Executive Intelligence Review
This webcast appears in the March 16, 2001 issue of Executive Intelligence Review. See also Lyndon LaRouche's opening remarks.

Questions to LaRouche from Panel, and His Answers

[PDF version of this dialog]

Mandeville, Free Trade and the Roots of Corruption

Dennis Falvy Valdivieso: Good evening, Dr. Lyndon LaRouche. Listening to your presentation, during which you cover decades in a very short period of time, not only as to economics, but also political and social matters....

I would like to get to the point, because time is short. I am more interested for the moment in my country, and not so much in the enormous powers called the Group of Seven, which happen to be the countries which fought on both sides of the First and Second World Wars. Today, they say Group of Eight, because the United States has allowed Russia, now that it has been decimated, to join that famous group.

I want to be very specific with you. You defended the Fujimori government. You had a few variables in his favor, according to the little I have heard from you. Fujimori fought drugs and Shining Path. I am not going to get into the second issue, because obviously Shining Path had to be fought. But, I always had my doubts about the drug trade part, especially with a U.S. ambassador here in Peru, who many of us suspect has worked with the CIA, and with our unfortunately famous Vladimiro Montesinos, who you should know about, at least from the wire services.

Well, Dr. LaRouche, on the one hand, I haven't heard you speak about corruption, extended and globalized. Nor have I heard you speak about 1971, when Bretton Woods went to hell, and derivatives appear, which, if I remember correctly, three or four years ago, when Long Term Capital nearly went bankrupt, it was no lesser person than Alan Greenspan who told the entire world that he was unable to control derivatives, which, as you know, are not so much monetary products, as the real missile aimed at the heads of Latin American countries, such as Argentina.

Allow me to conclude, because this is a concern of mine: Argentina, as you must surely know, was recently rescued from what was called financial disaster, with $40 billion from the IMF. Part of that rescue was the refinancing of something called the Pension Fund Administration, to the tune of some $11 billion that the Argentine government has not been able to pay out, and which is the workers' money. And now this system has been bought by your President, George Bush.

Point two, of which you are also probably aware, less than a week ago, the president of the Argentine Central Bank, Mr. [Pedro] Pou, is being accused by [U.S.] Senator [Carl] Levin—he was the one who discovered Raúl Salinas de Gortari in an $88 million money-laundering scheme involving Citibank. Not long ago, very recently, Senator Levin made this accusation, and on March 2, his Senate will be discussing a matter of $11 billion in money laundering by the Argentine government. And of course, people are coming out, for and against this.

My specific question, Mr. LaRouche, is: Do you think that by going back to your ideas, we are going to be able to develop countries like ours, without a frontal attack on corruption? Corruption, which is alive and kicking. Not only in Argentina. We see it in Mexico with Fobaproa [the $100 billion government bailout of Mexico's banking system, which had been looted under privatization], which you just referred to, and we are seeing it in our own beloved country, which is still, unfortunately, not receiving any help from the U.S. government to try to really dig out the truth. On the one side is Mr. Montesinos—and I am sure that the CIA knows where he is—, and then there is Mr. Fujimori, who is being protected by Japan, a member of the Group of Seven, or the Group of Eight, however you like to call it, and the United States hasn't mentioned this, and this gentlemen now claims he has Japanese nationality. ...

Is it good for the health of an economy, such as Peru, which you have so bombastically pointed out has immense potential wealth awaiting to be discovered or utilized? Therefore, sir, I do not agree with you. You may have the greatest riches in the world, but if corruption is completely embedded in the politicians, embedded in the media, embedded among the journalists who sell themselves for a bowl of porridge, the wealth will remain there. Because, as an economist, I know that when there is no supply, others will take advantage of the rest.

LaRouche: The problem of corruption: Now, anyone who is involved in accounting, as most of you gentlemen are, know a good deal about what the problem of corruption is. If you have an economy, which physically is profitable and healthy, then you can have an economy, in which profit comes from the contribution to the increase of the productive powers of labor of the economy. If, on the other hand, you have an economy, which is not growing, in the sense of increasing the physical product, the standard of living, the rate of investment in productive facilities, in agriculture, in industry, in infrastructure, then where does the profit come from? As you know, as accountants, you have two kinds of profit: One is physical profit, where you can show that there's an increase in the actual physical wealth created, in which an entity acquires a profit based on the gain in the contribution it makes to increase of wealth. There's another kind of profit, which is purely financial profit.

Now, the problem here, goes back to such things, as in the 17th Century, early 18th Century, a fellow called Mandeville—Bernard Mandeville—who is, today, considered the patron saint (or unsaint) of the Mont Pelerin Society, which is a very influential, British-founded society, associated with Friedrich von Hayek and Milton Friedman, for example—Prof. Milton Friedman. Now, von Hayek's formula, as that of Bernard Mandeville before him, promotes corruption. Mandeville said that good comes from evil. You must allow the legalization of evil, to get the good benefit. This is basis of many radical monetarist thinking.

Now, the root of corruption, as I see it, largely in the world today, is that, it is very difficult for entrepreneurs any more, under the conditions of the post-'71 system, it's more and more difficult for them to have a gain in income from actually increasing the physical wealth of the country per capita and per square kilometer. However, by various tricks, you can still have profit, which is called financial profit. The problem of a deregulated, radically free-trade system, under these kinds of conditions, where the entrepreneurs who engage in producing physical wealth—such as farmers and industrialists—are weakened, where the infrastructure's not developed, and people are seeking profit, the place to find profit is where Mandeville says to get it: If you can't get it any other way, go to evil.

My view is, that a protectionist model of economy, of the type that the United States had in its best periods, the kind of system that was recommended by Friedrich List, in his system of national economy: That a protectionist economy, a regulatory economy, is the one which promotes, selectively, those who are contributing to national wealth, should be given favorable treatment. Whereas those who are making their profits from financial speculation, or from black sources, should not be protected.

So, the problem of this increase in corruption has come largely from the fact that we have stopped being protectionist. We have stopped taking pride in helping people to develop. And, we've made it more lucrative, and easier, to get large sums of money, as monetary profit, through irregular means.

Now, if you want to go to corruption—I won't go into this here, but you know what I mean. In the highest levels of the United States, the highest levels of political parties of the United States, there is corruption more massive than all the corruption that you could possibly find in Peru! And it comes from the highest level.

For example, this case of the speculation in energy prices: What's happening to California, which is now causing a major political crisis, as well as financial crisis. This is corruption! You have entities like Enron, which are engaged in speculation. They don't really produce. But, they move into the market, and through speculation, they drive the prices of energy for households and industries, up as high as 400%. And loot them! Two large entities in California—Pacific Gas & Electric and Southern California Edison—are on the verge of bankruptcy, because of looting by these kinds of influences. This is pure corruption! But, in the United States, it is a form of corruption which is presently legalized!

And, therefore, I think, the key to this, is to recognize this point that has been often made in history, and in the history of economists: That you have to establish a moral standard, for what you promote and do not promote in national economy; in terms of state regulation, in terms of tax policy, in terms of accounting policy. You have to establish these protectionist standards, which say, those who contribute to the benefit of the people, as entrepreneurs, as laborers, as farmers, they should be encouraged to produce and to invest in expanding their productivity. Those who live like parasites on financial speculation, such as derivative speculation—which, in my view should be totally outlawed! Look, we have probably $400 trillion, estimated, of recorded and unrecorded financial derivatives floating on the world market today; against a world Gross National Product, estimated in the order of $42 trillion.

Now, how are we going to deal with a collapse of a $400 trillion financial bubble in derivatives, against a $42 trillion Gross National Product of the world, which is now collapsing?

So, I think the question of corruption: Don't go at the petty corruption. Corruption is a system which we, with our negligence, with free trade, with the policies of the Mont Pelerin Society, have licensed, is practiced. We have penalized people who do honest work, who are honest industrialists, honest entrepreneurs, who contribute to the economy. And, as long as we don't make the moral distinction, between who is doing something useful and who is a parasite, you're going to have corruption. And, when you have a condition like now, when the economies of the world are poor, in physical terms, then, people who wish to become rich, find that you become rich from corruption, not from honest labor.

Fujimori and Peru's National Sovereignty

Moderator announces that Patricio Ricketts Rey de Castro, former minister of education and well-known journalist and political analyst, and Alejandro Indacochea, senior professor of business administration at the Catholic University of Peru, have joined the panel.

Falvy Valdivieso: Thank you, for recognizing that the matter of derivatives is a real problem, begun by the group of the world's powers, and which could become the beginning of a truly brutal financial collapse, which could even surpass that of 1929. I am going to come to the point, because we have a Peruvian audience here, concerned for our country. We know that this is an economically small country; we know that it is a country with possibilities, but we are full of corruption.

I would like to ask you a very simple and clear question: You, in your writings that I have read, praised Mr. Fujimori because, according to you, he was the only person fighting the drug trade. Our poor evidence—which is poor because our technology is still very poor, not like your satellite technology—shows us through some videos that Fujimori's adviser, named Montesinos, really laundered money, and was in cahoots with the drug trade. There is sufficient evidence of this to say that this is so. There is also evidence that that gentleman was being sponsored by the CIA. And there is also evidence, sir, that the U.S. Ambassador here in Peru encouraged this situation. I am saying this in my own name, so as not to compromise anyone in this room, nor any person in this government. I am saying this on my own, and I am a journalist and I write a column. And if we are going to speak openly, we will say it to the Ambassador, because we are not going to allow anyone here who is linked to corruption.

My question, sir, is why were you wrong, and why did you believe that he was this little ... nobody, a poor naïve little Chinaman who knew nothing of the business, when there is evidence that Fujimori was linked to this money laundering and to Presidential airplanes that went to Russia, to the Russian mafia to deliver cocaine for weapons? I would like a concrete answer, if you would be so kind.

LaRouche: First of all, I have always operated internationally, on the basis of respect for the sovereignty of nations. As you may know, if you look at what I've written, or what my associates have written, that I was extremely critical of certain aspects of President Fujimori's economic policies. I did not think that the economic liberalization policy, even though I knew it was, in a sense, imposed upon him by, also, our great North American friend, as you would say—that I didn't think it was the best thing for Peru. But, nonetheless, I always defended the sovereignty of Peru, as I do now. And, therefore, I do not meddle in the sovereignty of a country. I make my criticisms objectively, as required.

Now, on the question of Montesinos. I think this area is a very dark area, and I think we ought to get not too enthusiastic about coming to conclusions about it. Because, there are certain mythologies and there are certain realities. And, I've been dealing with spooks for long period of time, and had them coming at me, and so forth. So, I know something about the business.

You have to recognize that the CIA operates in Peru, for example, under the auspices of the State Department. It is the intelligence arm of the State Department. There are other intelligence arms of the United States government, which do not operate through the State Department, including the special warfare division of the military. They also operate.

Also, in dealing with anti-drug operations: Anti-drug operations, in every part of the world, are very dirty. As well as the drug operations and the anti-drug operations. In drug intelligence operations, what the anti-drug operative tries to do, is to penetrate the drug networks. Now, how do you penetrate the drug networks? The way in which—it's like when the police investigate prostitution, or organized crime. The way they investigate, usually they penetrate the inside of the networks they are investigating. They use dirty money. They sometimes—in drug traffic, often—they will process drugs, as a way of getting to the top level, so to speak. So, these things go on.

So, therefore, the mere fact of a U.S. intelligence anti-drug operation, being involved in passing drugs and money, in Peru, as part of the anti-drug operation, does not really surprise me. It's the way things are done. And I, therefore, do not draw very strong conclusions about—and I don't pass judgment on the issue: To me, it's still an open question, personally.

Fujimori, in the case of, what happened in the [Japanese] Embassy: I supported him strongly, because there were forces in the United States, including in the U.S. government, which were taking an opposite view. He acted courageously, in the case of this matter, and therefore, I supported him and supported the sovereignty of Peru. Even though I had all these reservations about many of his policies, I had to respect him, as a President, and respected him when he was defending the sovereignty of his country; whether or not I had other differences with him.

I don't meddle inside countries, in any way I can avoid it.

The Economics of the 'General Welfare'

Luis Lizárraga Pérez: Good evening, Dr. LaRouche. We are having our second meeting with you, after last year. I would like to recall that on that occasion, you—when the United States was still in an upswing, in the stock market, above all—forecast the collapse of the stock market, and the economic risk that this signified. This, in fact, happened, particularly in the Nasdaq, where we have seen declines of more than 50%, in the problems of the European stock markets, the drop of international interest rate levels, and all this has generated the decline which you had already forecast a year ago, including that it had been inflated for electoral reasons, among other things, as you explained at the time.

Our concern, as Dr. Falvy said earlier, is our country. We see, that at the level of Latin America generally ... but in our country particularly, despite the fact that some economic indicators such as inflation, devaluation, and GNP, somewhat, etc., still maintain reasonable levels, however, the recession has kept unemployment and underemployment at very high levels, a situation which is very serious in our country. And this is the case not only in our country, but in other countries as well. In this case—and this is part of our topic here, the country risk level—and if you bring in also what you had already discussed regarding Dr. Falvy's question about the threat posed by the fall of the famous derivatives, and the rise of oil prices, and so forth, at this time:

What is your recommendation? How do you see the situation? What can you tell us concerning the situation which our country is facing at this time? Aside from these economic problems, we have, as has been well noted, pre-election problems, a problem of certain chaos, a problem whereby we are surprised by all that has occurred, and a new election is coming up. What is your view, and what is your recommendation for our country, within the world context, as it exists currently as far as risk levels for our country, which is one of the so-called "emerging" countries? What is your opinion as to what policies would be advisable in a situation such as ours, with the caveats that you have observed already ... so as to know what options our politicians have, to make decisions such that our country can move ahead.

This audience is made up mostly of certified public accountants, and this is a topic which interests us.

A second question, on a very different topic, and I would like you to comment: You said last year, that you recommend certain policies in the accounting sphere, in order to make evident information, both national and international, which in your opinion is also very important. We would also like to know more of your opinion on this.

Thank you.

LaRouche: First of all, one has to understand, as you all know, that the world is unjust. And the relations among states, today, is unjust. It was the policy—oh, since the 15th-Century Renaissance—when Nicholas of Cusa wrote his Concordantia Catholica, and laid down as a matter of doctrine of national law, that the world ought to be governed by a group of principles among sovereign nation-states. Now, the principles among sovereign nation-states meant, at that time, the introduction of what is called "the common good," or "the general welfare," which is enshrined in our Declaration of Independence in the United States, and also in the Preamble of the Constitution.

So, therefore, the idea that each nation should be sovereign, its government should be efficiently committed to the promotion of the general welfare of its citizens and their posterity, and that nations should cooperate to promote the general welfare among nations.

Now, this policy has been recurrently expressed in the United States. It was the policy of, for example, John Quincy Adams, as Secretary of State, as the author of the Monroe Doctrine. His letters on this are very clear. It was the policy of a protégé of John Quincy Adams, who later became President: Abraham Lincoln. Roosevelt, Franklin Roosevelt—who was the great grandson of one of the collaborators of Alexander Hamilton, Isaac Roosevelt—revisited that policy with his Good Neighbor policy. John F. Kennedy proposed that with his Alliance for Progress policy. We have to create a system of government, among governments, which is based on a community of principle among sovereign nation-states, not a hegemonic principle.

What we have now, especially since 1989-1990: In that period, '89-'90, with the collapse of the Soviet system, Britain, France (Mitterrand, at that point), and Bush agreed on setting up an unjust system in Europe, and out of that came a process of globalization, under which the world is run. You have the infamous Thornburgh Doctrine, from the United States, in that period, which gave the United States an imperial authority over the internal affairs of other countries. And that has worsened since then. These things are unjust, and must be changed. I work to change this. I would hope that the crisis, where nations need each other, and the United States needs the cooperation of many other nations of the world, for its own survival, that this crisis would bring us to the point that we would recognize that we must finally affirm that principle, of a principle of a community of sovereign nation-states, united on the principle of the general welfare of each and all.

Under those conditions, what should be done, could be done. What should be done, first of all, in the case of Peru? The way in which you get the kind of development that Peru needs, in the history of modern economy, starts largely in basic economic infrastructure: large-scale works in transportation, water management, power, municipal development, urban development, and so forth, which creates the infrastructure on which an economy develops. These investments in infrastructure, generally, are of 20- to 25-year duration. That is, you can not take these on cash-over-the-barrel exchanges. They're long-term investments, usually of 25 years minimum duration: To build a highway system, to rebuild a city, to build a water system, you have think in terms of a payout on a 25-year period; or in the period, shall we say, of a generation, from the birth of a child, until they're reaching fully adult maturity. These are the normal things.

So, therefore, this requires very low interest rates. It requires, not so much money lending; it requires credit. A country does not want to borrow somebody else's money, it wants to get the credit with which to buy the things it wishes to buy from abroad, for its own domestic needs for developing a project.

This is what Brazil needs, what Peru needs. Brazil needs it as well. But, this kind of project is the basis: a system of long-tem credit—25 years—say 1%, as we used to have it at optimal terms, under the old IMF. Projects which are going to be implemented, and, also, at the same time, to encourage other lending projects, credit, to go with private investments to go with it: To build a highway means that the country has to employ people, to build the highway. Private industry is developed to assist this project. Or, a railroad, or whatever. In water projects, the same thing is true.

So, that infrastructure projects which represent—oh, probably 40% of the total national income, production income, may be involved in infrastructure. That is, 40% of the throughput for developing and maintaining an entire economy, may be infrastructure. This was the case, for example, under Roosevelt, in recovery from the 1933, '32 Depression: That projects like the Tennessee Valley Authority, or the way in which Roosevelt used the Reconstruction Finance Corp. The result was, that for every dollar, that was spent in this kind of infrastructure development, about $1.4 would show up as further investments in the private sector. And, this is the way in which it should be done.

You, in Peru, probably have probably a very good idea, as accountants, in knowing what some of these things are, that are needed. You know how it works. It's not too hard to figure out, if you have experience as an economist or senior accountant. You know how these things work. If you have a credit system, that allows you, at very low interest rates, to have projects in the national interest, which not only benefit the infrastructure, but also provide the stimulus for private investment, with the market created by the infrastructure-building. This is the kind of approach.

What I would hope, is that we come to an agreement on reconstruction of, for example, the hemisphere. I've long been for a hemispheric cooperation association, of the United States with its neighbors to the south, of this type. To create a facility by which, some of these things which are transnational: for example, some of these highway, railroad, water projects, they're transnational. They can involve each nation, but they are projects which benefit all nations together.

And, these kinds of things should be the way to go to the future.

On the question of the physical economy, which you referred to. The second question: Often people, as accountants, make a mistake. And, everyone who thinks like an economist as well as an accountant knows it: That we often measure performance in terms of money. And, when you get into this derivatives area, for example, you realize that what may be profitable in money terms, may not be profitable in terms of the economy as such—the physical economy.

And, therefore, it's very important that we understand, that economy involves chiefly physical things. It involves the education of the labor force, which is learning scientific principles, largely, in schools—elementary and secondary schools and universities. It involves the development of scientific technologies. And it's the application of these technologies, through capital goods and so forth, to labor, which results in an increase in the output, over the effective cost of the input. And, what I emphasize is paying more attention to the non-linear side of the economy.

For example, I've written a paper on this, which will be published soon, which deals with this issue of the lessons from Vladimir Vernadsky, who was the developer of biogeochemistry [see EIR, March 2, 2001]: That we have three sets of physical principles, according to Vernadsky. One is, you have the non-living processes, and these are the subjects of normal physics. But, then, we know that living processes do not come from non-living processes. They have different principles, and they are efficiently physical principles. For example, most of the area of the Earth we live in, which is called the biosphere by Vernadsky, is made up of oceans. Where'd the oceans come from? The oceans were created by living processes. Where does the atmosphere come from? It was made by living processes. Where do most of the minerals and so forth, we use, where does it come from? From living processes—the result of it.

And, then, also we find that, in addition to the biosphere, that man, through his cognitive processes, his powers of discovery of principle, represents a still-higher level of physical principle, in which we're able to increase the rate of growth of the biosphere, relative to the planet as a whole.

And, it's this kind of thinking, that, in the case, for example, of infrastructure: In order to live, we have to make the desert bloom. We have to turn deserts into fertile areas. We have to build railroads; we have to build transportation systems; energy systems, and so forth. We must think of these as an extension of the biosphere, as creating the necessary conditions of life, under which enterprise can function. Without this infrastructure, it can't function.

And, so, we have to think more and more in deeper terms, in philosophical terms, about how an economy actually works, and not simply assume that an accounting report, which reports certain financial figures, tells us the truth about how the economy worked, or why it worked, or why it didn't work.

'The Public Interest Comes First'

Lizárraga Pérez: Thank you. I would like you to expand on the subject. One of the responsibilities that certified public accountants have, is to provide information for tax purposes. These taxes generate the fiscal revenue. However, a large part of the country's tax revenues have to be used to pay the so-called foreign debt. Our foreign debt fluctuates between $30-32 billion, of which 30-32% is owed to the private banks ... and another 30% to what is called the Paris Club.

My specific question, is: What do you think of the tremendous effect on our country, on the Peruvian economy, which is in acute recession, of servicing the foreign debt? And also, what possibilities do you see on a world scale, internationally, to alleviate, diminish this service on the foreign debt such that the country could use those resources for internal investment?

LaRouche:^We did a study some years ago, of the debt of the combined countries of South and Central America. And we observed, by this study, by taking 1971 as a starting point—that is, the point at which the famous Nixon shutdown of the fixed exchange-rate system occurred. Is that, what would happen was, actually the countries of Ibero-America have more than repaid every penny which they borrowed from foreign countries. They were actually delivered. What actually happened, how this thing was done—it was done by the following method: Is that the London Club, for example, would organize a raid on a national currency of an Ibero-American country. Then, they would declare the country to be in default, in a mess, by financial warfare. Then, someone would bring in the IMF or the World Bank—usually the IMF—and bring in the foreigners to say, "Well, we're going to negotiate to get you out of your bankruptcy." And, they would say, "You're going to write down the value of your national currency." So, the country would say, "Okay, we're going to write down the value of our national currency. Therefore we will pay the debt, foreign debt, at the same rate as before. We'll pay it in our national currency. We're obligated to pay out of our currency. We'll repay in our currency." But, they said, "No! If we write down your currency value, on the world market, we're going to increase your debt, to compensate for that to the foreign creditors."

And, if you look at the debt of the countries of Ibero-America, you will find that these countries have, in aggregate, more than paid everything that they actually ever borrowed!

If these raids had not been run, largely by the London Club of financial speculators, you wouldn't have the mess.

Now, the second question comes in: We now come to the point that the total obligations—financial obligations of the world, can never be repaid. The whole system is bankrupt. If you had the books before you, you'd know it. You may have some idea of what these books look like. They're bankrupt!

Now, what have you got? You've got a real economy, real nations, real production facilities, and real people. You can not shut them down. So, then you come back to a principle, called the law of equity: the principle of the general welfare. The model for this was something that was developed in the United States, under Roosevelt: It was called Chapter 11 bankruptcy. Now, in Chapter 11 bankruptcy, you pull the creditors and the debtors of a bankrupt institution together. But you also put a third party on the table, in the negotiations, called "the public interest"; the general welfare. And the public interest comes first. Not the creditors. Not the debtors. The public interest comes first. Because the obligation of government is to efficiently defend the general welfare of all of the people and their posterity.

So, what we're going to have to do—this bankruptcy is going to occur; it's going to collapse; it's inevitable. So, therefore, rather than having a chaotic bankruptcy and repudiation of debts, we'd do much better to have an orderly bankruptcy, which is why I want a New Bretton Woods conference: To assist in organizing a kind of international Chapter 11.

What I would do, which may please the former questioner, I would simply say, "We write off the books, immediately, all financial derivatives obligations. Nobody pays. Nobody owes. Wipe them from the books." And reorganize the remaining debt, as we would in any ordinary, good bankruptcy proceeding. But, always act to protect the general welfare, under the same rules which the United States adopted as Chapter 11 bankruptcy rules, under Roosevelt, during the 1930s.

That's what we're going to have to do with this situation. We can not have countries shut down. We face the fact that much of the debt is illegitimate. It is based on an artificial arrangement. It was not honestly incurred. It was imposed upon people by overreach, and people are suffering. You say, "We'll pay what we can. But we can't pay more. It doesn't exist. We can not shut down our nations, and starve our people to death."

So, let us look to the future, rather than the past, as you do in any regular bankruptcy reorganization.

Always try to save the firm, if you can, if it's viable. Reorganize it. Arrange between the creditors, the debtors. Arrange; come to an amicable agreement. We're looking to the future. The past is dead. And that's what we're going to have to do in this case. It's unjust; it's a system of unjustice. It shouldn't have happened; we shouldn't have allowed it to happen. What happend in 1971 should never have happened. What happened in the Azores in 1972, should never have happened. What happened in Rambouillet in 1975, should never have happened.

It shouldn't have happened. We made a mistake. The world made a mistake. The powers with the overreach, made the biggest mistake. We're just going to have to reorganize it.

The Strategic Threat to Peru: Drugs

Alejandro Indacochea: Good evening, Mr. LaRouche. I must confess that after receiving the invitation to participate in this video-conference, after entering your webpage, I was quite concerned. I was quite concerned that a security alert bulletin was released internationally, which says: "Now Comes the Narco-Democracy of 1%;" that, with Fujimori, the only government that truly was fighting against narco-terrorism in all of Ibero-America has fallen; that military leaders are being jailed. ...

After having examined your career. your highly interesting opinions regarding the architecture of, the instability of the world financial system, I reached the conclusion that you lack information about the country. You are not informed. You have just said that you are respectful and prefer not to meddle in internal matters, but when you say something like this, internationally, you are meddling in internal affairs and presenting a distorted picture, which isn't true. International opinion is being confused. Why? Because no one is going to be able to deal with, to address a problem that they don't see, or that they see as totally confusing.

I would invite you to come to Peru now, and to see for yourself the connection between the drug trade and the corruption of the institutions, which has left us practically without leaders. Where there has been collective frustration. ...

It is not the economic or financial crisis which most concerns us, at the moment—and I speak as someone who is an independent analyst in the field of finance, without any link or affiliation or identification with any special group. What most concerns us today, is, clearly the country's social capital which is collapsing. This problem of generalized corruption has led us to a situation in which nothing is viable, unless we identify this, unless we rebuild, unless we begin to build up our social capital again in the country. Because it is a situation in which the population doesn't believe in anybody. There is a problem of generalized distrust, unfortunately especially among the youth. ...

But please, I ask you, with this information going out to the international media, opinion is being misled. A wrong impression is given of the country. I beg you, in terms of discussion on the international level, not to talk about the country until you have all the information, until you are completely well informed of what is going on in the country.

But let us put that aside. I think that there are highly interesting and valuable aspects to the work which you have been carrying out in recent years. ...

I would like to reflect on the current situation in which we find ourselves as a country, because corruption implies rotting, and we have to start over, to rebuild. Nothing is viable economically, if there is corruption. This corruption is generating political instability, and this is reflected in our country risk level, and has a direct effect in the fall in investments. We have entered into a vicious circle, where corruption affects social capital, and in turn, the economic situation. ...

With your international experience, what proposal, what recommendation would you make for a country going through this situation, in this context, which is totally different, I would reiterate, from that which you present to us in the reports I have had the opportunity to read today?

Thank you.

LaRouche: Well, I've never been much concerned about Peru being a source of problems for the world. I've been concerned, in the narco question, of the threat to Peru of the international narcotics trafficking. That's where the problem lies.

Right now, for example, take the strategic threat to Peru on the narco side. You've had the virtual disintegration of Ecuador, in the dollarization of its economy. You have a situation in Colombia, which is an adjoining country, which is part of this problem, which is now out of control. You have an operation now in process to destabilize and break up Brazil into several parts, including taking the part of Brazil, which most closely adjoins the border of Peru, and turning it into a nest of problems, by actually denationalizing that area, in effect.

So, therefore, the problem, the threat to Peru, comes not so much from the inside—though the history of the narco-terrorists in Peru is well-known to me. And, that is a very dangerous problem, which the Peruvian military has kept under control for a number of years. I know these things, and how they work. And, to understand these things, you have to know how this operation works. It is not a matter of generalities: You've got to know how what you're dealing with. This is not endemic. It does not come from the people, up; it's organized from the top. And, it's organized internationally: It is not a problem of a nation, as such. It's a problem to a nation! It's a threat to a nation. And, the major threat to Peru, on the count of the narco-trafficking, comes from the outside Peru, not from inside it. Though it may become serious inside.

The danger is that you can get a border situation, an uncontrolled border situation, in which Ecuador, Colombia, and parts of Brazil become a nest of danger to the borders, and to Peru as a whole.

Now the problem here, is—you're right. Largely, the problem lies with the United States. It lies with, for example, the Inter-American Dialogue. You want to talk about drug pusher Number 1? It's the Inter-American Dialogue. These are the ones who insist no anti-drug measures be taken. They insist on legalizing it, on the basis of what I referred to before: this idea of Mandeville, that good comes from evil, through liberalization. These are the dangers. And, what you have, then, is that you have a powerful interest, typified by the chairman of the New York Stock Exchange Grasso going down to embrace Reyes in Colombia. You've got these problems! The father of the present President of the United States, was up to his ears in this stuff, in the name of Iran-Contra!

What happened in Peru, in terms of the actual drug income in Peru, was pennies compared with the scope of this stuff. Drug money was used, collected in the way you described it: It starts with a few dollars in Peru, it goes through the narcos in Colombia, it goes up the chain, and it goes up 30, 40 times that amount on the way up. What happens with this money? This money is then exchanged, it was involved in the Russian gangster operations. You had islands in the Caribbean, where Russian chiefly was spoken, because the gangsters were trading drugs for rubles, there. That sort of thing. You had the armies, as in Afghanistan, in Pakistan. Whole wars are run on the basis of financing with drug money.

We have a similar problem in Africa. This is not the problem of these countries, as such. They did not create the problem. Without the consent of the Anglo-American powers, it could not have happened. And, the moral responsibility lies more with my own government, than any government of Peru. We could have done things. Sure. You had Ambassador Jordan, down there, who was opposed to the drug traffic. General McCaffrey's an honest man—the drug czar of the United States. But, then, look at McCaffrey's proposals, his efforts, and compare them with the policies of his superior. The policies of Al Gore, for example, as Vice President. The policies of the Bush crowd.

Yes, the problem is there. But, the problem in Peru from drugs, does comes primarily from inside Peru, it comes from outside, as you indicate. The danger right now, is the threat to Peru, running through borders such as Ecuador, Colombia, and parts of Brazil. If Brazil is destabilized—and there's now an effort to destabilize Brazil, there's an effort now to bring down the present government of Brazil, to topple it. If they topple it, and if the powers that take over, that I think would take it over, if they topple it, then you're going to have the fragmentation of Brazil, and you're going to have the whole area going into crisis.

So, yes. The truth is: My country is the chief responsible party, because we have the power, and we don't use our power in the right way, and we condone it, and we protect—we protect the Inter-American Dialogue. The U.S. State Department supports McCaffrey, on the one hand. But it also intervenes, on the other side, to intervene on behalf of continuing the activity of the drug pushers.

My country is more responsible. And I know it. And I do something about. But, my view is lay the whole truth on the table.

Who Are the Destabilizers?

Indacochea: There is a problem of narco-globalization, upon which we agree; the problem of derivatives; what the movements of the financial system signify—, and undoubtedly I would love to discuss this at another time.

But I am frustrated, because you have not responded to my main question. You are meddling in Peruvian sovereignty at this time. This is destabilization.... I refuse to believe that now we have a democracy of 1% in the country. I am afraid that you have generalized, global information, but you don't know the current Peruvian situation. I am afraid that you don't have all the information about what is going on. If you were a Peruvian citizen, you would be concerned, and would realize that the responsibility lies ot only abroad, with the bad guys, the Russian mafia, and neighbors. No! There was drug trafficking here, it was deeply entrenched, and the corruption comes from that. So, by repeating this information internationally, you are destabilizing us as a country. It sends us contradictory signals, and as a Peruvian citizen, I cannot accept it. This is the main area in which I believe I have not been answered.

Thank you.

LaRouche: I thought I had answered it, actually. I didn't write that. I know what I've said, and I say it. That's the fact of the matter.

Indacochea: Might I ask a question? A brief one, very brief.

Vásquez Medina: If you will allow me...

Indacochea: No! No! Excuse me, one moment. I am dumbstruck, because this is an academic forum, and for him to tell me this by decree—because this is a decree! He is shutting me up. He is not giving me an explanation. I am most frustrated, concerned.

Vásquez Medina: I think I can clear the matter up for you. And I can explain the matter to the audience.

I think you have the right to present that, but please read carefully what you are talking about. Because the document you are reading from is from a statement of mine, that I issued. At the end of the document you will see my name, Luis Alberto Vásquez Medina, of the Ibero-American Solidarity Movement. That is the group which shares LaRouche's ideas, but I am a Peruvian citizen. And I take full responsibility for that statement, from which you have read selectively, and which obviously doesn't give the full sense of the document.

What I stated there—and everyone in the audience has a copy, because we were graciously permitted to distribute two documents, and which are not by LaRouche, but are my views and the views of my movement on Peruvian affairs—is that we are currently witnessing the fact that the changes in Peru are fundamentally the result of the U.S. and the international depression, and we were criticizing that situation. And we said that what was coming—and it now seems to be happening—was a situation in which there would be a dialogue with the terrorists, and concessions would be made along the lines of the Colombian model. That is what we stated there.

So, to be just, and truthful, and in order to not get prematurely bitter on a whim, Mr. Indacochea, simply read the document, and don't attribute it to someone who didn't write it.

Indacochea: Very briefly. Secondly, I would like to tell Mr. LaRouche to change his representative here in Peru, so that he gives him up to date and accurate information, and not of this sort. Evidently, I did read that Engineer Luis Vásquez was asserting that there is a 1% democracy, and leading the country in the current situation. My proposal from here, is that Mr. LaRouche, whom I have been following for many years, change his representative in the country.

Vásquez Medina: My second comment, before asking my question, is that I am very pleased that Mr. Falvy has acknowledged that it is derivates from all these secondary markets, which are the speculative cancer, the reason for this systemic crisis we are going through. I am happy about this, but I would ask that he assume the political consequences of this affirmation....

I would then ask that, now that he has begun to accept the thesis which, since 1994, more or less, in his famous Ninth Forecast, LaRouche presented—that this is the fundamental problem of the current crisis, the derivatives—that the political aspect be taken on also.

My question, Mr. LaRouche—to leave the comments to the commentators—is the following: Three or four decades of regulation, and all the ideologies of [post-industrialization], have reduced the U.S. economy to a lamentable state. The United States has been deindustrialized; it previously was the breadbasket of the world, and today it is importing food, including from countries that are going hungry, like Mexico, Brazil, etc. You have called this "the importer of last resort," where the U.S. has a trade deficit. presenting historic figures, historic records, of a trade imbalance.

The question is: How is this situation going to be affected by the fall in interest rates which has been going on, more or less at an accelerating rate, these past two years, as a result of policies imposed by Greenspan? The U.S. has sucked in capital with high interest rates, to cover its trade deficit. But the capital that was going to the United States has fallen, with interest rates that are no longer going to be attractive....

How is this hyperinflationary, low interest rate policy going to affect things, in the short term?

U.S. Financial System About To Explode

LaRouche: You have to appreciate: We're not talking about months; we're talking about a very short period of time. In the recent weeks, Alan Greenspan and the Federal Reserve System have gone absolutely panic-stricken. The U.S. monetary policy, U.S. financial policy, is in a state of absolute panic. There are solutions, but there is no political will for a solution. And without political will for a measure, which will cause a solution, you're going to have increasing panic. This panic is going to reach an explosive point, in the near future. My concern is, there's a tendency on the part of some in the U.S. government, to go to crisis-management measures, to try to distract attention from the crisis. Now, what Alan Greenspan is doing, is absolute lunacy. It is not a policy; it is pure desparation.

What happened is, that last Summer, the rate at which money was being printed, or poured in, to try to roll over existing debt balances, had reached the point it exceeded the amount of the current debt balance it was trying to roll over. Now, that happened in Germany in the Summer of 1923, where, after a period of money-printing to try to bail out and pay off the war-reparations debt, Germany's rate of printing of currency became so large, that the amount of currency being printed exceeded the amount of debt they were trying to roll over by printing currency. That point was reached during last Summer, in the United States, with the U.S. dollar.

At that point, they decided to try to keep the thing together for the Nov. 7 U.S. elections. So, massive amounts of new printing-press money were poured in, selectively, trying to avoid a hyperinflationary explosion, but at the same time, pumping up and keeping the system from collapsing.

We have hyperinflation: You see the explosion of fuel prices, of energy prices, the prices of manufacturers' supplies, and so forth. We already have high rates of inflation. The average rate of inflation was reaching about 10% overall, toward the end of this year. It's now expanding. With the collapse of whole sectors of the economy, the rate of inflation is increasing. For example, Alan Greenspan probably spent $4.5 billion yesterday to try to bail out the Nasdaq market, to stop it from collapsing below 2000 points. In a situation, where we're looking at a possible, early financial explosion. Not within months, but within weeks. This means we're coming to a point of decision, inside the United States, on what is going to happen.

So, that's the way to appreciate this problem. It's not going to continue this way. We're going to get to a point soon, at which: Either you will have Middle East wars, and similar kinds of things which distract public attention from the problem; you will then have measures, emergency measures taken inside the United States to control the political situation. Or, you will have a sensible solution, in which the United States decides to abandon its present policy, and go to the kind of policy, which can cope with the situation.

That's where we stand. That's the situation. We are at the end of the line.

As I said at the beginning, in my opening remarks: We can not predict what is going to happen. We can define the parameters of the crisis, and what the options ought to be, what direction they ought to take. But, what will happen, will be determined by the way powerful forces react to this crisis, especially the United States. And that's the only way you can read this situation. We're dealing with a very short-term point of decision.

Ban Privatization!

Patricio Ricketts: Good evening, Mr. LaRouche. It's a pleasure to be able to participate in this talk with you....

There has been a lot of talk around here, and not just now but for some time, of country risk. In my opinion, there is a certain confusion, because everyone applies the criteria in a way that I would say is most convenient for them. For example, the political situation of the moment, someone's statement, an inopportune phrase in the newspaper, could supposedly entirely change the flow of foreign investment.

It is persistently stated, for example, that one of the situations which is harming and causing risk for the country, is the halting of privatization. According to many economists, or people who speak with such authority, halting privatization is seriously affecting us. ...

So, I ask myself, and I ask you, Mr. LaRouche: to what degree can country risk be studied in isolation from world risk, and concretely, from the risk facing the United States itself? How is our risk quantified, as far as foreign investment is concerned, given what is going on in other markets? About three or four years ago, there was a drain of $3 billion, due, not to a national situation, but essentially as an effect of the Russian crisis. There was a reflux of capital globally, into which we had to pay $3 billion. This created a crisis from which we have not emerged.

So, in view of this confusion, I would like to ask you for your view of country risk, with internal factors, in relation to world risk at this moment, in relation to foreign investment, and certainly in relation to the laws of the United States. Seeing, as we all do, that Wall Street is beginning to crumble.

So, if you were a Peruvian finance minister, how would you view this problem from here?

LaRouche: Suppose I were Secretary of the Treasury of the United States, and, someone were to ask me, "What are factors of country risk in Peru?" Well, I would tell them to abandon the privatization program, to minimize the country risk. Because, if you privatize—. Look at the case of deregulation in the United States in the energy field. We have an absolute disaster in the United States, as a result of a process of deregulation, which is actually a process of privatization. At this point, there's a groundswell, throughout the United States, in the labor movement, and elsewhere, to reverse deregulation; to go back to re-regulation. If you look at the effects of the energy crisis caused by deregulation in the United States, you would say, "This is the major factor in making the United States, right now, a greater country risk factor." And, therefore, for the United States, I would say, the best way to reduce the country risk of the United States, is to ban privatization!

Not that we're against private industry, but there are those areas of investment, which are basically infrastructure, which are either regulated areas—. In the United States, we have a double system: You have facilities, utilities, public utilities, which are owned by the government, or created by them, or they were managed by the government, in the sense of regulation, but the ownership and the regulation was largely in private hands. And that worked, under a regulated system. If you destabilize that structure in infrastructure, you will cause an increased country risk.

Because, what's risk? Risk, in this case: If you're going to invest in a country, what's the first thing you're concerned about? You're concerned about, what can you get in terms of transportation? What can you get in terms of power supplies, to maintain your industry? What can you maintain, in terms of water management? What do you have in terms of urban infrastructure? What do you have in terms of hospital facilities? What do you have in terms of schools, and so forth? These are all factors that determine, for a private investment, either as a direct corporate investment or an investment in a private company, would determine whether or not you would want to invest in that country, or in that locality in that country. Therefore, the first step to make Peru less a country risk, is not to have privatization.

Privatization is simply a method of picking the bones of a country. People come in. They take a transportation system; they take a power system; they take other facilities, and they loot them! They take them over. For example, let's take the case of—under Carter—in the case of deregulation of transportation: In 1977, the United States had a very good transportation system, private transportation system, under the Interstate Commerce Commission rules. We had a system of fixed rates. The function of the rates was to ensure that, in a small community, outside the major cities, you could have an industry in a community, and that community could get freight service at rates, at prices, and with the regularity, which was competitive with that of a major city. Under deregulation, the immediate effect of deregulation, was, the competition went very high in the urban centers; and the service was cut off and the rates were driven up in the outlying areas. And, the result was, a disintegration of the transportation system in the United States. And whole communities that had been prosperous communities, were actually destroyed as a chain-reaction effect, of this deregulation of transportation, and privatization.

So, these are all the same thing. Privatization is not, by me, recommended to enhance country risk. Somebody will come in, and say they want you to privatize, because they've got some friends who want to come in and steal. It's that simple.

Ricketts: Elaborating on another area, Mr. LaRouche, would you say that the issue of drug-trafficking is a decisive factor in country risk? Or that drug trafficking in Peru today would potentially be a major deterrant to foreign investment?

LaRouche: Well, we would say, very simply, if you have a drug problem, you have a security-risk problem. And, certainly, having a security risk—. For example, just look at the extreme case, in Colombia, now: Look at the risk. What do you think of Colombia, as a country risk area? Do you want to put a firm up? Will you have a major security problem affecting your employees, affecting your operations? Will you have kidnapping done of your principals, by narco- traffickers? That sort of thing?

No. These things are significant, not merely because drugs have an effect in destroying people; whether they're the people in the country that produces them, or the people that consume it. But, because you have a criminal element, a criminal element of insecurity, which is created, which effects a deterrent affect on all kinds of enterprise. For example, agriculture: Agriculture's the first threatened. Now, in Peru, of course, obviously the development of agriculture is extremely important; but, if you don't have secure rural areas, you're not going to develop agriculture. The farmers are not going to stay there, or things will happen. You want to have industries. You want to have a network of industries functioning. You want security for the people. You want security for the firm.

The issue is one of internal national security—the drug-trafficking problem. And it represents a factor of threat to security of the people, and of the enterprises. Look what happened to Colombia. Colombia is the classic case of a bad example of a country, which was a very important country, with tremendous resources. Now, admittedly, they have the FARC problem, as the old Communist business from way before; and that problem was endemic—civil war—a virtual civil war problem, going back for years. But, as this became a narco-terrorist problem, and as foreign countries, including the United States government, became sympathetic to the idea of legalizing this drug operation, then the country was destroyed. It no longer functions. It no longer has a functioning economy.

Roberto Alva Sánchez: We would like to express our thanks to Mr. LaRouche, and to the distinguished panelists who participated in this exchange.

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