 Years ago I read William Greider's excellent book published in 1987 on how the US Federal Reserve System works. It was detailed and explicit and makes wonderful and informative reading, except for the solution he suggests to a huge problem. His was far too timid.
This article proposes a much different one. Greider called his book Secrets of the Temple with a sub-title: How the Federal Reserve Runs the Country. A better sub-title might have been how the Fed (and other key central bankers) runs the world. This article attempts to summarize what it does, how it does it, for whose benefit and at whose expense. For those who don't know, prepare for some stunning information and commentary.
Let's be clear at the outset. The US Federal Reserve, Bank of England, Bank of Japan and the European Central Bank (for the 12 European countries that adopted the single euro currency in 1999) are institutions with enormous power far beyond what most people everywhere can imagine. These most dominant of all central banks, as well as most others, have a powerful influence on the financial conditions in virtually all countries including their own, of course, in an increasingly borderless financial world where a significant economic event in one nation can affect most others for better or worse.
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 Why a Global Economic Deluge Looms
People who know the most about the world financial system are increasingly worried, and for very good reasons. Dire warnings are coming from the most "respectable" sources. Reality has gotten out of hand. The demons of greed are loose.
What is that reality? It includes a number of factors. Alone they would be exceedingly serious; combined, they are very likely to be lethal.
First of all, the International Monetary Fund (IMF) has been undergoing both a structural and intellectual crisis. Structurally, its outstanding credit and loans have declined dramatically since 2003, from over $70 billion to a little over $20 billion today, leaving it with far less leverage over the economic policies of developing nations--and even less income than its expensive operations require. It is now in deficit.1
A large part of the IMF's problems are due to the doubling in world prices for all commodities since 2003 -- especially petroleum, copper, silver, zinc, nickel, and the like -- that the developing nations traditionally export. While there will be fluctuations in this upsurge, there is also reason to think it may endure because rapid economic growth in China, India, and elsewhere has created a burgeoning demand that did not exist before, when the balance-of-trade systematically favored the rich nations.
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 Momentous change is approaching in American politics. Conceivably, the turning point has already arrived, too indistinct to recognize. We are witnessing the demise of the reigning economic ideology.
A deep shift of this kind is a very rare event, one that comes along only every thirty or forty years. Economic disorders accumulate that the orthodoxy cannot answer and may even have caused. Eventually, the ideological presumptions are discredited by real-world contradictions.
The last time this happened was in the 1970s, when economic liberalism foundered and collapsed. Ossified intellectually, unable to adjust to changed circumstances, the liberal order did not know how to deal with economic consequences like inflationary stagnation. As the long postwar prosperity lost its energy, so did liberal politics.
Something similar is happening now to the Republicans. Their problem is the underperforming economy, which must borrow to stay afloat and, roughly speaking, lifts only half the boats. The conservative order--inspired two generations ago by Milton Friedman and Friedrich von Hayek and brought to power by Republican ascendancy--pushed government aside so business and capital would be free to generate more lasting prosperity. But their utopian promise was not fulfilled. Instead, the right's principal product, one can say, was economic inequality.
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 Do countries have a choice in their economic systems? In the past, countries could choose between capitalism and communism, but today the choice is smaller if we are to take the failure of socialist states at face value.
Neo-liberals asserted that democratic capitalism had emerged as the clear winner in the competition for promoting human happiness, a conclusion summed up in the memorable phrase “the end of history”. But economics is a difficult subject to predict, and there have been a cascade of papers in the last two decades showing that current democratic capitalism is not the only possible system and perhaps an unlikely bet for long-term survival. The source of these threats is surprising given that it has, in the past, promoted capitalist development: human knowledge.
The classical representation of knowledge’s effect on growth is through technology and technological innovation. Advances in technological knowledge may become more productive over time. When today’s scientists invent something such as a new power source, a cure for disease, or a new material, it is often not just better than before; its improvement over past science is bigger than all past improvements. The implications of accelerating technological productivity were heavily investigated in the endogenous growth theory from the early 1990s. Two of the most striking implications are that growth can continue at a high rate indefinitely, and incomes in poor countries may never catch up with rich countries, even if they follow exactly the same policies and savings behaviour. The balance of current thought is that at the moment technology is good but not that good, and developing countries can catch up with developed countries. The more startling predictions of endogenous growth theory were not incorrect, but the technology has not reached a stage where they come into effect.
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While it's hard to see it here in the U.S., "trickle-down" economics is beginning to be confronted by popular democratic movements, which are bubbling up in communities across the country as well as all over the world in countries like Ghana and Bolivia, where fierce resistance to the privatization of water not only pushed big water multinationals like Bechtel out of the country , but led the government of Bolivia to begin pushing the world's international financial institutions to exempt water from trade liberalization (i.e. corporate predation) agreements and bolster effots to reverse now widely-discredited structural adjustment programs that have forced debtor nations to privatize essential services like water in exchange for usurious loan packages.
Activists who went to the World Water Forum held in Mexico City last month say that Bolivia's experience is beginning to show signs of rippling out to the rest of the world, becoming a significant model that the struggle for democracy can use to challenge the cold logic of "trickle-down" economics -- i.e. the bogus arguments for efficiency etc. by which privatization is sold.
Instead, the principles of community self-determination and social and environmental rights are beginning to bubble up and challenge the right of multinational corporations, unaccountable investors who benefit from the corporate system, and their shills in the development-financial institutions.
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Markets are often the best forecasters since their direction supposedly represents the collective wisdom of the smartest people moving them - the professionals, not the public that just goes along for the ride where they're taken.
The way the dominant "players" view the future is how they decide where they want to place their financial bets. Now, however, the financial markets (stocks, bonds and other money instruments) are in a tug-of-war with the price of gold, which is typically seen as a safe haven in times of uncertainty and in the past has moved inversely with the price of equities. Since 2003, when the Iraq war began, world equity markets have soared and still are moving up strongly except in the US where since 2004 they've gone up modestly. All are stable or rising, however, seeming to be pointing to good economic times ahead. The global bond markets seem to concur as they've been surprisingly stable as well and in the face of 14 consecutive interest rate hikes by the US Federal Reserve. The equity markets love wars because they're good for business - as long as they go well. The markets always discount the future about 6 months ahead, and today's valuations represent that view - that all is well, profits will keep rising and so will stock valuations.
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 The 21st century will be marked by a crucial debate: how can we make economic and social development compatible with the preservation of our natural environment?
The challenge is faced by developed and developing countries alike, but the burdens need to be more equally shared. The width of the divide between rich and poor countries has doubled over the last 40 years. While the developed world has benefited from the prosperity generated by economic progress, poor countries suffer the consequences of environmental degradation resulting from uncontrolled growth. Rich countries have unsustainable patterns of production and consumption. They are responsible for 41% of total carbon dioxide emissions, and their overall consumption of raw materials is four times greater than that of all other countries combined. With those conditions, there is no possibility of a sustainable future.
The scale of Brazil's natural assets is extraordinary: the Amazon region contains 20% of the planet's fresh water, and almost two-thirds of the country is still covered by natural vegetation. Against this backdrop we have been implementing policies that directly address our most pressing environmental concerns.
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