Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Collapse of the Debt Dollar Discipline: Financial Discipline & Punish

Currencies / US Dollar Dec 04, 2010 - 06:15 AM GMT

By: Ashvin_Pandurangi


Best Financial Markets Analysis Article*The following is Part I in a two part series of articles on the relatively rapid emergence and collapse of the "debt-dollar discipline" imposed on our global society. It is being done in two installments mainly due to my current time constraints, but also for the sake of shorter length and targeted focus. This part will introduce Michel Foucault's (renowned french philosopher, 1926-1984) analysis of "discipline" and "punish" in the modern state, and apply it to the global debt-dollar reserve system. The next part will focus entirely on the ongoing collapse of this disciplinary system, as it such an important and far-reaching topic.


Michel Foucault's seminal work Discipline and Punish explored the extreme institutionalization of "discipline" in modern Western society, as best exemplified by the evolution of the modern penal system. He illustrated this transformation by contrasting medieval public executions with the wholly distinct system of punishment we have today. The former was a stage for the sovereign (usually a King) to exhibit physical punishment on a criminal for violating the laws of the land, which were seen as an extension of the sovereign's body, and was designed to explicitly make the public aware of the sovereign's absolute power.

According to Foucault, this non-uniform system of public punishment eventually had the unintended consequence of creating public resentment for the sovereign, as the oppressed people would begin to identify with the suffering of the punished. This dynamic was evidenced by the violent riots that would erupt in support of prisoners during public executions. The powerful sovereign could no longer continue to maintain its domination while its political legitimacy was being undermined by such adverse reactions. These public displays may have revealed the extent of the sovereign's authority, but they were too disorderly for the modern state's purposes.

It is no coincidence that the modern penal system evolved along with the emergence of industrial production as the dominant economic force in Western society. The latter was a system entirely focused on increasing efficiency, where students, workers and soldiers alike were trained to be more obedient, faster and stronger in every aspect of their designated functions. Modern states facilitated this process of immense wealth production by instituting high levels of order on their citizens, or what Foucault would term "discipline". It was not really a tool for the Kings and Monarchs of old, but rather was more useful for controlling the populations of emerging democratic states [emphasis mine]:

Historically, the process by which the bourgeoisie became in the course of the eighteenth century the politically dominant class was masked by the establishment of an explicit, coded and formally egalitarian juridical framework, made possible by the organization of a parliamentary, representative regime. But the development and generalization of disciplinary mechanisms constituted the other, dark side of these processes. The general juridical form that guaranteed a system of rights that were egalitarian in principle was supported by these tiny, everyday, physical mechanisms, by all those systems of micro-power that are essentially non-egalitarian and asymmetrical that we call the disciplines. [Foucault, Michel (1975). Discipline and Punish: the Birth of the Prison, New York: Random House (p.222)]

Foucault pointed out the striking similarities of the prisons, schools, hospitals (especially "mental" institutions), military barracks, office buildings and factories that had been established in the modern state, as they were all designed around specialized functions, regimented schedules and high degrees of observation and control. These institutions even shared very similar physical architectures and were typically legitimized by an underlying "scientific" foundation, whether that be criminology, psychology, medicine or economics. It was their ultimate goal to internalize strict discipline within the individuals themselves, so they would automatically follow these societal "norms" without questioning any of their reasons or results. Anyone who strays too far from the expected behaviors are labeled as part of the "delinquent class", and are deemed to be in need of reform, rehabilitation, treatment or punishment.

The quintessence of this institutional disciplinary structure for Foucault was Jeremy Bentham's "Panopticon", which is a prison design involving a central watchtower with heavily tinted or mirrored windows. The prison cells would be located around the periphery, and prisoners would never be able to tell whether they were being observed or not. Bentham himself described the design as allowing "a new mode of obtaining power of mind over mind, in a quantity hitherto without example." [1]. It fit in quite well with industrial society's ever-important goal of maximizing efficiency, as it allowed prisons to cut down on the number of staff needed to control the prison population.

The Panopticon design principles have been implemented in several different prisons and even some hospitals after Bentham's time, but the general concepts can also be seen in other areas of modern life. For example, many U.S. highways have signs warning drivers that "speed limits are enforced by aircraft". It is highly unlikely that the state police department actually takes on the expense of using aircrafts for such a purpose, but that fact is largely irrelevant for the state. As long as drivers believe they are potentially being monitored from above, they will be more likely to obey the speed limits given to them. With such wide-ranging structural influence, Foucault's disciplinary society acts as an enormous, calculating machine which puts Hobbes' Leviathan to shame.

Global Financial Discipline

Institutional discipline and order have not just been isolated practices used for limited goals, but are now a pervasive element of global society's very fabric. It may have started as a design principle of Western nations, but has quickly spread to all corners of the globe with the exponential rise in transportation and communications technology. Perhaps the most crucial element of this disciplinary expansion has been the process of "globalization", and specifically the focus on creating "free trade" between countries and establishing inter-connected markets.

After all, the entire disciplinary transition in the Western world was arguably a response to the new economic realities of the industrial age. As the importance of financial transactions in economies around the world increased exponentially, a new form of discipline was needed for the human population. It would serve to solidify the power structures of a global financial society, usurping the previous role of the industrial class. This discipline was first imposed on the world through the Bretton Woods Agreement of 1945, in which the U.S. dollar was designated as the world's reserve currency.

Under the original plan, the currencies of all participating countries were to be given a fixed exchange rate to the U.S. dollar and the dollar, in turn, was the sole currency that could be converted into gold by foreign governments and central banks at a fixed rate of $35/oz. Basically, the system was designed to encourage international commercial and financial transactions between countries by making the dollar a standard currency of exchange backed by gold. The "science" supporting this new monetary system was "neoliberal economics" supported by "free-market fundamentalism", and also partially influenced by Keynesian theory, and its institutional embodiment was the International Monetary Fund (IMF).

Participating countries and their citizens were convinced that everyone could economically benefit from dollar-denominated "free trade" and that a global IMF could manage the system's "liquidity", occasionally helping out states that encountered financial problems by issuing them "low cost" loans. Throughout the last 60 years, many countries in the developing world have been convinced to finance new "infrastructure" projects through IMF loans, and usually the debt servicing costs overwhelm their ability to repay the loans. It is this point at which these countries enter into "negotiations" with the IMF and other creditors, which typically result in the implementation of austerity measures and the auctioning off of public assets below market value.

In 1971, the gold convertibility of the dollar was unilaterally revoked by the Nixon Administration, effectively making the dollar, as a piece of printed paper or its electronic equivalent, the sole basis for international exchange. Gold-backing of the dollar had been the one limiting factor for how much "liquidity" could be generated within the system, and so the new stand-alone reserve currency allowed for greatly increased international financial activity. It is key to understand that every U.S. dollar currently in circulation is backed by debt, meaning it was generated through the issuance of a loan and this loan created a corresponding liability. Therefore, the fact that more international corporations, governments and central banks were transacting in dollars essentially meant that they were accepting dollar-denominated debt for hard assets (most importantly oil), and all of the risks entailed by that debt.

Of course, on the way up the debt-fueled ladder of global economic growth, there was very little risk to accepting dollar transactions. In the wake of WWII, U.S. manufacturing and exportation of goods to a world in ruins led the country into a period of great economic prosperity and established the largest economy by a significant margin. Subsequently, with the domination of the financial services market, outsourcing of production, expansion of militaristic hegemony and provision of numerous domestic entitlements, the U.S. transitioned into a powerhouse consumer economy. Americans had an insatiable appetite for the financed sales of products from other countries (especially China), which further encouraged these countries to transact in debt-dollars. A crucial instrument for managing and reinforcing the debt-dollar discipline on the world was the "letter of credit".

For example, an issuing bank in Uzbekistan could grant a local importing business a letter of credit, which would serve as a conditional promise by the bank to pay a beneficiary in another country upon satisfaction of the letter's terms and conditions. The beneficiary may be a seller of equipment or materials in America, who must present the required documents to the issuing bank in order to draw on its payment rights. These secured transactions made it easier for international exporters/importers to do business without worrying about their legal rights in other countries, and also reduced their costs for financing transactions, since the issuing bank did not have to police the underlying sales contract.

The global debt-dollar discipline was thoroughly institutionalized through instruments such as letters of credit and organizations such as the IMF. As the factory disciplines its workers to be more docile and efficient, the debt-dollar institutions discipline their global constituents to take on increasing amounts of debt and consume more goods and services. More importantly, they discipline the constituents to become intrinsically attached to their financed lifestyles and the overarching institutions which manage the system. It is the constant maintenance of this attachment that is the coercive goal of "punish" under Foucault's analysis.

The Role of Financial Punishment

When Foucault wrote about modern society's need to "punish", he meant it in both the literal sense of how it is employed within penal systems and also the broad sense of how societal discipline is reinforced at every level. After all, the prison is merely an extension of the discipline continuously exerted on the individuals outside of its walls. While other critics saw the modern prison system as repeatedly failing in its goal to reform criminals, Foucault saw it as succeeding in continuously creating a state-controlled underclass of delinquents and normalizing the behaviors of those in the numerous "theatres of punishment". Although the codified laws of a society were important in maintaining order, the fundamental mechanism of ingraining discipline was ceaseless observation and "normalizing judgment" - a perpetual penalty.

Students, workers, soldiers, patients and inmates alike must be constantly monitored to not only assess their performance, but make them aware that their behaviors are being monitored. Using these observations along with other factors, various standards of conduct can be established to define the "normal" and expected behaviors. Deviations from these standards can be quantifiably measured with grades, performance reviews, medical classifications, etc. The whole point is to methodically allow people to become self-disciplined, relying on their own self-perceptions in relation to others, without actually using any (or very little) force.

A dual system of both rewards and penalties will coerce people to stay bounded within a range of "normal" behavior, and those who deviate will be marginalized in some manner. Penalties may take the form of negative marks, restricted activity, constraints on time or simply social stigmas, as long as they promote future discipline within the punished or among others who observe. Out of the societal group emerges an "individual unit" defined by his/her mechanistic functions and resulting hierarchical status in life, and consequently by how far he/she deviates from the "norm".

The debt-dollar discipline imposes a degree of abstraction in modern disciplinary society, in so far as it cannot be readily identified with a specific physical institution. The IMF and other central banks are critical coordinating institutions for debt-dollar transactions, but the system's participants worldwide cannot be directly observed and trained by such institutions. It is more of a parasite which has attached itself to all of the other disciplinary institutions, which help observe and measure the behaviors of financial consumers. The standards of conduct were already deeply rooted in society through these capitalistic organizations, which primarily judged subjects according to their socioeconomic status.

Financial consumers are pushed towards accumulating ever more material representations of their wealth, whether those be homes, cars, boats, consumer electronics, stock portfolios, etc. With modern computer technology, most of this financial activity can be easily monitored and recorded within centralized databases. The most prevalent mechanisms used to measure deviations from "normal" financial activity are credit scores for individuals and credit ratings for businesses. Although these measurements allegedly target a consumer's ability to repay debt, they typically end up reflecting the willingness of a consumer to take on debt. For individuals especially, a consumer's past level of questionable financial activity can help boost his/her scores above what they would be without any financial activity.

These mechanisms effectively serve as carrots and sticks for the financial consumer. If you have participated adequately in debt-dollar transactions, then you may be able to participate further at a relatively low cost. With this comparative advantage over other financial consumers, you will be able to elevate your socioeconomic status and be a respected member of society. In stark contrast, those who do not participate adequately will be priced out of debt-dollar transactions and will have a very difficult time competing for a limited supply of material goods and services. They will be labeled financial "delinquents" and lose all respect from the business community or society at large. In this manner, financial consumers around the world are trapped by the panoptic gaze of governments, lending institutions, rating agencies, private corporations and their fellow consumers.

The financial consumers in the debt-dollar disciplinary system also include sovereign states as well. These states have effectively become measured by their ability to issue debt and finance internal spending programs. Investment capital will flock to those states with the fastest growing economies and the highest-rated debt, which are typically those states carrying out the most financial activity. These states also rely on the fact that the IMF will help them out with debt-dollar "liquidity" if they run into financial difficulties on their quest to achieve relative economic superiority. Those states who do not adequately participate are treated unfavorably in all manner of other relations, including but not limited to trade negotiations, environmental agreements and diplomatic relations.

Of course, the broader power structures involved in the debt-dollar disciplinary system have also managed systemic threats by explicit mechanisms of punishment. Since the end of WWII, the U.S. has engaged in many subversive military and political operations against "Communist" or "Socialist" groups, as they represent a potential system of organization outside of the debt-dollar discipline. Many disciplined Americans are aware of their government's wars against North Korea and North Vietnam, as these fit well into the "fight for freedom" narrative, but not so much of their government's constant interventions in Latin America. The latter would frequently involve the subversion of democratically-elected leaders with financially protectionist tendencies, and therefore secrecy or misinformation was preferred over the traditional freedom narrative.

Despite such exacting punishments carried out within the the debt-dollar system, some threats have continued to evade its pervasive discipline. A good example of such a threat would be insurgent groups in the Arab world who continuously resist Western domination. Their influence in Middle Eastern countries may have been negligible in the past, save for the ongoing Israeli-Palestine conflict, but it has rapidly spread to many different fronts. The current intractable military operations in Iraq, Afghanistan and Pakistan are symbolic of a disciplinary system which has over-stepped its ability to exert global control. More recently, the ongoing global financial crisis is an obvious break down in debt-dollar discipline unlike any other in the last 60 years. Part II in this series will explore the future prospects of debt-dollar discipline around the world, and more generally the entire disciplinary structure of Western society first articulated by Foucault.

Ashvin Pandurangi, third year law student at George Mason University
Website: "Simple Planet" - (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2010 Copyright Ashvin Pandurangi to - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in