic assessment of how governance might change over their life span, and this assessment relies on social and political knowledge.

The pricing of derivatives thus depends heavily on strate-

gies of representation, because the calculation of risk across localities always involves evaluations of others' political culture and practices of governance. Textbooks on derivatives rarely or barely mention these strategies of representation because there is no way to shoehorn them into a model that sees itself purely in stochastically probable terms (Stigum 1990; Taylor 2000; Hunt and Kennedy 2000). However coarsely conceptualized, representations about the political persona and culture of Indonesians, South Africans, Mexicans, Turks, Malaysians, and so on are built into the pricing of derivatives. For example, the market incorporates a risk premium into currency contracts for Indonesia because the country is con-

sidered ethnically divided, politically unstable, and above all 57

Islamic and thus prone to sudden and irrational outbursts of fundamentalism; the same market penalizes the South Afri-

can rand on the understanding that any Black-governed Afri-

can state is part of a long lineage of endemic failure; while contracts for Latin American currencies generally include a premium for social instability caused by increasing poverty,

a history of left-wing politics, and corruption that the market presumes is part of the physiology of its governments and its people. There is here a kind of telescopic process in which the electronic media reduce extremely complex local realities to encapsulating images that become instantaneously globalviolence initiated by Islamic separatists in the southern Philippines and in western Turkey, marches by workers in Thai-

land and South Korea protesting against the government's

labor policies, the uncontrolled spread of AIDS in the Kwa

Zulu Natal province of South Africa, revolutionary activity throughout rural Colombia. The culture of the financial mar-

kets, animated by Western ideology, turns each of the circulated images into a universal icon of a certain species of locality. The markets then affix specific and different sets of

summary images to each locality in an effort to quantify the counterparty risk inherent in its politics.

Nothing exemplifies the summary power of these representations of place more than the market's internal notion of contagion-its operative understanding that financial turbulence in one country will invariably infect all others of the same type. Given the circularity of such prophesy, the economic arc of derivative trading is often like a seismological map: an initial financial shock foments others, with the most powerful regional systemic consequences deriving not from the origins of the original upheaval but from the fear and fallout, the victims those nations that appeared to be straddling

58 economic fault lines when the monetary turmoil occurred.

The recent record demonstrates that a monetary problem in, for example, Malaysia will within days spill over into Thailand, Indonesia, Singapore, and Vietnam -the metropolitan financial markets lumping all these nations together by means of the shorthand "emerging markets." Once these images of the local have become instantiated descriptions of an imaginary and imputed totality, they are reinserted into the localities through derivatives in ways that cannot but reshape their economic and social life. The resulting summary image thus becomes a reality so immanently real that governments are deposed, businesses go bankrupt, and sometimes lives are lost.

For an example of how this works, we need look no further than the Brazilian presidential election of 2002. When it became clear that Luiz da Silva of the Workers' Party stood a reasonable chance of being elected - to underline its identity the American press referred to it exclusively as the socialist or leftist Workers' party-the principal players in the Latin American financial markets began to sell and short the Brazilian currency. By the time da Silva was elected, the reale had depreciated by more than 30 percent against the dol-

lar and Euro. The secretary of the U.S. Treasury, Paul H. O'Neill (the retired CEO of a corporation that participated in the derivatives market), predicted that the derivatives markets would continue monitoring da Silva's performance until he could "assure them that he is not a crazy person," hell bent on economic redistribution and social justice (quoted in the New York Times, 29 October 2002, 3). During the electoral campaign, da Silva's opponents cited the reaction of the derivatives markets as a compelling reason to vote against him. There was a certain economistic logic in their recommendation: because 50 percent of Brazil's internal obligations are tied to the dollar, the country's overall debt obligation rose

sharply as a result of the devaluation instigated by the deriva- 59

tives markets, to more than $250 billion. Two effects are immediately obvious. First, a substantial portion of the money

that da Silva might have used to improve housing, sanitation,

and education in the cities' massive slums (orfavellas) would

now need to be siphoned off to meet debt obligations. Second,

out of fear of further roiling the financial markets, da Silva became greatly handicapped in his attempt to ameliorate eco-

nomic and social injustices, which is precisely what the citi-

zens of Brazil elected him to do. In other words, metropolitan currency markets are having an enormous effect on domestic politics and policies, with the locus of power clearly shifting

from the sovereign state to the globalized market; and if this

is happening in the world's ninth-largest economy, think of

its implications for all the smaller ones.

Circulation and the National State

Recently, the director of South Africa's bureau for economic research observed that something appears to have completely uncoupled the state of a nation's manufacturing and productivity from the exchange rates of its currency (Cauvin 200l).

Frankel and Rose (1995), writing in the Handbook ofInternational Economics, argue that "macroeconomic variables" no longer appear to have "consistent strong effects on floating exchange rates" (1709). Work by Flood and Taylor (1996) openly suggests that even a loose connection between the "macrofundamentals" of a nation's economy (commodity production and asset values) and the value accorded to its currency is a relic of a Bretton Woods past. The immediacy of the uncoupling demonstrates that analysis must come to grips with the interrelationship between capitalist production, global circulations of currency, and the nation-state form. The peculiarity ofthis relationship is its "quasi-performative" nature: finan-

60 cial derivatives help to create the culture of circulation that they presuppose for their circulation. That this relationship is socially and historically enframed shows that it is performative and pliable, transforming with respect to a totalizing structure that it is partly responsible for creating. This matters critically because a founding principle upon which production-centered capitalism is based is that there exists an indelible connection between money, production, and the national state. Nothing epitomizes this triangulation more than the creation and regulation of a national currency to foster domestic production, as exemplified when a central bank (such as the U.S. Federal Reserve) regulates a nationally specific supply of money to stimulate domestic production.

There is every reason to think that the emerging culture of financial circulation is instrumental in fracturing this relationship. Under the terms and logic of speculative capital, the price of a currency as measured in other currencies is based on the market for risk-bearing derivatives. This market has nothing to do with national production, the labor of any nation's citizen-subjects, or cultural values such as family, freedom, and dignity. Spatially, the state maintains a semblance of control over its currency only in the domestic sphere. Cen-

tral banks and other institutions of governance now appear too territorially bound, too financially undercapitalized, or both to exert political control over the circulatory processes in train. There is, accordingly, a decomposition of the triangulated relationship between the national currency, the national economy, and the sovereign national state. This is the relationship that is historically specific to, and has been a foundation of, Euroamerican capitalism, particularly since the midnineteenth century.' So what has constituted the foundation of national capitalisms-the relationship between production based on a national labor regime, a national currency issued and guaranteed by the state, and the territorial state made

sovereign through its capacity to regulate a bordered econ- 61

omy-now appears to be stalled in the past.

The Secret and Science of Derivatives

The global derivatives market is larger by a factor of three than the global market for commodities. And its economic power is commensurate with its great size. Nonetheless, derivatives are, paradoxically, a sort of public secret. Many people have now heard about derivatives, particularly in light of Enron's fall and the headlines it has generated, but far fewer understand what derivatives are and how they work, although an entire industry is devoted to creating derivatives and the market for them. Derivatives occupy a kind of practico-theoretical space, defined by a technical obscurity that together with the gargantuan size of derivatives makes them practically invisible. Few people ever get to buy and sell the complex derivatives and even fewer grasp their technical intricacies. Moreover, since there are few rules of financial disclosure, derivatives are tradable through offshore companies that may be as virtual as their products and transactions. So information about the strategies of speculative capital and

the operation of derivative markets is given in the past tense. The temporal lag means that the disclosure of a proprietary trading strategy and its effects mostly occurs posthumously, when, for example, government intervention compels a firm such as Long Term Capital Management to disclose its investment strategy, or when other market participants uncover the proprietary strategy by a kind of reverse engineering, thus leading the original user to abandon the strategy. The consequence is that derivatives are remote and invisible not only from the perspective of everyday life, but to the scientific investigation of financial markets and capitalism. Given that the derivatives market dwarfs all others in its financial size and

62 power, it is especially necessary to begin the production of knowledge about its structure and effects.

Such a production of knowledge poses a problem, because the capitalism of complex financial instruments implicates two worlds similar only in the reality that their social position and power stem partly from their insularity and involution. In one world are investment bankers, arbitrageurs, corporate financial officers, and quantitative analysts who view derivatives in a concrete, practical, and instrumental fashion and grasp them as natural economic products circulating according to a universal and transparent logic of efficiency and profitability. This is the world as defined by equilibrium theory, founded on the presupposition of the inherent efficiency of capital markets, and wedded to the use of stochastic models. In this perspective, the derivatives market's cultural basis, socio-structural foundations, and political implications appear only as afterthoughts or footnotes. Whatever this view reveals about the mathematics of derivatives or market practices, it actually has no account of the ascension of speculative capital, the transformed concept of risk, or even the bases of the trading models themselves. In the other world is a variegated ensem ble of analysts who, however well attuned to

the social-historical character of capitalism and its underlying logic, possess only a nebulous appreciation of contemporary financial instruments, Those who write from this perspective characteristically concentrate on the social and political implications of financial markets and instruments, but have little to say about these markets or instruments themselves, Indeed, they separate the technical and practical dimensions of the culture of financial circulation from its socio-global implications,

This division of worlds is expressed as a division of intellectual labor, Fields such as business economics, technical market analysis, and accounting preside over the formal and

quantitative research on what are referred to as naturally oc- 63

curring markets, whereas social and critical theory attends

to the underlying social categories of capitalism and their sociopolitical implications, The division is further codified in

the division of interests among professional journals, segre-

gated into those that focus on the internal dynamics of derivatives (such as their volatility and risk profiles) and others

that analyze the flow of capital as part of a wider system of relations, This division is further inscribed in the dispositions

of scientists through the socializing and disciplinary process,

which inclines them to appreciate and be comfortable with particular modes of analysis, either the econometrically or the socially grounded. This division of labor is also at a deeper

and more self-reflexive level a division over what constitutes

the proper vision of financial capital and its circulation: economics opting for a formal and stochastic interpretation, so-

cial and critical theory for a social and historical one. All of

this brings the social structures that help to produce a field

of knowledge-its journals, positions, and so on-into align-

ment with its cognitive and motivating structures-received problems, career pathways, intellectual awards. The result is

firther reinforcement of the limits or boundaries that ground

the division of interests and perspectives. Unfortunately, this division of labor usually fails, and nowhere more than in the analysis of the culture of financial circulation: for the analysis must be both socio-structural and technical to grasp the necessary relationship between surface and underlying forms.

While on their surface all derivatives have similar properties (they are contracts with fixed expiration dates whose price is determined by the value of their underlying assets), the variegated character of the social phenomena that require national and global interconnectivity (currency, interest rates, stocks) makes for substantial differences in the social construction of the various types of derivatives. These differences

64 are, however, excluded from the economic discourse on derivatives as a condition of that discourse. In order for this type of discourse to objectify the derivative as an exclusively formal and quantifiable entity, one that can be analyzed using mathematical modeling techniques borrowed from physics, it is necessary to set aside the socio-historical dimensions of circulation. It is necessary to put aside or bracket the ways in which derivative markets transform the basic structures of capitalism in general and that of finance in particular. And indeed, if we are content with looking at derivatives in this light and only on the surface, they do appear to simply reflect or express what is going on.

But this economistic view not only hides the creative effects of speculatively driven derivatives, it also hides the way in which derivatives create their surface appearance. The economistic view mistakes the appearance of derivatives for their underlying reality. One consequence, as will later become very clear, is that for the mathematics to work it is necessary to make assumptions that disregard the real financial world and the principles of mathematical statistics. For now, it is worth pointing out that derivatives create their surface appearance by creatively presupposing social contexts of use,

which economistic analysis then (mis)takes as an objective, external, and imposed reality. This move guarantees that the field of financial practice will never include the principles of its own genesis, construction, or encompassment of other peoples and places."

Instead, the culture of derivatives posits itself as a space lying beyond the power of representation, one that is discernible only through quantification, grasped objectively as the necessity (emanating from the thing itself) of reducing all event structures to forms of differential equations, and subjectively as a kind of mathematical intuition embodied (as a quasi-genetic endowment) in those who master the financial

practices. This culture of finance appears in numerous forms. 65

It appears in academic and insider publications as well as newspapers and electronic media. It also appears in the organization, day-to-day operation, and distribution of money and

power at investment banks (and nonbank banks), electronic trading sites, and hedge funds. Ironically, its own social determination and specific historical character lie in its uncon-

scious refusal to recognize the socio-historical construction of

the (derivative) object or (participating) subjects. While the financial community certainly knows that the derivatives it creates are profitable, it cannot account for their emergence,

the way these derivative products price risk, or the concept of

risk itself. In a word, the financial community's only answer

to "why the rise of circulation" is that it was simply in the

nature of things. This reply notwithstanding, the question is

still an intriguing one: Why did the global circulation of financial derivatives, in what historically is only a blink of an

eye, grow from nothing to the planet's largest market?

3 Historical Conjunctures

For those who like to mark transitions with dates, the year 1973 seems to be the significant turning point, the period when the fulcrum of power and profit began to shift from the production of commodities to the circulation of capital. In that year the destabilization of global currency markets (culminating in the collapse of the Bretton Woods system) interacted with a host of other historical events to create an economic and political force endowed with its own direction and momentum. The transformative event that hastened processes already in motion was OPEC'S embargo on the export of petroleum and the ensuing escalation in energy prices, followed by price increases in other goods that precipitated a period of stagnation and inflation.

Before the embargo, the price of petroleum on world markets hovered around $3 per barrel of crude, but by the time the decade had come to a close oil prices had surged by a factor of thirteen to $39. Oil producers opted to denominate petroleum prices in U.S. dollars; this compelled every oildependent nation (except the United States) to obtain dollars, and in very significant amounts, through the foreign exchange market. Especially for emerging states, this precipitated an enormous transfer of wealth from oil-dependent

-

nations to OPEC members. Recycling petrodollars was essentiallya process by which the current account surplus of OPEC nations financed deficits in nations that imported petroleum. According to the then conventional and now discredited wisdom - encapsulated in the OECD'S (in)famous McCracken Report (Organization for Economic Cooperation and Development 1977)1-0PEC would deposit its titanic surplus in the international money markets, where it would then be recycled through the global banking network, ending up back in the hands of what, at the time, were called the LDCS, or less developed countries. The economic mantra was that privatized global financial markets would restore economic equi-

68 librium by selling their excess funds to emerging nationstates, thereby allowing them to obtain petroleum in exchange for debt.

There was, however, no logical or institutional reason why global money markets should recycle petrodollars according to humanitarian principles of social fairness and justice. As World Bank records would later underline, for the remainder of the decade the net flow of capital to developing countries was actually negative, even as G-7 nations absorbed somewhere north of $150 billion per year. Without access to the capital surplus of petroleum producers, developing and transitional nations could generate the precious foreign exchange they needed to purchase oil only by cutting back on or forgoing other, non-oil imports, including the capital equipment needed to sustain employment and productive output. Among other things, the free market model of international finance apparently forgot that bankers are loath to buy a stream of short-term variable-rate funds-the tens of billions of dollars of OPEC revenues held as short call deposits -and then extend long-term fixed-rate loans under any conditions, let alone to economically strapped and already indebted countries. Predictably, international capital markets would fur-

nish balance-of-payments financing only to countries they deemed creditworthy, which essentially excluded much of the postcolonial world. That the advanced industrialized nations actively colluded in dividing up almost all of the available capital meant that the negative consequences of the worldwide net capital deficit fell mainly on the shoulders of those who could least afford it. Thus, the recirculation of petrodollars gave postcolonial nations their first introduction to a form of economic violence so abstract and mediated that its structural dynamic remained all but invisible.

Advocates of the "free market" solution to the crisis precipitated by the escalation in petroleum prices were taken in

by their own ideology, mainly by seeing risk as an externality 69

to the system rather than its product. Looking at what they

took to be the more economically advanced countries of the periphery, they reasoned that countries such as Egypt and Argentina could never go bankrupt because the government

always had the ability to tax the citizenry. No matter how high

the mountain of foreign debt rose, countries did not go out

of business and therefore the debt could always eventually be

paid off In contrast to this logic, the oil producers reasoned

that if they deposited huge sums in banks whose loans ex-

posed them to financially troubled states and corporations,

they were exposing themselves to substantial and unneces-

sary risk. So the producers bypassed the banks, investing

an extraordinary amount of petrodollars directly in Ameri-

can assets, such as government debt (mostly Treasury bonds)

and blue-chip corporate equities (companies such as General Electric). The U.S. government aided such investment by cre-

ating a special arrangement that "allowed the Saudi Arabian Monetary Agency to buy U.S. government obligations with-

out competitive bidding" and directly from the Federal Re-

serve (Spiro 1999, 109-10). The United States was essentially providing securities-that is, claims on the future cash flow

of the corporations and government lending institutions in question -in exchange for a capital infusion into current accounts.

One immediate consequence of the continuing infusion of petrodollars was that the dollar became even more overvalued in relation to the other benchmark currencies, the German mark and Japanese yen, in substantial part because successive administrations in Washington were using the current account surplus generated by the inflow of petrodollars to further inflate the money supply and thus be able to underwrite the conflict in Vietnam and the cold war. As early as July 1974, the Federal Reserve opined that the "growth of

70 money and credit is proceeding at a faster rate than is consistent with general price stability" (Federal Reserve Bank 1974, 564). Diplomatic phrasing aside, the ascent in oil prices produced two effects, both of which were especially disastrous for the developing world: first, neither oil-producing nations nor the metropolitan recipients of petroleum revenues put the money back in global circulation, thus instantaneously wounding the world economy; second, to prosecute its own agenda, the United States inflated the supply of dollars.

The massive and unprecedented transfer of capital from the oil-importing nations, especially in the developing world, to the United States could not but accelerate an inflationary spiral that had begun in 1973 with de facto devolution of the Bretton Woods system (Van DormaeI1978). Bretton Woods, in place since 1944, put in place national political capital controls that by regulating the segregation of foreign and domestic money markets enabled a nation's central bank to adjust interest and currency rates based on domestic economic objectives. (Webb demonstrates that during this period approximately two-thirds of all international capital circulations were official government-to-government transactions.) The relative fixity of the Bretton Woods system gave a state the political

option to intervene on behalf of its currency with the confidence that its actions would not dramatically disturb interest rates, ignite inflation, or precipitate a speculative "run" on its currency (Marston 1993). The two architects of the Bretton Woods System, John Keynes and Harry Dexter White, were in near complete accord that capital controls were necessary to allow governments to set interest rates to advance their domestic aims (such as full employment) and to prevent shortterm speculative movements and flights of currency. Their thesis was that because markets functioned inefficiently at times, it was necessary to intervene politically in those instances.

Bretton Woods was the first successful political framework 71

for the world's economic organization. Its founding insight

was that states could dampen destructive disputes over the circulation of commodities by politically regulating interna-

tional flows of money. Thus the abandonment of the Bretton Woods system seismically shifted the balance of power, begin-

ning a process that would gradually but inexorably empower

the market at the expense of the governing state. Especially,

but not only, in the United States there began a call for less government regulation and intervention in capital markets.

The idea was that "the market," understood in quasi-political

terms as a collective agent that encapsulated and transmit-

ted the world's economic votes and interests, would, ifleft to

its own devices, provide adequate liquidity, confidence, and adjustments.

The demise of Bretton Woods led to floating exchange rates: the market would now determine cross-currency ratios. The new system obliged every country to do just what so few could do: monitor and regulate its currency's market value so that it would fluctuate predictably and only slowly within a relatively narrow band. Even the most cursory inspection underlined that the level of monetary uncertainty

and risk would soar and that a satisfactory mechanism for setting stable rates was nowhere in sight. So almost immediately, the ascending power of global financial circuits forced national regulators worldwide to abandon a politics of control over the supply of money and credit, leading to the elimination of "long-established interest rate ceilings, lending limits, portfolio restrictions, [and] reserve and liquidity requirements" (Eatwell and Taylor 2000,37), Precisely the situation that had provoked deep consternation for Keynes and White now appeared to be imminent (see especially Keynes 1980, vols. 25-26). Moreover, it would soon become all too clear that as certain and steadfast as Keynes and White had been

72 in their thinking about the perils of free-floating and unregulated capital, their views were developed in response to an era of laissez-faire capital when neither the sums of circulating capital nor their technological amplifications were anything like what they would soon become.

During this formative period, the metropolitan states periodically contemplated the restoration of capital controls. The British seriously worried about the possibility of reinstating exchange controls to dampen the London-based Eurodollar market. But the British declined, realizing that the trade in Eurodollars was a source of substantial profits for their banking sector, that the key to the future economy lay in the development of financial instruments, and that the hammer of capital controls would only serve to drive the Eurodollar emporium to another shore. In 1978 policymakers at the U.S. Federal Reserve considered reviving capital controls in an attempt to mitigate the downward pressure that speculative markets had brought to bear on the dollar. The dollar crisis of 1978-79 was the first indication that under the right circumstances not even the size of the American monetary system nor the pricing of key commodities in dollars rendered the

United States immune from the pressures of global money markets. Moreover, policymakers in Washington concluded that they no longer had the monetary muscle or political support to decisively implement capital controls. So in great contrast to the manufacturing sector, where trade controls are omnipresent, the political community all but abandoned any attempt to control the circulation of capital.

If the political community was to abrogate responsibility for currency values, the only capitalist alternative was the market. When the closing of the gold window forced currencies to float, when the international political community renounced the project of managing the global economy, risk

was now critically privatized. It should come as little surprise, 73

then, that 1973 witnessed the genesis and flowering of the derivatives market. As Millman notes, existing futures and op-

tions contracts became the "building blocks" of a whole new

genus of financial products, setting off a chain reaction that shifted the epicenter of financial power from institutional relationships "to new equations and economic models" (Mill-

man 1995, 3). It should also come as no surprise that standard economic theory, its analytical tools no longer in tune with

a world now globalizing, predicted the opposite of what did happen. Analysts (such as Williamson 1983) predicted that a regime of flexible rates would stabilize the international cur-

rency system and, by delinking the national economies, also increase their autonomy, options, and freedom to act. 2 The

reality is that a new sociostructure and culture of circulation

came into being whose dynamic is technologically amplified

flows of speculative capital. This emergent system quickly be-

came so enormous that it increasingly determined exchange

rates independently of the needs or necessities of any specific nation, even as the cumulative effect of derivative trading increased the volatility and variability of exchange and interest

rates. The ultimate effect was a transfer of power from the political to the economic system, from the citizen-subject to the market.

Rising Political Instability

The economic disruption of emerging nations instigated by the surge in oil prices, the dearth of counterbalancing loans, and the resulting insolvency of even the most fiscally responsible regimes also generated a rising level of political instability. The prices paid for exported raw materials and unskilled labor began a secular decline that would still be in

74 train a quarter-century later. The cost of imported energy, technology, and finance capital began an equally long-lasting and corresponding ascent. The resulting impoverishment of the emerging world - states such as the Congo, Cambodia, Nicaragua, Angola, Zaire, Burma, Chad, Laos, and Mozambique suffered astounding declines in GDP (United Nations 197sa)-was instrumental in producing political turbulence that fueled existing civil wars, instigated new ones, and sowed the seeds of future ones. Some would see 1973 as the flashpoint of the third world war, meaning that the two superpowers, the United States and Soviet Union, fought a hot and bloody war on the terrain of the Third World (Coronil aooo). Others would observe that further north, across the Islamic Mediterranean, the year marked the emergence of factions that for the first time were able to consolidate the economic interests of streams of unemployed migrants with those of a once prosperously rising middle class now under siege, to advance a new, more overtly militant and fundamentalist political Islam (Kepe11986 on Egypt; Bennoune 1988 on Algeria).

However one might portray this turn of events, the turmoil and violence ignited by the disruption of already frag-

ile postcolonial economies moved David Rockefeller to organize the Trilateral Commission in 1973. The commission was a collaboration of corporate and political leaders; its stated objective was to foreground American leadership in order to dampen a global outbreak of violence and instability. No ordinary commission, it included among its founding members a future president of the United States, several past and future secretaries of state and foreign policy advisors, transnational corporate leaders from, among other sectors, banking and finance, and heads of the World Bank and the IMF. The commission operated according to the belief that by stabilizing the global economy, one could stabilize regional and na-

tional economies, which would then galvanize a planetary in- 75

stallation ofliberal, stable capitalist democracies (Gill 1990 ). Responding to these tumultuous changes, the commission's leadership commissioned a report in late 1973 entitled The

Crisis of Democracy. Its authors argued that as a result of

the current crisis the periphery was becoming increasingly undemocratic and ungovernable (Crozier, Huntington, and Watanuki 1975). A few years later Zbigniew Brzezinski, the Trilateral Commission's first director, in collaboration with

David Owen (Britain's foreign secretary and leader of its So-

cial Democratic Party) and Saburo Okita (Japan's foreign minister and chairman of its task force on the prospects for democracy), produced a companion report called Democracy

Must Work, in which they ominously observed that the "prin-

cipal threats confronting the global community" centered on

the growing possibility of full-scale worldwide economic deterioration which would then precipitate "major social break-

downs in large portions of Africa, Asia, and perhaps Latin America, thereby reducing prospects for democracy and enhancing the opportunities for extremists ... to seize power" (Owen, Brzezinski, and Okita 1984, 1).

In retrospect at least, 1973 seems to be the kind of year we entomb as a cliche, such as watershed or turning point. The metaphors come easily because the year gave birth to a directional dynamic that shaped the emergence of a culture of financial circulation, the events setting in trajectory a pathdetermined process that seems to be transforming the character of capitalism, further skewing the global distribution of wealth and undermining the power of the state to govern the economy. It was the year in which risk was fully privatized, financial derivatives began to trade, and a new creature of political violence came into being, on one level more abstract than anything that had existed before, and on an-

76 other level so firmly attached to everyday life that the older categories of conflict - civilians versus combatants, children versus adults, innocence versus guilt-no longer seemed to apply. By the time the new millennium came into sight, the culture of financial circulation had become a centerpiece of globalization and the modern restructuring of the nationstate. In less than three decades, the International Monetary Fund would explicitly tie its lending policies toward developing and transitional countries to the derivatives markets. Indeed, the changes that were and would be generated by circulatory capitalism depended on the construction of these markets and their instrumentation.

The Development of Financial Instruments

The IMF can take this step because another historical trajectory is also in train: the development of the financial instruments and institutions necessary for the meteoric rise of derivatives. Though options to buy and sell commodities have a very long history (Aristotle mentions them and the Dutch marketed them during the tulip bubble), the key conceptual breakthrough that defines the modern development

of derivatives is the objectification of risk, specifically being able to price risk itself. The breakthrough analysis in this area was Henry Markowitz's elaboration of portfolio theory (1952; 1991). Until Markowitz's work, traders assessed investing strategies based on their rate of profit alone, with no thought given to their riskiness. Drawing on a marriage of statistical protocols and linear programming, Markowitz's analysis, first published in the 1950S, argued that by quantifying risk, by subjecting it to mathematical interpretation, it was possible to assemble a stock portfolio that positively maximized the relationship between profit and risk. The ideal portfolio was one that permitted outsized returns while mini-

mizing the risk of loss. Though it was not appreciated at the 77

time, Markowitz was inventing the foundations of modern trading strategies and the hedge fund.

Modern portfolio theory conceptualizes risk as variance of returns on assets. Intuitively, variance measures the volatility of an asset; this is the magnitude of swings in a price around its mean. 3 High variance, or excessive risk in relation to potential reward, was something the successful portfolio avoided. The conclusion from portfolio theory, now embodied in the mantra to "diversify," is that while the return on a diversified portfolio will be the average of the returns on its individual holdings, its volatility will be less than the average volatility of those holdings. The ideal, economically maximizing portfolio is thus not the one with the least absolute risk but rather the one with the greatest relative spread between incurred risk and potential return. And so the concern that would consume succeeding generations of financial experts would be how to purify and refine the pricing of risk so as to maximize profits while minimizing risks. In contrast to previous forms of financial analysis, which focused on the impending risks or rewards of each investment, or the lottery-like thinking of common folk who fixated on the size of the potential jackpot, portfolio

management focused on the relationship between the risks and rewards of the portfolio as a whole. The theoretical endpoint was riskless profit, or arbitrage.

From this point onward, the measurement and quantification of risk became the presupposition, if not the overriding preoccupation, of contemporary finance. Perhaps its culmination was the publication, also in the prescient year of 1973, of what would soon become known as the BlackScholes model (Black and Scholes 1973). The model was the first strictly quantitative attempt to calculate the prices of options where the determinative variable is the volatility of the underlying asset(s). The counterintuitive result is

78 that options pricing does not derive from directional movement of the underlier-whether, for example, a stock's price has increased or declined - but from the magnitude of the price swings alone (Natenberg 1988). The acceptance and refinement of the Black-Scholes equations fueled the explosive growth of derivatives markets because it standardized and formalized their pricing profile in exclusively quantitative terms. Once the market's participants accepted the underlying mathematical assumptions of the Black-Scholes model (and very few possessed the insight or inclination to understand the assumptions, let alone their implicationsj," they could calculate options pricing mechanically. Within six months of publication of this seminal paper, the Wall Street Journal began to carry software advertisements for figuring options prices.

The calculation of basic measures such as the volatility of assets depended on having statistical records and the requisite formal models and computation infrastructure. Indeed, Markowitz's discovery was not initially adopted for two reasons. First, there was a lingering attachment to the generative schemes of the older and more conventional style of investing, a style based on researching individual firms and

picking the best stocks. Risk was expressed in the aggressiveness of the investment strategy, not some mathematical analysis. Second, the calculation of the necessary covariances among assets in Markowitz's model far exceeded the computational capabilities then available. But with the development of modern computers, statistical information bases, and increasingly complex technical models, these impediments were largely overcome, thus launching an era in which quantitative analysis emerged as the dominant rationale of financial decision making. Along with the conceptual innovations and development of supporting technological infrastructure, institutional developments such as the introduction of cash

settlements to replace the actual delivery of the underlying as- 79

sets and clearinghouses to help minimize counterparty risk (Stigum 1988) also contributed to the explosive growth of derivatives.

At the end of the day, thanks to the pioneering work of Black and Scholes, there was a straightforward and accessible pricing model for risk-an unprecedented extension of quantification into the universe of abstract risk. Other analysts joined in, and the model was extended to encompass increasingly abstract forms of risk that went beyond simple commodities options pricing into the much more sophisticated world of complex financial derivatives. The process took two lines of development: the creation of derivative products and markets by investment banks and the working out of the technical mathematics needed to conceptualize these products and the functioning of their markets. In ensuing years, mathematical statistics would work not so much in concert with but rather alongside those who fabricated and marketed derivative products. Computer pricing programs and the inhouse technicians who designed them would functionally and socially mediate their relationship. Eventually, traders could run the pricing programs with little technical, never mind

real mathematical, expertise or understanding. The result was the evolution of parallel but barely connected worlds, with those working in mathematical statistics knowing very little about the substance of finance, derivatives, or their markets and those from the financial world grasping the mathematics in only the most mechanical and econometric sense.

The division of worlds and of financial labor turns out to be important because it allows the market to conflate the notion of probability with that of distribution. The assumption is that the market can, automatically and with no further specifications, use a stochastic model to measure any phenomenon that has a distribution. In mathematical statistics terms, this

80 means that the stochastic model can be used without specifying the abstract space of events that (1) define the limits of any distribution and (2) specify the formal identity of the points within that space. So the conflation of the notion of probability with that of distribution effectively precludes any questioning of the interrelationship between the model used to price derivatives and the abstract space of events of those derivatives. This is a meaningful omission because for humans, this abstract space of events is defined by our culture and history. For humans, this socio-historical space is defined not by object categories, like the Sun or the book that you are holding in your hands, but by relational categories, such as nationality, the pursuit of democracy, or the reader's reaction to the book. However, the use of stochastic models is so widely accepted as the method of pricing that the financial community speaks about the parameters of the distribution, about political and market risks for example, as though they were real, measurable things. In other words, it mistakenly speaks about relational categories as though they were object categories. What this use of stochastic models thus conceals is the social processes that give rise to the phenomena and the social processes that underlie the use of the model itself. The end

result is a peculiar and deceptive transformation: socially constituted objects of analysis are socially constituted as though both the objects and the analysis were not socially constituted.

From the start, the financial community embraced the pricing model as a breakthrough, confident of having begun to unravel the keys to the physics of finance. Chief among its virtues was that the model allowed agents to unbundle and disaggregate the economic and political aspects of commerce into their component parts. It also allowed relational objects to be translated into individuated concrete units, so that "risks became 'things' like commodities-tradable at any

moment at the right price" (Steinherr 1998, 101). Steinherr, 81

who is general manager of the European Investment Bank and author of its risk management system, notes that this commoditization generated "a virtuous cycle" in which risk types

could be isolated and "repackaged" into derivatives, leading

to a capitalism in which there was the "distribution of risk at

a fair price" (101). The decomposition and concretization of

risk, once achieved, gave birth to a new financial alchemy in

which market makers could recombine different risk profiles

into products that could be bought and sold at will in unlimited quantities. The result was a kind of secret stardom for risk-driven derivatives as the vehicles of speculative capital.

While it would take another quarter-century for their effects

to become fully apparent, market-internal mechanisms for quantifying and distributing risk were now preempting po-

litical relations among nations as the controlling source of international economic predictability. No longer would men

like Harry Dexter White of the U.S. Treasury meet behind

closed doors at Bretton Woods with 1. M. Keynes, his British counterpart, to hammer out the future of the international monetary system. No longer would the hegemon be able to orchestrate the global economy through a nation-based po-

litical system. Indeed, what is ultimately becoming legible is that the quantification of risk itself is an expression and realization of the limits of national capitalism.

By 1973 the continuing cold war, the cascading American involvement in Vietnam, the overproduction and over-accumulation of capital in the metropole 's industrial base, and the unprecedented escalation in dollar-denominated energy prices all combined to instigate the unraveling of the Bretton Woods system for controlling capital flows. There followed what would rapidly become a permanent state of emergency in the international money markets, an intensification of civil strife

82 in a significant number of postcolonial nations, and the use of development agencies and international banks to propagate the Euroamerican conception of the liberal capitalist state. The outsourcing of primary inputs to production led to a need for ways to monetarily manage connectivity. The trajectory of the global political economy coincided and intersected with the development of technologically amplified means of conceptualizing and quantifying risk-that is, the market's way of costing connectivity. A result was the explosive ascension of a financial derivatives market, orchestrated by a science of risk and fueled by increasingly expanding pools of speculative capital in the hands of investment banks, hedge funds, and corporate financial divisions. The convergence of these forces in the early 1970S points away from conventional approaches to the global economy and the state, which grasp economy and polity as only extrinsically linked. Against this separatist vision of social life, the evidence indicates that derivatives and politics have a many-sided and imbricated relationship, their cultures of circulation more like the helix of the genetic code than mutually independent variables.

This history also suggests that circulation is gaining a power and autonomy that were impossible under an eco-

nomic regime organized around and dominated by industrial, production-centered capitalism. It is moreover unclear whether standard economic approaches, from either formal or Marxist economics, possess the intellectual tools ready to the task of dealing with this new globalizing socioeconomic reality. Standard macroeconomic theories of international trade and exchange rates, or Marxist approaches that originate from a labor theory of value, appear to have little to say about circulation: in the first instance because the theories bracket the culture and sociostructures of circulation, concentrating on surface forms, and in the second instance because financial derivatives do not embody labor or value in

their or indeed any conventional senses of those terms. The 83

political side of this academic quandary is that few if any contemporary lawmakers grasp what derivatives are, how they

work, or the ways they affect their constituents. For politi-

cians, the news that the OTe market is growing so rapidly because financial intermediaries increasingly offset exposure

in their derivatives portfolio by designing cash-based hedg-

ing strategies using repos (short for repurchase agreements)

might just as well be conveyed in an ancient Sumerian dialect.

And without understanding, there is little possibility of genu-

ine political oversight or regulation, much less the kind of cosmopolitan cooperation that oversight or regulation would

entail. The events crystallized in and around 1973 set in mo-

tion a directional dynamic whose consequences are still unfolding, not the least of these being the advent of cultures of circulation whose socio-structures and generative principles challenge existing schools of thought on globalization and the ascending power of speculative capital.

4 The Institutional Basis of Derivatives

Because derivatives exist in an electronic virtual space, appear only infrequently and fleetingly in the public sphere, and presuppose a conflation of virtual and real time and space that is removed from the temporality and geography of everyday experience, scholars and other professional interlocutors (lawyers and regulators) find it difficult to conceptualize what derivatives are and how they work, or to appreciate their power. The speculative persona of the derivative appears to encourage its characterization as an advanced form of "casino capitalism" (Strange 1986), the very term casino suggesting at once an economy of chance separate from the "real" economy and a high-stakes game in which the exchange of money is consequential only for winners and losers. Derivatives do, of course, involve wagers and often speculative positioning, but only on the surface: ultimately derivatives are monetized relations about the relations of capital that go directly to the inner dynamics of the global banking system. Headlines announcing that the U.S. Federal Reserve and a coerced consortium of money-center institutions had opened their wallets to shore up a private firm specializing in derivatives, named (more hopefully than ironically) Long Term Capital Management, gave some inkling that those in

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