The Washington Consensus

Does any of this sound familiar in the extreme? This case is about Turkey, but you can fill in the name Zambia for Turkey at any point. THe only significant difference is that in Zambia, the IMF used HIPC to pry away even more value and businesses.

How Turkey's goose was cooked
By Henry C.K. Liu

This article appeared in AToL on September 18, 2003

I was invited to give a lecture on "The Global Economy in Transition" at the Seventh International Conference on Economics held on September 6-9 at the Economic Research Center of the Middle East Technical University in Ankara. The conference brought together from all over the world prominent economists with diverse viewpoints and special expertise, ranging from central bankers and policy specialists to academicians and scholars. The ideological range covered neo-classical to Marxist economics, as well as apolitical macroeconomics and mathematical modeling experts.

The event also gave me occasion to review the economic situation of Turkey, a country that paid dearly for playing by the rules of the International Monetary Fund (IMF) and neo-liberal market fundamentalism. The Turkish government, in its good-faith efforts to join the European Union, has managed to plunge the country's economy from the frying pan into the fire.

The financial press reported that both Turkey and Argentina, beginning in late November 2000, experienced a sudden drop in investor "confidence", whatever that is, posing the biggest challenge to the IMF and the United States since the Asian financial crisis of the 1997. Both nations were desperately seeking emergency IMF loans, the largest bailout packages since an IMF rescue of Brazil in 1998.

The precipitating troubles were linked to the sharp slowdown in the growth rate of the United States economy and the selloff in US stock markets. Export-oriented developing nations in Latin America, Asia and the Middle East had depended heavily on robust expansion in the United States to power their own tentative recoveries from a recession in the late 1990s, and to service their dollar debts. The IMF agreed on December 6, 2000, to provide US$7.5 billion in new loans and deliver about $3 billion in already promised loans early to bolster Turkey, where stocks plunged and overnight, interest rates soared on fears that the nation's banking system could collapse. The turmoil raised fears not only that Turkey's ambitious economic overhaul would fail but also that investors would lose faith in the prospect of other major emerging economies worldwide.

Unlike other situations, Turkey appears to have been the victim of sound economic management along neo-liberal lines. In Turkey, the coalition government of former prime minister Bulent Ecevit, acting with dubious IMF advice and counterproductive support, began an economic overhaul early in 2000 intended to bring the economy up to European standards, part of its bid to join the EU. Dancing to the tune of IMF doctrines, Turkey set up a strict currency-management system, imposed budgetary discipline and moved to privatize state assets, all in accordance with the Washington Consensus. The effort reduced government borrowing and sharply lowered hyper-inflation. Unlike Japan, Turkey adopted a program that forced its 81 banks to improve their operations or face terminal consequences. Turkey had a neo-classical long-term economic plan, it had the most stable government in a decade, and it had been on a self-imposed austerity program since mid-1998.

Notwithstanding that such drastic austerity will destroy any booming economy, let alone a troubled one, the IMF handed $4 billion to Turkey to back a new three-year program, matched by another $4 billion from the World Bank. The stated aim: to bring inflation, which had averaged more than 80 percent in each of the previous eight years, down to single digits by 2003. The IMF money created a brief illusion of success for a program heading for systemic disaster.

The Turkey program was implemented in January 2000, and all went well at first, thanks to the sudden injection of $8 billion from the IMF. Interest rates on government paper plummeted to 45 percent from highs of more than 140 percent in 1999. Turkish planners could make financial plans at last, thanks to exchange-rate policies that were designed to devalue the Turkish lira slowly and in an orderly manner until mid-2001. The government even started fixing up social security and agricultural subsidies, much to the delight of supply-side, neo-liberal economists. By the summer of 2000, Turkey had raised more money through privatization and the sale of mobile-phone licenses than it had in the previous 15 years, using the US formula of "air ball" financing - loans based on future cash flow rather than hard assets or current profits.

Not surprisingly, after 11 months, privatization had slowed to a crawl, with potential buyers waiting for further declining prices and pending deregulation. Lower domestic interest rates in the context of fixed exchange rates had fed a consumer-lending boom that sucked in imports, putting pressure on Turkey's foreign-currency reserves. The lower rates also constrained the easy profits once made by midsize banks that survived mostly by lending money to the government. Criminal cases were publicized to uncover decades of corrupt bank management, to lay blame on human frailty rather than policy error. The same corruption, albeit real, was not credited for the brief "success" of the flawed program. Turks at all level of wealth began to move money abroad cashing in their Turkish liras for US dollars. Foreign investors/creditors began withdrawing credit lines from Turkey at the beginning of December 2000, after fears developed that many Turkish banks, which were under heavy pressure to reorganize, had become insolvent.

Unlike Argentina, which faced a different problem - investors there were worried that Argentina's slow-growing economy might not have the wherewithal to repay its hefty foreign debt - Turkey's crisis was caused by faulty monetary and fiscal policies that even the United States would not have been able to afford. Ironically, the government's seizure of 10 troubled banks in November 2000 to clean up the banking system had the opposite effect. The move, instead of promoting "market discipline", caused foreign investors to panic about the solvency of the banking system. In reality, the foreign banks were merely upset that their hope of buying up Turkish banks on the cheap had been spoiled by the government. A $7.5 billion package of emergency IMF funding announced on December 6, 2002, brought a fragile stability to Turkish markets. With a straight face, the IMF said Turkey would not then need extra bridge loans from other international institutions, as foreign banks cut their exposure to the country with vengeance.

A full-scale financial crisis was triggered by a minor "bloodletting" among Turkish banks. The crisis had its roots in 1999. Turkey, a country of 65 million people, with a $200 billion economy that overtook Russia's gross national product in 1998, applied for its 17th standby agreement with the IMF, with a promise to adopt Fund prescriptions. Consumer lending that had helped the economy return to growth after a massive August 1999 earthquake had ground to a halt. Growth was now expected to be flat in the first quarter of 2001, causing severe economic pain.

Already overburdened Turkish taxpayers again paid the price for budgetary- and economic-stability policies at the wrong time and on a wrong schedule. It was at this critical juncture that a "blood feud", as the big newspaper Hurriyet called it, broke out in the banking sector.

One of the midsize banks, Demirbank, had been taking business from Turkey's big established banks. It had also bet big on the anti-inflation program's success in bringing interest rates down still further. At one point, Demirbank held 10 percent of Turkey's domestic debt. But it was funding its operations from Turkey's short-term money markets, which were supplied by the same big-money banks it had alienated. The funny thing was that these money-center banks, with their international network, got their funds from the short-term US repo debt market through New York international banks.

When delays hit a big Demirbank foreign-loan syndication, the bank suddenly found its lines of credit cut. Demirbank was forced to dump its Turkish treasury bills at a loss to meet margin calls and other obligations. A classic fire sale began, not much different from the situation faced by the hedge fund LTCM in the United States, except on a much smaller scale. Normally, the Turkish central bank would have stepped in to ease Demirbank over its liquidity crisis, as the New York Fed did with LTCM, and all would have been fine. But a key condition of IMF support for Turkey's anti-inflation program was a cap on the total foreign and local currency in circulation in Turkey. So when the Demirbank crisis triggered a small rush to buy dollars from the central bank, it drained Turkish lira out of circulation just when they were most needed to ease lending between banks.

Already spooked by trouble brewing in Argentina, emerging-market investors stampeded out of Turkey on November 22, 2000, before the long US Thanksgiving holiday weekend. As yields on Turkish domestic assets slid from 35 percent to 4.5 percent, many investors started selling Turkish treasury bills to cut their losses. They sought safety in dollars, sucking the central bank's currency reserves down farther. Deutsche Bank alone sold $700 million worth of Turkish treasury bills in a day, mostly on behalf of clients (read hedge funds) but also for its own proprietary trading accounts.

Briefly breaking with the IMF plan, the Turkish central bank supplied local currency to the banks. But it was too late.

Turkish markets stalled and plunged into a panicky tailspin. Within two weeks, $7 billion of Turkey's $24 billion of pre-crisis foreign-currency reserves had fled the system. Fears spread that Turkey would be forced to devalue its currency, which would wreck the Turkish economic program, shake global "confidence" in emerging markets and undermine the stability of the ruling order of Turkey, a rare secular democracy in the Muslim world.

Turkey hung tough and took over Demirbank. This helped it earn the admiration of the IMF and the promise of $7.5 billion in emergency funds. As the outcome became clear, investors poured back in more than $1.5 billion - including at least $300 million through Deutsche Bank (less than half of one day's sale earlier). On December 10, 2000, 30 Europe-based banks met in Frankfurt, Germany, and pledged to keep credit lines open. Turkish and IMF officials would seek similar commitments a few days later in a meeting with US bankers in New York convened by Citibank. No one mentioned anything about the interest rates. The Turkish central banks had no option but to accept what the international banks demanded.

Speculators with liquid assets had won big. Some foreign speculators tried to point out that as many as one-third of the customers of the international banks at the December 29 meeting in Frankfurt were actually high-net-worth Turks, who bought dollars and euros with their lira and sent their foreign currency back into Turkey as foreign capital. International hedge funds, despite their new strategy of avoiding overwhelming the small markets, also bet hundreds of millions of dollars against the Turkish lira. They could achieve 10 percent gains in dollar terms in two weeks simply by playing the market for short-term deposits during the crisis. Indeed, a dollar-based gain on Turkish treasury bills of 29 percent to the end of June could still be locked in on December 11, according to Istanbul's Bender Securities. Far greater returns were theoretically possible at the Istanbul Stock Exchange, where prices fell 50 percent during the 30 days to December 5, and then rocketed back up 40 percent in two days. Speculators were laughing all to way not to the bank, but on their way out from the bank.

Meanwhile, the economy of Turkey lost big. The legitimacy of the reform process itself had also been thrown into question. Although Turkey vowed that the aim of its IMF-backed program was to privatize the economy and financial system, Demirbank became the 11th Turkish bank to be taken under state control in the past two years. More seemed likely to follow.

When would the IMF snake oil be exposed for the quack medicine that is actually was? Western bankers had vowed (as a non-binding commitment) to continue lending money to Turkey, giving a vital boost to efforts to restore "confidence" in that nation's finances just days after the Fund agreed to provide an emergency aid package. This loss of confidence was cause by the very IMF rescue policy earlier. It seems that the IMF and the international banks were a team: the IMF arrived first as a carrier of financial virus in the name of financial health, then the international banks came as vulture investors in the name of financial rescue. Market confidence returned as one big confidence game.

Gazi Ercel, then governor of Turkey's central bank, and Stanley Fischer, the No 2 official at the IMF, conducted the meeting in Frankfurt, which was organized by Deutsche Bank and included representatives from Dresdner Bank and Commerzbank of Germany and Citigroup of the United States, among other major lenders. (Less than three years later, Fischer joined Citigroup as vice chairman.)

In hindsight, it becomes clear that the Turkish financial crisis could have been avoided if the Turkish government had rejected IMF prescriptions earlier. Once the crisis began, it could have been defused with central-bank intervention to provide a timely inter-bank liquidity rescue. Alas, neo-liberal fixation on market fundamentalism caused the Turkish government to forgo that option, and the rest was history. Liberalization of financial market under dollar hegemony had plunged the Turkish economy into a protracted abyss from which it will not be able to extract itself unless Turkish leaders summon up the necessary political courage to expel the IMF, curb the "political independence" of its central bank, which views its mandate as protecting the value of money at the expense of the national economy, and reinstitute a national banking regime that uses the banking system to support the national economy.

Turkey must take decisive steps to protect itself from predictable harm from dollar hegemony. It should recapture the authority to issue sovereign credit to put its national economy on the path to new prosperity with equality and economic justice for all.

Henry C K Liu is chairman of a New York-based private investment group. His lecture discussed the global economy in transition, focusing on the changing nature and role of money, debt, trade, markets and development. In summary, the lecture presented the view that an economy is not an abstraction. An economy is the material manifestation of a political system, which in turn is the interplay of group interests representing, among others, gender, age, religion, property, class, sector, region or nation. Click here to read more.

Henry C K Liu was invited to give a lecture at the Seventh International Conference on Economics held on September 6-9 at the Economic Research Center of the Middle East Technical University in Ankara. The conference brought together from all over the world prominent economists with diverse viewpoints and special expertise, ranging from central bankers and policy specialists to academicians and scholars. The ideological range covered neo-classical to Marxist economics, as well as apolitical macroeconomics and mathematical modeling experts.

Liu's lecture discussed the global economy in transition, focusing on the changing nature and role of money, debt, trade, markets and development. In summary, the lecture presented the view that an economy is not an abstraction. An economy is the material manifestation of a political system, which in turn is the interplay of group interests representing, among others, gender, age, religion, property, class, sector, region or nation. This is an edited version.

Individual interests are not issues of politics. Therefore, the politics of individualism is an oxymoron and, by extension, the Hayekian notion of a market of individual decisions is an ideological fantasy. Markets are phenomena of large numbers and herd instinct where unique individualism is of little consequence. The defining basis of politics is power, which takes many forms: moral, intellectual, financial, electoral and military. In an overcapacity environment, company executives lament about the loss of pricing power. The global economy is the material manifestation of the global geopolitical system, and global macroeconomics is the rationalization of that geopolitical system.

The nomenclature of economics reflects, and in turn dictates, the logic of the economic system. Terms such as money, capital, labor, debt, interest, profits, employment, market, etc, have been conceptualized to describe components of an artificial material system created by power politics. The concept of the economic man who presumably always acts in his self-interest is a gross abstraction based on the flawed assumption of market participants acting with perfect information and clear understanding of its meanings. The pervasive use of these terms over time disguises the artificial system as the product of natural laws, rather than the conceptual components of power politics. Just as monarchism was rationalized as a natural law of politics in the past, the same is true with market capitalism today.

The market is not the economy. It is only one aspect of the economy. A market economy can be viewed as an aberration of human civilization. People trade to compensate for deficiencies in their current state of development. Exploitation is slavery, not trade. Imperialism is exploitation on an international level. Neo-imperialism after the end of the Cold War takes the form of neo-liberal international trade.

Free trade cannot exist without protection from systemic coercion. To participate in free trade, a trader must have something with which to trade voluntarily in a market free of systemic coercion. That tradable something comes from development, which is a process of self-betterment. International trade is not development, although it can contribute to domestic development. Domestic development must take precedence over international trade, which is a system of external transactions supposedly to augment domestic development. But neo-liberal international trade since the end of the Cold War has increasingly preempted domestic development in both the center and the periphery. Global trade has become a vehicle for exploitation of the weak to strengthen the strong. Aside from being unjust, neo-liberal global trade as it currently exists is unsustainable, because the transfer of wealth from the poor to the rich is unsustainable. Neo-liberal claims of fair benefits of liberalized trade to the poor of the world, both in the center and the peripheral, are simply not supported by facts.

Most monetary economists view government-issued money as a sovereign debt instrument with zero maturity, historically derived from the bill of exchange in free banking. This view is valid for specie money, which is a certificate that can claim on demand a prescribed amount of gold or other specie of value. Government-issued fiat money, on the other hand, is not a sovereign debt but a sovereign credit instrument. Sovereign government bonds are sovereign debt while local government bonds are institutional debt, but not sovereign debt because local governments cannot print money. When money buys bonds, the transaction represents credit canceling debt. The relationship is rather straightforward, but of fundamental importance.

If fiat money is not sovereign debt, then the entire conceptual structure of capitalism is subject to reordering, just as physics was subject to reordering when man's world view changed with the realization that the earth is not stationary nor is it the center of the universe. For one thing, capital formation for socially useful development will be exposed as a cruel hoax. With sovereign credit, there is no need for capital formation for socially useful development. For another, private savings are not necessary to finance development, since private savings are not required for the supply of sovereign credit. With sovereign credit, labor should be in perpetual shortage, and the price of labor should constantly rise.

A vibrant economy is one in which there is labor shortage. Private savings are needed only for private investment that has no social purpose or value. Savings are deflationary without full employment, as savings reduces current consumption to provide investment to increase future supply. Say's Law of supply creating its own demand is a very special situation that is operative only under full employment. Say's Law ignores a critical time lag between supply and demand that can be fatal to a fast-moving modern economy. Savings require interest payments, the compounding of which will regressively make any financial system unsustainable. The religions forbade usury for very practical reasons.

Fiat money issued by government is now legal tender in all modern national economies since the collapse of the Bretton Woods regime of fixed exchange rates linked to a gold-backed dollar in 1971. The State Theory of Money (Chartalism) holds that the general acceptance of government-issued fiat currency rests fundamentally on government's authority to tax. Government's willingness to accept the currency it issues for payment of taxes gives the issuance currency within a national economy. That currency is sovereign credit for tax liabilities, which are dischargeable by credit instruments issued by government. When issuing fiat money, the government owes no one anything except to make good a promise to accept its money for tax payment. A central banking regime operates on the notion of government-issued fiat money as sovereign credit. That is the essential difference between central banking with government-issued fiat money, which is a sovereign credit instrument, and free banking with privately issued specie money, which is a bank IOU that allows the holder to claim the gold behind it.

US president Thomas Jefferson prophesied: "If the American people allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive people of all property until their children will wake up homeless on the continent their fathers occupied ... The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs." It was a definitive statement against the "political independence" of central banks. This warning applies to the people of the world as well.

The Independent Treasury Act, passed in 1840, removed the federal government from involvement with the United States' banking system by establishing federal depositories for public funds instead of keeping the money in national, state, or private banks. Under the Independent Treasury Act, bank notes were to be gradually phased out for payments to and from the government; by June 30, 1843, only hard money was to be accepted.

The Whigs, led by Henry Clay and Daniel Webster, opposed the Independent Treasury, but not to favor private banking. They were committed to the re-establishment of a national bank like the one president Andrew Jackson abolished in 1832. After winning a congressional majority in the election of 1840, the Whigs succeeded in repealing the Independent Treasury Act on August 13, 1841, although they were unable to gain the support of President John Tyler for their national bank proposal. The return of the Democrats to power after the election of 1844 led to the passage in 1846 of a new Independent Treasury Act, nearly identical to that of 1840. This legislation remained substantially unchanged until passage of the Federal Reserve Act in 1913, which established central banking in the US.

When the Civil War began in 1861, the newly installed president, Abraham Lincoln, finding the Independent Treasury empty and payments in gold having to be suspended, appealed in vain to the state-chartered private banks for loans to pay for supplies needed to mobilize and equip the Union Army. At that time, there were 1,600 banks chartered by 29 different states, and altogether they were issuing 7,000 different kinds of banknotes in circulation. Lincoln immediately induced the Congress to pass the Legal Tender Act of 1862 to authorize the issuing of government notes (called greenbacks) without any reserve or specie basis, on a par with bank notes backed by specie, promising to pay "on demand" the amount shown on the face of the note with another note of same value. The greenbacks were supposed to be gradually withdrawn through payment of taxes, as specified in the Funding Act of 1866, to allow the government to redeem these greenback notes in an orderly way without interest.

Still, during the gloomiest period of the war when Union victory was in serious doubt, the greenback had a market price of only 39 cents in gold. The fall in value was related to the survival prospect of the Union, not to loss of specie basis, which was non-existent. After the war, the Supreme Court in a series of cases declared the Legal Tender Act constitutional and Congress decreed that greenbacks then outstanding would remain a permanent part of the nation's currency. Indisputably, these greenback notes helped Lincoln save the Union. Lincoln wrote: "We finally accomplished it and gave to the people of this Republic the greatest blessing they ever had - their own paper to pay their own debts." The importance of this lesson was never taught to the world's governments by neo-liberal monetarists.

Government levies taxes not to finance its operations, but to give value to its fiat money as credit instruments. If it chooses to, government can finance its operation entirely through user fees, as some fiscal conservatives suggest. Government needs never be indebted to the public. It creates a government debt component to anchor the debt market, not because it needs money. Technically, government never borrows. It issues tax credit in the form of fiat money. So when US president Ronald Reagan said the government does not make any money, only the private sector does, he was merely mouthing a political slogan, with no clear understanding of the true nature of money and credit. Fiat money is all that government makes, freely and without constraint, as Federal Reserve governor Ben S Bernanke recently warned in a speech on deflation. And only government can make fiat money as sovereign credit.

Sovereign debt is a pretend game to make private debts tradable. The relationship between assets and liabilities is expressed as credit or debt, with the designation determined by the flow of obligation. A flow from asset to liability is known as credit, the reverse is known as debt. A creditor is one who reduces his liability to increase his assets, which include the right of collection on the liabilities of his debtors.

The state, representing the people, owns all assets of a nation not assigned to the private sector. Thus the state's assets is the national wealth less that portion of private sector wealth after tax liabilities, and all other claims on the private sector by sovereign rights. Privatization generally reduces state assets. As long as a state exists, its credit is limited only by the national wealth. If sovereign credit is used to increase national wealth, then sovereign credit is limitless as long as the growth of national wealth keeps pace with the growth of sovereign credit. Even if the private sector has been assigned all of a nation's tangible assets, the state, by virtual of its existence, can still claim that portion of private sector assets allowed by the constitutional regime. Such claims include the state's power of taxation, nationalization, confiscation, condemnation by eminent domain and the power to grant and revoke monopolies, and above all, the power to issue legal tender by fiat - in other words, the inherent rights of sovereignty.

When the state issues money as legal tender, it issues a monetary instrument backed by its sovereign rights, which includes taxation. The state never owes debts except specifically so denoted voluntarily. When a state borrows in order to avoid levying or raising taxes, it is a political expedience, not a financial necessity. When a state borrows, through the selling of government bonds denominated in its own currency, it is withdrawing previously issued sovereign credit from the financial system. When a state borrows foreign currency, it forfeits its sovereign credit privilege and reduces itself to an ordinary debtor because the state cannot issue foreign currency.

Government bonds can act as absorber of credit from the private sector. Government bonds in the United States, through dollar hegemony, enjoy the highest credit rating, topping a credit risk pyramid in the international debt market. Dollar hegemony is a geopolitical phenomenon in which the US dollar, a fiat currency, assumes the status of primary reserve currency of the international finance architecture. Yet architecture is an art of esthetics in the moral-goodness sense, of which the current international finance architecture is visibly deficient. Thus dollar hegemony is objectionable not only because the dollar usurps a role it does not deserve, but also because its effect on the world community is devoid of moral goodness.

Money issued by government fiat is a sovereign monopoly, while debt is not. Anyone with an acceptable credit rating can borrow or lend, but only government can issue money as legal tender. When government issues fiat money, it issues certificates of its credit good for discharging tax liabilities imposed by government on its citizens. Privately issued money can exist only with the grace and permission of the sovereign, and is different from government-issued money in that privately issued money is an IOU from the issuer, with the issuer owing the holder the content of the money's backing.

But government-issued fiat money is not an IOU from the government because the money is backed by a potential IOU from the holder in the form of tax liabilities. Money issued by government by fiat as legal tender is good by law for settling all debts, private and public. Anyone refusing to accept dollars in the United States is in violation of US law. Instruments used for settling debts are credit instruments. Buying up government bonds with government-issued fiat money is one of the ways government releases more credit into the economy. By logic, the money supply in an economy is not government debt because, if increasing the money supply means increasing the national debt, then monetary easing would contract credit from the economy. Empirical evidence suggests otherwise: monetary ease increases the supply of credit. Thus if money creation by government increases credit, money issued by government is a credit instrument, quod erat demonstrandum.

Hyman Minsky rightly said that whenever credit is issued, money is created. The issuing of credit creates debt on the part of the counterparty, but debt is not money; credit is. If anything, debt is negative money, a form of financial antimatter. Physicists understand the relationship between matter and antimatter. Albert Einstein theorized that matter results from concentration of energy and Paul Dirac conceptualized the creation of antimatter through the creation of matter out of energy. The collision of matter and antimatter produces annihilation that returns matter and antimatter to pure energy. The same is true with credit and debt, which are related but opposite. They are created in separate forms out of financial energy to produce matter (credit) and antimatter (debt). The collision of credit and debt will produce an annihilation and return the resultant union to pure financial energy unharnessed for human benefit.

Monetary debt is repayable with money. Government does not become a debtor by issuing fiat money, which, in the United States, takes the form of a Federal Reserve note, not an ordinary banknote. The word "bank" does not appear on US dollars. Zero maturity money (ZMM) in the dollar economy, which grew from $550 billion in 1971, when president Richard Nixon took the dollar off a gold standard, to $6.333 trillion as of June 2003, is not a federal debt. It amounts to more than 60 percent of US gross domestic product (GDP), roughly equal to the national debt of $6.67 trillion at the same point in time.

A holder of fiat money is a holder of sovereign credit. The holder of fiat money is not a creditor to the state, as many monetary economists claim. Fiat money only entitles its holder a replacement of the same money from government, nothing more. The holder of fiat money is acting as a state agent, with the full faith and credit of the state behind the instrument, which is also good for paying taxes. Fiat money, like a passport, entitles the holder to the protection of the state in enforcing sovereign credit. It is a certificate of state financial power inherent in sovereignty.

Topics presented at the Seventh International Conference on Economics included the critical examination of globalization, the causes and management of financial crises, international finance architecture, growth economics, labor economics and risk management. The conference provided a venue to exchange views on the latest thinking and recent technical advances in economics in response to pressing current problems and issues. For more information, visit the conference website at http://www.erc.metu.edu.tr.