Financial Derivatives and the Globalization of Risk 9780822334187, 0822334186

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Public Planet Books

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

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

Financial Derivatives and the Globalization of Risk

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Financial Derivatives and the Globalization of Risk Edward LiPuma and Benjamin Lee

DUKE UNIVERSITY PRESS

Durham & London 2004

© 2004 Duke University Press All rights reserved Printed in the United States of America on acid-free paper  Typeset by Tseng Information Systems, Inc. in Bodoni Book Library of Congress Cataloging-inPublication Data appear on the last printed page of this book.

Contents

Preface

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Global Flows and the Politics of Circulation

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Derivatives, Risk, and Speculative Capital

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Historical Conjunctures

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The Institutional Basis of Derivatives

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Deriving the Derivative 107

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The World of Risk

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Derivatives and the Stability of the State 161

Glossary Notes

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Bibliography Index

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67 85

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Preface

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his book is the result of a collaboration that began more than twenty-five years ago, although it was then only perceived as a conversation among friends wanting to make sense of the incandescent and incipient changes that would eventually be labeled globalization. Increasingly, the conversation could not but foreground two questions that seemed, quite significantly, to merge into one, or, minimally, to possess a common center of gravity. The first question concerned what appeared to be an extraordinary reorganization of the place of developing and transitional economies within a rapidly (if not rabidly) globalizing economic system; the second question concerned the demise or at least the slow dissolve of manufacturing and industrial production in the metropole and the corresponding rise of circulation—what we would call the cultures of circulation. And indeed, everywhere we looked there was evidence of the ascension of the culture and sociostructures of financial circulation. Nonetheless, there was very little in the way of theories or methods to deal with these problems. On the one side was the universe of financial analysis, which although sprawling, technologically amplified, and technically intricate had little aptitude for the social issues surrounding the emergence of

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a global financial circuitry. There was little or no interest in or appreciation for the social and economic conditions that might engender and sustain the emergence of a global system. On the other side of the intellectual divide was a universe of social theorists who, though deeply concerned with the transformations occurring globally, especially in the developing and transitional economies, had very little familiarity with finance, let alone a financial system that had become a powerful agent and institution of the encompassment of others. The tools of the trade developed to deal with the expansion of a production-centered system of nation-state–based capitalism did not seem to illuminate the transformations taking place. This book can thus be understood as a down payment on bridging this gap, an attempt to familiarize social theorists with the global culture of financial circulation now in ascension, and to illuminate for the financial community the social grounding and political implications of the transnational flow of capital. The touchstone of our account is what we consider a new and emerging interrelationship between speculative capital, a more abstract notion of risk, and financial derivatives. Although the collapses of Long Term Capital Management and Enron brought derivatives into public consciousness, the literature on what happened, and why, and what were the implications, has been divided between popular accounts and an often forbiddingly formal technical literature. We quickly realized that part of the problem was the separation between the technical discussions of derivatives and their perceived effects on social and cultural processes. What we have tried to do in this short introductory work is show that the cultural and economic dimensions of contemporary financial globalization cannot be separated; any account of how derivatives work in the contemporary world must locate them in the so-

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

Financial Derivatives and the Globalization of Risk

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Global Flows and the Politics

of Circulation

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

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ductions and returns to democracy that they have only recently won. So much is this the case that there is sometimes a nostalgia, at once genuine and insincere—not, as is sometimes mistakenly thought, for ousted and discredited authoritarian regimes, but for the certainties that they brought to everyday life. Not the least of these certainties was a foundational logic that once seemed to bind work to wealth, virtue to value, and production to place. The contrast with the contemporary globalization of finance capital could not be more striking. Technologically driven derivatives detach the value, cost, and price of money —manifest in exchange and interest rates—from the fundamentals of the economy, particularly the state of production, the social welfare of the producers, and the political needs of citizens for self-determination, dignity, and the creation of identities. The economic power of the capital markets also threatens the right of popular dissent against those who govern the economy. Although this right, helped immeasurably by advances in communication, only reached its maturity in the twentieth century, its contemporary roots now run deep and worldwide. But the forces of circulation offer up no address or even an identifiable object. How does one know about, or demonstrate against, an unlisted, virtual, offshore corporation that operates in an unregulated electronic space using a secret proprietary trading strategy to buy and sell arcane financial instruments? The mass media can disseminate the visions and voices of dissent, almost instantaneously and worldwide (and usually at a profit); but without a recognizable object, such as that provided by the national state or a corporate headquarters, the dissent seems meaningless, impotent, or worse, some entertaining spectacle. The question that is both concealed and that matters concerns the economic powers and global reach of financial derivatives. One way of posing the question is to collect the news head-

lines and to ask what the collapse of Argentina and the Enron Corporation, the demise of hedge funds such as Long Term Capital Management, and the accounting scandals at Arthur Andersen have to do with high and rising interest rates in Johannesburg, Kuala Lumpur, Istanbul, and other locations on a multipolar periphery. Are these phenomena also connected to the sudden and severe devaluation of currencies and then the ascension of interest rates, to levels of cross-currency volatility that confound any possibility of economic planning, to the concomitant escalation in global impoverishment, and to the increasingly intense and pervasive forms of indigenous unrest and regional disquiet, and the decline in the capacity of national states to provide social welfare? The short answer is that they are all tethered to the umbilical cord of circulation. They are directly defined by global streams of capital and critically configured by the buying and selling of the financial instruments called derivatives. So though financial derivatives are cloistered and complex, their character matters because they inform the course of capital that informs the course of people’s lives worldwide. The singular result is that globally, government officials, the academic community, and the news media are beginning to appreciate the extraordinary power and reach of these flows of capital. To assume, as some commentators have apparently done, that derivatives cannot be influential because they exist in virtual space and therefore do not produce anything material or real is as unsound as assuming that religion must be historically inconsequential because, after all, God doesn’t really exist. Derivatives have episodically captured the world’s attention because of a number of spectacular failures and crises that threaten entire economies and regions. These examples of catastrophe matter in themselves and because they identify the fault lines along which key transformations are taking place. Catastrophes also open an unexpected window into the

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inner clockwork of financial transactions that would otherwise be closed to public scrutiny. On this accounting, the Asian currency crisis of 1997, the collapse of firms such as Long Term Capital Management and local governments such as Orange County (California), the introduction of financial risks so systemic that they threaten a global implosion of the banking system, and the accelerated and economically disabling devaluation of currencies such as the Turkish lira and Argentine peso all confirm that electronically amplified flows of capital have become instrumental in compromising the sovereignty of national economies, and thus the extent to which politics, democratic or otherwise, can regulate circulatory capitalism. There is a growing concern that the international order is disintegrating because the global economy is on the edge of crises whose shape and symptoms are different from past and more familiar ups and downs. Though it is the regional crises and spectacular corporate failures that periodically put derivatives on the front pages and internet banners, their social and economic effects are more pervasive and difficult to determine. They infiltrate the economies of weak and developing nations through their effects on the price of money, which in turn greatly affects its availability for housing, education, and the other social goods whose provision is necessary to advance the economy. At least as important is that financial derivatives not only are designed specifically to deal with short-term fluctuations in the price of money but also tend to exaggerate the oscillations in exchange and interest rates. For manufacturers this makes it extremely difficult to synchronize on the one hand the time horizon of commodity production, which to be successful must be measured in years, and on the other hand short-term fluctuations in the cost of the money necessary to purchase their plant and equipment and guarantee them a profit on the goods they export. The impact of the fluctuations is hitting developing

nations particularly hard, causing business failures that have little to do with the demand for the product or the efficiency of the producer. The result is often increasing poverty for the already poor and further weakening of already weak states. The most salient feature of our times is that contrary to the buoyant optimism of the early postwar period (1945–73), most ‘‘developing’’ nations are regressing economically if not also politically. Especially because of its wide-ranging impact on the developing world, the financial turbulence of the past decades— exemplified by one currency and debt crisis after another— has convinced most serious observers (though certainly not all) to abandon the assumption that liberalization of the capitalist financial markets was destined to bring about a new regime of unparalleled global economic benefits. Also left by the wayside has been the overly optimistic imaginary that liberated economies of liberated peoples would bury their pasts and launch a progressive process of planetary integration. In its place is a troubling realization: unregulated flows of capital are engendering a turbulence that is undermining the lives of even peoples who inhabit territories incomparably distant and different from the landscape of metropolitan capital. Whether anyone understands what is happening or not, irrespective of political consent, arcane financial markets and instruments—encoded in the most mathematical of terms—appear to be determining the fate of those who reside in what the metropolitan literature, such as that issued by the International Monetary Fund (imf), identifies as economically emerging and transitional nations—the concept of the ‘‘Third World’’ apparently rendered senseless by the demise of the Second and dissolution of the First into the image of the planetary market. It is becoming increasingly clear that since the early 1970s, the cultures of circulation, especially that defined by speculative capital and the risk-based deriva-

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tive, have unceremoniously begun to displace production as the leading edge of capitalism. This transformation accelerated through the 1980s and then exploded in the 1990s into the new millennium. The bankruptcies and currency crises that punctuate the transformation destroy the perception that it is possible to attend to politics independent of the economy, thereby undermining the celebration surrounding the resuscitation of democracy and civil society after the cold war in the post-colonial and once communist universe. So a continuing refrain in both academic and popular works on globalization is that transnational capital has become instrumental in defining every aspect of the present economic environment, from the climate for interest and exchange rates to the topography of global redistributions of labor. These works see these streams of capital as mobile, muscular, and speculative, moving in a self-created and selfcreating terrain lying beyond the perimeter and thus the regulatory power of the state. In the metropole as much as the post-colony, commentators have become progressively aware and worried that these global flows of finance capital will, in the words of the historian Eric Hobsbawm, gradually reduce ‘‘older units, such as ‘national economies’, defined by the politics of territorial states’’ to mere ‘‘complications of transnational activities’’ (1994, 573). Arjun Appadurai (2000) contends that circulation’s most ‘‘striking feature is the runaway quality of global finance which appears to be remarkably independent of traditional constraints of information transfer, national regulation, industrial productivity or ‘real’ wealth’’ (3; our emphasis). Saskia Sassen observes that such flows are leading to a ‘‘denationalization of domains once understood and/or constructed as national’’ (2000). Eric Peterson (1995) warns that continuation of contemporary trends will lead to the inevitable ‘‘hegemony of global markets’’ and the power of circulatory capital to determine the conditions of produc-

tion; Jean and John Comaroff (2000) underline the degree to which ‘‘the explosion of new markets and financial instruments’’ gives the financial order an autonomy ‘‘from ‘real production’ unmatched in the annals of political economy’’ (300–301), while the geographer David Harvey (1989) claims that emerging circulatory forms are fracturing the history of capital itself. In concert with this concern for circulation and its capacity to efface the forces of regulation, there is a growing emphasis on the social character of markets, particularly the ways in which the creation and distribution of wealth have to do with more than technological advancement and unfettered competition. There is a growing realization that modern markets rely on governance and cultural institutions that they are also partly responsible for creating. Fligstein (2001) notes that the social structures, social relations, and institutions underlying the market are the works in progress of a longterm historical project, and that in many cases they represent the fruit of sometime desperate experimentations in the face of market turmoil and economic depressions (4). In a parallel vein, Perez (2002) and Brenner (1998) attempt to understand how the social and political economy of globalizing capital absorbs, assimilates, and deploys great upsurges in wealth generated by technological advancements and the over-accumulation of capital that so often follows them. They argue that the social and institutional framework, including governance, developed to deal with the previous set of technologies (such as those of Fordist production) are invariably inadequate to enframe the new technologies, in this case the globalizing forms of financial circulation. There is a mismatch both across geoeconomic spaces, as exemplified by the relationship between the metropolitan nations and those of the periphery, and between the techno-economic and socioinstitutional spheres, such that the economic system at least

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temporarily decouples finance capital from the organization of production. In that respect, our argument is that the globalizing process now in motion is engendering a decoupling on a scale more encompassing, more powerful, and also perhaps more permanent than anything that has gone before. From a historical perspective, the capitalist circulation of money and commodities that began in earnest in the nineteenth century appears to be taking a new direction. Though this expansion was long in the making, dating at least as far back as the sixteenth-century Low Countries (Schama 1988), and its eventual trajectory was far from ordained, its dominant and world-dominating form only fully emerged at the start of the nineteenth century. Its developmental logic animated a process of perpetual expansion, punctuated by rounds of amplified globalization, with the result that capitalism engineered an increasingly interdependent worldwide political economy based in production and founded on a single, self-universalizing division of labor. While financial and mercantilist capital were present from the outset, and importantly so, this form of capitalism valued production over circulation, labor over risk, investment capital over its more speculative cousin, and the territorialized state over both more local forms of sociopolitical organization (especially world cities) and supranational forms. In what is probably a far too mechanistic metaphor, the swing of the economic pendulum that began with mercantile capital and then shifted toward production-centered, state-based capitalism is currently in the process of returning, albeit in a profoundly different way, to a more circulation-centered paradigm. This circulatory regime is less strongly tied to state and territory, more culturally diffusive, violent in ways that are both more abstract and more tangible, and above all, founded on a reorganization of the interrelationship between production and circulation. In this respect, the current round of

globalization is so significant because it is transforming the blueprint for restructuring a global political economy that has been dominant for two centuries. The touchstone and animating force of the contemporary global transformations is the reemergence of circulation as the cutting edge of capitalism. Circulation is the cutting edge of capitalism in a variety of senses. First, circulation is rapidly becoming the principal means of generating profit, absorbing the capital formerly direct toward production. The contemporary trajectory is that the surplus value attached to commodity production is declining while that attached to the circulation of knowledge, money, entertainment, and technology is increasing. Indeed, there is only one interpretation of a host of recent economic statistics (such as statistics of equity capitalization): capital is flowing out of and away from things tied to production and into those related to circulation. Second, the global expansion and power of capitalism are now bound up with its capacity to organize cultures of circulation. What is a new, consistent, and determining feature of these circulatory systems is the geopolitical redirection of flows away from the periphery of capitalism and toward its metropolitan core. Few things exemplify this more than the flow of capital itself. Third, circulation is the cutting edge of capitalism because the driving impulse behind technological innovation is the shift from production to circulation. The transmission of voice, image, data, and money, globally, accurately, and instantaneously, has become the primary mission, the business plan, of a large and increasing number of companies worldwide. Fourth, the cultures of circulation now in ascendance are the principal factors in reorganizing the functions of the state. More generally, they are leading to the reconfiguration of superimposed spatial scales, including and especially the emergence of ‘‘global cities’’—new urban imaginaries that are emerg-

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ing as sites or platforms for these globalizing circulatory systems. And finally, these circulation systems are leading to a transformation in the habitus of culture itself. Culture is moving away from singularity and territorial attachment, and toward ‘‘glocalization’’ and plurality, meaning that each site or locality internalizes other sites as a characteristic of its position and repositioning in the global marketplace. These transformations are concurrent and conjunctive, but not only are they not coordinated, the absence of coordination is one of their most distinctive features, leading to a present that is being defined by multiple and overlapping globalizing processes. Not surprisingly, there is escalating concern that these planetary circulations of capital will only exacerbate and further structurally entrench the already deep disparities between the economic fortunes of rich and poor nations, helping to worsen a global economy in which so many countries are in an ever-deepening crisis. George Soros, the financier who is both a participant in and a self-reflective observer of the economy, argues from experience that understanding the architecture and appreciating the power of the capital markets is crucial to understanding the present, both the economic politics of the metropole as embodied in the policies of the imf and the political economy of despair (Soros 2002). The Nobel laureate Joseph Stiglitz seconds Soros’s argument (Stiglitz 2002), criticizing the economics of the imf and noting along the way the complete absence of evidence that capital market liberalization spurs economic growth or helps to consolidate democracy. Outside the metropole, in places like the southern cone of Africa, the Islamic Mediterranean, much of south central Asia (especially Pakistan and Bangladesh), and increasingly more of a once more prosperous Latin America (especially Argentina, Bolivia, Venezuela, and Colombia), a deepening

economic crisis is coupled with a rapid deterioration in the ability of already enfeebled states to control their borders, quell violence and terrorism, deal with the aids pandemic, regulate markets, and provide answers to a generation of dispossessed youths who insistently ask why the world appears to resemble a slot-machine tilted against them. Why have so many nation-states continued to lose ground economically over the past quarter-century, and what is causing even those countries that not long ago seemed on the threshold of success (Argentina, Ghana, Egypt) to fall back? At least part of the answer has to do with the ascension and power of unregulated circulatory capital. Indeed, rapidly accumulating evidence more than suggests something transformative about this present, a quality that has made history again come alive even as the character of capital and the relationship between polity and economy resemble nothing in their pasts. The result is widespread agreement that these global streams of capital are transforming the economic and political landscape. But acknowledging the presence and power of finance capital as a defining feature of the contemporary landscape only underscores those concerns that have garnered far less analytical attention. What are commentators referring to when they talk about global flows of finance capital, transnational capital markets, or more specifically the power of financial derivatives? What are the images and institutions, the concepts and contradictions, the agents and agendas that organize these global flows of capital in a world-space that is virtual, transversal, and asymmetric? There is clearly an argument to be made that these features, by decisively transforming the space of events, shape the way in which state politics and governance can manage or domesticate the global money markets. This space is a true world-space because it transcends the distances and differences that once mattered, meaning

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that it can just as easily map life in the hinterlands of Mauritania and Laos as in the urban capitals of the United States or the European Union. This compression does not reflect the dissolution of space into promiscuous global flows, but rather its redefinition through the creation of new channels of connectivity. These lines in the world-space are virtual in that the capital accounts have no fixed physical address or home, existing only in an electronic idiom. This is critical because the oxygen of collective democratic governance is contestation and consensus between addressable agents and institutions interacting in a public political sphere. Without an addressee, the driving democratic ideals of the public good and accountability have little purchase, making it hard to insure that these processes of financial circulation do not degenerate into processes of beggaring one’s neighbors, especially those developing countries which, having fragile economies and weak banking systems, are unable to defend themselves. This world-space is also transversal in that the circulations of capital breach national boundaries as though they did not exist, money and credit flowing from one nation to another in unprecedented amounts. Certainly a chief characteristic of the recent period is that while the transnational trade of commodities has continued to inch up gradually, the transnational flow of capital has skyrocketed. And more than being simply a matter of economy, the circulation of capital translates into power. The space is asymmetric in that the flows continually cede power to institutions (such as money center banks) and individuals who define themselves from a Euroamerican perspective—a perspective that simply assumes the rest of the world to be a financial appendage to the West. These qualities suggest that the question of what global circulations of capital are flows into the question of how the character and culture of these circulations are implicated in the evolution of politics, globally. How, for example, does the emergence of

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

In terms of a theory of economy, there is an ongoing debate over the character of contemporary capital, focusing on how the structure of capital changes when it goes global. Derivatives and their culture of circulation go to the core of the controversy: for what precisely is it to risk, invest, or otherwise deploy free (not production-directed) capital in the production and circulation of capital itself—and to do so in ways that appear to be socially and historically specific to contemporary capitalism? To build on Schumpeter’s insight that the very success of a regime of capitalism creates the conditions for its own disruption, what would revolutionize the modern regime founded on an industrial, production-centered, model of capitalism? What would transform a regime of capitalism whose reality had become bound up with the sovereignty of the state? There is a rather compelling argument, explicitly endorsed here, that locates in the emerging cultures and sociostructures of circulation a critical source of the disruption, and a seismic force contributing to it (Lee and LiPuma 2002). Indeed, the implication of our central argument is that speculative capital, circulated through riskdriven derivatives, is currently restructuring the relationship between production and circulation by accelerating and ex-

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panding the spatial reach of the reproduction of capital. In looking at the rise of circulation, we are witnessing the rise of a transformed form or new phase of capitalism in which production is (and remains) a crucial, indispensable, but now encompassed moment of a globalizing system that is striving toward a different type of totality. This newly evolving totality appears more cosmopolitan than national in nature, though the ultimate response of nation-states to this challenge is still a work in progress. An initial reading of the growing number of commentaries on the global politics of the liberalization of capital markets underscores that they generally fall into three camps. For neoliberals, the trope of the free market is the centerpiece in the celebration of the open, universal, and triumphant circulation of capitalism’s essence—money capital itself in all its numerous forms. This ideology, which influences the way its adherents investigate international movements of capital, pays fleeting attention to their social implications and even less to their sociostructural foundations. Their main argument is that empowered capital markets are the touchstone of capitalism, that nowhere is the disparity between the metropole and the postcolony greater than in the development of capital markets, that this disparity is the dominant cause of the problems facing former colonies, and that accordingly they should liberalize their capital markets as quickly as possible. The neoliberal premise is that well-functioning markets eventually and inevitably produce better social results than any government social engineering, ‘‘better’’ being defined as tending to maximize individual preferences and prerogatives. According to neoliberal economics, a key solution to the social problems facing former colonies is the opening of their markets to Euroamerican global capital flows. From the distance and difference of the postcolony, this viewpoint could hardly be more neocolonial or ethnocentric, for it presup-

poses, inaccurately, that former colonies have the infrastructure, resources, and political stability to compete in the capital markets on an equal footing. For Marxists and critical theorists, capital flows are the trope that is invoked to characterize a skewed world where the epicenter of wealth generation seems to have seismically shifted from productive labor and the processes of turning raw materials into useful commodities to cultures of circulation built up, rather ominously, around intricate, omnivorous networks of technologically enabled financial instrumentation. The fear is that this species of capital, freed of political constraints imposed by state regulation, will redesign the world in its own distorted and alienated image, thus exaggerating already horrific disparities in wealth and health between the metropole and the lands that lie mostly to the south. Those on the left see in the specter of these flows of speculative capital a new means of advancing the western economic domination of others, as transnational nuclei of concentrated financial political power crystallize in spaces so virtual and electronic that their only addresses are encrypted web pages. This etherealness complicates the analysis for those who study domination: for with the rise of derivatives not only do the underlying social relations of domination appear to be abstract, but the surface relations now have their own form of abstraction. The rise of circulatory capitalism appears to have thrown orthodox Marxists and critical theorists into a tailspin, because each passing day’s news seems to emphasize that the traditional analytical tools of their trade—concepts like class relations, private property, material production, and also surplus value—may no longer be contemporaneous with themselves. The culture of financial circulation does not appear to concern or pivot on these concepts in any meaningful way, and recourse to them is distinctly unproductive. One way

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of dealing with this concern is to argue, with some traditional Marxists, that these new financial and speculative transactions signify nothing more than a new phase in exactly the same labor- and production-centered capitalism that Marx described. But this view only sidesteps rather than confronts the growing autonomy and authority of financial circulation and the sociostructures that make it possible. Whatever the theoretical posture or position, any attempt to theorize the present needs to explain why the market for financial derivatives mushroomed from virtually nothing in 1973 to become the world’s largest market in less time than it took Marx to publish volume one of Capital. Lying between neoliberal and Marxist views is a mushy middle ground manned by neo-Keynesians, who contend that capital markets operate efficiently only when the political process regulates them effectively. The understanding—endorsed and practiced by the U.S. Federal Reserve—is that state regulation should be sufficiently light and deft that it produces market efficiencies without producing sociological distortions (read: redistribution of wealth). The neo-Keynesians tend to share several key assumptions with the neoliberals, importantly that the economy is the hub of society and that well-tuned markets are effective means of producing and distributing social goods (such as education). When, as is increasingly the case, the neo-Keynesian perspective surfaces in reports written for agencies concerned with advancing economic development, it focuses less on the character of global flows and the structural foundations of circulation than on coming up with institutional solutions to stop the economic bleeding in the postcolonial world. In this brand of economics, the emerging global financial markets are like great rivers that the world must harness to capture their true benefits. None of the tropes are, of course, entirely wrong: the financial markets for capital do epitomize modern capitalism,

they certainly do intensify existing forms of domination and lead to new forms, and some form of regulation is surely a necessary counterweight to the threat of state destabilizations and systemic risk. Nonetheless, if the notion of global circulations of financial capital is to have real value analytically, it is necessary to theorize and thematize their instrumentation, the social ontologies that underwrite their production and circulation, and the visibility of financial instruments in the public political sphere. The magnified scale of these transnational financial flows in concert with the ever-increasing abstraction of the relations mediating them (in terms of both their central concepts and their quantification) foregrounds the question of what is at stake, politically and economically, in the ascension of a system of cosmopolitan circulation. As things currently stand, there appear to be trillions of dollars of empirical evidence that do not fit any established analytical paradigms. To put the issue politically, what kinds of politics and political culture are possible and permissible when capitalism shifts out of alignment with its surface-level segmentations, most notably the democratically governed nation-state? What kinds of domestic disturbances and instabilities start to appear when transnational agents and markets begin to exert control over economies once managed in and through the national state? Each day brings fresh evidence that transnational markets and institutions have begun to impose their will on nationally imagined economic spaces and the communities of economic interests that they once followed. Indeed, one can easily read the history of late-twentieth-century capitalism as a sustained attempt by financial capital to emancipate itself from the political system and its regime of regulation. It no longer seems realistic to think that we can adequately grasp the economy and culture of a globalizing world-space, the international reorganization of industrial production and

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

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Since the early 1970s there has evolved a global culture of financial circulation. This culture is being set in motion by the forms, particularly the many and varied types of derivatives, that circulate through it, and defined by a financial community willing to speculate on the risks associated with globalization—or, more precisely, the forms of connectivity brought about by globalization. Accordingly, however scholarly publications, trade journals, or the mass media sometimes portray it, the explosive rise of speculative capital, nowhere more evident than in the presence of the risk-bearing derivative, is not a historically short-lived economic aberration. Rather, the embodiment of speculative capital in the risk-driven derivative seems to reflect, amplify, and be determined by the ongoing transformation in the foundational sociostructures of a globalizing economy. Present-day financial derivatives might better be conceptualized as a primary stage in a new economic trajectory whose ultimate direction and implications will depend on how the global community, particularly the metropolitan nation-states, responds to their effects. So much more than simply economic, this transformation turns on the evolving relationship between the rising import of circulation and the development of the financial institutions and instruments that are currently reshaping the global circulations of capital.1 This observation gives rise to a structural and historical argument that draws upon but also extends the insights of an ensemble of globalization analysts, from fields as diverse

as accounting, political economy, postcolonial anthropology, and urban geography. The basic or founding argument is that the internal dynamic of capitalism compels it to perpetually and compulsively drive toward higher and more globally encompassing levels of production. This directional dynamic has engendered such progressively ascending levels of complexity that connectivity itself has become the significant sociostructuring value, leading to the emergence of circulation as a relatively autonomous realm, now endowed with its own social institutions, interpretative culture, and socially mediating forms.2 Though it went mostly unnoticed at the time, beginning in the early 1970s Euroamerican capitalism was compelled to reorganize itself in the face of growing competition from South Asia (the ‘‘Asian tigers’’). Industrial manufacturing of all types needed to discover newer ways to incorporate more marginal regions (particularly South Asia but also Latin America) to shore up contradictions created by its compulsion to overproduce commodities and over-accumulate capital. Within the metropole, finance capital flowed out of the old economy and into technology, eventually so indiscriminately that it fomented a technology bubble that burst just as the millennium closed. Beyond the metropole a global restructuring began to unfold, in which Euroamerican firms began to outsource an increasing share of the production of industrial materials and component manufacturing to the more advanced regions of the more advanced developing nations, such as Thailand, India, and Brazil. The hinterlands of the advanced periphery (parts of India and Mexico) as well as whole nations such as Pakistan, Guatemala, and Mauritania became outsourcing centers for raw materials and manual labor production. Photographs and reports of ecologically insensitive logging operations and dilapidated, airless factories cramped with young women sewing apparel for mass metropolitan markets seem

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to exemplify that reality. Still other countries, particularly those in sub-Saharan Africa and remote parts of Asia (such as Cambodia), are participating in this restructuring in only the most marginal and episodic sense, isolated from all but the most exploitative aspects of the global economy. No nation has so come to embody and exemplify all three dimensions of outsourced production, and on such a profoundly grand scale, as China, with a vast, determined, and rapidly growing manufacturing industrial sector, huge urban encampments of sweatshops, and far western regions that are economically isolated from changes happening elsewhere. China and to a lesser extent India appear to be the complex microcosms and chief beneficiaries of this restructuring of production. Moreover, from a financial standpoint, the over-accumulation of capital throughout the metropole inflicted a serious blow to the banking sector in particular and financial institutions generally because it could not but depress margins on forms of traditional lending—that is, lending to the declining industrial sector. In simple terms, the demand for capital has grown slowly while the supply has sprinted ahead, thus motivating the financial sector to seek out newer sources and streams of profit, such as teaming up with international agencies (such as the World Bank) to underwrite outsourcing operations and, not least, creating a derivatives market. The confrontation between a metropole redirecting capital and nation-states wedded to Fordist regimes of production created problems of connectivity immune to more traditional solutions. The proliferation and institutionalization of contractual outsourcing (an agreement to supply a product over a defined period) increased existing risks, such as counterparty and interest rate risks, even as it spawned new ones, such as currency and sociopolitical risks. What these newer risks had in common was that they could not be handled or offset by the conventional forms of insurance (such as hedging). For many

corporations doing business globally, the problematic and uncontrollable consequence of outsourcing was that exogenous events beyond their control or corporate intelligence, such as a steep shift in cross-currency rates due to the election of a socialist-leaning president, could seriously harm or destroy the profitability of an enterprise. Connectivity thus produced a demand for ways to deal with the effects of outsourcing. To help their corporate clients hedge against these risks, financial institutions developed derivatives and their markets. Because of their experience in similar markets, they recognized that for derivatives to function effectively, their markets needed to be liquid, the principals able to purchase and sell securities as their needs demanded. The need for liquidity provided a new avenue and opportunity for absorbing the over-accumulation of capital in the metropole, giving birth to institutions, such as hedge funds and new banking divisions, that specialized in managing what ‘‘the street’’ would call ‘‘speculative capital’’ (Saber 1999). Furthermore, as these pools of risk capital grow, as financial technicians craft new derivative contracts to expand the reach and maximize the leverage of speculative capital, and as new technologies permit instantaneous, around-the-clock trading worldwide, the power of such circulatory capital grows exponentially. The metropole’s need to deal with industrial overproduction motivated producers to develop newer and less expensive sites of production overseas, which in turn led to what at first glance appeared to be no more than a straightforward extension of existing commodities markets but quickly took on a life and evolutionary trajectory of its own because of its unprecedented capacity to absorb the capital over-accumulation. Production’s most important product is rapidly becoming the production of connectivity itself— that is, the logistics, communication networks, global financial instruments, and technologies used to assist and amplify

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connectivity. Programmable microchips, wireless communications systems, high-speed data transmission, and real-time inventory assessment are only a few of these technologies. The institution and implications of these financial instruments epitomize the way in which the circulatory process is redefining the production and possibilities of value itself. This process connects and separates localities and, more critically, compels other nations to globalize themselves by implementing what amounts to structural adjustment policies (especially exchange rate liberalization); such policies allow these nations to compete globally for capital and outsourcing contracts but also render them vulnerable to the interests of speculative capital. The new form of connectivity is both an instrument and an example of the reproduction of global economic asymmetries on terms so new, so materially different from anything that has gone before, that peoples, states, and movements the world over are searching for the sites of power and for the identity of those who exercise control. While it is unclear whether national states can create a supranational agency to rein in circulation, it is clear that any action will entail a newer and more cosmopolitan understanding. So whatever action the world may take, the first task must be to develop a socially critical conversation on what we are dealing with. Derivatives and Their Implications: A First Look

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

it is now instrumental in determining the wealth of nations. The first of these elements is called speculative capital. This is a huge, not production-directed, and continually expanding pool of mobile, nomadic, and opportunistic capital that resides in the hands of private hedge funds, leading investment banks (J.P. Morgan Chase), and the financial divisions of major corporations (GE Capital). These funds, banks, and firms are located in the cultural and mental if not always geopolitical landscapes of Europe and the United States. The second element is the financial derivative products. The institutions participate in global markets in many ways, and use of these products is the most significant. Such derivatives are the main instrument that speculative capital uses in the global marketplace. Financial derivatives are essentially wagers on changes in the cost of money (that is, interest rates) or the relationship among national currencies. From the viewpoint of the market, they appear necessary and natural because they are motivated by the risks associated with the connectivities lying at the heart of globalization. The final element is a newly minted and determinative conception of risk, new because risk has here become abstracted from the relatively concrete universe of uncertainties, and determinative because it constitutes the basis for the production and pricing of derivatives. The construction and combination of these elements are the molecular structure of what we call the culture of financial circulation. Although none of the three elements are themselves new, their combination, redefinition, institutionalization, and technological amplification are producing a fundamental shift in how the world economy works, characterized by the growing power and autonomy of the sphere of circulation. What makes this ascension of circulation more than economically significant is that it seems to be engendering what amounts

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to a planetary shift in power away from national state political systems, or perhaps political systems of any kind, and toward the global financial markets. Financial derivatives matter for two reasons. First, they are ‘‘the functional form that speculative capital assumes in the marketplace’’ (Saber 1999, 128); and second, they are the structural form that circulates and globalizes risk. Speculative capital takes this form because derivatives unify in a single instrument the objectification of various types of risk, the almost extraordinary leveraging of those risks, and the possibility of being used for both hedging and speculation. The process of objectification is central because derivatives are not concrete but socially imaginary objects that use the classifying powers of language to tie together sets of distinct and separate relations. So objectification denotes the process by which the contemporary financial community, operating much like an orchestra without a conductor, concretizes a complex amalgamation of social, economic, and political relations into a single recognizable object (like a derivatives contract) that then appears to be independent of these social relations because they are not part of the manifest appearance of the object or instrument. The derivative appears to be simply a contract that permits buyers and sellers to speculate or hedge. As the investigation unfolds, it will become clear that this appearance conceals a more complex phenomenon. Derivatives are also an optimal vehicle for speculative capital because they allow for extraordinary leverage, which confers two potential advantages. The first advantage is that a given amount of capital can control a significantly larger amount of an underlying asset. An investment bank can, for example, collateralize its control over ten billion Mexican pesos by putting up only a fraction of that amount, meaning that its wagers can have enormous economic reverberations. The leveraging of risk thus refers to ways in which the as-

sumption of risk through the derivative is subject to a multiplier effect because the amount invested is only some small percentage (as little as 1 percent) of the contract’s value. By using derivatives speculative capital can effectively chase the profits gained from assuming the risks associated with global connectivity. The second key advantage is that leverage can permit speculative capital to make bets so large (as on a specific currency) that it influences and sometimes determines the outcome of the bet. Although speculative capital’s use of risk-bearing derivatives has antecedents in the long history of international finance, it is also an economic technology whose reach and power are greater than anything that has come before—captured in the statement by John K. Galbraith that ‘‘no economic development of our time is so threatening as to its effect and so little understood as the great and unpredicted movements of financial capital between countries’’ (2000). Galbraith is alluding to the reality that the ascension of circulatory capital generates a double movement in which new forms of financial progress and freedom, as defined by the West, are inseparable from the rise of a new form of domination and disenfranchisement, generally and most visibly visited on others. To appreciate why this is so it is necessary to understand what happens when speculative capital, riding the back of and geometrically exaggerating the effects of corporate hedging strategies, is used in conjunction with the power of leverage to precipitously devalue the currency of countries such as Turkey, South Africa, Indonesia, and Argentina, to cite some recent examples. Almost overnight the cost of repaying debt denominated in dollars or European Currency Units (ecus) spirals upward, as does the cost of oil, technology, and new capital, igniting inflation, draining the nation’s exchange reserves, and a short while later causing numerous

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businesses to fail, unemployment to escalate, and the standard of living to fall. This is not an imaginary or overwritten scenario. It is simply the logical outcome of the Western logic of a globalizing culture of circulation, which maintains that in a competitive capitalist world there will be those who triumph and those who suffer.3 In the middle months of 1997, the world currency markets depressed the Thai baht by 30 percent, with the result that banks stopped lending, interest rates became exorbitant for those who could borrow while bankruptcy consumed those who could not, unemployment climbed to its highest level in twenty years, and workers took to the streets of Bangkok to protest their plight, leading to an imf agenda that forced Thailand to replace its constitution with one more adapted to global flows of transnational capital. The reformed constitution dramatically deregulated the national capital markets, opening them to foreign speculation. The economic debacle in Thailand—one of the dominos in what metropolitan commentators have repeatedly referred to as the Asian debt crisis but which is much more accurately described as the Asian U.S. dollar shortage—and the more recent currency crises in Turkey, Argentina, and Brazil have confirmed what many already suspected: that circulatory capital had already gone a substantial way toward subjugating production and manufacturing capital to its dynamic. There seems to be no way to characterize the real effects of speculative capital on Latin America, Africa, and other points on the economic periphery other than as violence. There is, indeed, mounting evidence that speculative capital is producing what people on this periphery experience as abstract symbolic violence. The violence is symbolic in the sense that it is not accomplished physically by means of military force or colonialism, though it may, of course, engender the conditions (such as impoverishment) that precipitate violent crime and warfare. The violence is also abstract in the sense

that it never appears directly; rather it mediates and stands behind local realities—such as interest rates, food costs, and the price of petroleum. In everyday life, people experience the effects of the market only through the products they can no longer afford, interest rates that make buying a home or improving a business impossible, the retrenchment of social welfare projects (such as electrification for rural settlements), and a decline in the standard of living. The violence is also more fundamentally abstract because it arises from abstract forms that are themselves constitutive of globalization relations, as we now know them. It is expressed as a conflict between local communities and a global system whose dynamic and trajectory lie beyond the reach of local insight and control. The appearance of a globalizing culture of financial circulation standing in opposition to the local communities that make up the globe is an expression of the underlying abstract basis of this modern form of violence. The violence is thus abstract in terms of both its opacity at the level of everyday existence and the oppositional character of the sociostructural relationship between the global and the local. The double abstraction of violence begins to articulate new forms of harm, terrorism, and absolutism; by detaching violence from sovereignty, it creates a new relation between the objective structures of the production of violence and its subjective internalization in the form of fear and anger. Violence is no longer linked in any simple way to the desire of states to monopolize it as one means of controlling the space of the nation and, correlatively, developing a narrative of mastery over that space. Rather, violence is becoming economically systemic in the sense that it is external to politics, law, or any claims shaped by the state or its citizen-subjects. It also differs from the economically motivated violence of the past, such as colonialism, in that it does not involve the inscription of new spatial relations, the subversion of local indige-

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nous property arrangements, forcible resource extraction, or the conscription of labor. Space is no longer the raw material of international violence, in that the violence of finance is so far-removed and remote from both the spaces of everyday life and the sovereignty of the states that it profoundly affects. All this suggests that abstract violence is intrinsic to the financial circulatory system, appearing in the covenants of World Bank loans and, more often, in the structural adjustment policies of the imf. Its effects are violent because it damages and endangers the welfare and political freedoms of those in its path, and does so without ever revealing itself. Lacking any sensible qualities, the harm brought about by, for example, exchange rate volatility seems to materialize out of thin air. The economic power that this violence confers on speculative capital in no way depends on popular awareness, let alone political consent; rather, the power is so abstracted and transverse that those in its path mostly intuit the existence of the derivatives market and speculative capital from the effects that it produces on their lives and livelihood. The violence that this power produces is not the result of an immediate, direct, or concretely social relationship, like that found on the Fordist factory floor. This violence acts covertly on the primary conditions of national economic existence, eroding citizens’ faith in the worth of their currency, the continuity of the economy, and the ability of those elected to provide for their social welfare. So it is surprising only to those cloistered within the metropole that throughout much of Africa, South Asia, the Middle East, and other southward locations there is a deepening anxiety and anger stemming from the power of the emerging derivatives markets to determine the quality of people’s lives, although these markets are unregulated, veiled, and beyond their political control.

The Direction of Analysis

Understanding the culture and sociostructures of financial circulation must begin self-reflexively; for the power of the financial system depends greatly on its power to produce the categories through which it is grasped. Most of the academic and all of the professional trading community use these categories. These categories, including those of risk, volatility, capital, and the derivative, define the objects and circumscribe the limits of insight by seeing financial circulation as a play of decontextualized and naturally occurring market surface forms. This cannot but lead to a naturalization of its conventions, an essentialization of its socially created ontology, and an externalization of its manifest social implications. The social and political power of financial derivatives are grounded in great measure on their appearing not to be social or political at all, but to simply express the mechanisms and profit goals of the market. The basic models for pricing options have a history that stretches back to the foundations of theoretical physics: investigations of Brownian movement, later applied to market practices. One consequence of this use of mathematical physics is that a decisive line is drawn between the conceptual foundations and social institutions presupposed by the market and the objects of economic analysis. Analyzing the market for the global flows of finance and speculative capital thus entails deconstructing the analytical work already done under the names of business economics, finance, and accounting. The grounding of the analysis is also complicated by the reality that derivative products and markets continually mutate to overcome whatever political defenses governments throw up in their path. In other words, the object of analysis is both moving and often socially misunderstood.

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To get a better appreciation of how financial derivatives work and what is at stake politically, we provide a social and critical account of circulation. By analyzing the role of financial derivatives in the imbricated networks of global circulation that channel the movements of capital, we seek to illuminate the socio-structural character of financial circulation, deconstructing the ways in which derivatives encapsulate, quantify, and speculate on conceptualizations of risk created in the very processes of circulation. The analysis will show that derivatives represent a new means of objectifying economic reality because they seek to capture and mediate the entire ensemble of relations that create the social through the concept of quantifiable abstract risk. They are relations about the relations of capital—a metalevel that steers the transnational circulation of finance capital. The metalevel arises from the creation of a doubly abstract notion of risk—that is, one that is abstract not only in the conventional sense of being removed from immediate ordinary reality (such as the risk of nuclear war or air pollution) but in the historically specific sense of objectifying different, globally distant, and incommensurable social relations as a single priced thing. Not only monetarily large—any transaction less than ten million dollars is referred to as a ‘‘skinny’’ trade—but enlarged through leverage and hidden from ordinary oversight, the derivatives financial markets exert extraordinary influence over the value of money and the cross-temporal relationships between economic and political action. This ascendant culture of financial circulation, the evidence suggests, coincides with the emergence of cross-border relations that compel states to redefine the terms of economic governance and is also a critical determinant of that redefinition. Through these concerns, we address a key dimension of the transforming and transformative articulation of economy and polity in contemporary capitalism. We take it as axiom-

atic that we must organize our methods to illuminate the relation between culture and economy, thus refusing to separate, as has been the practice, the operational and mathematical techniques of the derivatives markets from their social implications. The reason we refuse to disconnect social reality from economic technique is, as will become evident, that the mathematical processes are intrinsic to forms of objectification, concealment, and power through which these new financial tools are determined. The term ‘‘cultures of financial circulation’’ is intended to convey that the imbrication of the sociocultural and economic is so intrinsic to the reality at hand that any separation is a failure of theory and method. And of insight as well, for accounts that fixate on either side of the divide between socioculture and economy cannot but reify and misrecognize their object of study. We also take it as axiomatic that the analysis cannot reduce the relation between the culture of financial circulation and the cultures of governance to an elementary confrontation between market and states. Quite the reverse. Our understanding is that the sphere of circulation draws upon and reconfigures the underlying sociostructural relationships between capitalisms and cultures, in particular the socially structuring ontology of Euroamerican capitalism with respect to the political culture of governance. In the succeeding chapters, we provide a sociocultural account of the fast-evolving political and economic contexts surrounding the development of financial derivatives, highlighting the ascension and centrality of speculative capital and the notion of abstract risk. The account then locates derivatives by specifying their metric and temporal structures, especially with respect to a production-oriented, labor-based conception of the economy; and finally we suggest some of the hegemonic implications of this culture of circulation for the ongoing construction of democratic governance across the

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postcolonial divide. Indeed, it is becoming clear that the construction of connectivity is grounded in, and presupposes, a set of scalar asymmetries. We thereby raise a question we do not begin to answer, a question raised by those such as Jürgen Habermas (1996) and John Rawls (1993) who wonder and worry whether contemporary capitalism will coercively remake the world in its own image: What if the next hegemon, after Britain and the United States, is not a nation-state at all but the deep and misrecognized structures of capitalism itself ? To phrase the problem politically, given the cosmopolitan character of global flows of finance capital, on what terms is it possible to have governance without state government? How will the modern state, designed to deal with the conjuncture of production-centered capitalism and the nation, have to reinvent itself to be functionally adequate to a highly transversal circulatory capitalism? What happens, Paul Virilio (1995) wants to know pointedly and pessimistically, when the circulatory forces now in motion instigate a form of corruption that exists beyond the purview of politics as we know it and eludes all democratic oversight, thus exposing us to, setting the stage for, a yet-to-be-known and unprecedented fatal calamity, the planetary ‘‘circulation of the generalized accident’’ (90)?

2 Derivatives, Risk, and Speculative Capital

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t now seems well established that though derivatives are complex and virtual, and circulate almost exclusively in the cloistered world of investment banks, hedge funds, transnational corporations, and specialized global trading firms, it is impossible to grasp the character and influence of global flows of capital without a knowledge of how they operate within a culture of financial circulation. Derivatives have come to the foreground because they are the chosen instruments of a speculative and opportunistic capital that circulates globally, with worldwide implications, but is controlled by a rather small coterie of socially interconnected, mutually aware Euroamerican agents and institutions. The heart of globalization—or, better perhaps, ‘‘glocalization,’’ which captures the simultaneously large and intimate quality of its processes—is the ways in which the financial community organizes the money markets to pump capital through the global circulatory system. On the surface, derivatives seem to be extensions of wellknown financial vehicles, though at a deeper level they turn out to be considerably more complex than is generally acknowledged by conventional economic accounts. A derivative is a species of transactable contract in which (1) there is no

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movement of capital until its settlement, (2) the change in the price of the underlying asset determines the value of the contract, and (3) the contract has some specified expiration date in the future. There is no movement of capital or exchange of principal in the sense that neither party to the transaction makes a commitment to lend or accept deposits. These financial instruments are called derivatives because their value derives exclusively from an underlying asset rather than from any intrinsic economic value. Historically, the most common kinds of derivatives were futures contracts on bulk goods, such as corn, coffee, and cattle, where the value of a contract at any point was determined by the relationship between the cash price of the specific underlying commodity, the strike price of the contract (the agreed-upon price at expiration), and the time remaining until expiration. From their inception during the waking moments of capitalism until the end of the twentieth century, futures contracts were used mostly to hedge and speculate on the risk associated with agriculture and mining. These kinds of contracts, pioneered by seventeenthcentury Dutch merchants and subsequently refined by first the English and then the Americans, have provided the conceptual launching point for contemporary derivatives. Today, for example, foreign exchange rates, performative indexes (such as the nasdaq 100), government bonds, and credit risk can all serve as underlying ‘‘commodities’’ upon which contracts are written. What are considered relatively straightforward actively used derivatives, such as the Eurodollar contract, are traded directly on recognized exchanges (such as the Chicago Board of Trade). Beyond this, banks and other financial institutions devise and market more complex (sometimes one-of-a-kind) derivatives especially designed to meet the individual and evolving needs of their corporate clients. The financial community refers to this latter market as the

over-the-counter or otc market. Where exchange-traded derivatives are public and regulated, this larger and more rapidly expanding derivatives market is private and unregulated. Although the underlying asset can be almost anything that could be bought and sold in discriminated units, the most common derivatives are commodity futures, stock options, and currency swaps. A future is a promise to buy or sell an asset at some determined price at some specific time in the foreseeable future. To take a well-known example, a farmer who decides to hedge against a possible decline in the price of his crops at harvest could prospectively agree to sell them at a fixed price at some future time. The farmer is thus willing to forgo the prospects of higher prices and hence higher profits in exchange for a certain reduction in the risk of lower prices (especially prices lower than the costs of production, which would imperil the process of reproduction).While the farmer is hedging his risks and thus guaranteeing a rate of profit, the counterparty to the trade is speculating that the price of the commodity will be higher at the expiration date. One side of the same trade may be the soul of prudence, the other pure speculation. Options differ from futures in that they afford the buyer the right, but not the obligation, to buy or sell some underlying asset at a fixed price at a future date. For example, someone might purchase an option on a stock, such as ibm or even a firm that specializes in derivatives trading. This kind of option, referred to as a ‘‘call,’’ might give the buyer the right to purchase one hundred shares of the stock at $50 a share anytime over the next six months. The price of the option on that stock might be $5 a share, or $500 for a contract on one hundred shares. If at the end of six months the price of ibm had risen to $60 a share, the options buyer could exercise his or her right to buy 100 shares at $50, thereby realizing a profit of $5 a share (the $60 value of each share minus the $50 pur-

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chase price minus the $5 cost of the option), or $500. Ignoring transaction costs, the original $500 investment in buying the options would yield a profit of $500 and a rate of return of 100%. If, alternatively, the buyer had instead purchased 100 shares of ibm at $50 and then sold them at $60, he would have made $1,000 on his original $5,000 investment, for a rate of return of 20%. Conversely, if the price of the stock did not rise to $60 but instead fell to $49, the buyer in the second example would have lost only $100 of his original investment of $5,000. But the buyer in the first example would have lost his or her entire investment, the option to buy shares at $50 having become worthless. Thus options offer not only much greater potential rewards but also much greater risks. The difference in rates of return represents the leverage that the option provides. The pricing of an option turns out to depend on the riskiness or volatility of the underlying stock, asset, or instrument. ‘‘Swaps’’ exchange one asset flow for another, such as floating interest rates for fixed rates. In a now typical hedging scenario, a financial institution saddled with a large pool of fixedrate loans, such as thirty-year mortgages, can offset the risk associated with rising interest rates by transforming the payments into a variable rate loan with a fixed-for-floating rate swap. In foreign exchange markets, swaps entail buying a currency at the spot price and simultaneously selling it forward. Swaps are thus financial instruments that attempt to price the risks of connectivity itself, though they are not the only instruments for doing so. Derivative products are built up by combining futures, options, and swaps in innovative ways with respect to the underlier. Anything from currencies and interest rates to broadband and electricity can serve as underliers so long as they are volatile, produce risk, and can be given a price. The argument that underpins our analysis and differenti-

ates it from others is that the concatenation of these basic derivatives does not simply produce more complex and quantitatively different financial instruments, but engenders and represents a qualitative transformation in the way that speculative capital conceptualizes and globalizes the types of risk associated with globalizing processes. The explosive expansion of derivatives is due to their ability to be used for (and legitimated by) hedging but also to be open to almost unlimited speculation, to provide leverage, and to be adaptable to different kinds of connectivity. What particularly distinguishes derivatives from their underlying asset is their short-term perspective. Since derivatives have a fixed expiration date, to make a profit one must exercise them on or before that date. In contrast to the longterm perspective of production-centered manufacturing or industrial capital, derivatives are oriented toward maximizing short-term profits. The ideal is thus to discover pricing irregularities allowing for the arbitrage opportunities that are a speculator’s dream: the realization of riskless and instantaneous profits. These irregularities can and do arise because of distances and inefficiencies across markets, causing the same asset (or nearly the same asset) to be priced differently in different markets. For instance, if the Japanese yen is trading at ¥ 100 = $1 U.S. in Tokyo but at ¥ 100.1 = $1 U.S. in New York, a riskless profit could be made by simultaneously buying yen in New York and selling yen in Tokyo. Since these arbitrageable differences are small and fleeting, capitalizing on them requires the use of leverage and speed; speculative capital has to be mobile, nomadic, short-term, and flexible. Speculative capital can reduce risk not only by pricing the derivative accurately, but also by compressing as much as possible the time span of the transaction. Thus one of the basic principles of speculation is that the faster capital moves, the less risk is incurred. It should not be surprising, then, that derivatives

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have become the financial instrument par excellence for the development of circulation-centered speculative capital. Currency Derivatives: An Example

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Whether measured by dollar volume or the number of contracts executed, currency derivatives are a significant dimension of global finance, a point stressed in a manifesto from the International Monetary Fund (1995). The report indicates that corporate and institutional hedging enhances the translatability of currencies and capital while the speculative use of derivatives increases both the quantity and velocity of capital. From a purely functional viewpoint, the availability of speculative capital is necessary and helpful because it provides liquidity to the currency markets, allowing those who hedge to find someone to take the other side of the transaction. It also prompts the financial community to lobby for the unregulated mobility of speculative money. Though it is not immediately visible, at the core of the process is a selfgenerating and self-perpetuating circularity, a treadmill-like effect that as we advance the argument about the growing autonomy of circulation will turn out to be even more critical. The treadmill effect occurs because corporations doing business transnationally employ derivatives to offset the repercussions of currency volatility; the provision of sufficient market liquidity requires the participation of speculative capital which tends to amplify volatility; the amplification of volatility both increases the need for the corporations to hedge their currency exposure and the profit opportunities for speculatively driven capital. From this perspective, financial derivatives do not simply exploit price fluctuations around the mean (as conventional economics would have us believe) but actively create them; thus they do not simply express economic reality but are central to the creation of circulatory

capital. Historically, financial derivatives markets have expanded so globally and exponentially because they produce the conditions of their own necessity. As noted, for capital to be mobile it must be convertible across currencies, which in turn increases the necessity for hedging. Because virtually all ‘‘domestic’’ manufacturing depends on transnational outsourcing (for components, technoknowledge, assembly, financing, and so on), the shifting relative values of currencies have become critical determinants in the success of any venture. To deal with this the global market designs and circulates an extraordinary variety of derivatives, from simple ‘‘vanilla’’ to complex ‘‘hybrid’’ ones. A complex derivative might come about in the following way. A corporation that calculates its revenues in U.S. dollars signs a contract to provide ten million cellular phones a year for five years to a Brazilian subsidiary of a South African corporation at a unit price of three hundred rand. To fulfill the contract the American corporation agrees to license the interior architecture of the cell phone from a German-Italian corporation at twenty Euros per phone. The American firm also enters into an agreement with a Mexican manufacturer to provide casings for the phones at fifty thousand pesos per hundred and a contract with a Japanese firm for a package of components at two thousand yen each. The American firm will then assemble the cell phone, using parts that it manufactures through the licensing agreement with the European company and others acquired from the Mexican and Japanese suppliers. To finance the five-year contract, the American corporation draws upon a secured revolving line of credit that it maintains with its money center bank, essentially taking out, at least from a manufacturing standpoint, five separate loans over the life of the phone contract. The American company calculates that at current exchange rates for the currencies involved and at the prevailing interest rate, it can anticipate

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anywhere from 20 to 25 percent margins on deliverable cell phones. The American company projects that it can successfully arbitrage labor costs (because of the state and stability of the labor market), arrange to buy the phone’s components and rent the licenses at profitable rates, and borrow capital on reasonable terms. The caveat is that the profitability of the contract, and thus the health of the company, depends on having exchange and interest rates remain relatively constant for five years. This was a reasonable gamble when the metropole fixed or pegged cross-currency rates and domestic interest rates barely fluctuated, and then only very slowly. During the 1950s, for example, it is likely that a firm in the United States would have considered that the costs of hedging its positions canceled out the possible advantages from reducing its risk. This was because rates were stable and transaction costs were high. However, in the contemporary global economy it is improbable that exchange rates will remain constant for five days, never mind five years. Corporations that participate in international transactions must either accept uncertainties that could potentially wipe out future profits or offset their risk by dipping into the derivatives market. There are two ways to accomplish the objective. The first is to have the financial arm of the corporation make a coordinated set of individual transactions on the established exchanges, such as globex or eurex. The firm would then establish a position that would swap variable rate debt for fixed, thereby guaranteeing the cost of money, as well as opening positions that froze the exchange rates of rand, yen, pesos, and Euros in respect to the U.S. dollar. The price of the contracts would reflect the risks that the markets ascribe to the individual transactions over the specified time. Marked to the full value of the cellular phone contract hypothesized above, the American firm might need $250 million in currency con-

tracts to hedge fluctuations in the rand, and $200 million in contracts for Euros, pesos, and yen, plus a contract to offset the amount borrowed to finance the process. In other words, a manufacturing contract worth $250 million could easily motivate more than half a billion dollars in derivatives trades. For the corporation, derivatives trading itself may generate a risk, because on established exchanges the liquidity and duration of currency contracts are inversely correlated, meaning that to hedge its exposure to foreign currencies for five years the corporation in the example above would have to roll over or renew a series of shorter contracts. The strategy of rolling over contracts may result in losses if the nearby price settles below that of temporally deferred contracts. So as an alternative to initiating multiple coordinated or linked contracts, the corporation might enlist the service of an investment bank that would construct an otc derivative. Rather than let the pooling and distribution of different risk profiles take place at the level of the market, specialists in derivatives would integrate all forms of risk into a unified instrument valued at about $500 million. In exchange for a fee, the intermediary would create the instrument and guarantee both sides of the transaction. The bank’s derivatives specialists would identify the types of risk likely to be encountered (such as currency and interest rate), quantify their level of potential risk or volatility, determine a price or premium predicated on these calculations, and then market pieces of the derivative to hedge funds and other subscribers, including other divisions of the same bank. In practice, banks often warehouse one side of the transaction as they line up potential buyers. Exchange-traded derivatives and the otc versions are themselves often linked because the investment house may well initiate contracts on the exchange to balance its risk position until it completes the sale of the derivative. The example underlines the extent to which the universe

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of financial derivatives is an expanding and generative set of strategies for dealing with connectivity—that is to say, a financial situation which brings different and distant entities into conjuncture. In the example outlined above, there is no intrinsic or social connection between the architecture of the cell phone, the semiconductors, the plastic casing imported from Mexico, and the kinds of money used in the transactions except that all these elements are incarnations of the commodity form. The use of derivatives is an attempt to mediate these forms of risk-producing difference and distance. Moreover, the derivative creates a form of connectivity not only quantitatively greater but qualitatively different from that generated at the level of production. There are numerous permutations of the example presented here and no formalized limitations on the range of possibilities. Indeed, as customers’ needs in the derivative markets ramified, many financial concerns scoured the university system to enlist those fluent in mathematics, and then gave the ‘‘quants’’—as these mathematicians are called—a free hand in engineering new hybrid derivatives. An absence of codification and steering mechanisms in the virtual, transnational, and unregulated environs where derivatives thrive opens the door to improvisation and the construction of derivatives whose circulatory complexity is so great that analysts can model the behavior of the financial instruments only by discounting precisely those causes of volatility that might eventually prove lethal (chief among these are counterparty and country risk). In this environment, derivative dealers typically represent their practices and the organization of the derivatives market in the language of what might be called intuitive quantification. Those who buy and sell take it as axiomatic that their exposure to the market predisposes them to sense, to anticipate, what is quantitatively correct even before it is mathematically

confirmed, just as the regular and institutionalized circulation of quantitative analyses of the market serves to train their senses. The way in which dealers estimate the ‘‘right’’ price for a contract assumes that their experience of what happened to similar past contracts translates into an accurate prediction.While the market appears to be based solely on contractto-contract relationships objectively guided by statistical calculations, it also includes an entire culture of speculation, guided by an inculcated sense of the playing field or market, through which those who trade and market derivatives intuitively assess the riskiness of a given contract. Pragmatically, no matter the math, neither the designers nor buyers of a customized (otc) derivative product can ever positively determine or predict the eventual riskiness of an individual, situationally specific instrument; buyers must depend on their trust and confidence in the intuitive quantification abilities of designer-sellers as expressed in their accumulation of knowledge and know-how. So although the market has no language for it, the derivatives market has a kind of quasi-objective aiming. Translated onto the global stage, this creative presence is one of the unspoken ways in which the most powerful political economies impose their presence on others. Analyzing Derivatives

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

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speculate in derivatives markets. A second group of principals are investment banks (or bank-like firms) that fabricate and market derivatives for their corporate clients and augment liquidity by making an aftermarket for derivative products. Traders for these investment firms often seek to hedge their positions but also speculate, usually in the interbank market. In addition, the financial arms of transnational corporations that hedge have also become active in fabricating and marketing derivatives products. The third type of principal is hedge funds that pool the investment contributions of wealthy clients: fund managers seeking opportunities for both arbitrage and directional bets on any market, from the stock market to foreign currency exchanges. Since hedge funds are primarily engaged in speculation, the investment community imagines their market role as that of providers of liquidity. From the perspective of political economy, there are a handful of critical realities or dimensions to the organization of financial derivatives. The first is that derivatives are functionally indifferent: the same instruments that agents use to hedge or manage risk can also be used for speculation. This functional indifference exists because there is only a pricing relationship between the underlying asset and the derivative contract. The second reality is that while in theory any company, person, or state anywhere in the world can buy and sell in the derivatives markets, in practice only those in the metropole have the socio-financial contacts, technical knowledge, and requisite capital to participate on any significant scale. The result is that the creation and control of the globally influential derivatives market rests almost entirely in metropolitan hands. The third reality is the growth and spread of a culture of speculation throughout the metropole (Strange 1986; Harvey 1989). This growth and spread do not indicate that market professionals have somehow become much more will-

ing to rely on good luck or fortune. Instead, the motivating force is a culture of speculation centering on a matrix of beliefs, dispositions, and institutional acceptance that encourage participants to focus on risk-reward ratios rather than on absolute risk—this focus being part of an understanding of what today’s portfolio management is all about.1 The result is that banking firms, corporations, and hedge funds have come to envision speculation as an essential component of a well-balanced portfolio. The fourth reality is that these principals now control somewhere in excess of a trillion dollars in nomadic and mobile capital. Edwards (1999, 192) estimates that hedge funds alone oversee approximately $300 billion of capital. In practical terms, the enormous size of this pool of capital available for speculative purposes means that if trading in one direction, such as shorting of a particular currency (that is, betting against it), gains momentum (‘‘momentum trading’’ is itself an established strategy), it can overwhelm the reserves of even large and economically sound nationstates. The final reality is that the fundamental structural features of the derivatives market favor economies of scale. And the consequence is control concentrated in the hands of the ten largest Euroamerican institutions. Current wisdom is that this select group of firms makes the market for approximately 90 percent of all financial derivatives traded. Their overwhelming institutional and technical advantage, which lies at the heart of circulatory capital, breeds a new form of vascular control over the extremities of the global capital network. Because derivatives are designed to deal with the risks produced by connectivity, and because these risks continually change in response to the evolution of globalizing process, derivatives are themselves constantly changing. The participants of this ascending and virtual financial community imagine, quantify, circulate, and also continually discard

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newly fashioned derivatives in a kind of experimental practice aimed at creating connectivity. In this respect, derivatives are forms of innovation and improvisation designed to generate new possibilities of interconnectivity and translation across politically maintained economic frontiers.2 This is particularly true with respect to the over-the-counter market. The otc market has no location or address, and the contractual parties can be anywhere in the world; it has no defined membership and thus the identities of the contracting parties need not be known; there are no requirements to trade and thus no rules or regulations; the market has no standardized products and thus no securities boundaries—derivatives can be traded simply or embedded in other (frequently less arcane) securities. The only recognized way to impose rules on what is currently the planet’s largest market is to aim at market participants in each national jurisdiction; but this is exactly what most central bank regulators now recognize as an all but impossible task. The compelling point is that conceptually and operationally, state-based solutions are inadequate in principle because it is not the relationship between states that is at issue, but transversal relationships between forms of capital whose modes of valuation deny their socio-political character. If, as many suggest, capitalism is beginning to slough off the shell of the nation-state and matriculate to a more cosmopolitan expression, this process is inseparable from the development of circulatory structures. What is sometimes misunderstood is that though the new communication technologies, exemplified by satellite-linked internet cafés in small cities in Africa and South Asia, create an equality of access to information at the level of the subject, the socio-structures and cultures of circulation also, and at the same time, engender an objective dependence that inhabits the very conditions of connectivity itself, so that individuals’ acts of subjective freedom are

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

Why should arcane financial practices and products, especially those confined to spheres of circulation, matter globally and to those who have never even heard their name? One might respond first simply by noting the size and growth of the market. In the beginning no one kept exact score because founders and first followers never imagined that they were launching a new era in the history of capitalist finance, and that they were the moving parts in a reinvention of the financial field. In 1970 the yearly valuation of financial derivatives—principally those devoted to interest rates and foreign exchange—was probably only a few million dollars. The sum swelled to about $100 million by 1980, to nearly $100 billion by 1990, and to nearly $100 trillion by 2000, when about 1,500 million derivatives contracts were traded (BIS 2000). By 1999 bulk commodities, for centuries the mainstay of the futures market, accounted for no more than 0.6 percent of total contracts, whereas financial derivatives had risen to approximately 90 percent of all contracts (Taylor 2000, 11). There is more to this $100 trillion than the number 1 followed by fourteen zeros. Consider that according to the crystals of economic history, it is approximately the same as total global manufacturing product for the last millennium.

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Or that deposits and transfers of that magnitude must be electronic, notional, and virtual because the amounts being circulated exceed the total quantity of the world’s physical currencies. A determining feature of derivatives and their circulation is that they do not involve property, either in physical or fetishized form (such as a stock certificate).3 The purchase of a derivative grants the buyer an electronically registered future claim in trade for the seller’s ‘‘right’’ to electronically transfer and register a notional credit equal to the quantity extinguished in the buyer’s account. The trade is mediated by money in a newly created self-mediating form, engendering, as it were, a currency not directly tethered to any national economy or regulatory structures. In contrast to manufactured commodities, human labor and materials are inconsequential in the creation and valuation of derivatives. The gargantuan size of the derivatives market, especially for derivatives devoted to interest rates and currencies, creates a culture of circulation in which no nation-state, not even the United States, can regulate the exchange value of its currency, the character of its reserve assets, or the transnational movements of capital. The term ‘‘globalization,’’ which entered the glossary of the metropole in the 1990s, acknowledged the power and autonomy of the forces of circulation unleashed worldwide in the 1970s, which were now able to turn on the West the same transformative forces that had already been unleashed on the multipolar periphery. For the metropolitan nations, the derivative markets came to function as a kind of auto-imperialism, displacing more national, recognizable, and regulated forms of financial commerce. The second reason why the financial derivatives markets have taken on a global importance stems from their effects on the former colonies and more generally what we have called the multipolar periphery (the regional clusters, such as those in central Africa, of marginalized nations). The character of

financial circulation directly tilts and distorts the world economy in favor of the metropole (Soros 2001). This leads the economist Joseph Stiglitz to observe that anyone who thought that ‘‘money would flow from the rich countries to the poor,’’ that the metropole would assume ‘‘the lion’s share’’ of the deep systemic risks associated with currency and interest rate volatility, or even that ‘‘the global markets were efficient,’’ would be sadly mistaken (2001, 24). A growing body of evidence suggests that the culture of financial circulation is more than incidentally responsible for the expanding disparities between rich and poor and that understanding its global dynamics is essential to understanding the underlying causes of immiseration and conflict, the conditions for the rise in the postcolonial world of non-state, militia-like fundamentalisms and war machines. The clearest effects are the ways in which a derivatives market of this magnitude can influence exchange rates between hard and soft currencies and thus the global purchasing power of a country’s currency, a relation that becomes especially crucial when its economy is struggling and the state is weakened. The telling question is what happens when speculative capital uses the power of leverage to sell or short a given currency on a significant scale, or, conversely, uses the same power to purchase large quantities of a given currency. The effect of the first tactic is to dramatically reduce demand for the currency. So as momentum builds and more capital speculates on the short side, thus betting against the currency, the currency undergoes a precipitous, and sometimes enduring, devaluation. Such has been the economic fate of Turkey, Thailand, Malaysia, Indonesia, South Africa, Brazil, and Argentina, to cite only the most recent examples on an ever-expanding list. These devaluations are not simply technical events but social calamities that cost businesses, jobs, and lives. The effect of the second tactic, especially when specu-

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lative capital is closing out its short positions, is to continue to induce volatility in the currency, making it all but impossible for local export producers to organize their production schedules and central banks to manage the supply of money in response to the needs of the domestic economy. The threat of devaluation is perhaps more important, because it is more general, than instances where precipitous devaluation has actually occurred. Especially across the postcolonial world, the persistent reality that a nation’s currency may suddenly come under attack all but compels it to maintain substantial dollar reserves, often amounting to a significant proportion of total national assets. Holding these liquid reserves is inherently deflationary and anti-growth, not only because they represent money not used to stimulate the economy but also because they prevent nations from investing in those areas, such as education and business loans, that boost future economic output. Global circumstances, over which these governments exercise no control, compel them to remove local capital from food processing, manufacturing, and other commercial activities to appease the gods of circulation. This creates a ripple effect through the economy, because depressed economic activity frequently leads to overwhelming numbers of underemployed, directionless youths who, in many of the large and swelling cities of the postcolonial world, gravitate toward violent crimes and theft. The threat of violence in turn motivates local owners of capital to direct their expenditures to guarding existing output, such as hiring a private police force to protect their businesses and homes, rather than investing in new output. The result of high volatility in transnational markets is that in many parts of the world, people can only look at the wealth of the global economy from its ‘‘immiserated exteriors’’ (Comaroff and Comaroff 2000, 315). Moreover, the investment by the periphery in the curren-

cies of the center also has the effect of underwriting the valuation of the dollar and Euro. The negative repercussions of having highly valued metropolitan currencies are more numerous and widespread than the benefits, in part because the governments of the United States and the European Union offset the advantage that peripheral economies gain from their low cost of labor, as measured in dollars and Euros, by subsidizing American and European producers and erecting complicated trade barriers on agricultural goods, textiles, steel, and other products. Two examples of the problems encountered will be sufficient to make the point. The first concerns the production of knowledge itself. For the intellectual communities, universities, and research institutions throughout the postcolonial world, the current cost of books, journals, computer programs, laboratory equipment, and other scientific goods is so high as to impair the possibility of conducting research. Throughout the developing world, libraries, scholars, and institutes can no longer afford to purchase the scientific materials that are needed to facilitate research, including the kinds of studies that aid these nations in dealing with their immediate economic and political problems. When young professors find that membership in a professional organization such as the American Political Science Association or the American Economic Association eats up almost an entire week’s paycheck, they are marginalized, their voices censored, no longer able to challenge (and enrich) the ideological content of mainstream Euroamerican ideas. An equally telling, certainly more immediate, and potentially more disastrous impact is that nations poor in dollars and Euros cannot afford to buy the medical equipment, surgical instruments, supplies, and pharmaceuticals necessary to maintain, let alone improve, their health care systems. What is more, the metropolitan nations are now using

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their exchange rate advantages to lure the best health personnel, especially experienced nurses, from the advanced developing nations. (Exchange rates are relevant because nurses and other workers use their earnings in dollars to send some money home, as well as to accumulate a nest egg that they will eventually repatriate.) An example: according to the U.S. Immigration and Naturalization Service, American hospitals recruited over two hundred South African nurses in 2001, although South Africa already suffers a serious shortage of experienced nurses worsened by the aids pandemic (ins Statistical Yearbook for 2001). The logic is devastatingly simple. When people become ill but lack adequate health care, their productivity and thus the productivity of their nation as a whole declines, as does their overall standard of living and quality of life. There is a deeply disturbing quality to the directional dynamic engendered by the social structure of financial circulation. To guard against a downdraft in the value of their currency, the world’s marginal economies must maintain reserves in metropolitan currencies, particularly the dollar. This is in effect a transfer of wealth or subsidy from nations that are southern, struggling, and peripheral to the metropolitan center. The funding of these reserves added to the cost of debt service generates net capital outflows that exceed direct external assistance by some $50 billion a year (Held 1995, 256). Moreover, the metropole does not distribute these inflows of wealth equally to all its own income classes; on the contrary, the wealthiest 1 percent receives a disproportionate share. Then, seeing a dearth of economic opportunities in the local equity markets, this group increasingly turns around and invests its new capital in hedge funds, these funds made attractive partly because of their success in the speculative trading of financial derivatives (Edwards 1999). The general metropolitan view is that this directional dynamic is simply

the logical unfolding of a globalizing culture of circulation, a competitive capitalist world in which there are those who triumph and those who suffer. Yet seen from the dark side of globalization, can anybody in the United States or the European Union seriously still wonder why those in the developing world should harbor anger or resentment toward them? Financial derivatives in all their technical sophistication matter because although they may appear too cloistered and arcane to have anything to do with great and burgeoning disparities in wealth between the metropole and the developing countries, in reality derivative markets are instrumental in producing these disparities. In attempting to offset the local forms of risk engendered by a circulation-centered, post-Fordist economy, the globalization of a financial regime shaped by speculatively driven flows of capital threatens systemic risk to the banking system and, more generally, the universal risk that the changes being imposed on the nation-state by these circulatory structures will generate a gap between the rich nations and poor so chasmic that the twenty-first century will witness even more violence and political instability than the twentieth did. The Character of Risk

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

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sees risk as a natural object. For the most part, those who base their calculations and global strategies on this conception of risk, both in financial circles and in much of the academy, see it simply as the contemporary elaboration of a universal confrontation with uncertainty. The idea is that humans everywhere, from time immemorial to the present day, have sought to master and manage risk, attempting to offset uncertainty and forecast the future to increase the chance of economic success. This perspective treats economic interests and risk as wholly natural, universal, and mutually corresponding dimensions of human behavior. The epistemological premise underlying this perspective is that though risk is inherently connected to a time and a place and inherently circumscribed by the here and now, it is an acultural and ahistorical species of knowledge. The present is different only in the sense that science is providing new technologies to tackle the problems of risk prevention, calculation, and pricing—that at least is the standard narrative endorsed by mainstream texts on derivatives. This view of risk derives from the natural sciences. So it assumes that the financial community can grasp risk by using natural science models, such as, literally, the equations that capture the collisions of atomic particles. This natural science view of risk is extremely appealing because it allows for the use of mathematical statistics, which, in turn, allows the financial community to price derivatives precisely. But precision is very different from accuracy, and however appealing the natural science model may be, using it is a disabling mistake. From the start, this view can never grasp the social character of the risks that derivatives attempt to mitigate because it unquestioningly brackets twin issues: the social embeddedness of risk and the process by which agents construct risks as social facts. More specifically, the natural science view elides the social ontology underwriting its objectification of

risk. The issues of specificity and objectification will turn out to be important, because the risks that derivatives objectify and their socio-structural functions are historically specific to the emerging culture of financial circulation. The financial derivatives now in use are based on a notion of abstract, monetized risk that organizes the circulation and pricing of derivatives and thus the activity of speculative capital. Yet the very process that prices and commodifies also conceals its own social character, making more difficult the task of visualizing the systemic risk of having a system based on abstract, monetized risk. The people and institutions that participate in the derivatives market, as well as the market itself, embody the perspectives and promote the interests of Euroamerican capitalism. They generally believe in conservative politics and neoliberal economics, a world where capital circulates with a minimum of political intervention. They hold the view that as a result of economic competition, some individuals, institutions, and national economies are successful and become richer, others tread water, while still others, indeed the majority, lose and are further impoverished. This economistic and empowered worldview has no place for concepts such as market failure, economic equality, and social justice; and so it has a jaundiced response to a government’s efforts to achieve these goals. The economistic worldview that flows from the character of derivatives trading takes it as axiomatic that because capital market liberalization has proven to be the best policy for the metropole, as exemplified by its economic dominance, then it must be the best for even the most slowly developing nations. The agents and institutions that trade derivatives almost universally subscribe to a conservative reading of the political economy derived from their deep immersion in the Euroamerican neoliberal culture of capitalism and governance. Their view of governance embodies the social ontology

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of a procedural perspective (as articulated and exemplified by mainstream American political science) that narrows the social role of government to a politics of personal choice, individual rights, and safeguarding institutions. This economistic view is so deeply inscribed, shared, and accepted by the members of the financial community that it constitutes their basic template or model for behavior. And it leads those who control the capital markets to devalue the currency, jeopardize the economy, and in this way undermine the government of any nation that has an alternative vision of what governance can and should be. The technical reason for this is that the pricing of a derivative must always take into consideration what the market refers to as counterparty risk—that is, the likelihood that one of the parties to a contract will default or restructure the terms of its execution, thereby damaging or destroying the contract’s value. While the market always prices derivatives exclusively in terms of stochastic probabilities of movement in the value of the underlying asset, it must at an earlier stage also include an assessment of the totality of risks associated with a particular sociopolitical context. This assessment is done under the rubric of political or country risk. It reflects the reality that not only can either party to a transaction default, but the market can interpret political changes (such as the election of a leftist party) as compromising the authority that guarantees the integrity of the underlying asset. Financial derivatives thus always include an assessment of the sociopolitical and economic conditions of the government that issues the currency or bonds. The market pricing of such contracts internalizes a probabilistic assessment of how governance might change over their life span, and this assessment relies on social and political knowledge. The pricing of derivatives thus depends heavily on strate-

gies of representation, because the calculation of risk across localities always involves evaluations of others’ political culture and practices of governance. Textbooks on derivatives rarely or barely mention these strategies of representation because there is no way to shoehorn them into a model that sees itself purely in stochastically probable terms (Stigum 1990; Taylor 2000; Hunt and Kennedy 2000). However coarsely conceptualized, representations about the political persona and culture of Indonesians, South Africans, Mexicans, Turks, Malaysians, and so on are built into the pricing of derivatives. For example, the market incorporates a risk premium into currency contracts for Indonesia because the country is considered ethnically divided, politically unstable, and above all Islamic and thus prone to sudden and irrational outbursts of fundamentalism; the same market penalizes the South African rand on the understanding that any Black-governed African state is part of a long lineage of endemic failure; while contracts for Latin American currencies generally include a premium for social instability caused by increasing poverty, a history of left-wing politics, and corruption that the market presumes is part of the physiology of its governments and its people. There is here a kind of telescopic process in which the electronic media reduce extremely complex local realities to encapsulating images that become instantaneously global— violence initiated by Islamic separatists in the southern Philippines and in western Turkey, marches by workers in Thailand and South Korea protesting against the government’s labor policies, the uncontrolled spread of aids in the Kwa Zulu Natal province of South Africa, revolutionary activity throughout rural Colombia. The culture of the financial markets, animated by Western ideology, turns each of the circulated images into a universal icon of a certain species of locality. The markets then affix specific and different sets of

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summary images to each locality in an effort to quantify the counterparty risk inherent in its politics. Nothing exemplifies the summary power of these representations of place more than the market’s internal notion of contagion—its operative understanding that financial turbulence in one country will invariably infect all others of the same type. Given the circularity of such prophesy, the economic arc of derivative trading is often like a seismological map: an initial financial shock foments others, with the most powerful regional systemic consequences deriving not from the origins of the original upheaval but from the fear and fallout, the victims those nations that appeared to be straddling economic fault lines when the monetary turmoil occurred. The recent record demonstrates that a monetary problem in, for example, Malaysia will within days spill over into Thailand, Indonesia, Singapore, and Vietnam—the metropolitan financial markets lumping all these nations together by means of the shorthand ‘‘emerging markets.’’ Once these images of the local have become instantiated descriptions of an imaginary and imputed totality, they are reinserted into the localities through derivatives in ways that cannot but reshape their economic and social life. The resulting summary image thus becomes a reality so immanently real that governments are deposed, businesses go bankrupt, and sometimes lives are lost. For an example of how this works, we need look no further than the Brazilian presidential election of 2002. When it became clear that Luiz da Silva of the Workers’ Party stood a reasonable chance of being elected—to underline its identity the American press referred to it exclusively as the socialist or leftist Workers’ party—the principal players in the Latin American financial markets began to sell and short the Brazilian currency. By the time da Silva was elected, the reale had depreciated by more than 30 percent against the dol-

lar and Euro. The secretary of the U.S. Treasury, Paul H. O’Neill (the retired ceo of a corporation that participated in the derivatives market), predicted that the derivatives markets would continue monitoring da Silva’s performance until he could ‘‘assure them that he is not a crazy person,’’ hell bent on economic redistribution and social justice (quoted in the New York Times, 29 October 2002, 3). During the electoral campaign, da Silva’s opponents cited the reaction of the derivatives markets as a compelling reason to vote against him. There was a certain economistic logic in their recommendation: because 50 percent of Brazil’s internal obligations are tied to the dollar, the country’s overall debt obligation rose sharply as a result of the devaluation instigated by the derivatives markets, to more than $250 billion. Two effects are immediately obvious. First, a substantial portion of the money that da Silva might have used to improve housing, sanitation, and education in the cities’ massive slums (or favellas) would now need to be siphoned off to meet debt obligations. Second, out of fear of further roiling the financial markets, da Silva became greatly handicapped in his attempt to ameliorate economic and social injustices, which is precisely what the citizens of Brazil elected him to do. In other words, metropolitan currency markets are having an enormous effect on domestic politics and policies, with the locus of power clearly shifting from the sovereign state to the globalized market; and if this is happening in the world’s ninth-largest economy, think of its implications for all the smaller ones. Circulation and the National State

Recently, the director of South Africa’s bureau for economic research observed that something appears to have completely uncoupled the state of a nation’s manufacturing and productivity from the exchange rates of its currency (Cauvin 2001).

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Frankel and Rose (1995), writing in the Handbook of International Economics, argue that ‘‘macroeconomic variables’’ no longer appear to have ‘‘consistent strong effects on floating exchange rates’’ (1709).Work by Flood and Taylor (1996) openly suggests that even a loose connection between the ‘‘macrofundamentals’’ of a nation’s economy (commodity production and asset values) and the value accorded to its currency is a relic of a Bretton Woods past. The immediacy of the uncoupling demonstrates that analysis must come to grips with the interrelationship between capitalist production, global circulations of currency, and the nation-state form. The peculiarity of this relationship is its ‘‘quasi-performative’’ nature: financial derivatives help to create the culture of circulation that they presuppose for their circulation. That this relationship is socially and historically enframed shows that it is performative and pliable, transforming with respect to a totalizing structure that it is partly responsible for creating. This matters critically because a founding principle upon which production-centered capitalism is based is that there exists an indelible connection between money, production, and the national state. Nothing epitomizes this triangulation more than the creation and regulation of a national currency to foster domestic production, as exemplified when a central bank (such as the U.S. Federal Reserve) regulates a nationally specific supply of money to stimulate domestic production. There is every reason to think that the emerging culture of financial circulation is instrumental in fracturing this relationship. Under the terms and logic of speculative capital, the price of a currency as measured in other currencies is based on the market for risk-bearing derivatives. This market has nothing to do with national production, the labor of any nation’s citizen-subjects, or cultural values such as family, freedom, and dignity. Spatially, the state maintains a semblance of control over its currency only in the domestic sphere. Cen-

tral banks and other institutions of governance now appear too territorially bound, too financially undercapitalized, or both to exert political control over the circulatory processes in train. There is, accordingly, a decomposition of the triangulated relationship between the national currency, the national economy, and the sovereign national state. This is the relationship that is historically specific to, and has been a foundation of, Euroamerican capitalism, particularly since the midnineteenth century.4 So what has constituted the foundation of national capitalisms—the relationship between production based on a national labor regime, a national currency issued and guaranteed by the state, and the territorial state made sovereign through its capacity to regulate a bordered economy—now appears to be stalled in the past. The Secret and Science of Derivatives

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

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the operation of derivative markets is given in the past tense. The temporal lag means that the disclosure of a proprietary trading strategy and its effects mostly occurs posthumously, when, for example, government intervention compels a firm such as Long Term Capital Management to disclose its investment strategy, or when other market participants uncover the proprietary strategy by a kind of reverse engineering, thus leading the original user to abandon the strategy. The consequence is that derivatives are remote and invisible not only from the perspective of everyday life, but to the scientific investigation of financial markets and capitalism. Given that the derivatives market dwarfs all others in its financial size and power, it is especially necessary to begin the production of knowledge about its structure and effects. Such a production of knowledge poses a problem, because the capitalism of complex financial instruments implicates two worlds similar only in the reality that their social position and power stem partly from their insularity and involution. In one world are investment bankers, arbitrageurs, corporate financial officers, and quantitative analysts who view derivatives in a concrete, practical, and instrumental fashion and grasp them as natural economic products circulating according to a universal and transparent logic of efficiency and profitability. This is the world as defined by equilibrium theory, founded on the presupposition of the inherent efficiency of capital markets, and wedded to the use of stochastic models. In this perspective, the derivatives market’s cultural basis, socio-structural foundations, and political implications appear only as afterthoughts or footnotes. Whatever this view reveals about the mathematics of derivatives or market practices, it actually has no account of the ascension of speculative capital, the transformed concept of risk, or even the bases of the trading models themselves. In the other world is a variegated ensemble of analysts who, however well attuned to

the social-historical character of capitalism and its underlying logic, possess only a nebulous appreciation of contemporary financial instruments. Those who write from this perspective characteristically concentrate on the social and political implications of financial markets and instruments, but have little to say about these markets or instruments themselves. Indeed, they separate the technical and practical dimensions of the culture of financial circulation from its socio-global implications. This division of worlds is expressed as a division of intellectual labor. Fields such as business economics, technical market analysis, and accounting preside over the formal and quantitative research on what are referred to as naturally occurring markets, whereas social and critical theory attends to the underlying social categories of capitalism and their sociopolitical implications. The division is further codified in the division of interests among professional journals, segregated into those that focus on the internal dynamics of derivatives (such as their volatility and risk profiles) and others that analyze the flow of capital as part of a wider system of relations. This division is further inscribed in the dispositions of scientists through the socializing and disciplinary process, which inclines them to appreciate and be comfortable with particular modes of analysis, either the econometrically or the socially grounded. This division of labor is also at a deeper and more self-reflexive level a division over what constitutes the proper vision of financial capital and its circulation: economics opting for a formal and stochastic interpretation, social and critical theory for a social and historical one. All of this brings the social structures that help to produce a field of knowledge—its journals, positions, and so on—into alignment with its cognitive and motivating structures—received problems, career pathways, intellectual awards. The result is firther reinforcement of the limits or boundaries that ground

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the division of interests and perspectives. Unfortunately, this division of labor usually fails, and nowhere more than in the analysis of the culture of financial circulation: for the analysis must be both socio-structural and technical to grasp the necessary relationship between surface and underlying forms. While on their surface all derivatives have similar properties (they are contracts with fixed expiration dates whose price is determined by the value of their underlying assets), the variegated character of the social phenomena that require national and global interconnectivity (currency, interest rates, stocks) makes for substantial differences in the social construction of the various types of derivatives. These differences are, however, excluded from the economic discourse on derivatives as a condition of that discourse. In order for this type of discourse to objectify the derivative as an exclusively formal and quantifiable entity, one that can be analyzed using mathematical modeling techniques borrowed from physics, it is necessary to set aside the socio-historical dimensions of circulation. It is necessary to put aside or bracket the ways in which derivative markets transform the basic structures of capitalism in general and that of finance in particular. And indeed, if we are content with looking at derivatives in this light and only on the surface, they do appear to simply reflect or express what is going on. But this economistic view not only hides the creative effects of speculatively driven derivatives, it also hides the way in which derivatives create their surface appearance. The economistic view mistakes the appearance of derivatives for their underlying reality. One consequence, as will later become very clear, is that for the mathematics to work it is necessary to make assumptions that disregard the real financial world and the principles of mathematical statistics. For now, it is worth pointing out that derivatives create their surface appearance by creatively presupposing social contexts of use,

which economistic analysis then (mis)takes as an objective, external, and imposed reality. This move guarantees that the field of financial practice will never include the principles of its own genesis, construction, or encompassment of other peoples and places.5 Instead, the culture of derivatives posits itself as a space lying beyond the power of representation, one that is discernible only through quantification, grasped objectively as the necessity (emanating from the thing itself ) of reducing all event structures to forms of differential equations, and subjectively as a kind of mathematical intuition embodied (as a quasi-genetic endowment) in those who master the financial practices. This culture of finance appears in numerous forms. It appears in academic and insider publications as well as newspapers and electronic media. It also appears in the organization, day-to-day operation, and distribution of money and power at investment banks (and nonbank banks), electronic trading sites, and hedge funds. Ironically, its own social determination and specific historical character lie in its unconscious refusal to recognize the socio-historical construction of the (derivative) object or (participating) subjects. While the financial community certainly knows that the derivatives it creates are profitable, it cannot account for their emergence, the way these derivative products price risk, or the concept of risk itself. In a word, the financial community’s only answer to ‘‘why the rise of circulation’’ is that it was simply in the nature of things. This reply notwithstanding, the question is still an intriguing one: Why did the global circulation of financial derivatives, in what historically is only a blink of an eye, grow from nothing to the planet’s largest market?

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3 Historical Conjunctures

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or those who like to mark transitions with dates, the year 1973 seems to be the significant turning point, the period when the fulcrum of power and profit began to shift from the production of commodities to the circulation of capital. In that year the destabilization of global currency markets (culminating in the collapse of the Bretton Woods system) interacted with a host of other historical events to create an economic and political force endowed with its own direction and momentum. The transformative event that hastened processes already in motion was opec’s embargo on the export of petroleum and the ensuing escalation in energy prices, followed by price increases in other goods that precipitated a period of stagnation and inflation. Before the embargo, the price of petroleum on world markets hovered around $3 per barrel of crude, but by the time the decade had come to a close oil prices had surged by a factor of thirteen to $39. Oil producers opted to denominate petroleum prices in U.S. dollars; this compelled every oildependent nation (except the United States) to obtain dollars, and in very significant amounts, through the foreign exchange market. Especially for emerging states, this precipitated an enormous transfer of wealth from oil-dependent

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nations to opec members. Recycling petrodollars was essentially a process by which the current account surplus of opec nations financed deficits in nations that imported petroleum. According to the then conventional and now discredited wisdom—encapsulated in the oecd’s (in)famous McCracken Report (Organization for Economic Cooperation and Development 1977)1—opec would deposit its titanic surplus in the international money markets, where it would then be recycled through the global banking network, ending up back in the hands of what, at the time, were called the ldcs, or less developed countries. The economic mantra was that privatized global financial markets would restore economic equilibrium by selling their excess funds to emerging nationstates, thereby allowing them to obtain petroleum in exchange for debt. There was, however, no logical or institutional reason why global money markets should recycle petrodollars according to humanitarian principles of social fairness and justice. As World Bank records would later underline, for the remainder of the decade the net flow of capital to developing countries was actually negative, even as g-7 nations absorbed somewhere north of $150 billion per year. Without access to the capital surplus of petroleum producers, developing and transitional nations could generate the precious foreign exchange they needed to purchase oil only by cutting back on or forgoing other, non-oil imports, including the capital equipment needed to sustain employment and productive output. Among other things, the free market model of international finance apparently forgot that bankers are loath to buy a stream of short-term variable-rate funds—the tens of billions of dollars of opec revenues held as short call deposits—and then extend long-term fixed-rate loans under any conditions, let alone to economically strapped and already indebted countries. Predictably, international capital markets would fur-

nish balance-of-payments financing only to countries they deemed creditworthy, which essentially excluded much of the postcolonial world. That the advanced industrialized nations actively colluded in dividing up almost all of the available capital meant that the negative consequences of the worldwide net capital deficit fell mainly on the shoulders of those who could least afford it. Thus, the recirculation of petrodollars gave postcolonial nations their first introduction to a form of economic violence so abstract and mediated that its structural dynamic remained all but invisible. Advocates of the ‘‘free market’’ solution to the crisis precipitated by the escalation in petroleum prices were taken in by their own ideology, mainly by seeing risk as an externality to the system rather than its product. Looking at what they took to be the more economically advanced countries of the periphery, they reasoned that countries such as Egypt and Argentina could never go bankrupt because the government always had the ability to tax the citizenry. No matter how high the mountain of foreign debt rose, countries did not go out of business and therefore the debt could always eventually be paid off. In contrast to this logic, the oil producers reasoned that if they deposited huge sums in banks whose loans exposed them to financially troubled states and corporations, they were exposing themselves to substantial and unnecessary risk. So the producers bypassed the banks, investing an extraordinary amount of petrodollars directly in American assets, such as government debt (mostly Treasury bonds) and blue-chip corporate equities (companies such as General Electric). The U.S. government aided such investment by creating a special arrangement that ‘‘allowed the Saudi Arabian Monetary Agency to buy U.S. government obligations without competitive bidding’’ and directly from the Federal Reserve (Spiro 1999, 109–10). The United States was essentially providing securities—that is, claims on the future cash flow

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of the corporations and government lending institutions in question—in exchange for a capital infusion into current accounts. One immediate consequence of the continuing infusion of petrodollars was that the dollar became even more overvalued in relation to the other benchmark currencies, the German mark and Japanese yen, in substantial part because successive administrations in Washington were using the current account surplus generated by the inflow of petrodollars to further inflate the money supply and thus be able to underwrite the conflict in Vietnam and the cold war. As early as July 1974, the Federal Reserve opined that the ‘‘growth of money and credit is proceeding at a faster rate than is consistent with general price stability’’ (Federal Reserve Bank 1974, 564). Diplomatic phrasing aside, the ascent in oil prices produced two effects, both of which were especially disastrous for the developing world: first, neither oil-producing nations nor the metropolitan recipients of petroleum revenues put the money back in global circulation, thus instantaneously wounding the world economy; second, to prosecute its own agenda, the United States inflated the supply of dollars. The massive and unprecedented transfer of capital from the oil-importing nations, especially in the developing world, to the United States could not but accelerate an inflationary spiral that had begun in 1973 with de facto devolution of the Bretton Woods system (Van Dormael 1978). Bretton Woods, in place since 1944, put in place national political capital controls that by regulating the segregation of foreign and domestic money markets enabled a nation’s central bank to adjust interest and currency rates based on domestic economic objectives. (Webb demonstrates that during this period approximately two-thirds of all international capital circulations were official government-to-government transactions.) The relative fixity of the Bretton Woods system gave a state the political

option to intervene on behalf of its currency with the confidence that its actions would not dramatically disturb interest rates, ignite inflation, or precipitate a speculative ‘‘run’’ on its currency (Marston 1993). The two architects of the Bretton Woods System, John Keynes and Harry Dexter White, were in near complete accord that capital controls were necessary to allow governments to set interest rates to advance their domestic aims (such as full employment) and to prevent shortterm speculative movements and flights of currency. Their thesis was that because markets functioned inefficiently at times, it was necessary to intervene politically in those instances. Bretton Woods was the first successful political framework for the world’s economic organization. Its founding insight was that states could dampen destructive disputes over the circulation of commodities by politically regulating international flows of money. Thus the abandonment of the Bretton Woods system seismically shifted the balance of power, beginning a process that would gradually but inexorably empower the market at the expense of the governing state. Especially, but not only, in the United States there began a call for less government regulation and intervention in capital markets. The idea was that ‘‘the market,’’ understood in quasi-political terms as a collective agent that encapsulated and transmitted the world’s economic votes and interests, would, if left to its own devices, provide adequate liquidity, confidence, and adjustments. The demise of Bretton Woods led to floating exchange rates: the market would now determine cross-currency ratios. The new system obliged every country to do just what so few could do: monitor and regulate its currency’s market value so that it would fluctuate predictably and only slowly within a relatively narrow band. Even the most cursory inspection underlined that the level of monetary uncertainty

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and risk would soar and that a satisfactory mechanism for setting stable rates was nowhere in sight. So almost immediately, the ascending power of global financial circuits forced national regulators worldwide to abandon a politics of control over the supply of money and credit, leading to the elimination of ‘‘long-established interest rate ceilings, lending limits, portfolio restrictions, [and] reserve and liquidity requirements’’ (Eatwell and Taylor 2000, 37). Precisely the situation that had provoked deep consternation for Keynes and White now appeared to be imminent (see especially Keynes 1980, vols. 25–26). Moreover, it would soon become all too clear that as certain and steadfast as Keynes and White had been in their thinking about the perils of free-floating and unregulated capital, their views were developed in response to an era of laissez-faire capital when neither the sums of circulating capital nor their technological amplifications were anything like what they would soon become. During this formative period, the metropolitan states periodically contemplated the restoration of capital controls. The British seriously worried about the possibility of reinstating exchange controls to dampen the London-based Eurodollar market. But the British declined, realizing that the trade in Eurodollars was a source of substantial profits for their banking sector, that the key to the future economy lay in the development of financial instruments, and that the hammer of capital controls would only serve to drive the Eurodollar emporium to another shore. In 1978 policymakers at the U.S. Federal Reserve considered reviving capital controls in an attempt to mitigate the downward pressure that speculative markets had brought to bear on the dollar. The dollar crisis of 1978–79 was the first indication that under the right circumstances not even the size of the American monetary system nor the pricing of key commodities in dollars rendered the

United States immune from the pressures of global money markets. Moreover, policymakers in Washington concluded that they no longer had the monetary muscle or political support to decisively implement capital controls. So in great contrast to the manufacturing sector, where trade controls are omnipresent, the political community all but abandoned any attempt to control the circulation of capital. If the political community was to abrogate responsibility for currency values, the only capitalist alternative was the market. When the closing of the gold window forced currencies to float, when the international political community renounced the project of managing the global economy, risk was now critically privatized. It should come as little surprise, then, that 1973 witnessed the genesis and flowering of the derivatives market. As Millman notes, existing futures and options contracts became the ‘‘building blocks’’ of a whole new genus of financial products, setting off a chain reaction that shifted the epicenter of financial power from institutional relationships ‘‘to new equations and economic models’’ (Millman 1995, 3). It should also come as no surprise that standard economic theory, its analytical tools no longer in tune with a world now globalizing, predicted the opposite of what did happen. Analysts (such as Williamson 1983) predicted that a regime of flexible rates would stabilize the international currency system and, by delinking the national economies, also increase their autonomy, options, and freedom to act.2 The reality is that a new sociostructure and culture of circulation came into being whose dynamic is technologically amplified flows of speculative capital. This emergent system quickly became so enormous that it increasingly determined exchange rates independently of the needs or necessities of any specific nation, even as the cumulative effect of derivative trading increased the volatility and variability of exchange and interest

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

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The economic disruption of emerging nations instigated by the surge in oil prices, the dearth of counterbalancing loans, and the resulting insolvency of even the most fiscally responsible regimes also generated a rising level of political instability. The prices paid for exported raw materials and unskilled labor began a secular decline that would still be in train a quarter-century later. The cost of imported energy, technology, and finance capital began an equally long-lasting and corresponding ascent. The resulting impoverishment of the emerging world—states such as the Congo, Cambodia, Nicaragua, Angola, Zaire, Burma, Chad, Laos, and Mozambique suffered astounding declines in gdp (United Nations 1975a)—was instrumental in producing political turbulence that fueled existing civil wars, instigated new ones, and sowed the seeds of future ones. Some would see 1973 as the flashpoint of the third world war, meaning that the two superpowers, the United States and Soviet Union, fought a hot and bloody war on the terrain of the Third World (Coronil 2000). Others would observe that further north, across the Islamic Mediterranean, the year marked the emergence of factions that for the first time were able to consolidate the economic interests of streams of unemployed migrants with those of a once prosperously rising middle class now under siege, to advance a new, more overtly militant and fundamentalist political Islam (Kepel 1986 on Egypt; Bennoune 1988 on Algeria). However one might portray this turn of events, the turmoil and violence ignited by the disruption of already frag-

ile postcolonial economies moved David Rockefeller to organize the Trilateral Commission in 1973. The commission was a collaboration of corporate and political leaders; its stated objective was to foreground American leadership in order to dampen a global outbreak of violence and instability. No ordinary commission, it included among its founding members a future president of the United States, several past and future secretaries of state and foreign policy advisors, transnational corporate leaders from, among other sectors, banking and finance, and heads of the World Bank and the imf. The commission operated according to the belief that by stabilizing the global economy, one could stabilize regional and national economies, which would then galvanize a planetary installation of liberal, stable capitalist democracies (Gill 1990). Responding to these tumultuous changes, the commission’s leadership commissioned a report in late 1973 entitled The Crisis of Democracy. Its authors argued that as a result of the current crisis the periphery was becoming increasingly undemocratic and ungovernable (Crozier, Huntington, and Watanuki 1975). A few years later Zbigniew Brzezinski, the Trilateral Commission’s first director, in collaboration with David Owen (Britain’s foreign secretary and leader of its Social Democratic Party) and Saburo Okita (Japan’s foreign minister and chairman of its task force on the prospects for democracy), produced a companion report called Democracy Must Work, in which they ominously observed that the ‘‘principal threats confronting the global community’’ centered on the growing possibility of full-scale worldwide economic deterioration which would then precipitate ‘‘major social breakdowns in large portions of Africa, Asia, and perhaps Latin America, thereby reducing prospects for democracy and enhancing the opportunities for extremists . . . to seize power’’ (Owen, Brzezinski, and Okita 1984, 1).

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In retrospect at least, 1973 seems to be the kind of year we entomb as a cliché, such as watershed or turning point. The metaphors come easily because the year gave birth to a directional dynamic that shaped the emergence of a culture of financial circulation, the events setting in trajectory a pathdetermined process that seems to be transforming the character of capitalism, further skewing the global distribution of wealth and undermining the power of the state to govern the economy. It was the year in which risk was fully privatized, financial derivatives began to trade, and a new creature of political violence came into being, on one level more abstract than anything that had existed before, and on another level so firmly attached to everyday life that the older categories of conflict—civilians versus combatants, children versus adults, innocence versus guilt—no longer seemed to apply. By the time the new millennium came into sight, the culture of financial circulation had become a centerpiece of globalization and the modern restructuring of the nationstate. In less than three decades, the International Monetary Fund would explicitly tie its lending policies toward developing and transitional countries to the derivatives markets. Indeed, the changes that were and would be generated by circulatory capitalism depended on the construction of these markets and their instrumentation. The Development of Financial Instruments

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

of derivatives is the objectification of risk, specifically being able to price risk itself. The breakthrough analysis in this area was Henry Markowitz’s elaboration of portfolio theory (1952; 1991). Until Markowitz’s work, traders assessed investing strategies based on their rate of profit alone, with no thought given to their riskiness. Drawing on a marriage of statistical protocols and linear programming, Markowitz’s analysis, first published in the 1950s, argued that by quantifying risk, by subjecting it to mathematical interpretation, it was possible to assemble a stock portfolio that positively maximized the relationship between profit and risk. The ideal portfolio was one that permitted outsized returns while minimizing the risk of loss. Though it was not appreciated at the time, Markowitz was inventing the foundations of modern trading strategies and the hedge fund. Modern portfolio theory conceptualizes risk as variance of returns on assets. Intuitively, variance measures the volatility of an asset; this is the magnitude of swings in a price around its mean.3 High variance, or excessive risk in relation to potential reward, was something the successful portfolio avoided. The conclusion from portfolio theory, now embodied in the mantra to ‘‘diversify,’’ is that while the return on a diversified portfolio will be the average of the returns on its individual holdings, its volatility will be less than the average volatility of those holdings. The ideal, economically maximizing portfolio is thus not the one with the least absolute risk but rather the one with the greatest relative spread between incurred risk and potential return. And so the concern that would consume succeeding generations of financial experts would be how to purify and refine the pricing of risk so as to maximize profits while minimizing risks. In contrast to previous forms of financial analysis, which focused on the impending risks or rewards of each investment, or the lottery-like thinking of common folk who fixated on the size of the potential jackpot, portfolio

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management focused on the relationship between the risks and rewards of the portfolio as a whole. The theoretical endpoint was riskless profit, or arbitrage. From this point onward, the measurement and quantification of risk became the presupposition, if not the overriding preoccupation, of contemporary finance. Perhaps its culmination was the publication, also in the prescient year of 1973, of what would soon become known as the BlackScholes model (Black and Scholes 1973). The model was the first strictly quantitative attempt to calculate the prices of options where the determinative variable is the volatility of the underlying asset(s). The counterintuitive result is that options pricing does not derive from directional movement of the underlier—whether, for example, a stock’s price has increased or declined—but from the magnitude of the price swings alone (Natenberg 1988). The acceptance and refinement of the Black-Scholes equations fueled the explosive growth of derivatives markets because it standardized and formalized their pricing profile in exclusively quantitative terms. Once the market’s participants accepted the underlying mathematical assumptions of the Black-Scholes model (and very few possessed the insight or inclination to understand the assumptions, let alone their implications),4 they could calculate options pricing mechanically. Within six months of publication of this seminal paper, the Wall Street Journal began to carry software advertisements for figuring options prices. The calculation of basic measures such as the volatility of assets depended on having statistical records and the requisite formal models and computation infrastructure. Indeed, Markowitz’s discovery was not initially adopted for two reasons. First, there was a lingering attachment to the generative schemes of the older and more conventional style of investing, a style based on researching individual firms and

picking the best stocks. Risk was expressed in the aggressiveness of the investment strategy, not some mathematical analysis. Second, the calculation of the necessary covariances among assets in Markowitz’s model far exceeded the computational capabilities then available. But with the development of modern computers, statistical information bases, and increasingly complex technical models, these impediments were largely overcome, thus launching an era in which quantitative analysis emerged as the dominant rationale of financial decision making. Along with the conceptual innovations and development of supporting technological infrastructure, institutional developments such as the introduction of cash settlements to replace the actual delivery of the underlying assets and clearinghouses to help minimize counterparty risk (Stigum 1988) also contributed to the explosive growth of derivatives. At the end of the day, thanks to the pioneering work of Black and Scholes, there was a straightforward and accessible pricing model for risk—an unprecedented extension of quantification into the universe of abstract risk. Other analysts joined in, and the model was extended to encompass increasingly abstract forms of risk that went beyond simple commodities options pricing into the much more sophisticated world of complex financial derivatives. The process took two lines of development: the creation of derivative products and markets by investment banks and the working out of the technical mathematics needed to conceptualize these products and the functioning of their markets. In ensuing years, mathematical statistics would work not so much in concert with but rather alongside those who fabricated and marketed derivative products. Computer pricing programs and the inhouse technicians who designed them would functionally and socially mediate their relationship. Eventually, traders could run the pricing programs with little technical, never mind

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real mathematical, expertise or understanding. The result was the evolution of parallel but barely connected worlds, with those working in mathematical statistics knowing very little about the substance of finance, derivatives, or their markets and those from the financial world grasping the mathematics in only the most mechanical and econometric sense. The division of worlds and of financial labor turns out to be important because it allows the market to conflate the notion of probability with that of distribution. The assumption is that the market can, automatically and with no further specifications, use a stochastic model to measure any phenomenon that has a distribution. In mathematical statistics terms, this means that the stochastic model can be used without specifying the abstract space of events that (1) define the limits of any distribution and (2) specify the formal identity of the points within that space. So the conflation of the notion of probability with that of distribution effectively precludes any questioning of the interrelationship between the model used to price derivatives and the abstract space of events of those derivatives. This is a meaningful omission because for humans, this abstract space of events is defined by our culture and history. For humans, this socio-historical space is defined not by object categories, like the Sun or the book that you are holding in your hands, but by relational categories, such as nationality, the pursuit of democracy, or the reader’s reaction to the book. However, the use of stochastic models is so widely accepted as the method of pricing that the financial community speaks about the parameters of the distribution, about political and market risks for example, as though they were real, measurable things. In other words, it mistakenly speaks about relational categories as though they were object categories.What this use of stochastic models thus conceals is the social processes that give rise to the phenomena and the social processes that underlie the use of the model itself. The end

result is a peculiar and deceptive transformation: socially constituted objects of analysis are socially constituted as though both the objects and the analysis were not socially constituted. From the start, the financial community embraced the pricing model as a breakthrough, confident of having begun to unravel the keys to the physics of finance. Chief among its virtues was that the model allowed agents to unbundle and disaggregate the economic and political aspects of commerce into their component parts. It also allowed relational objects to be translated into individuated concrete units, so that ‘‘risks became ‘things’ like commodities—tradable at any moment at the right price’’ (Steinherr 1998, 101). Steinherr, who is general manager of the European Investment Bank and author of its risk management system, notes that this commoditization generated ‘‘a virtuous cycle’’ in which risk types could be isolated and ‘‘repackaged’’ into derivatives, leading to a capitalism in which there was the ‘‘distribution of risk at a fair price’’ (101). The decomposition and concretization of risk, once achieved, gave birth to a new financial alchemy in which market makers could recombine different risk profiles into products that could be bought and sold at will in unlimited quantities. The result was a kind of secret stardom for risk-driven derivatives as the vehicles of speculative capital. While it would take another quarter-century for their effects to become fully apparent, market-internal mechanisms for quantifying and distributing risk were now preempting political relations among nations as the controlling source of international economic predictability. No longer would men like Harry Dexter White of the U.S. Treasury meet behind closed doors at Bretton Woods with J. M. Keynes, his British counterpart, to hammer out the future of the international monetary system. No longer would the hegemon be able to orchestrate the global economy through a nation-based po-

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

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By 1973 the continuing cold war, the cascading American involvement in Vietnam, the overproduction and over-accumulation of capital in the metropole’s industrial base, and the unprecedented escalation in dollar-denominated energy prices all combined to instigate the unraveling of the Bretton Woods system for controlling capital flows. There followed what would rapidly become a permanent state of emergency in the international money markets, an intensification of civil strife in a significant number of postcolonial nations, and the use of development agencies and international banks to propagate the Euroamerican conception of the liberal capitalist state. The outsourcing of primary inputs to production led to a need for ways to monetarily manage connectivity. The trajectory of the global political economy coincided and intersected with the development of technologically amplified means of conceptualizing and quantifying risk—that is, the market’s way of costing connectivity. A result was the explosive ascension of a financial derivatives market, orchestrated by a science of risk and fueled by increasingly expanding pools of speculative capital in the hands of investment banks, hedge funds, and corporate financial divisions. The convergence of these forces in the early 1970s points away from conventional approaches to the global economy and the state, which grasp economy and polity as only extrinsically linked. Against this separatist vision of social life, the evidence indicates that derivatives and politics have a many-sided and imbricated relationship, their cultures of circulation more like the helix of the genetic code than mutually independent variables. This history also suggests that circulation is gaining a power and autonomy that were impossible under an eco-

nomic regime organized around and dominated by industrial, production-centered capitalism. It is moreover unclear whether standard economic approaches, from either formal or Marxist economics, possess the intellectual tools ready to the task of dealing with this new globalizing socioeconomic reality. Standard macroeconomic theories of international trade and exchange rates, or Marxist approaches that originate from a labor theory of value, appear to have little to say about circulation: in the first instance because the theories bracket the culture and sociostructures of circulation, concentrating on surface forms, and in the second instance because financial derivatives do not embody labor or value in their or indeed any conventional senses of those terms. The political side of this academic quandary is that few if any contemporary lawmakers grasp what derivatives are, how they work, or the ways they affect their constituents. For politicians, the news that the otc market is growing so rapidly because financial intermediaries increasingly offset exposure in their derivatives portfolio by designing cash-based hedging strategies using repos (short for repurchase agreements) might just as well be conveyed in an ancient Sumerian dialect. And without understanding, there is little possibility of genuine political oversight or regulation, much less the kind of cosmopolitan cooperation that oversight or regulation would entail. The events crystallized in and around 1973 set in motion a directional dynamic whose consequences are still unfolding, not the least of these being the advent of cultures of circulation whose socio-structures and generative principles challenge existing schools of thought on globalization and the ascending power of speculative capital.

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4 The Institutional Basis of Derivatives

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

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the know knew differently. As the chairman of the Federal Reserve, Alan Greenspan, observed, the price volatility instigated by the collapse of firms such as Long Term Capital Management could have reverberated through the banking system and thus ‘‘potentially impaired the economies of many nations, including our own’’ (Greenspan 1998, 1046). Steinherr, echoing a common sentiment among financial managers, reckons that the ‘‘advance since the mid-70s in the ability to identify and isolate the key financial risks commonly found in modern economies, together with the development of financial institutions that can commoditise, trade, and price such risk are the crowning achievement in the evolution of modern market economies’’ (1998, xvi), thereby marking the most significant advance in world capitalism since the Industrial Revolution (18). Steinherr and other participants in the derivatives markets focus on how the concept of risk as a commodity becomes so thoroughly institutionalized, generating a formal apparatus and a habitus (that is, a culture of speculation) for pricing and marketing risk, that the process progressively takes on an aura of naturalness, a formalized fluidity that governs otherwise increasingly disorganized capital circulations. Despite such unbound enthusiasm, many observers remain very suspicious of derivatives, aware that under production-centered capitalism speculation can appear only as accessory or marginal to the production process. Derivatives also arouse misgivings and distrust because they coordinate dimensions of financial activity that look suspect when spied from the perspective of the more traditional approaches, Marxist or neoliberal. Derivatives do not appear to involve productive labor, the organization of activities seemingly devoid of any real acquaintance with material resources, the output neither a good nor a service aimed at satisfying a demand or promoting further productive out-

put. Derivatives seem valueless according to a labor theory of value: though they are surely commodified, as the earlier quote from Steinherr illustrates, derivatives do not appear to incorporate concrete labor or mediate social relationships in any meaningful way. According to liberal economic treatments of production and employment (such as the Cambridge Economic Handbooks), derivatives are examples of speculative excess that contribute little or nothing economically. They are neither a real input in the production process nor a means of conveying wealth. Inasmuch as derivatives fixate on short-term capital flows rather than longer-term investment, and because derivatives so forcefully compress the time horizon of capital that they engender a kind of permanent instability, they seem to invert the priorities of traditional financial sensibility. They can unify in a single instrument extraordinary leverage, the opportunity for unfettered speculation, the threat of global risk to the banking system, and the possibility for arbitrage (the generation of wealth without work or risk); yet envisioned from another angle, derivatives are the epitome of capitalism, especially when finance capital is seen as money used omnivorously and opportunistically to create more money, as speculative capital. Circulation versus Trade

Although analysts sometimes compare the circulation of derivatives with the trade relations and international lending of previous eras (Zevin 1992), the culture of financial circulation is specific to millennial capitalism. This is true at the level of both form and substance. What circulated globally in previous eras was commodities, services, and the various incarnations of industrial capital, such as those employed to promote manufacturing and commerce. These circulatory forms continue to exist today, as measured by, among other things,

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direct foreign investments and international trade. But the present moment is different in that these now conventional interstate economic relations have been joined and overlain by circulatory forms in which the flows of capital are monetized relations about the relations of capital, thus creating a metalevel. On top of, at times competing with, and now often substantively inflecting the conventional organization of internationalized capital is another derivatively driven flow of liberalized capital that has no foundation in the system of production. To give an example that captures both the complexity and the difference: in a commonly used derivative type called a structured note, the principals attach the coupon payment and the repayment of the principal to abstract asset prices (such as inter-exchange rates) in such a way as to produce extraordinary leverage on the initial capital investment. Those involved in the transactions are, however, required to ‘‘book’’ (that is, record for accounting purposes) only the principal amount. The liabilities inherent in the payoff formula of the structured note are off–balance sheet, meaning that a note showing a substantial gain or loss may appear as a balanced or neutral transaction. The note can then be counted either as an asset against which money can be lent, for example by a bank, or as collateral against which money can be borrowed. This type of transaction differs significantly from others in the long history of international finance in that the derivative objectifies relations of capital already existing in a derivatively abstracted form. Moreover, the transaction itself becomes a source of new money as well as a means of redistributing and amplifying risk. The contrast with ordinary bonds is telling. We are not, for example, talking about the British selling bonds (or gilts) in the American market or the United States counterselling bonds to London bankers. Rather what is being created here

is a new family of financial instruments that entwine the two kinds of bonds and their currencies in hedging, arbitrage, or speculative strategies. The small point is that while the market considers the bonds of both the U.S. and British governments almost entirely risk free (because they are subject only to interest rate risk in the event of rising inflation), the derivative interconnecting the two carries a much greater degree of risk. The larger point is that once the instrument is fully detached from the underlying asset, and once the underlier is no longer a conventional asset (such as corn or cattle) but a relation of monetized capital, such that the instrument functions as credit money, then a new structure for creating, circulating, and also valorizing capital comes into existence. Indeed, insofar as financial derivatives constitute a new species of money they allow a highly leveraged and governmentally unregulated production, circulation, and destruction of capital. Commentators who take their cue from the economic history of production-centered capitalism can all too easily sort these changes into established categories, in the process overlooking the underlying socio-structural and cultural changes and their globally transformative effects. Failure to appreciate these effects leads to the unproductive conclusion that the present flow of derivatives is simply an elaboration of an international financial circuitry that has had global aspirations since at least the nineteenth century.1 While it is surely true that what we are seeing is not the first round of globalization, inserting derivatives into this history can never of course explain their commanding ascent from nothing to prominence or the deep intuition by a growing number of commentators that there is something startling about the present, something that is fracturing the history of capital and signals a break with the past. It is a maxim of science that the difference between two phenomena cannot be explained by what they have

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in common, and so in this case the extraordinary ascension of derivatives trading cannot be explained by the continuities of the international capital markets. In the same vein, analysts cannot explain the growing disparity in wealth between the metropole and the margins in terms of what has remained constant (such as government corruption in the developing world). Moreover, the markets, the scientific field, specialized journals, and electronic media have so extensively rehearsed the play of risk-bearing derivatives that derivatives currently appear as unavoidable representations of, and responses to, contemporary world realities. 90

Market Participants and Institutions

The global circulatory system is creating a directional dynamic that encourages agents to equate investment with finance, or at least to see finance as the most profitable sphere of investment. Increasingly, the most productive investments, those having the highest return on capital, are those concerned with investments in the flows of capital itself. The dynamic is generating three institutional effects in respect to the character of who will participate in the derivatives markets, and more critically, who will provide the monetary, organizational, and technological fuel for the expansion of the otc markets. This expansion refers not only to the absolute size of the markets but also to their interdependence, as reflected in the global intersubstitutability of financial products and the unbridled internationalization of institutional portfolios. In this arena, the unparalleled growth of derivative markets invites crisis contagion on a global scale because of, Steinherr summarily notes, their ‘‘undefinable and unlocalisable nature, the derivative induced lack of transparency, the breakdown of hedging and valuation of derivative positions in the

face of major breaks in asset prices, the growing concentration of the derivatives industry and the operational risks of the large players’’ (1998, 190). To this list could be added the structural interpenetration of market participants in terms of institutional connectivities and the circulation of agents among these institutions. To understand who participates in the derivatives market is to understand the socio-restructuring of capitalism with respect to the labor of capital. The steady decline of investment opportunities in long stock positions in the industrial sectors inspired the advent of the more diversified, omnivorous, and global hedge fund. In terms of investment vehicles nothing characterizes the thirty-year horizon from 1973 to 2003 more than the unabated growth in the number and size of hedge funds, their growth propelled in good part by a successful concentration on financial derivatives. In contrast to the more conventional and more closely regulated mutual fund that has narrower, more precisely determined, and usually more conservative investment objectives and available tools, the hedge fund is a barely regulated entity that creates and thrives on speculation. A second participant is the financial arm of the major corporations. Originally designed to help customers finance the purchase of the products manufactured by the industrial division and to implement insurance hedging strategies, these financial arms are now growing faster than their manufacturing cousins and also becoming increasingly disconnected from production in that their financial activities, products, and global presence bear a much stronger resemblance to investment banks and to hedge funds than to divisions of conventional manufacturing firms. Some examples of this internal metamorphosis include GE Capital, the financial arm of General Electric, and gmac, the General Motors Acceptance

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Corporation. And as global financial circulation, crowned by the derivatives markets, has mushroomed, the growth rates and profitability of these financial divisions have become significantly greater than those of their once predominant manufacturing parents. These now enormous financial machines are the ‘‘nonbank banks’’ of the money markets, representing the corporate realization that under an increasingly circulatory regime dealing in monetized capital is far more profitable than plowing capital back into industries awash in overcapacity. The final major participants are commercial and investment banks, which are increasingly involved in the derivatives markets. Banks have climbed onto the otc derivatives bandwagon as a means of compensating for a decline in the profitability of lending to industrial manufacturers and their distributors. In other words, the rise and proliferation of hedge funds, the internal shift of corporations toward finance, and the aggressive entrance of commercial banks into the global derivative markets are mutually reinforcing outcomes of the transformation away from a production-based economy and toward one of circulation. The explosive growth in financial derivatives participation at J. P. Morgan Chase gives some idea of the transformation in institutional banking. According to the U.S. Treasury Department (through the barely known Office of the Comptroller of the Currency), in the mid1970s J. P. Morgan and Chase Manhattan, at that time separate entities, had scant exposure to the derivatives markets. Fast forward a quarter-century, and we discover that the combined company now has derivative positions that usually exceed $20 trillion. Of this total, foreign exchange positions fluctuate between $2 and $3 trillion in notional value, meaning that J. P. Morgan Chase’s leveraged derivative positions are larger than the gross domestic product of all but a handful of nations.

Markets and Institutions

All markets need to fabricate forms of regularity and stability to offset the potential chaos that maximizing actors might create in a purely competitive arena, such as by reneging on their debts or committing fraud. One of the ways in which markets control themselves is through the production of agents who operate from the same set of cultural understandings and dispositions. Not least is the creation of subjects who believe that the continuity and integrity of the market are in their common self-interest and who are willing to construct institutional mechanisms and take material steps to preserve those qualities. The creation and management of social networks—such as those between certain hedge funds and investment banks—also serve to stabilize market transactions. Though economics barely recognizes that more is necessary, the reality is that for any system of production to work effectively if not always most efficiently, other institutions are needed. Industrial and manufacturing firms require considerable infrastructural investment (such as roads and airports), property rights (such as patent rights), and a legal system able to enforce contracts and settle disputes, not to mention public safety. To conceptualize this politically, one of the critical achievements and missionary objectives of the modern state was to evolve concepts of control to organize production-centered capitalism. The resurgence of the culture of financial circulation is transforming this landscape, significantly because the very character of capital, and especially instruments such as derivatives which are essentially abstracted relations about the relations of capital, requires much less in the way of institutional and governmental support systems. Aside from technology and telecommunications, there are few infrastructural requirements and none specific to the derivatives markets.

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The concept of market control, embodied in the agencies, laws, and instruments developed to regulate a nation-based, production-centered economy, seems to have little traction in the realm of transnational circulation. Indeed, in the sphere of financial circulation there seems to be a close connection between internal market growth and the minimization of concepts of control. In the financial world-space, the over-the-counter derivative markets have been the fastest-growing markets in history. They represent an aspect of the practical triumph of a neoliberal economic ideology in the sense that when considered solely in terms of their internal dynamics, these markets appear to exist only at the level of praxis. In their basic design or configuration, they create a trading platform that has little to do with exchange-based markets, including those that have historically defined and housed futures trading. The otc market is structurally not a market at all, at least not in the conventional sense, but an ensemble of self-replicating, overlapping, and interpenetrating computerized trading networks. The overarching structure of these connective networks is not visible from any point in the system, each agent necessarily acting upon only a core set of generative schemes made of trading strategies and statistical models. Accordingly, these otc markets have no location and hence no address, contractual parties can be anywhere in the universe, and more specifically, the address of the computer site from which the trade was initiated may bear no relation to the location of the institution or agent initiating the trade. Although some 25 percent of otc transactions have their book location in London, the contractual parties may be anywhere. In contrast to established exchanges, the otc markets have no definite or defined membership. Operationally, this means that there are no formal and enforceable rules, outside of the general

law of contracts. The absence of an identity coupled with the absence of an address means that there is no basis for holding any parties accountable for the financial or socioeconomic consequences of their actions. There is also little basis on which to regulate the markets or their participants because the transversal, virtual, and secretive character of the transactions makes it extremely difficult to establish either regulatory domain or jurisdiction. Practically, the derivatives markets capitalize on accounting systems originally designed to record the financing of the production of goods and services, and when these systems are imported into the sphere of circulation they permit the most heavily leveraged and therefore financially precarious parts of transactions to remain invisible because they do not appear on the balance sheet. Furthermore, existing oversight and regulatory agencies, such as the U.S. Securities and Exchange Commission, grew out of an economic regime founded on industrial production. Aiming to supervise exchange-traded, stock-based options and futures contacts on commodities, these agencies have taken a national, simple, fixed-instrument-based approach to regulation. This tack has made it next to impossible for them to decipher the financial hieroglyphics necessary to regulate individually customized, embeddable, globally circulated, off–balance sheet transactions. From a regulatory standpoint, it is transparent from their public comments and congressional testimony that the leadership of the U.S. Federal Reserve and Treasury supports the current state of affairs.2 The transversal and virtual character of the markets notwithstanding, the ability of speculative capital to shape instruments and markets that operate globally and independently of production- and state-based controls requires a defined institutional framework. While these institutional arrangements predate the advent of financial derivatives, these

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markets have taken extraordinary advantage of them. Indeed they constitute the institutional underpinnings for the growing autonomy of circulation. Instruments and Underliers

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The character of a derivative is always relational in the sense that it is founded on the relationship between the instrument itself and whatever serves as the underlying measure or determination of change. The derivative is of course what it is precisely because instrument and underlier are transactionally separable but formally conjoined: the volatility of the former depends on the latter. The character of the derivative is also relational in that it not only links contracting parties, but does so temporally in that one must pay the other at some future date (the expiration of the contract). For the market to continue and prosper, almost all contracts must be successfully settled, success defined here as the certainty of timely payment. Both sets of relationships require an institutional infrastructure, which also constitutes the moment of territorialization of the market. While the derivatives markets may be free-flying in electronic space, they must touch down somewhere because the institutions only obtain and maintain their authority by virtue of having a specifiable location: a social presence in a recognized political jurisdiction. As noted, for most of their storied history derivatives had two presentations: they were options contracts that gave the buyer the right but not the obligation to take possession of the underlying asset, such as a company stock or parcel of land, while they gave the seller the obligation to deliver the promised asset; or derivatives were forward contracts, promises that some underlying asset would be delivered at a certain price and date. There is here a duality of patterning,

with asset production running along one track and derivative trading running along another. For most of the history of derivatives, the tracks were closely parallel because derivatives were production-focused and functionally geared to hedging (especially hedging of the price of bulk commodities and stocks). In addition, for most of the history of the futures market the exercise of a contract called for the delivery of the product in question, which further underlined the connection between production and the derivatives markets. Under this regime, the value of a contract and the motivation for its execution ultimately flowed from rights in and to production, meaning that circulation was coupled with and subordinate to production. Indeed, until the crisis of the 1970s metropolitan states set the global standard by delineating the economy in terms of national production. So powerful and important is the ideology connecting sovereignty to output that economic reporting, even in the face of ever-increasing connectivity, continues to employ the distinctions between imported and domestic goods and between foreign and domestic capital, thereby bracketing the implication of existing circulatory structures (such as the outsourcing of productive inputs, global financing, and transnational companies). Structurally, a key aspect of aligning economic and national realities was the stability of capital, and hence nations sought to exercise political controls over cross-border movements of money. Until the early 1970s, the institutional organization of derivatives markets and the maintenance of national capital controls limited both the profit opportunities and supply of speculative capital. But both dimensions of this equation would soon change, and dramatically so. Starting in the 1970s and at a rapidly increasing pace thereafter, the over-accumulation of manufacturing capital in the metropole along with engorged

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monetary inflows produced by a permanently higher plateau for petroleum prices generated an abundance of speculative capital—that is, capital that cannot profitably be utilized to increase industrial production. Searching for a way to increase their rates of return, those who ran these pools of speculative capital first poured money into Japanese and other East Asian stock and real estate markets. When this speculative bubble began to burst in the early 1990s, they then turned to Euroamerican technology and internet enterprises by betting on option indexes (such as that reflecting the nasdaq 100, a ‘‘basket’’ of stocks dominated by technology firms like Microsoft and Intel), all the while increasing their participation in the market for financial derivatives. Although it was not immediately apparent, as evidenced by how slowly investment banks established derivative trading desks, financial derivatives would turn out to furnish the greatest opportunities for speculative capital. What was apparent was that for the derivatives market to gain altitude would require institutional changes and the liberalization of national capital controls. The first thing necessary to free speculative capital was to create as great and as secure a separation as possible between the derivative and the underlier. This separation would become especially important when the underlier was not an asset at all, but rather an abstract relation such as that between two currencies. As virtually all the manuals on derivatives emphasize, the primary objective is to isolate and price the risk(s) from the underlying instrument, allowing market participants to arbitrage differences in the pricing of risk between variegated underliers and investment horizons. Note that while it is possible to deliver a thousand bushels of corn or a thousand shares of ibm, it is materially impossible to deliver the interrelationship between currencies or credit classes (such as bonds versus mortgages). Accordingly, the

structure of settlement had to be cash itself in lieu of physical delivery. The innovation began to permeate the futures markets in the early 1970s with the introduction of the Eurodollar contract: enriched by the new form of settlement, it immediately became one of the most actively traded contracts in history. What could be more natural than having the perfectly standardized commodity, monetized relations about capital, settled in kind? The result was that there was now no limit on the kinds of abstract monetary relationships that a derivative might attempt to price, since there was no necessary relationship between the underlier and the contract settlement. This also meant that market principals could handle their entire relationship electronically: the contract could be created, posted, sold, and settled with nothing more than computer terminals and accessible bank accounts, located anywhere and belonging to anyone. Presaging what was to come, the essential movement of the market was away from hedging on production to wagering on circulation. The second institutional innovation was the creation of a complementary relationship between exchange-traded and over-the-counter derivatives routed through the interbank markets. The ease of execution, robust volume, and standardization of exchange-traded contracts permit those who create individually tailored otc contracts to offset their positions. The banks that are market makers for otc derivatives, such as J. P. Morgan Chase, use the established exchanges to calibrate and readjust their risk exposures and better balance their positions during periods of extreme volatility, when interbank markets become rather illiquid (that is, when there is no one to take the other side of a position). Critically, and contrary to their own publicized ideology, speculative operators seem to thrive best when there is a pairing of unregulated and informal markets with regulated and formal ones.

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Those who deal in the interbank markets can rely on the exchanges because of a third institutional innovation: the development of clearinghouses. Such houses are affiliates or subsidiaries of an exchange whose principal function is to match, confirm, and guarantee the transaction and its cash settlement. This institutional arrangement replaces the complex basket of credit risks created by multiple counterparties with the consolidated risk of the clearing corporation. What this means is that clearing corporations become the opposite party to every transaction on the exchange, guaranteeing that no matter how volatile the underlier, and thus no matter the size of the loss sustained by the party on the unfavorable end of the transaction, the contract will always be settled. For its part, the clearing corporation shields itself from defaulting customers by requiring the parties to every transaction to post collateral and to adjust that amount during major market swings. In reality, accurately monitoring the solvency of their customers has become nearly impossible because a customer’s otc positions are private and thus invisible. A number of other smaller but cumulatively important institutional changes have accompanied the ones already noted. The market has developed new and more transparent mechanisms for collateralizing positions and for determining the constantly evolving credit quality of the major market participants. Beginning in 1999, several consortiums of large market participants took another institutional route, creating internet exchanges in an effort to increase standardization, reduce fragmentation, and insure liquidity. A variety of ngos have also been formed, such as the International Swaps and Derivatives Dealers Association, which in an externalization of a once governmental function created what it called a ‘‘Master Agreement’’ to formalize definitions as to what counts, for example, as a restructuring (as opposed to a simple adjustment) of developing nations’ debt. Put bluntly, the market—under-

stood as a collective metropolitan agent—wants to know with certainty when an emerging nation finally sinks financially. Territorialization and Institutions

These institutional innovations and adaptations are the visible imprint—that is to say, the territorialized site and anchoring—of circulatory capitalism. Insofar as money and credit are the groundwork of the economy, there is here a deep privatization of the public good. The new institutions perform statelike functions, trying to guard against catastrophic capital loss and systemic disturbances to the financial system to insure an enduring stream of profit opportunities, rather than public goals such as fairness, competitiveness, and the longterm success of the system itself. But more than privatizing state functions, they also disable state regulation. In a world defined by concealed and often disguised, embedded, off– balance sheet transactions, the use of traditional regulatory tools, especially capital requirements based on balance sheet ratios, is meaningless because the notional principal of outstanding derivative contracts frequently dwarfs balance sheet assets by a factor of hundreds. The disabling of political regulations is accompanied by a quest for deregulation in those areas where state functionalities still exist. The golden goal is not the end of regulation, accountability, or creditworthiness criteria, but rather the state’s externalization of these functions such that the financial markets answer only to themselves.What is more, as long as the financial markets continue to develop outside the perimeters and parameters of state authorities, this externalization becomes something of a selffulfilling fantasy. In other words, at the institutional level as elsewhere, circulatory capitalism reorganizes the relationship between politics and economy. These adaptive institutional changes also rescale state func-

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tions to a set of global relationships between institutions located in world cities, such as London, New York, and Amsterdam. So although the institutions that design, market, trade, and profit from financial derivatives strategically locate themselves in national state spaces (most are registered if not incorporated in both the United States and the European Union), those involved in structuring the derivatives market deliberately place it beyond the reach of state regulation. Like the contemporary incarnations of violence, the mimicry of which is hardly accidental, the institutional structures of finance resemble pre-modern, extra-state forms of organization only now empowered by (post)modern technologies of connectivity, control, and power. The socio-structure of the derivatives markets parallels that of contemporary terrorist organizations, though of course the forms of violence it visits on others are far more abstract, symbolic, and displaced. Speaking about the social organization of interconnectivity, Sassen observes that ‘‘the new professionals of finance belong to a cross-border culture . . . embedded in a global network of local places—particular international financial centers among which people, information, and capital circulate regularly. Further, as financial centers, London, New York, Zurich, Amsterdam, and Frankfurt are all part of an international yet highly localized work subculture, [producing] relations of intercity proximity operating without shared territory: proximity is deterritorialized’’ (Sassen 2000, 226). The culture of financial circulation deterritorializes proximity, even as the institutions designed to stitch together this global network of financial centers motivate a new kind of territorialization. These finance center cities become the chosen sites for the movement and accumulation of circulatory capital. This new international culture of circulation not only deterritorializes proximity but is also centrally involved in shaping a worldview and political discourse that regards gov-

ernment oversight and interventions as inherently dysfunctional economically, better to be replaced by market-based institutions that displace once state-based functions simultaneously to the subnational level of the global city and a supranational level of transversality. The culture of circulation seeks to nurture a global, ideologically infused campaign to convince those who manage the imf, the World Bank, and the federal banks and treasury departments of metropolitan nations that the externalization of state monetary functions is a milestone on the superhighway to globally efficient money markets and that conversely, those involved in the derivatives markets are, by virtue of their experience and knowledge, best suited to fill key government posts. The principals explicitly grasp the state as an impediment to the speculative circulation of capital and applaud the externalization and rescaling of state regulatory functions, claiming all the while that nothing motivates the innovation of new and more state-evasive financial instruments like a threat of regulation. In inveighing against all and any government oversight or regulation—historically exemplified by the periods of the classical gold standard (1878–1914) and Bretton Woods (1945–73)—the derivatives market is instrumental in animating the forms of risk, such as currency and credit volatility, that international political agreements had once upon a time suppressed. The Institutional Basis of Systemic Risk

It is clear from the political response to testimony by speculative capitalists, such as statements made by the hedge fund manager George Soros before the U.S. House Banking Committee, that the public understands derivatives as either the latest incarnation of Las Vegas ‘‘gambling’’ (in the words of Henry Gonzalez, the committee’s chairman) or an exotic fi-

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nancial contraption beyond quotidian understanding. But however politicians, the media, and the public characterize derivatives, the reality is that they definitely matter because they are sutured to the heart of the banking system. Warren Buffett, arguably the most astute investor of his century and unquestionably the most successful in terms of capital allocation, notes that derivatives are ‘‘financial weapons of mass destruction’’ that ‘‘will almost certainly multiply in variety and number until some event makes their toxicity clear’’ (Letter to shareholders of Berkshire Hathaway, March 2003). Systemic risk often goes under the rubric of contagion risk, meaning essentially that the failure of one major dealer instigates a domino or cascading effect, precipitating a catastrophic banking failure. Moreover, the level of systemic risk present in the system at any point in time is structurally impossible to determine because the risk models currently in use are designed to determine derivative and lending exposure only one institution at a time as opposed to systemically. If catastrophic failures like that of Long Term Capital Management make anything clear, it is that the participation of financial firms in otc derivatives markets inevitably underestimates the level and seriousness of contagion risk. Institutionally, nothing exaggerates systemic risk more than the existence of a substantial and increasing quantity of interdealer positions. In simple terms, this means that the typical counterparty to a trade is another financial institution, so that as the notional value of the global exposure increases so does the possibility that the integrity of the system will be breached dramatically, and that the central monetary authorities will be unable to halt or repair the damage. The second institutional reason for concern is that the otc markets significantly tighten intermarket connectivities, meaning that it is increasingly easy to transmit turbulence from

one market to another, and increasingly difficult to inoculate a market against potential damage. The widespread use of derivatives for cross-market arbitrage all but guarantees that eventually, inevitably, some political event will push the banking system over the edge. In sum, the derivatives markets help to create the problems that they are designed to extinguish on the understanding that the ‘‘democracy’’ of the unfettered market is more efficient and productive than the visible hand of governance. In contrast to production-centered capital, whose locus of control is the national state, circulatory speculative capital attempts to forge a sphere of finance external to the state system. The underlying but unstated trajectory is to simultaneously externalize, rescale downward, and diffuse into the market itself the economic functions once normally carried out by national states. Toward this end, institutions churn out transactions that do not appear on the balance sheet, do not adhere to conventional accounting standards, are so complex in their objectification of risk that determining the risk is statistically unfeasible, and are also so global in scale and functionally interconnected that the greatest risk of all, to the system as a whole, is a risk that these institutions cannot even begin to ascertain or measure. The main reason why a market this large has been able to avoid detection and regulation is that derivatives are too complex, too virtual, and apparently too mathematical for either the political community or those who investigate political economy and culture. In a sense, the derivative is the perfect capitalist invention, because it seems to have no concrete form sufficiently legible and visible to allow it to become a sustained subject of conversation in the public sphere. The derivative surfaces only episodically as a diffuse threat to the financial system when the public learns of the failure of a firm or government agency,

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such as Long Term Capital Management or Orange County in California (Baldassare 1998). Because derivatives operate at a meta-economic level, being compressed relations about the relations of capital, they do not appear to be part of the financialization of everyday life in the way that portfolio-managed pension funds do.

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5 Deriving the Derivative

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t the level of appearances a derivative is a kind of specialized commodity, circulating in the cloistered sphere of high finance, that possesses the power to significantly influence the everyday lives of people globally. The effects of the trading of derivatives are sometimes violent, and always abstractly so. Nonetheless, a portrait of the appearance or obvious aspects of financial derivatives can only tell part of the story, critically because the market appearance of derivatives conceals and erases the constructive underlying interrelationships between speculative capital, the objectification of risk as a value, and the construction of the instrument itself. An adequate analysis must thus begin to peel away the apparently nonsocial, epistemologically neutral character of the derivative to reveal how it socially constitutes its appearance as a formal, instrumental, nonsocial object. At their deepest level, financial derivatives transform relations among people into relations among things, and just as importantly, make it seem as though those layered relations among people were never material factors in the first place. They make it seem as though each instance or token appearance of a financial derivative is a perfect and transparent realization of a mathematically defined type. In this respect, the mathemati-

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cal technology seems so powerful that it absorbs the reality to which it refers. As we have noted, using language from the field of finance capital, derivatives are instruments whose monetary value derives from other underlying assets. Their earliest forms were futures contracts whose underlying asset was a productionbased bulk commodity; more recently, in response to globalizing markets, the underlying asset classes have included currencies, stocks, bonds, performance indexes, and also other derivatives. A critical dimension of derivatives is that they do not involve the immediate exchange of principal and, accordingly, are not immediately counted on financial balance sheets, so that especially when financial agents combine different types of derivatives they allow for an extraordinary and unprecedented degree of leverage. So relatively small wagers can move much larger financial mountains, or more to the contemporary point, relatively large cumulative bets can revalue the currencies of entire countries. A defining feature of derivatives is that they exist in a kind of temporal parenthesis, beginning and terminating at a pre-specified moment, in most instances closing out the transaction at an agreed-upon date and time. Nonetheless, the formal economic definition of the derivative—which encompasses any contract whose rate of return is determined by a continuously measurable underlying asset or performance index (Rubinstein 1987)—conflates types of financial instruments critically different in terms of their basic design, forms of objectification of risk, temporality, and more generally the underlying world of social and semiotic relations upon which they are ultimately founded. On the surface, financial derivatives differ at the general (type) and individual (token) levels. They differ generally at the level of type according to the forms of arbitrage and hence the form of assets that they are designed to exploit: the relationship

among currencies, interest rates, indexes, and so on. There is nothing inherently commensurable between, for example, interest rates and stock indexes. A swap, which exchanges one income stream for another (floating to fixed, for example), is incommensurable with a directional bet on the near-term relationship between two currencies. Derivatives also differ at the token level because even apparently identical types of instruments have distinct underlying fundamentals. For example, a directional wager on the volatility of Russian interest rates is socio-economically distinct from a parallel wager on the directionality of interest rates in the United States because the forces and institutions that determine rates are themselves different. Insofar as the objective of the derivative is to create connectivity across difference, meaning that the instrument in question must capture these differences, then the context or ground for each derivative will be as variegated as the realities that it captures. In the case of cross-border transactions, it will necessarily include often very different political cultures and economies. The pricing models in use cannot adequately reflect the differences between the underlying political cultures and economies (tending to reduce these differences to formal categories such as political or country risk based on summary images), thereby introducing a type of opacity that the model cannot itself detect. Phrased another way, all formal models implicitly rest on the claim that they are useful because they are fitted to the world as objectively given. From this it follows that if a model does not fit the world because it fails to adequately capture the reality that it purports to mathematize, the results will be precise but inaccurate. A derivative may thus have a precise, mathematically determined price that is also extremely inaccurate. It is important to keep this distinction in mind because our native thinking about quantification, whose power and legitimacy stem from the

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idea of mathematics as the most sacrosanct form of expert knowledge, encourages people to equate precision with accuracy. But objectively, precision refers to, and is the result of, the internal characteristics of the model; accuracy refers to, and is the result of, the success of the model in modeling the world. But beyond precision and accuracy, there is an even deeper mode of understanding, self-reflexivity—the process by which a mode of analysis apprehends the sociohistorical conditions for the production of itself and its object(s) of analysis. Though technical literature on derivatives does not so state, there is a contradiction between the formalist (and formulaic) aspects of derivatives modeling, which presupposes forms of fixity, constancy, and boundedness consistent with the mathematics of Brownian motion, and the unabated demand for new otc derivatives instruments to meet the challenges posed by a transforming world economy. In a globalizing economy of objects, relationships, and representations, where connectivity has itself become an imperative, the continuing innovation of new derivatives is a financial form of experimental practice aimed at creating new cross-border connectivities. Banks, for example, increasingly couple foreign bond issues with currency swaps to lower costs by capitalizing on different spreads to interest rate benchmarks in two currencies. There is an accelerating demand for, and production of, new products; some contracts are in such demand that they are institutionalized on the established exchanges (for example the Euro-to-U.S. dollar contract on the eurex), while other derivatives shimmer only fleetingly before they disappear. Many derivative products are the specialized productions of specific institutions: Bankers Trust, which despite its name is no longer a bank in any conventional sense of the term, has offered its clientele rate-differential swap agreements, lookback currency options, reverse floating-rate note contracts,

interest rate swaptions, currency quantity-adjusting options, and convertible money market units, to cite only a few from its continually changing inventory. Culturally and globally, the improvisation of new derivatives is a perpetual process of probing and responding to a transforming world economy. What goes unnoticed is that the more a situation demands innovation and improvisation, the more acts of classification (classifying a newly created derivative as being of a certain type) embody a creative moment hidden from view by the very institutionalization of the act of classification necessary to price the new instrument. This moment is extraordinarily important because it constitutes the first step in the creation of what is an inseparable, if generally misrecognized, link interconnecting the semiotics and mathematics of the derivative, albeit in a negative way. Given their crucial role in circulation, it is inevitable that derivatives should be extremely heterogeneous and transforming, so much so that analysts who attempt to define what derivatives are must resort to a formal and minimal definition. The conventional definition of a derivative, as a financial instrument whose value derives from an underlying asset, actually says nothing about its basic character, content, or contextualization. Nonetheless, the organization of knowledge in Euroamerican capitalism moves academic commentators, the commercial media, and those who fabricate and trade derivatives to see all of these heterogeneous connectivity-producing contracts as interdependent instances of a general totality. This totalization also occurs at both the type and token levels. So, for example, the financial community never calls into question the reality-creating assumption that two swap contracts—one yen-dollar, the other rand-Euro—are tokens of the categorical type ‘‘currency derivative.’’ If, however, we acknowledge the total social and political contextualization of derivatives, then these two con-

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tracts are so heterogeneous as to defy lumping or totalization. For example, both the socio-historical context of the South African economy (the legacy of apartheid, the admixture of races and ethnicities, the deeply proletarian character of its workforce, and its export dependence on commodities such as gold) and the organization of the financial sector (the structuring of this sector also deeply inflected by its isolation during the apartheid years) make the rand fundamentally distinct from other currencies. The two swaps are similar in a formal and formulaic sense only—that is, as though they existed independently of their own social histories. Even a brief look at the texts and documents on derivatives is enough to indicate that the financial community treats the relational categories of currency and derivative as though they denoted concrete material objects. In this respect, the derivative is nothing less than a socially imagined, relational object whose socially constituted character is that of a naturally occurring, concrete object. What this pointedly indicates is that financial derivatives capture their own production through the circulation of a practice in which the category, derivative, creates a totality only retrospectively—that is to say, as an objectification of its own praxis. The practice is thus performative and retrospective because it already presupposes the totality of the category as a condition of its own production. So every act of the appearance of the object is also the disappearance of its social character. There is a kind of ontological reversibility in which the derivative can appear practically only if its social character remains invisible while its social character appears only in the most impractical way, such as in the academic discourse of formal socioeconomics. The usual concept of the derivative is thus what Marx would have called the fetishized appearance of a much more complex reality, a reality that is more open-ended, more dependent on forms of collective agency,

probabilistic solely in the epistemological sense, its trajectory defined more by functional teleologies than by random processes—in short, a reality that is thoroughly sociohistorical. In this way, the concept of the derivative not only masks and misrecognizes the processes and conditions of its own production; its abstract character is an instrumental aspect of the real relations of financial circulation that it mediates and helps to engender. This view is not only light-years from the economistic view held by the financial community but cannot be imagined or considered from it. The Contrast of Capitals

Financial derivatives and speculative capital stand as instrument and agent in the global circulation of the money form. This was not always the case. Historically, speculative capital emerged from existing forms of capital, first as its surplus and then as its competitor. Speculative capital is an indispensable aspect of contemporary finance because it facilitates the availability and pricing of derivatives, thus allowing for the construction of a market for corporate hedging. More critically, although capital used speculatively has long existed, its embodiment in derivatives leads to a qualitative change in its basic character. To understand how this qualitative change might come about, it is necessary to contrast forms of capital. In a capitalist economy, capital typically has three basic forms. They correspond to the various dimensions of the production process, each contributing to capital’s primary objective of increasing the rate of return and thus the surplus garnered by the owners of capital. For most of the history of capitalism, especially its recent history, the central figure in the production process was industrial or manufacturing capital. This refers, of course, to the money spent on plant, equipment, and people to increase productivity and thus the rate

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of return. So, for example, a manufacturer of cellular phones may plow its accessible capital into new plants, technologies, and designs in the expectation that it can successfully distribute and profitably sell enough phones to generate a positive return on capital. But manufacturing cannot alone generate a positive return on invested capital because it constitutes only one moment of the cycle of production, distribution, and consumption. The labor and intervention of wholesalers, distributors, and retail merchants is needed to ‘‘move’’ the product. Thus a mobile phone manufacturer (such as Motorola) may use distributors (such as Arrow Electronics and Avnet) to supply retail outlets (such as Radio Shack). The capital that the intermediaries use to finance their operations is commercial in the sense that its goal is to connect supply with demand. Commercial capital depends on its industrial cousin, for it siphons off a portion of the surplus value embodied in a commodity at the time of production in exchange for allowing manufacturing capital to turn over, and hence expand. Moreover, because of a division of labor premised on the understandable reality that wholesalers, distributors, and retailers are more efficient at their tasks than manufacturers are, the use of commercial capital permits industrial capital to turn over more rapidly, thereby increasing its rate of return. The use of capital in another capacity, as credit, adds further efficiencies to the objective of augmenting the rate of return. Credit capital functions as leverage to industrial capital and commercial capital, providing them with the means of increasing their productivity and profits. So long as the manufacturer can successfully deploy more capital and the yield on the use of that capital is greater than the interest rate charged by the lender, credit capital will augment the rate of return of industrial capital. Commercial capital tends to accelerate the turnover of industrial capital, while credit capital

tends to increase the quantity of capital turned over. Thus our cellular phone producers may obtain capital by borrowing from corporate banks and issuing bonds to buy more, and more efficient, equipment than would be possible by relying on internally generated cash alone. If, as is now true of many of the metropole’s manufacturing sectors (such as automobiles), producers cannot successfully deploy more capital or even earn the cost of existing capital, there will be an overaccumulation of capital in the metropole and an outsourcing of much production to the multipolar periphery. These are, of course, the exact sociohistorical conditions for the problem of global connectivity and the rise of speculative capital. Both commercial capital and credit capital feed off of industrial capital, and for this reason they share its characteristics. Their profitability is either directly or indirectly rooted in, and determined by, commodity-producing labor. The system works on the premise that each of us will sell our labor in order to buy from others what we cannot produce ourselves. In this respect, the profitability of these forms of capital is invariably mediated by labor, however circuitously. These forms of capital are directly situated within and internally organized in terms of the sphere of production, thereby constituting the financial bedrock of production-centered capitalism. That industrial, commercial, and credit capital all share one final objective exemplifies the point. A brief glance at the history of business, with the rise and demise of so many industries and enterprises, is enough to convince us that the quest to increase the rate of return on industrial capital invariably faces an array of serious risks. The elements of nature, such as hurricanes and blizzards, may destroy or idle plant and equipment, distribution centers, and retail outlets. The critical executives of a company may perish suddenly. Newer, more profitable industries may hire away the most innovative designers and productive workers. There

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is always the great risk that given the time lag between the conception and consumption of a product, consumer tastes may change. And the list of course goes on indefinitely. The common denominator in these diverse risks is that they are all concrete and external to the production process. If they did not exist, production would not only go on; it would be the better for their absence. Indeed, a primary goal and conspicuous failure of socialist command economies, such as the Soviet Union, was to eliminate most of these risks. All the forms of industrially related capital operate on the premise that the best way to counterbalance these immediate risks is to take a long-term perspective. Harmful causes, such as hurricanes and general strikes, happen episodically rather than routinely or assuredly. So entrepreneurs assume that fluctuations in these risks will iron themselves out over the long term and that insurance is available to guarantee that the business can continue to produce or distribute despite a serious harmful event. Speculative capital, by contrast, focuses on the fluctuations themselves. It thus bets that individual events and processes will disrupt, if only temporarily, the long-term continuities. In taking this perspective, speculative capital becomes entirely distinct from both the substance and the trajectory of the underlying assets; the temporal horizon of speculative capital is the short term. This short-term perspective has several immediate effects. The first is that the connection between the wager and the underlying asset becomes completely arbitrary. Traders can use any derivatives contract to hedge or speculate: whether or not they own the underlying asset is material only insofar as owners can use the underlier to collateralize the trade. The second effect is that risk becomes central to the design of the speculative instrument. The reason is that the wager itself is on the probability of a singular event or fluctuation. Effectively, then, speculative capital runs on risk; it runs on its

determination and distribution through the production and pricing of derivatives. The third effect is that time itself becomes a form of uncertainty or risk. The reasoning is that the longer a contract is outstanding, the greater the chance of fluctuations. As a result, the temporal trajectory is to minimize the time span between the purchase of a derivative and its expiration date. The optimal point is thus reached when the time span between purchase and expiration is zero: that is, when there is arbitrage. The globalization of financial derivatives more than amplifies the systemic effects of speculative capital; it constitutes a qualitative change in its character. Before the emergence of a global culture of financial circulation, options and forward contracts were ultimately grounded in production because the underlying asset was a dimension of that regime. For example, the buyer of a call option on a computer manufacturer, such as ibm, was betting that a growing demand for its computers would increase its profitability and thus its share price. Similarly, the buyer of a call option on a money center bank, such as J. P. Morgan Chase, was betting that a growing demand for credit capital by, for example, computer manufacturers interested in buying new capital equipment to increase output would lead to greater bank profits and thus a higher stock price. In the same way, forward contracts for the future sale of cattle, soybeans, petroleum, and other commodities were grounded in production, and primary production at that. All these derivatives were production-based, which had two implications. The first was that the regime of production often constrained the production of derivatives. Creating contracts was impossible for some products, such as women’s textiles, and unnecessary for others becase of lack of demand (the fluctuations were so small and regular as to be of no interest to speculators). The second implication was that the political system could supervise what was essentially a do-

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mestic market, made and manned by local participants. And both the exchanges and participants had known addresses. Financial derivatives have changed all this. Now the underlying asset is no longer coupled to production, but to the medium and means of circulation: money. In the sphere of production, money expresses the deep commensurability, and facilitates the surface exchange, of commodities. In the realm of circulation, money simply expresses and facilitates itself. In what are rightly called the money markets, money mediates itself as capital, currency, interest, and so on. The result is that the underlying asset can now become an abstract relation. Consider that a derivative that speculates, for example, on the volatile relationship between the U.S. dollar and the South African rand takes their abstract relationship as its underlier. Or consider that a swap takes the abstract interrelationship between fixed and floating interest rates as its underlier. In other words, the object of the financial derivatives market is the interconnectivity of forms of money. When the underlier is an abstract relation, centered within circulation, a new world opens up for speculative capital— a world that speculative capital seeks to make in its image. Freed from the constraints imposed by production, the market for financial derivatives faces no immediate limit to its size. And indeed, production-based derivatives, futures on commodities, and standard stock options have become an insignificant fraction of the derivatives market. Once almost the entire market, they now constitute less than 1 percent of the total dollar volume of trades. More significantly, once the speculative capital devoted to financial derivatives becomes self-reflexive and begins to feed on itself, it develops a directional dynamic toward an autonomous and self-expanding form. It operates independently of production and becomes extremely large and growing. So in the end, the creation of risk-driven derivatives that focus on the interconnectivity of

forms of money allows for the rise of a new and powerful form of circulation-based speculative capital. The Social Abstraction of Risk

In a capitalism tilted toward circulation, the character of risk becomes different from what it would be under a regime of production. As long as analysis grasps circulation as simply the connective tissue linking production and consumption, then risk is a socially unproblematic category. Its meaning is as pragmatic as it is clear: the possibility of economic loss due to a failure of production, loss during transport and storage, or the absence of market demand. And commodities futures markets have dealt with this form of risk for a long time. Such risk is concrete and extrinsic to the inner dynamics and organization of the economy. This view, which is the standard economic view, understands risk as a transhistorical and transcultural reality: accordingly, what differs across time and culture is the realization of the risk and the measures taken to mitigate it. So conceived, the objectification of risk is not an intrinsic aspect of the culture and sociostructures of financial circulation, but an extrinsic reality that the financial community deals with through the creation of financial instruments such as derivatives. By marked contrast, the approach taken here sees risk as a socially and historically specific construction. It grasps the conceptualization of risk embodied in the risk-bearing derivative as fundamentally specific to the cultures of circulation that shape contemporary globalization, not least the culture of financial circulation. The implication of this perspective is that postmodern objectifications of risk are neither transhistorical nor transcultural. Rather, they possess a social character specific to these cultures of circulation. The manner in which the culture of financial circulation deals with risk is

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more than simply a technical process because the social objectification of risk defines this process. The emergence of the culture of financial circulation is thus inseparable from the objectification of risk, as is the underlying and roiling contradiction between the socio-historical foundations of risk and its analysis through stochastic models founded on the denial of those foundations. The contradiction surfaces in, and as, the field of risk management. It appears in its research and practice as a recurring scene in which even the most sophisticated manager fails to reach the horizon of managed risk because suddenly, unexpectedly, unanticipated social variables destabilize the portfolio and cause exactly the kind of losses that risk management was supposed to prevent. In one dimension, derivatives attempt to mitigate the risks engendered by particular concrete situations, such as the possibility that the dollar will decline in relation to the Euro. In another and deeper dimension, derivatives are objectifications of abstract risk. Because the relationship is complex, but no less important for being so, it is worth considering the terms ‘‘objectification’’ and ‘‘abstract.’’ Objectification refers to the way in which the financial community imagines or thinks of a relational category as though it were an object category. So, for example, it imagines the relationship between the leadership of a particular government and its national economy as an objectively measurable thing called political risk. Abstract refers to the quality of relationships that the financial community reduces to things or object categories before bundling various forms of risk together into a package. It is this objectification of abstract risk that defines and determines how agents think about the character of the global circulation of capital through the new financial instruments, and it also distinguishes this form of circulation from the long history of worldwide trade in commodities. Hence, the derivative is the general form of relation or connectivity in the culture

of financial circulation, or, from the opposite direction, the reason why the financial community calls any product that fosters connectivity a derivative. Conceived in this manner, the derivative must presuppose the existence of abstract risk in the act and instrument of mitigating an amalgamation of concrete and specific risks (as with the company in the example in chapter 2 that outsources its production of cellular telephones). The culture of financial circulation runs on the derivative that in turn is based on the objectification of risk. The objectification of risk requires that those who measure, manage, and manipulate risk detach it from the social context in which it is immersed. Thus the financial community abstracts the element of risk from the intertwined social, economic, and political circumstances that gave rise to that risk, removing the risk to a conceptual space in which it may be considered independently of these circumstances. The financial world institutionalizes this process by ascribing names that insert these instances of risk into a classification system. Thus the financial field recognizes interest rate risk, counterparty risk, volatility risk, country risk, credit risk, directional risk, transaction risk, and so on. The process, in the act and fact of inserting the instances of risk into a classificatory scheme, asserts that they belong there, and going back one step, that they may indeed be detached from their social contexts. The baptism and acceptance of a name, that is the nominalization of distinct types of risk, helps to transmute the thing named, because its existence is no longer inseparable from other relations. It becomes, in other words, a social function: an object that has a definite and autonomous character. In this respect, risk itself comes to define social relations in terms of place or any other form of definition. One result is that agents immersed in this culture of circulation, including those in business economics, do not accord a social character to risk. Rather, risk resembles

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the real-world result of the combustion of economic, political, demographic, and other forces. Abstract risk seems undeniably objective in that from the perspective of those involved it is a uniform and general sphere of unavoidable abstract necessity that functions in a lawlike manner. This determination of risk is such that the corporation’s own needs appear to be the source of the necessity. Seemingly the risks associated with transnational circulation are impersonal, objective, and structural, and therefore not social at all; and thus the compulsion to offset risk is understood as a natural response to an objective reality. That economic activity everywhere is risky obscures the tendency of transnational circulation to produce a historically determinate and socially constituted form of risk: abstract, discrete, and quantifiable. Circulation conflates the two under the cover of an apparently indisputable necessity: companies that operate globally must defer and distribute risk to stay in business. The risks that are produced locally in a specific time and place manifest themselves as a decontextualized necessity. According to this logic, the election of a more ‘‘liberal’’ president in one nation or the enactment of a low-income housing project in another increases risk in the same way that a prolonged drought increases the risk of crop failure. The social illusion is that the foundational act of objectification that brings abstract risk into existence and the reproduction of this objectification through the circulation of specific derivatives conceal each other. And practically, agents can certainly buy and sell derivatives as though their only social aspect were the execution of the contract. Connectivity and Risk

In contrast to the production cycle, which allows manufacturers, wholesalers, and their bankers to minimize risk by investing capital for fixed extended periods, what defines the

character of circulation is variable short-term risks. Globally oriented corporations must continually hedge against such risks and thereby engender their own market, seeking globalized financial markets that are as open, as universal, as politically unregulated, and as liquid as possible.1 The generative schemes of speculative capital, through which it interconnects markets once wholly national, are both highly technical and improvisational. To give an example of the new technical coupling: now that the prolonged recession in Japan has pushed the country’s interest rates to nearly zero (in late 2003 a typical rate offered on deposits was 0.001 percent a year), hedge funds, especially from the United States, and other arbitrageurs have been actively borrowing billions of yen from the strapped Japanese banks. They are converting the yen into dollars and European Currency Units, then lending the money at considerably higher rates to corporations outside the g-7 in need of a ‘‘hard’’ currency (for instance, to a Brazilian firm that wants to purchase the technology it needs to outsource for a g-7–based firm), and hedging the strategy by combining long Eurodollar positions and U.S. dollar-to-yen and Euro-to-yen swaps. One does not have to become fluent in the technical grammar of the transaction to appreciate that these strategic capital movements (1) implicate globalized production and circulation, (2) involve both hedging and speculation (foreign borrowers could potentially default if their ‘‘soft’’ national currencies were suddenly devalued), (3) serve to interconnect dispersed sites of production, the fixed income markets in the United States and Japan, and currency derivative and global interest rate markets, and (4) do all this in such a way that a series of formally independent but interconnected transactions produces a systemic effect. It is also worth noting that the goal of the participating hedge funds and arbitrageurs is to minimize their exposure by compressing the investment

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period, finding ways to offset the transactions, and shifting privately incurred risk to the public system as a whole. The creation and concentration of enormous pools of speculative capital in concert with the development of financial instruments has begun to sediment a new level of financial reality, giving a historically new and exponentially more powerful meaning to what has always been the global outreach of capital under western capitalism. Not the least of these new meanings centers on the reorganization of economic time. Speculative capital helps to shape a circulation-based world of derivatives that lies at the other end of the temporal continuum from production. In sharp contrast to investors in the production cycle, who attempt to mitigate risk by elongating the investment period, the speculators who drive the global flows of capital seek to minimize risk by compressing time and distance. These speculators compress time by simultaneously assuming long and short positions that generate profits without exposing them to the full measure of risk. And even when speculative capital makes positive directional bets, the time horizon is extremely short when compared to an investment in production because, in the case of derivatives, the underlying asset is characteristically only an abstract relation (such as that between currencies). The movements of speculative capital are thus rarely measured in years, more usually in months and sometimes in minutes. Where the production cycle for a durable good is often as long as a decade and has no predetermined termination point, derivatives always expire at preset dates and almost always in the immediate future. In the cycle of augmentation, M–C–M', speculative capital passes through the stage of commodification only in the notational form of the derivative. Derivatives compress space by using new technologies that link geographically dispersed markets into global communications systems such that even the most complex transactions are in-

stantaneous and virtually costless. The compression of space does not, and is not intended to, eliminate difference in the name of sameness; it opens local sites of difference to the flow of financial power. Indeed, as peripheral states restructure their banking sectors to deal with new financial instruments, they also create new platforms that the local elite can use to export capital to the metropole. All these financial and technological transformations make possible the ascendance of an opportunistic and speculative capital that is constantly on the prowl for sudden and random inefficiencies across markets. In fact, movements of speculative capital instigate or exaggerate some of these inefficiencies. To pounce on these episodic possibilities, capital must be immediately available rather than tethered to long-term investments, so that the principals can relocate their capital with a few strokes of a computer keyboard; the result is that the opportunistic nature of speculative capital materializes as a drive to be mobile, nomadic, and fixated on short-term ventures (Saber 1999, 73). The emergence of speculative capital and arbitrage is the flip side of business hedging strategies designed to preserve equity.Within this arena, nothing seems more appropriate than derivatives which combine in a single financial instrument an objectification of risk and a means of leveraging that risk, and can be used for both hedging and speculative purposes. It is not surprising, therefore, that the use of derivatives increases geometrically as the global circulation of money and capital ‘‘discovers’’ new forms of risk. Theorizing Circulation

Derivatives, especially those having to do with the transnational flow of capital, are one of an increasing number of powerful examples of the ascendance of new sociostructures of circulation. Infiltrating the platforms of production, these

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structures are orchestrating the global displacement and dispersal of production-working labor. They are also fabricating the resources of connectivity that allow for the despatialization of the social processes of combining raw materials, technology, and labor to produce commodities. More than reorient production, these forms of circulation seem to imbue capitalism with a transformed sociostructural logic. A crucial way in which they amplify the horizon of its existing logic is by valorizing risk as a new and privileged form of social mediation. Over and above the mediation of social relations through commodity-determined labor, the cultures of circulation seem to give rise to a form of mediation founded on information. With the technologically accelerating mobility of capital (brought about in great part because so much capital is mobilized to accelerate technology) and the development of complex derivatives (which are, in great part, capital’s adjustment to this new technology), we are heading into an epoch where the leading edge of capitalism is no longer labor-based commodity production but rather the expansion of finance capital. Capitalist social relations are no longer mediated only by labor but by risk, because these new financial instruments assume that particular forms of risk, no matter how existentially incommensurable (such as the risk that a software program will gain end-user acceptance and the risk that interest rates will remain steady during the introductory phase of its marketing), can be aggregated as an abstract form, susceptible to and determinable by mathematical calculation, combined within a single derivative, and then distributed to speculators, many of whom have collateralized their payment by making wagers in the reverse direction (that is, engaged in arbitrage). This also appears in the principle that corporate entities have a fiduciary responsibility not to assume their

own risk with respect to capital and its monetized circulations. The use of derivatives to commodify risk has also transformed the temporal horizon of circulation-centered capitalism. The contrast with production-centered capitalism is clear when we look at the term ‘‘arbitrage,’’ usually defined as simultaneously buying an asset for a lower price in one market and selling it at a higher price in another. If we relax the temporal restriction of simultaneity, then arbitrage, buying low and selling high, is simply the way to make a profit. The simultaneity of the buying and selling highlights the dimension of risk: simultaneously buying low and selling high would be a riskless profit. Unlike in production, the temporal horizon or dimension of financial circulation centers on the short term, indeed the shortest term possible. This shortterm horizon is realized and exemplified in speculative capital’s quest for arbitrage, a situation in which counterbalancing positions neutralize the risks created by duration: that is, the time lag between the initiation of the derivative and its expiration date. Speculative capital is referred to as hot money, meaning that within circulation there is a temporally directional dynamic aiming toward the compression of time, in terms of both keeping any one derivative position open and turning over capital as expeditiously as possible. Although superficially this is an issue of time, a sliding scale of more time or less, the evidence indicates that it is a further qualitative determination of circulation. The reason for this is that time is exposure to risk. It is a ubiquitous form of risk characteristic of every derivative of every type.Within the sphere of production, producers minimize the externally produced risks that they may encounter by lengthening their time horizons. They reduce their exposure to production’s various uncertainties

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by adopting a long-term perspective, with the understanding that environmentally motivated gyrations in returns on capital will eventually iron themselves out if just given sufficient time. Some examples are in order. A producer of semiconductor microchips (such as Intel or Advanced Micro Devices) may dip into the capital markets to fund the purchase of new manufacturing equipment. Because of the expense of the new equipment, the return on the investment will by no means be immediate. The producer runs the twin risks that interest rates may increase and that a slump in personal computer sales may drive down demand for its microchips. Nonetheless, it makes an investment in new equipment anyway in the belief that over a three- to five-year period fluctuations in demand and thus microchip pricing will even themselves out, making the capital investment worthwhile.With this in mind, corporate officers, even in a field with production cycles as rapid as those of semiconductors, continually emphasize their long-term perspective. Or take a firm such as Amazon, whose profits depend on the transshipment of goods. It recognizes that nature, in the form of a blizzard, hurricane, or cyclone, will occasionally destroy or temporarily shutter a distribution center, that truck containers of packages will sometimes be hijacked, and that the employees of the shipping company may walk out or strike over their grievances. However, the company (and its insurers) will also assume that the longer the time horizon, the more transportation risks will smooth themselves out, making it possible to price the risks into its costs of doing business. In both cases, the risks are external and thus time is an ally of risk management. By contrast, an inverse set of risk conditions determines the sphere of global capital circulation. Because every derivative has an expiration date and because the time period bracketed by any given derivative has no external referent—the re-

lationship, for example, between currencies such as Euro and dollar is continuous—time is both a source and a quantifiable dimension of risk. Time is a summation of the length of exposure to abstract risk and thus to the possibility of greater volatility. Accordingly, for speculative capital the mitigation of circulatory risk depends on the compression or neutralization of time. The directional dynamic is aimed directly toward the short term. For speculative capital, the means of connectivity, the derivative, becomes the end in itself as its source of profit and reproduction, meaning that to minimize risks speculative capital must continually turn itself over in the shortest time possible. The short term thus comes to define and dominate the temporal horizon for the movement and reproduction of speculative capital. The result is that the culture of financial circulation attempts to create social forms, such as abstract risk, and institutions, such as clearinghouses, that allow circulation to turn upon itself. A peculiar world emerges in which the continuous flow of sociohistorical realities (such as the relationship between intertwined economies and currencies) reappears as a quasi-autonomous circulation of short-term, abstract risk–bearing, socially decontextualized derivatives. The derivative, in essence, has a short-term temporal dynamic that not only is entirely different from that of production—it has entirely different social consequences. A World at Risk

The science of modern finance—the body of work produced in the fields of economics, finance, and accounting—goes a long way toward naturalizing its evolution through a selfunderstanding that imagines the invention of financial instruments as an efficient, rational, and compulsory response to changes in an objective structure that lies, like the solar system, simply out there. The supposition is that the world pro-

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duces a reality of risks as an unmediated, unavoidable consequence of economic behavior, that agents respond rationally to the risks by finding the right tool for the task of mitigating these risks (that is, derivatives), and that the nature of the efficiency of free markets leads to the formation of speculative capital. The evolution of derivatives and the rise of speculative capital are fundamental responses to changes in the reality of the risk, the deepening of its profile, the darkening of potential dangers. Blake and Walters (1976), for example, writing in the immediate aftermath of Bretton Woods, state that ‘‘the emergence of the Eurodollar market was a direct response to the necessities of financing expanded international transactions’’ (49). Whitman (1977) says that floating rates are an ‘‘inevitable response to the presence of high and widely divergent rates of inflation among nations’’ (144). Crane and Bodie (1996) argue that historically, ‘‘form follows function’’ in financial markets so that the ascendance and design of derivatives are an outcome of the functional needs of global corporations to manage the changing character of world finance. Stigum (1990) asserts that it is entirely natural for derivative markets to be located in the West because the periphery is beset by ‘‘political instability’’ and populated by groups (‘‘the Arabs’’ are explicitly cited) that have ‘‘displayed little talent for the sort of cooperation’’ required to develop money centers and for the most part ‘‘have never displayed great interest in or aptitude for banking and finance’’ (253). In an article about why ‘‘derivatives’’ evolved, Miller (1986), drawing on an appropriately naturalistic metaphor, says ‘‘they were lying like seeds beneath the snow, waiting for some change in the environment to bring them to life’’ (4). The idea is that the increasing importance to contemporary companies of always-existing forms of risk has led to the evolution of the derivative as a probability-calculating tool. Amplifying this view of history, Silber (1983) and Kane (1988)

argue that the explosive interaction of technology with three ‘‘exogenous’’ forces—the monetary environment after Bretton Woods, the matriculation of an ever-increasing number of nations to the power of global economic actors (such as the ‘‘Asian tigers’’), and attempts by metropolitan governments to rein in and regulate unregulated markets—made the discovery and development of the derivative and its markets ‘‘inevitable’’ (Silber 1983, 92). Embodied in these histories is an unstated narrative of predestination, a story line that depicts the financial tools, objectification of risk, and capital markets that materialized at this particular historical conjuncture as the natural and only possible reply to changes in an objective and extrinsic environment. Though it remains invisible and inchoate, beneath this way of visualizing history is a chain reaction of techno-scientific assumptions that sees the global economy as a world of individuals, variously handicapped by their traditions and subjectivity, but in which the fittest are able to divine new ways of maximizing their position and profits by creating derivatives to manage the risks objectively given by an objective reality. What is remarkable is that scholarly accounts of derivative markets produced by business economics and kindred disciplines tend to simply flesh out and organize the ideology of the participants, thereby ignoring all that practice in its most pre-reflective state ignores, and moreover, offering a scripted performance that legitimates and circulates the fetish of that market as a universal form. Accordingly, standard economic theorizing on capital markets and risk can never provide the basis for analytical understanding, especially of their sociostructural character, because the theorizing assumes a prior objectification of the very socioeconomic relations upon which the theorizing rests. These accounts rule out a self-understanding of the pragmatics of the theorizing’s own intervention.

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Metropolitan capitalism—in the person and institution of market makers, government officials, and formal economists —grasps the monetization of risk as inherently beneficial to producers and consumers. The understanding is that to obtain efficiently determined present or spot prices for currencies, capital, and other commodities, it is necessary to have at hand efficiently set future prices. The perfectly functioning market is one in which buyers and sellers can accurately discount the deltas of the future prices of the money and commodities transacted, allowing the market to take, for example, inflation or the future price of money into consideration. So the efficiency of present prices turns on the market’s ability to objectify the future, and to do so accurately. The assumption, from the standpoint of market models, is that present prices perfectly reflect the current state of knowledge concerning future supply and demand—that is, the culture and technology of the circulation of information (such as price reporting) are frictionless. Closer to reality, the market recognizes that present prices range from slightly to moderately inefficient because there is not enough reliable transparent information concerning the future. On these grounds, it seems that liquid and transparent exchange-traded derivatives, because they quantify future prices, perform a unique and valuable role in price discovery. On the basis of this argument, at once theoretical and political, regulators in metropolitan governments, especially those schooled in economics (members of the U.S. Federal Reserve and the European Central Bank), have consistently looked kindly on derivatives and thus refrained from regulation. However, there is more to the story, particularly for economically marginalized or distressed states. Certain classes of derivatives (such as knockout exchange rate options) used extensively in currency, interest rate, and energy sectors do not simply provide a means of discovering future prices but are

active instruments in setting present prices. As a number of commentators have noted (Malz 1995; Steinherr 2000, 108– 9), the way derivatives monetize time has led to serious price volatility for reasons having nothing to do with the fundamental economic value of underlying assets.What this means is that for purely technical reasons—reasons that seem arbitrary, mysterious, and sometimes capricious from the outside—currency values, interest rates, or energy prices may rise or decline for reasons sharply independent of the realities of a country’s political economy. In other words, the hardship caused by a currency depreciation or a spike in interest rates may be a completely inadvertent result of the internal operation of the market. Furthermore, because the market is invisible and so much faster-moving and more volatile than production cycles, those who produce for export in locations like South Asia and Africa are at the mercy of a market so far beyond their comprehension or control that they can only puzzle about how, in the space of a fortnight, the economic environment has turned so forcefully against them. We can now amplify our previous discussion by noting that purely technical market-internal factors can cause the devaluation of a currency, which in turn motivates opportunistic speculators to participate on the down side, the downdraft in the currency progressively feeding on itself until such severe damage is done to the economy that what began as a market imperfection ends up having an enormous reality effect for an entire population. More than simply monetizing time in a specifically (post)modern way, the character of financial derivatives gives substance to a new form or realization of money, what amounts to an extension of credit money. A new form of money comes into being because, structurally, its foundation is neither the intrinsic source of value thought to inhere in precious metals nor the authority of the state, but rather a mutual interdepen-

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dence founded on the necessity to mitigate uncertainties (im)posed by the future performance of distant monetized spaces; and because, functionally, it does not serve either as a store of value or as a medium of exchange but as an embodiment of a discrete flow of quantified simultaneous time. A derivative contract is a collateralized ‘‘promise to pay’’ that is constituted and held in place by historically specific institutionalized social relations. These institutional relations establish and enforce a means of contractual settlement. Given these realities, derivatives function as far more than symbolic placeholders in the exchange ratios of the real (read: productionbased) economy. Rather, they function as a platform for configuring credit, debt, and account in such a way as to facilitate circulation. This is significant because as the augmentation of the financial derivatives market amplifies willy-nilly the supply of credit money on a global scale, it undermines the chances of stable transnational capital circulation. From this standpoint, it should not be hard to see that financial derivatives constitute a real economic weapon, those who control their supply and circulation able to control others economically. At another level, financial derivatives also shape a new means of grasping historical events, in that they presuppose that the market can reimagine and reduce sociohistorical processes, no matter how seemingly incommensurable or complex, to terms of abstract, quantifiable, and hence manageable risk. The expected volatility of a cross-currency derivative, for example, will encapsulate the state and anticipate the stability of the two nations’ political and financial systems, as well as the internal behavior of the market. The financial derivative thus has an underlying categorical structure based on its ability to ontologize real-time event structures. The social fiction made real is that aculturally derived technologies of understanding—especially the development of par-

tial differential equations for modeling time-bracketing transactions—permit (post)moderns to parse any event structure into its naturally occurring components, to abstract those components from the event structure and from their temporal flows, and to assign a calculable and quantified value to these components, thereby allowing agents to entertain the expectation that they can predict and manage future events. These concepts, which underlie the performativity of derivatives, function as an unconditional, nonconscious, state-ofthe-world social ontology. Those who participate in the division of economic labor that presupposes and distributes risk assume that this social ontology is an unquestionable and unmediated reflection of financial realities. Moreover, the development of globalized trading firms, derivative exchanges, hedge funds, banking divisions that specialize in creating and marketing derivatives, and journals devoted to risk management continues to institutionalize this social ontology. While any single derivative ‘‘predicts’’ or discounts the future, derivatives as a class of financial instruments significantly influence that future. Certainly, the calculus that agents use to determine the value of a derivative assumes that its effect on the future is so minimal as to be discounted in the discounting mechanism. However, while this may be more or less true with respect to an individual transaction, derivatives as a collective action transform the economic landscape. The risk is that by geometrically multiplying leverage throughout the system, the collapse of one firm could ignite a chain reaction, which because of an unprecedented degree of connectivity, could eventually threaten the global financial system. Further, because so many money managers are immersed in the same Euroamerican culture of financial circulation they are preadapted to sense or read the market in the same way, leading them to act in concert but not collusion. The exponential growth in the use of derivatives stems precisely from

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the reality that they do transform the event structures they seek to model through the sheer quantity, connectivity, and monetary value of the transactions. In a significant sense, then, the derivatives market embodies a deeply rooted contradiction. On the one hand, it assumes that the analysis of a derivative can discount and quantify risk because the social reality that it models will remain constant over the life of any specific transaction. On the opposite hand, derivatives as a class of financial instruments are powerful because they transform that social reality and therefore the character of the risk that engenders the social interdependence of the principals. In this respect, the price that the market assigns to a given derivative will always be precise —a specific number—but only fortuitously accurate because the nature of the derivative itself violates the entry conditions for the use of the partial differential equations used to calculate prices. The reason is that though the derivatives market destroys its own past conditions of production, the equations assume that it is possible to measure volatility because some sequence of historical values occurred under the very same conditions of production. The pricing of derivatives thus presupposes that they simply reflect economic reality rather than have a hand in creating it, meaning that to the extent that the global market for derivatives, in concert with other social and historical forces, transforms political and economic conditions, it will be impossible to accurately calculate volatility and thus price a derivative accurately. In different words, every derivative pricing has some degree of inaccuracy that may be great or small, but is unknowable until it is too late. One result is the possibility of financially shattering debacles such as the Orange County fiasco, the bankruptcy of Baring, and the collapse of Long Term Capital Management, run, a bit ironically, by two economists honored with Nobel prizes for their quantitative wizardry in pricing options. In

these cases, the extraordinary leverage that derivatives afford was combined with a (mis)pricing that failed to properly account for the volatility of the underlying assets. A more recent example was the announcement by American Express in July 2001 that its financial arm had suffered a loss of $826 million on derivatives, moving an economist who determines derivative quality for the financial rating service Moody’s to be quoted in the New York Times as arguing that because the ‘‘computer models used to figure out how to value risks are not very good’’ the pricing of such derivatives is frequently ‘‘not very sophisticated’’ (Norris 2001). To compound the irony, the same article began by noting that the market thinks of collateralized mortgage obligations as one of the most intensively studied and understandable derivatives. Similarly, in November 2001 Enron, then the seventh-largest company in the s&p 500, imploded on the basis of cascading losses in the leveraged off–balance sheet trading of a type of derivative that it had invented and created a market for. The debacles that occur within the sphere of circulation have a very different underlying temporality from that of production. Whether it is called the ‘‘business cycle’’ in conventional discourse or the crisis of over-accumulation in Marxist discourse, the understanding is that as a capitalist economy operates over time the relationship between production and demand will become sufficiently disjointed and discordant that it can be righted only by a painful and occasionally prolonged period of readjustment. Though they differ sharply as to its cause, both business and Marxist economists agree that crisis is a systemic feature of the operation of a capitalist economy because there is no way to repeal the business cycle or the imperative to overaccumulate. Each individual crisis is thus grasped as an example of an underlying and inherent temporality. The cyclical downturns immanent in the structure of production unfold over a matter of years, corpo-

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rations and entire industries slowly being pushed toward a financial precipice as their rates of profit contract. The tortured decline of steel manufactures in the g-7 nations is a case in point: each cyclical decline in the rate of profit produced a lower low until there was industrywide failure. By contrast, the structures of circulation leverage the short term, putting capital in accelerated motion and thus so condensing the temporality of failure that it almost appears to be instantaneous. What is at issue in this space is not the relationship between production and consumption, but circulatory relationships infused with risk because they are separated by time or distance. That is the essence of arbitrage, the shape of financial instruments that quantify abstract risk and come with expiration dates. Ideologically, this cognitively distant and displaced vision of the derivatives market implicates the continual naturalization of convention. In a critical and recognized sense, the efficiency of the market depends on the creation of a (seemingly) objective structure, one that then conceptualized as an authoritative collective agent compels participants to accept this social ontology as natural. Commentaries on the derivatives market (Taylor 2000; Bank for International Settlements 1996; Group of Thirty 1993; plus any issue of the trade publication Futures and Options World ) so deeply presuppose the naturalized convention of transparently factual, abstractable, and quantifiable risk that these categories do not warrant mentioning, never mind reflexive discussion. Market participants take the position that although financial derivatives originated in the late twentieth century in direct response to the globalization of circulatory capital, they reflect a reality that could not have been otherwise. Accordingly, these participants cannot but imagine that the otc markets as well as the global electronic exchanges such as globex embody the collective agency of the market, which appears to stand over

and against individual agents. In this respect, these planetary exchanges which are everywhere and nowhere, seemingly omnipresent but without central location, are a perfect microcosm of the conception of society itself as it appears within modern-day capitalism. The derivative is thus a special instance of the fetish because the financial community fails to appreciate that it is only through an unconscious act of shared imagination that its underlying ontology can come into existence, that this ontology is a necessary condition of the derivative’s efficiency, and that it functions as the ground of the mutuality, sameness, and performativity of creating, buying, and selling these financial instruments. In concert with the ideology of the contract, each financial derivative appears as an autonomous, freely moving entity, in this manner concealing its interconnectivity to other derivatives—what ultimately produces its reality effects, such as wholesale national currency devaluations—and its relationships to both the social contexts it presumes to capture and the social contexts that produce it. On its economistic surface, the derivative appears to be entirely defined by the product itself, the market (the contract-based transaction) and the institutions that do the creating, buying, and selling. The enacting of the derivative is thus a critical moment of reification, as the derivative appears to be nothing more than a market-driven contract between self-determining subject positions: ‘‘seller’’ and ‘‘buyer’’. Because these subject positions treat derivatives as objective instantiations of abstract monetized risk(s), derivatives cannot but impart a fully objective character both to themselves and to the subject positions that engender the transaction. The derivative appears as a technical activity that the market can regulate in an instrumental manner, even as it defines a culture of circulation through the monetization of space-time, based on the cre-

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ation of a new form of money and a new mode of temporality. So though the interests, instruments, and subject positions are new socially and historically, they do not appear to be part of a large-scale epochal transformation in the very structure of capitalism. To buyers and sellers—that is, to the market—they are purely economic and specialized responses to changes in the real conditions of doing business in a global, technologized world.

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6 The World of Risk

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ince the mid-1970s the rapid and unprecedented expansion of speculative capital has produced a new culture of financial circulation that has enormous consequences both for the organization of capital and for the great disparities in wealth and life possibilities between the metropole and the multipolar periphery.What makes this emerging culture of financial circulation new is not the global flow of capital; earlier centuries also witnessed great movements of money. Its newness does not lie in increased levels of technological sophistication and power, though these of course make it easier to carry out nearly instantaneous worldwide transactions. What renders the social relations of financial circulation so historically novel is that they are defined and determined through the quantification and pricing of risk. What we have referred to as the ‘‘objectification of abstract risk’’ relies upon increasingly complicated and sometimes controversial accounting protocols and pricing strategies. Since risk is a relation that objectifies itself in other relations, such as financial derivatives, its function in shaping and stimulating the production of connectivity is inseparable from the moment of objectification. Thus the production of derivatives,

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by objectifying and combining context-specific risks in order to model and price them, also objectifies risk in an abstract form. Beyond this, the power of the financial derivatives market compels those in the developing world to not only accept this notion of risk but to assume a substantial and disproportionate share of the risks engendered by the global capital markets. Operationally, abstract risk appears in two dimensions. The financial community uses the notion of volatility—the speed and degree of price fluctuations—to capture the first dimension. Before the development of modern ideas of risk management (which could also be called ‘‘volatility management’’), most of financial forecasting was based upon statistical enumerations of concrete risk—essentially directional bets on whether the price of an asset would rise or fall. Insurance companies would make similar decisions based upon statistically compiled histories and appropriate samplings. The breakthrough, initiated by Markowitz’s portfolio theory, was to disregard the directionality of specific price swings and focus on their magnitude, measured by statistical notions such as standard deviation. Volatility has become the centerpiece of modern risk management, whether it be in the BlackScholes equations for pricing options, diversification strategies to minimize risk and maximize return on investment, or volatility-at-risk programs to calculate exposure risk. One effect of focusing on volatility was to abstract from the concrete risks associated with particular assets. For example, before the development of portfolio theory, the usual procedure was for investors to simply research individual companies and then place directional bets on whether the stock price of these companies would go up or down, given their knowledge of the companies and their estimate of future risks that the companies might face (such as commodity prices, inflation, and strikes). Markowitz argued that the rate of return

on an investment was not dependent on the chance that one or more of these concrete risks might materialize but rather on the aggregation of these risks as measured by the stock’s volatility. From this perspective, the critical aspect of a stock’s risk is not the risks encountered by the issuing company or the risks associated with the particular stock, but its contribution to portfolio risk. In a model that would eventually appear in the pricing of derivatives, Markowitz argued that portfolio optimization turned on a tradeoff between the expected return of individual securities against the contributions of those securities to overall portfolio risk. He reasoned that because markets were efficient at pricing risk, the greater the risk assumed, the larger the potential return. In addition, Markowitz showed that if one considered a whole portfolio of various stocks, one could maximize return and minimize risk by appropriately diversifying. One way of reading his analysis is that if the standard economic assumptions concerning market efficiency and price competition accurately reflect what is going on (markets are perfect; all investors maximize mean and variance utility functions over a common investment horizon and are equally risk averse, all investors have the same expectations about security rewards and risks), then an analysis of abstract risk is more useful than one of concrete risks. William Sharpe (1964) and others refined and broadened Markowitz’s insights to show how to calculate the average volatility of a stock relative to the volatility of the market as a whole, thereby laying the foundation for what became known as the capital asset pricing model and the notion of value-at-risk (var); at the same time, the refinements and extensions of Markowitz’s theory transformed his calculations of the covariances among all the securities in a market to a relation between each security and the whole market. Though it was noted only obliquely, the development of portfolio management distilled the notion that risks can be

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socially disembedded and aggregated, in the process crystallizing the notion of systemic risk. The growing use of volatility in risk management points to the second dimension of abstract risk. With the refinement of volatility measures and the concomitant pricing of risk, abstract risk became a basic category among various financial instruments and institutions. For example, value-at-risk has become the preferred way of assessing corporate risk; it measures the maximum loss in the value of a portfolio over a given time within a certain level of probability. The Basle Accord (1996) for international banks uses var for calculating capital requirements; when these requirements are not met because of changes in asset valuations, a bank is required to add equity to cover the risk. At the same time, these assets include derivative instruments whose pricing depends upon volatility measures and which may be used to speculate on the differential volatilities of their underlying assets. The result is to create a circulatory process of capital formation that presupposes abstract risk as one of its constitutive dimensions. Directly implicated are financial institutions such as banks, brokerages, and exchanges; but also included would be governments, pension funds, and business schools. Corresponding to the two related forms of risk objectified in the derivative are two forms of connectivity. The first is the contextually specific connectivity that is generated by the objectification of particular types of risk in the buying and selling of a derivative product. Thus, for example, a currency derivative linking dollars and yen creates a specific, temporally bracketed connection between the two currencies. The second form of connectivity derives from the objectification of abstract risk. Here, the connectivity created by each derivative appears to be an instance of the global structure of financial circulation. Within the circulatory system, abstract risk thus functions as the means and mechanism of ‘‘finan-

cial translation’’ among different contextually specific derivative instruments. It is simultaneously the form of risk that is historically specific to circulatory capital and an objectified form of global social connectivity. In contrast to concrete risk, abstract risk strives toward totalization, producing a directional dynamic in which the sociostructural effect of buying and selling derivatives is to uncouple circulation from production and imbue it with an autonomy unknown to earlier phases of capitalism. The result is that both the mediation of connectivity by abstract risk and the uncoupling of circulation from production have a sufficiently objective character to seem far removed from social determinations. The culture of financial circulation does not seem to be a system that politically interrelates agents, institutions, or nation-states with respect to one another. The risk-bearing derivative, which on the surface is simply an attempt to offset the uncertainties created by globalizing processes such as outsourcing, gives circulation a life of its own, making it appear as though it were independent of the agents and institutions that it interconnects. It follows from this that circulation is evolving into a framing or metasystem that defines the context and the goals and means of financial practice. The construction of financial derivatives also brings together two levels of practice. On one level, there is a pragmatic determination that is also an act of classification of the varied types of risks that a particular situation produces. On another level, there is a pragmatic determination of which risks should be consolidated within the derivative, thus lending an abstract dimension to the risk-bearing derivative. This abstract dimension of risk has defining features that are part of its natural character. Specifically, the abstract dimension seems to behave in a lawlike, quasi-statistical manner, yet to be wholly impersonal and asocial. It appears to emanate directly and objectively from the situation; those who are re-

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sponsible for producing derivatives simply calculate and price the risks produced by the formal dimensions of financial circulation. As long as its maker follows the proper technical principles, the derivative will seem to accurately express the world-given risks. This mode of objectification creates a twoway street, because it conceptually sutures concrete and abstract dimensions, making it appear as though the movement from concrete to abstract implicated no human intervention other than the technical assembly and market distribution of the derivative. But something else is happening: the suturing also works in the other direction, creating the impression that the impersonal, asocial, and lawlike characteristics of the abstract dimension are invariably embodied in, and can be read off of, the derivative. The plurality of incommensurable types of risk is reduced to a singularity. The various concrete, specific types of risk—concrete and specific because they are drawn from real social conditions—are abstracted into a single, homogeneous whole that the financial community may price. It is crucial to appreciate that this process of detachment and reassembly creates the objectification of risk. So however natural the category of risk may first appear, it is deeply social because it is founded on a process that those in the financial world have made in the course of their collective history and acquired in the progress of their personal lives. The financial community’s development of the concept and modeling of volatility was the next step in the objectification of risk. The central idea is that the market can best describe and predict the behavior of abstract risk by measuring its variability over time. The understanding is that the magnitude rather than the direction of change in the values for a specific derivative communicates all the financial information necessary to price it. Note that the measurement of volatility tries to formally reincorporate the contextual social information that had to be removed to produce abstract risk in the

first place. The social is reintroduced in, and misrecognized as, the history of a derivative’s volatility. The result is that all the complex socio-historical forces that shape the value of the assets underlying a derivative are now simply a pattern of price movements. From the start of portfolio theory, analysts have recognized that the model does not perfectly model ‘‘real-world conditions’’ (Rosenberg 1981). Nevertheless, these realizations were tempered by the belief that the model was sufficiently close to reality to yield useful predictions and that further refinement of the mathematics would bring the model progressively closer to real-world market conditions. Indeed, after almost two decades of subsequent research, the mathematicians Hunt and Kennedy (2000) would argue that ‘‘stochastic calculus and martingale theory [a kind of stochastic process that focuses on random variables] were the perfect tools for the development of financial derivatives, and models [derived from physics] based on Brownian motion turned out to be highly tractable and usable in practice’’ (xv). As suggested above, the final and continuing dimension in the formal objectification of risk has been its quantification through stochastic formulas, such as those invented by Black and Scholes and advanced subsequently by a growing mathematics of derivatives. All these derivative-pricing models take it as axiomatic that volatility patterns record, reflect, and measure the abstract risk profile captured by any and all derivatives. If we deconstruct the stochastic differential equations used to price derivatives, we find a common assumption that all future events will replicate past events and that the conditions of application are uniform across time and space. Socially speaking, both the design of these equations and the institutional design of the field of mathematics all but guarantee that analyses of derivatives will never scrutinize or call into question the presuppositions about social reality that underwrite the validity of the equations’ foundations. That the fi-

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nancial community relies so unquestioningly on these equations only serves to proclaim, reiterate, and legitimize the idea that risk is a formal, abstract, and context-insensitive entity. So what creates the metalevel and makes risk systemic in contemporary circulation is not the truism that it is the common element in all sorts of transnational transactions but rather that once risk exists in an abstract form, it can take on the overarching role of helping to produce connectivity itself. Moreover, because each calculation of abstract risk functions constructively in the same way, the calculations are also instrumental in helping to forge the overall circulatory system. Abstract risk functions systemically because it interconnects the variegated forms of specific concrete risk, defining them as quantifiable through the same mathematics, and also because its character is system-wide and abstracted from all sociohistorical contexts. Viewed from the perspective of circulation as a field of action (such as outsourcing or currency exchange), a concrete risk is particular and also part of a fluid and heterogeneous global circuitry; as abstract risk, however, it is an individuated aspect of a homogeneous and systemic concept that strives toward the production of a circulatory totality. This totality is always out of reach because, as we suggest, it is ultimately impossible to disembed risks from the contexts of their production and consumption. Nonetheless, it is precisely the process of disembedding these risks that provides the directional dynamic of financial circulation, a dynamic that lends itself to the illusion that stochastic models can adequately capture the risk in risky situations. As much in the financial community as in popular culture generally, mathematics maintains a privileged position. It alone is thought to provide truths that are pure in the sense that they are uncontaminated by politics, great and small, and to do this in an argot that is so far removed from the everyday that it is well beyond the pale of ordinary understanding.

Even the intermediate stage of understanding—the ability to apply mathematical models mechanically without any real grasp of their underlying foundations—is thought to be an achievement worthy of awe. In this respect, the mathematics of derivatives consecrates the concept of abstract risk even as this concept of risk makes the math possible. Without an already-existing objectification of abstract risk, the financial community could not have developed or tested its stochastic models of derivative pricing. An important irony in the evolution of this process is that the statistical methods developed in the financial community occurred independently of the field of mathematical statistics. Reading the literature on derivatives, one gets the sense that it is often attempting to reinvent a not always perfectly round wheel. This is important to the present discussion because mathematical statistics has determined that probability is a measure of sets in an abstract space of events, meaning that for real-world problems such as pricing derivatives, analysis needs to identify and specify that space of events for the problem at hand (Salsburg 2001, 301). It can now be understood that for derivative pricing the objectification of abstract risk provides a means of specifying a heterogeneous and often apparently indeterminable space of events. The distinction between concrete and abstract risk does not imply the existence of two types of risk, but two inseparable dimensions of risk implicated in the construction and circulation of derivatives. The derivative does not embody two types of risk: rather, the forms of risk differ depending on whether they appear as concrete and specific instances of risk or as an overarching objectification of the totality of relations. What is critical about the derivative is that it is this abstract bundle of risks that is priced, sold, and circulated. This abstract quality amplifies the sociality of the object, the derivative, in ways that quite paradoxically mask its sociality by

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subsuming, equating, and then quantifying all forms of social relations material to the fact of specific, concrete risks. So the risk that social and political turbulence may precipitate a change of government in a postcolonial supplier, the risk that the economic politics of the central bank may motivate a rise in interest rates and a tightening of liquidity, the risk that a counterparty may use the bankruptcy laws to avoid payment, and more—all may be combined in a single derivative and priced as a package. Although they are necessarily not aware of it, this is what many commentators mean when they say that what characterizes the contemporary financial system is the ‘‘commoditization of risk’’: namely, the wealth of social, economic, and political relations that engender specific risks appear as a singular, homogeneous object. As our analysis has tried to indicate, this commodification does allow the market to unify, quantify, and price these forms of risk, but it does so at a great and hidden cost: it now becomes impossible to price the socio-historical risk that a unique or revolutionary event will occur or to price the systemic risk to the circulatory system as a whole. The Risks of Circulation and the Circulation of Risks

Whatever else it may do, the use of derivatives objectifies diverse and often unrelated circulations in a single instrument and then distributes the risk to a theoretically unlimited set of buyers. By combining forms of risk that need not be related or commensurable, derivatives engender an abstract form of risk, meaning that what the derivative objectifies is risk itself as opposed to relations intrinsic to the social economy.Where risk is concrete—such as the risk that frost will damage the crops, the chief executive of a company will perish, or a war will impede oceanic transportation—the steps taken to offset that risk are economic, direct, and visible.

By contrast, the objectification, aggregation, and parceling of risk in the creation and sale of derivatives generate a new mode of economic interdependence, in that risk becomes the very basis of systems of circulation capable of defining the immediate future of an entire country (determining whether, for example, it can raise the funds needed to finance low-income housing). So a defining feature of this form of interdependence is that people, especially those on the periphery, have no control over what constitutes risk or which risks the market determines are produced by the character of their political culture, history, or social economy. Nevertheless, the risks that the market assigns to them determine their access to finance capital and their ability to purchase dollar- and ecudenominated goods, particularly energy and technology. In other words, the metropolitan conception of risk, quite apart from any concrete or specific circumstance, is the basis for derivative-based systems of circulation, such as monetary exchanges. A sociostructure of financial circulation in which derivatives constitute the general form of the product being circulated catalyzes the independence of the circulatory system from production (technically speaking, it generates a new form of social mediation specific to, and also instrumental in, the growing independence of circulation). As one pundit has put it, ‘‘it’s no longer the real economy driving the financial markets, but the financial markets driving the real economy’’ (real, in this case, denoting the production-based economy). The risk-based derivative thus appears to be a historically new way of suturing the circulatory system globally. This way of suturing circulation is compatible with other and older forms of interdependence, even while, as the quote above suggests, it is beginning to direct and dominate their trajectories. In a globalizing circulatory system in which the derivatives market is the largest and most influential, the objectification of

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risk becomes an increasingly critical basis for creating and dealing with connectivity.While a specific derivative may help a particular company to hedge its risks, the role of speculative capital insures that the volume of transactions far exceeds the use values of hedging for the particular firms. So the derivative serves on the one hand as a use value for companies engaged in production, while on the other hand as an abstract exchange value for speculative capital. Accordingly, the derivative has a bipolar personality. It is simultaneously the means by which globalizing production capital offsets the risks of connectivity and the author of its own form of connectivity that has nothing to do with the connectivities of outsourcing, for example. In other words, risk has become a very peculiar and particular sociological object: to mitigate specific and concrete risks through the derivative, it must be abstracted and monetized; and, to deal with connectivity, risk must be instrumental in creating a circulatory sphere organized by speculative capital. This is very different from the concept and character of risk under a regime of production-based national capitalism. In such a regime risk is not organized, it is not commodified, and firms deal with specific risks through specific actions. Foreign currency risk is dealt with by making sure that the bulk of a company’s profits come from domestic sources; the risk of lack of product demand is dealt with by increasing the advertising budget and distribution outlets; the risk that a company’s suppliers may not stand by it during a recession is dealt with by fostering personal relationships and mutual commitment among the companies’ managements; and so on. By contrast, in a postmodern, postindustrial economy in which financial derivatives define the global circulation of capital, firms cannot mitigate the risks created by connectivity solely through direct social action. The result is that as the circulation of capital animated by speculative investment leads to the

autonomy of circulation, risk emerges as a principal means, along with the outsourcing contract, by which persons and companies organize global interdependence. Risk does this by serving as the objective means of organizing social relations within the sociostructures of circulation. Anonymous agents and organizations are brought into relationship by their participation in a circulatory system of riskbased transactions. In ways analogous to and distinct from the function of abstract labor in the sphere of production, risk itself subsumes the forms of connectivity possible through direct economic action. In this sense, a form of risk that it presupposes and produces defines the emerging culture of global financial circulation. So in addition to its usual and concrete function of hedging (an action that guards against a recognized uncertainty), risk in its abstract form is the selfconstructive force within a system of circulation. Risk in this abstracted sense specifies the function of risk in the structuring of global connectivity. It is worth pointing out here that in the sphere of production, risk has much the opposite effect: it undermines connectivity by disrupting the logistics and temporalities of commodity manufacturing and distribution. The Politics of Circulation

A defining feature of contemporary circulation is that it has become its own objective, its institutions and mechanisms seemingly independent of, and unconcerned with, the persons and nations affected by it. The production of a substantive, production-enhancing value, such as that gained from hedging, has rapidly become mostly incidental to the flow of capital and the speculative grasp for new sources of profit. As noted, hedging now makes up less than 5 percent of the value of financial derivatives trading, and that number is only expected to decline. Without large and growing pools of ag-

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gressively speculative capital, the complexion and power of contemporary derivatives would be entirely different because there would be no markets to function as reference points for their pricing. There would be no way to establish volatility or price movement of a derivative, even by analogy, as is commonplace in the creation of otc products. Because of the self-expanding role of speculative capital, circulation has not only become a means to an economic good (the mitigation of uncertainty) that is itself a means, but the means collapses into itself, creating a system in which means dominate ends. Accordingly, the various types of financial derivatives now marketed correspond less to the needs of corporate hedging than to the relentless search by speculative capital for arbitrage opportunities. The characteristics of the market imbue it with a self-expansive character that at a deep systemic level is neither motivated by production nor oriented toward consumption. Essentially, speculative capital subsumes risk, defining its globalization. And as this process develops, the goal of financial circulation increasingly shapes the means of its realization. The evidence indicates that the metropolitan financial community’s globalization of risk generates relations of connectivity that affect citizens, institutions, and nation-states. The risk-bearing derivative is thus politically charged. Risk does not, however, appear in the public sphere in this highly social political capacity; rather, the abstraction, pricing, and globalization of risk appears as an objectifying activity that simply bridges the relationship between specific sets of uncertainties and the derivatives market. Accordingly, though the derivative embodies risk in both its concrete and abstract dimensions, the latter dimension becomes externalized through the relationship between the derivative and the underlying asset: a relationship expressed through the concept of notional value (the amount of capital controlled by a particular deriva-

tive at a given point in time). This externalization produces an influential duality. On the surface, a financial derivative is no more than the means of summarizing and pricing the concrete risks that materialize in a specific situation. On a deeper level, the derivative is the objectification of its abstract dimension, the notional amount. And because derivatives externalize that which engenders connectivity, namely abstract risk, they appear to be no more than the human results of naturally occurring needs. This duality thus imparts an objective, seemingly asocial, and politically neutral character to both the concrete risk embodied in the derivative and its abstract dimension as well. In this way the character of risk—a character that apparently is objectively natural—expresses even as it conceals the social construction of risk and its political implications and functions in generating a globalizing circulatory system. Indeed, the analysis presented here underlines that a significant political feature of the globalizing circulation of capital is the contrast between its systemic character and its particular appearances. So one of the paradoxes of financial derivatives is that those disciplines and analysts adept at understanding their technical aspects and markets are least likely to grasp their political implications and effects. Those working in business economics and kindred fields treat the risks associated with the global circulation of capital as particular appearances flowing from the natural consequences of economic action. They tend to assume that beneath the actions and beyond the consciousness of agents, derivatives are the sum of their formal properties, which one can grasp in an entirely formal way through the methods of mathematical statistics (methods, we have argued, that are strangely de-mathematized in the sense that they fail to specify certain critical mathematical conditions for their production). Such accounts not only locate themselves at the surface of the phenomena but also

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implicitly assert that there are no deeper sociostructural and political foundations. Consonantly, these accounts of financial derivatives cannot begin to explain why risk in an abstract form came to functionally mediate global connectivity and emerged as a dominant financial category only in the final quarter of the twentieth century. They cannot explain why the quantification of risk entails a necessary and constant process of social disembedding. But most of all, they cannot explain why circulation has taken on a systemic character, thereby engendering the real possibility of systemic or catastrophic risk to the financial circulatory system as a whole. By assuming that risk is always and everywhere the same, these accounts have no way of conceptualizing the present, a present whose perhaps most influential political reality is the ascension of cultures of circulation, especially that of finance. The surface-level analysis of the risk-bearing derivative offered by the financial community is understandable in the sense that the form suggests the possibility of its misinterpretation. The act of embodying quantified and heterogeneous risks in a financial instrument only makes sense if analysis understands the lumping of the various risks as simply their objectification. There is no other way to make various incommensurable risks, each of which has its own social, economic, and political foundations, transparent to a single, quantified, priced derivative other than to assume that these foundations do not exist. The problem is further that when the financial community focuses on the derivative, the presence of risk is transparent, but not its function in creating a circulatory system. It is easy to see that a given derivative involves, for example, political, liquidity, and counterparty risks, but not that the social imagination of abstract and quantified risk instigates the ascendance of a new form of global financial circulation. The special function of risk in creating circulation does not, and cannot, appear as an attribute of risk per se. By

implication, the historically specific function of risk in creating connectivities that deeply influence the lives of people becomes reified, appearing only as the abstract aspect of the numerous kinds of derivatives. As this occurs, a necessary relationship develops between the production and circulation of derivatives to hedge the concrete risks associated with global connectivity and the emergence of a quasi-autonomous sphere of financial circulation. Under the auspices of speculative capital, abstract risk increasingly defines and infiltrates the contexts of concrete risk. As a result, one of the risks now facing nations, institutions, and firms is that irrespective of the existence of any specific concrete dangers or uncertainties, the derivative markets may turn against them. To put this differently, the culture of capital circulation is reducing the peoples of the periphery to means: for they exercise no control over the forms of circulation that truly control them. Once the sphere of financial circulation exists independently of the political process, then investment banks, hedge funds, and other institutions of speculative capital can decide only which derivatives trading strategies are most likely to generate a profit, while those on the periphery can decide only how they will respond to these trading strategies. Without a politics of circulation, its dynamic is beyond human control. Systemic Risk

It is an astonishing irony that the culture of financial circulation has itself become the most significant global monetary risk. And it is equally ironic that the culture has fabricated a risk it can neither recognize nor price. Put simply, the risk is that systemic risk will produce systemic failure; that is, the interconnected network of global financial institutions will fall like dominos when an unexpected, because

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stochastically unpredictable, catastrophe topples a major institution such as J. P. Morgan Chase, which has trillions of dollars of derivative exposure. This possibility, like the explosion of a nuclear power plant, is simultaneously improbable yet too potentially devastating to ignore. Such systemic failure, produced from a combination of miscalculation and an event that cannot be calculated because it is a historical singularity, would have telling ramifications for not only circulatory capital but production-based capitals as well. Systemic failure is the risk that because of the global interdependence of the financial system, a catastrophic collapse of one institution progressively engulfs and topples other institutions until the entire system becomes dysfunctional. Under these conditions, the financial structure could no longer allocate capital, provide liquidity, or allow for a coherent monetary policy. While banking systems can and have collapsed before, financial derivatives certainly escalate the breadth and severity of failure. This is all but inevitable because such derivatives lure institutional players to pyramid leverage as a way to enhance speculative returns, the financial system has become interconnected globally, and derivatives operate in a space so unregulated that it is difficult to even determine from where in the metropolitan world such failure might originate. While a financial winter might structurally resemble other more localized failures, its size and planetary scale could portend greater and possibly catastrophic consequences if it were of such great magnitude that neither international institutions like the imf nor national federal banks had sufficient reserves and dexterity to serve as lenders of last resort. To date, the closest event to such a meltdown was the fall of Long Term Capital Management (ltcm), one of the world’s largest hedge funds, which between January and September 1998 lost upwards of 90 percent of its outstanding value. The losses sus-

tained by ltcm posed, in the words of a study by the General Accounting Office, ‘‘potential systemic risk’’ (1999, 2). Describing the situation, the Bank for International Settlements wrote that the state of global financial markets raised ‘‘apprehensions among market participants and policy makers of an imminent implosion of the financial system’’ because liquidity had evaporated ‘‘in both industrial and emerging economies,’’ making it very difficult for borrowers ‘‘to raise financing even at punitive rates’’ (quoted in General Accounting Office 1999, 5). Aware that the failure of ltcm to repay its debt obligations could instigate a chain reaction, the U.S. Federal Reserve decided, contrary to its own well-publicized policy, that it would be imprudent to allow the markets to take their course. Accordingly, the Federal Reserve orchestrated a recapitalization of ltcm. Since the salad days of ltcm, the financial derivatives market has grown exponentially, become more global, and fabricated more ways to pyramid leverage. ltcm’s off–balance sheet holdings of $1.4 trillion with an average leverage ratio of 30 to 1 is now dwarfed by firms, epitomized by J. P. Morgan Chase, whose exposure is measured in tens of trillions of dollars and whose leverage ratios sometimes top 600 to 1. And while it is certainly true that the notional value of a firm’s derivative contracts is not necessarily an accurate gauge of its risk exposure (since its positions may be arbitraged), the fact is that neither these firms nor regulators can measure the actual risks by using current modeling techniques. The reason is that these models can only accommodate repetitive as opposed to singular events—what in other circles is called the socio-historical—and they cannot account for, or take account of, systemic risk. The second point is that financial crises have the greatest impact on the least creditworthy firms and nations. This means that a global financial

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meltdown would have its most devastating effects on the various points of the periphery. However improbable a financial implosion, such an occurrence would result in extraordinary misery for the peoples and destabilize the governments of Latin America, Africa, and much of South Asia.

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7 Derivatives and the Stability of the State

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inancial derivatives are a crucial dimension, and their emergence is a critical moment, in the ascendance of circulation. This is, but is also much more than, the amplification of the flows of materials and money across national borders that on the margins were always soft and rather permeable. The centerpiece is a reorganization of the world economy animated by globalizing processes whose main hubs are cultures and sociostructures of circulation in which financial derivatives are increasingly important cogs—important because they add a metalevel to the transnational pulse of capital and because they emanate from the metropole. Powered by the emergence and abundance of speculative capital, the riskdriven derivative has come to exert enormous influence on the global economy by inflecting and deflecting the movements of capital, the ultimate lubricant of commerce. The explosive rise of derivatives from almost nothing to the planet’s largest market is instrumental in, and also expressive of, a world change that challenges virtually all existing accounts of the interrelationship between the economy and the state. Capitalism appears to be transforming from a production-centered, nation-based political economy to a much more cosmopolitan structure in which not only does

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production share the stage with circulation, but circulation appears to be subsuming production, a process that seeks to simultaneously (if not contradictorily) amplify global productive output even as it encompasses and reorganizes the geography of the existing regime of production. In this process, circulation is emerging as the leading edge of global capital and the transformative engine driving an ensemble of other modifications to the world order, not least in the ways states conduct domestic politics. This transformation is occurring with a haste unknown in the past, a haste itself elemental to the reinvention of Euroamerican capitalism (we underline the Euroamerican limitation because Japan has been bypassed as being beyond the scope of this work). In terms of political economy, Euroamerican capitalism in its cycles of creative destruction and resurrection seems to have reinvented itself, once again, and in the process transformed the social conditions for the production of a capitalist politics. It is important to be clear about what is happening. Many of the world’s nation-states, particularly in Africa, Latin America, the non-petroleum-producing states of the Islamic Mediterranean, and huge swaths of Southeast Asia, are being simultaneously detached from the global structure of production even as they are attached by the chains of circulation. There is, moreover, an intrinsic connection between their disenfranchisement from the global realm of production and their absorption into a transformative circulatory system. The metropole’s contemporary economic condition, characterized by industrial overcapacity and capital overaccumulation, is leading to what may turn out to be a politically if not economically toxic triangulation, especially because Euroamerican capitalism sees its best immediate economic prospects in using its resources to advance this triangulation. Operating under the name of neoliberalism and

the ideology of the free market, the reorganization of global capitalism is progressing toward a tripolar economic space. In the metropole, this process appears as the much-writtenabout slow dissolve of industry and manufacturing, and the resulting restructuring in which the circulatory enterprises of finance, media and internet services, and logistics come to the fore, coupled with the shift in production to technologies of circulation and the shift in technology and software platforms to design products manufactured (in whole or part) elsewhere. As Perez (2002, 99–100) notes, this is producing a set of contradictory effects. Those sectors of the economy involved in creating and installing these new technologies of circulation, amply financed by the oversupply of capital, are experiencing rapid and accelerating growth; and, displaying enormous potential for wealth creation, they are fast displacing industrial manufacturing as an engine of growth. Conversely, those nations and regions that lack the technological, educational, and financial capital to either move into the technologies of circulation or become the new manufacturing centers are entering into a vicious downward spiral of slow or nonexistent growth coupled with a drain on capital. This reformation of production underpins the postFordist metropolitan economy of outsourcing, linked to the outlocation or relocation of entire sectors of production to varied points on the multipolar periphery. This reconfiguration or multi-territorialization of production within the context of the differences and distances produced by nation-state politics created the conditions of connectivity that were the springboard for the ascent of a culture of financial circulation. As this outline suggests, the periphery is truly multipolar in that the benefits of both outsourcing and the relocation of production benefit some countries and regions and all but exclude others. Much of Southeast Asia, the huge and densely

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populated eastern half of China, select regions within the Indian subcontinent, and a few other areas are the main beneficiaries of this new geography and functional rescaling of global capitalism. Especially noteworthy is the florescence of China as the epicenter of production even as its near neighbor competitor, Japan, struggles to wean itself from what was once its way to wealth but is now an economically suffocating regime of state-steered, production-monocentric capitalism (most strongly exemplified by a banking system yoked to what was once a very prosperous regime of industrialized production and the real estate values it supported). According to an assessment of globalization by the World Bank (2001), only twenty-four nations, led by China, have benefited from the reorganization of global industrial production, though some of those are now beginning to slip behind. This report indicates in aridly statistical fashion, even as it underestimates, that the metropole in concert with the new national centers of industrial production and oil exporters are doing well economically, whereas the remainder of the world is suffering a worsening decline in personal incomes, product per capita, standard of living, and practically every other measure of economic prosperity. Though the structure of circulation affects the lives of all nations, it does so unevenly, according to the way in which the global political economy inserts various regions into global capitalism. The situation is as clear in its large form as it is lapidary in its details. To transcend the limits of economies that are still deeply dependent on minimally skilled labor, unfinished goods, and tourism, the smaller but more advanced nations of the periphery, like Thailand, South Africa, and Malaysia, have sought to invest in value-adding sectors, such as the manufacture of communications technology. Even less advanced economies (such as Mexico and Ghana) are aware that there is a steady and unstoppable decline in the value

added of simple production, making it all but impossible for their expanding populations to maintain, let alone increase, their product per capita. The hitch is that to accomplish the goal of making manufacturing more technologically directed, they need to attract capital from Euroamerican investors. But to attract such capital, even from the World Bank, the borrowing country must liberalize its internal financial controls, on the assumption that the free market inevitably makes better long-term economic decisions than the political system. The process of liberalization, as enunciated by the International Monetary Fund, calls for privatization of state-held banks, the deregulation of local money markets, elimination of foreign exchange controls (letting the currency float), and the introduction of more accessible records and more transparent (read: standardized) accounting. The catch is that such liberalization opens the borders not only to manufacturing capital but also to its speculative cousin. Indeed, the record indicates that while net private capital inflows to many countries have remained stagnant for a decade (Institute for International Finance 2000), there has been an astronomical increase in the flow of speculative capital. What should give pause is that nations that only a decade ago were on the verge of development (Ivory Coast, Indonesia) now appear to be slipping backward into economic chaos and instabilities of many types. The third leg of the triangulation is an increasing number of nations and soon perhaps continents that are being progressively decoupled and excluded from the global structure of production. Owing to a global reshaping of production in which outsourcing is narrowly channeled, the enrichment of China and other privileged regions of the multipolar periphery is increasingly coming at the expense of others. So, many developing and transitional countries are internally fractured to support just a few industries, such as textiles and tour-

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ism, which are integrated, if only at the margins, into global capitalist production, in contrast to the externalization and disenfranchisement of the other parts and populations. For these nations, the real issue is not the functional rescaling of capitalism (illustrated by the rising importance of global cities) or the restructuring of the production of inputs (outsourcing), but being decoupled from the global economic system on which they are dependent for the critical resources (petroleum, pharmaceuticals, technology, and capital) that would form the foundation for any sustainable development. Like increasing immiseration and political turbulence, few things exemplify this combination of dependence and detachment more than the permanent state of monetary emergency prevailing in these barely assembled states, which have only a little and declining ability to control inflation, the denationalization of needed capital, and cross-currency and interest rates. The ascension of a Euroamerican globalizing culture of financial circulation exacerbates these problems, multiplying their effects beyond anything known in the recent past. What from the metropole appears to be no more than the natural evolution of capitalism appears from the disenfranchised periphery to be a new technology of impoverishment and violence. Few things are as much on the inside of social life as money: for money is a social relationship that is a connectivity, meaning that money can take on forms and functions that encompass but also go well beyond the economic. The circulation of money is certainly the connective medium that facilitates the flow of goods and services, but it is also part of a moral economy that citizens use politically to assess the quality of governance. In this vein, people the world over seem to interpret the instability or volatility of their national currency as an index of the stability of the state that issues, and presumably guarantees the value of, the currency. So the permanent

state of monetary emergency that exists in many states along the periphery touches off a chain reaction that begins in the economy but quickly inflects many dimensions of political life, such as the level of trust and confidence that citizens have in their government. Although any particular crisis may have its local factors (such as a new government, or collapse of a crucial commodity price), the many points along the periphery also share a number of related reasons for their continuing states of monetary emergency. First, their central banks have little control over the domestic price of money, interest rates rising and falling mostly in response to exogenous realities that lie outside any form of governmentality. Second, there is little or no relationship between the success of the domestic economy of production and the value of a currency on the transnational markets. So even in an expanding and increasingly productive economy, an externally motivated, precipitous, and thus unanticipated decline in the value of a currency may compel the central bank to defend it by increasing interest rates and tightening access to credit, moves that tend to slow economies that hardly need to be slowed. Finally, the violent swings in the value of the currency and in interest rates make it very difficult if not impossible to coordinate the flow of capital with the capital investments required to augment production. The state of monetary emergency that has befallen so many nations underlines that the growing cultures of circulation, exemplified perhaps by finance, not only generate a freer circulation of people, goods, capital, and services but a corresponding undertow that is often divisive and violent. The metropolitan reply to expressions of concern about these globalizing processes is that every great transformation has left dead and wounded states in its progress toward betterment. But what invites frustration and anger throughout much of the multipolar periphery is that in the vocabulary of

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those who steer these globalizing processes, betterment seems to be a purely economic term, one in which the law of competitive advantage triumphs over, indeed thumbs its nose at, the laws of sociality, such as those of justice and independence. For many billions of people, the hidden hand conceals its violence. Violence in the Abstract

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Under the rule and during the regime of the modern production-centered nation-state, violence took essentially two forms: the violence that occurred within the limits of sovereignty and under the auspices of the state as a deployment and expression of its power, including war; and violence directed against the sovereignty of the state either by internal revolutionaries, from the heights of politically minded, militant opposition down to the most pedestrian criminals, or by another sovereign state (or coalition of states). What these incarnations of violence have in common is that they are direct expressions of the topos of sovereignty. The terror that flows in and around the state is direct and tangible in that it is always ultimately grounded in the right and realities of physical force. The dominant motif in this perspective is that the state best expresses its collective agency and sovereignty through the construction of a mutually and freely agreed upon body of social rules, norms, and contracts, including and particularly those related to the use of violence. The world is thereby divided into those forms of violence that are the work of the agreement of the collectivity and those that undermine sovereignty, internally by crimes that breach the accepted body of norms, rules, and contracts, and externally through attack by another sovereign power, namely war. The globalizing processes now in motion are actively disassembling this organization of violence at both ends. As has

frequently been the case historically, the work of violence is most visible among those least able to defend themselves, in the immediate case the dependent countries now being decoupled from the world production system. At the most local level, one sees an extraordinary increase in the immediacy and pervasiveness of violence against civilian citizen-subjects. Across much of sub-Saharan Africa, the Islamic Mediterranean, and the northern cone of South America, not to mention parts of the former Soviet Union, what little sovereignty states might have enjoyed is being greatly undercut by the emergence of denationalized, politically aimless, and fanatic war machines—guerilla groups, gangs, coalitions of mercenaries, and other predatory entities that terrorize and visit extreme forms of violence on the population in general as a means of extracting resources, gaining recruits, and guaranteeing control. Often hooked into a range of transnational networks, these instigators of violence are only incidentally related to the sovereignty of states insofar as they arise in the disorganized space that is resulting from the implosion and dissipation of formal political institutions. Speaking about these decoupled states, the Africanist Achille Mbembe observes sorrowfully that emerging technologies of destruction have become ‘‘more tactile, more anatomical and sensorial,’’ being less concerned with inscribing people in a disciplinary apparatus than in ‘‘the order of the maximal economy represented by the ‘massacre’ ’’ (Mbembe 2003, 34). At the same time, the rising cultures of circulation, especially those which are creating a permanent state of monetary emergency, are producing a new and much more abstract form of violence, one that is partly responsible for the disintegration of formal political institutions, processes, and sovereignty on the periphery. Where the other form of violence is increasingly visceral, this form is mediated, indirect, and visible solely through its effects on everyday realities.

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The quotidian effects of speculative uses of risk-driven derivatives appear in all of the innumerable ways that the price of money inflects the ability of a government to carry out its responsibilities and of people to create a reasonable standard of living. This violence is also more profoundly abstract because it arises from abstract forms that are themselves constitutive of globalization relationships, as exemplified by the emergence and interlinking of the various dimensions of speculative capital, decontextualized risk, and the derivative to engender a new level of financial abstraction heretofore unknown. Together these forces generate a metalevel to the global circulation of capital, which in turn produces violent repercussions without any overt political intention or sovereign objectives. So the appearance or apparition of a globalizing culture of circulation in opposition to the local communities that make up the globe is an expression of the underlying abstract foundation of this most contemporary species of violence. The violence is abstract in terms of both its opacity at the level of everyday existence and the oppositional character of the sociostructural relations between the global and the local. This double nature of abstract violence, at least from the standpoint of its victims, amounts to a new form of terrorism, a new mode of abstract domination, one in which violence is so economically systemic that it appears necessary and inevitable. Politics and the State of the State

There can be little doubt, given the accumulating reports from the metropole and the periphery, that certain parts and products of the globalizing processes, such as the rise of a Euroamerican culture of financial circulation, work to compromise the stability and sovereignty of those transitional states that are struggling to politically consolidate them-

selves. From a structural, historical view, what kinds of politics and political culture are possible and permissible when capitalism shifts out of alignment with its surface-level segmentations, notably the sovereign nation-state? What kinds of domestic disturbances and instabilities start to appear when transnational agents and markets begin to exert control over economies once managed in and through the national state? Each day brings fresh evidence illustrating that these transnational markets and institutions have begun to impose their will on nationally imagined economic spaces and the communities of economic interests into which they once insinuated themselves. While the nations of the metropole and to a lesser extent the new centers of manufacturing and industrial production have the (decreasing) capacity to offset, blunt, or circumvent some of the excesses of the monetary circulatory system, the more marginal and externalized nations are helpless. The emerging financial regime raises the question of whether the owners of mobile transient capital, whose financial practices suspend their allegiance to any specific state, are constructing a sociostructure and culture of circulation that circumscribes and constrains the possibilities of state action to the point where these states no longer have the capacity or will to stabilize themselves. Because modern history has made the state responsible for securing democratic rights, any great decline in the power of the state to supervise capitalism may well propagate a form of domination whose basis lies in abstract, virtual, and osmotic global money markets. Their rise to power also forcibly foregrounds the organization of a world system founded on the national state: specifically, whether this inter-national system can shape a collective strategy of insight and action on those occasions when the machinery of specific governments, including and most especially those of the metropole, cannot articulate a political

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response to what in the now paradigmatic reality of financial circulation presents a problem resistant to state-based solutions. In this expanding universe, the issue is not simply whether the metropolitan states can agree on another international regulatory body (see for example the proposal by Eatwell and Taylor 2000 for a World Financial Authority), but more importantly whether it is possible to craft a cosmopolitan political form that is as potentially democratic and stabilizing as that of the national state. Our current history of the highly unpredictable, lightning-like, and destabilizing ways in which capital rushes in and out of local currencies challenges the ideology prevalent in the commentary on international finance that these markets gravitate toward equilibrium and are democratic because they represent the sum of consumer preferences or votes. Reality appears to impel the alternative realization that the globalizing financial markets, and the cultures of circulation on which they are founded, are fundamentally destabilizing and undemocratic. These realizations notwithstanding, reliance on a nebulous notion of the structure of circulation has greatly impeded an understanding of the political implications of capital flows —especially with respect to state power and the balance of power among states. Increasingly, across a wide spectrum of positions, commentaries on state stability begin by acknowledging that circulatory capital is undermining, in ways as powerful as they are unfathomable, the capacity of states to do what all states must do regardless of their political complexion: govern. Trying to understand the recent history of Latin America, Atilio Boron, professor of political theory at the Universidad de Buenos Aires, observes that the global capital markets continue to impose conditions that ‘‘are tantamount to a subtle takeover of the national economy,’’ resulting in a ‘‘surrendering of sovereignty’’ (1998, 55–56). Writing about

and from the southern cone of Africa, Achille Mbembe (1999) observes that the ‘‘temporality’’ of technologically accelerated finance capital seems to be overwhelming if not tyrannizing the region’s economies and states (53). With these observations in mind, we have attempted to enunciate a framework that will make it possible to penetrate the relationship between global streams of speculative capital and national and regional politics. The culture of circulation of derivatives, especially those that regulate exchange rates and capital flows, structurally reproduces existing forms of global asymmetry and, more importantly perhaps, introduces a new form of structural and structuring asymmetry that owes its coherence to a set of ideologically impregnated conceptual schemes. The western capitalist conception of risk becomes the only empowered and empowering notion. It is imposed by the transnational banking system, by multilateral monetary agencies, and also by metropolitan governments when extending foreign aid. This concept of risk fosters asymmetry because it inscribes western ideology, specifically an acultural notion that modernity is a set of enhancing transformations that every nation-state can, should, and no doubt will be forced to go through. On this view, which appears implicitly or explicitly in every account of global money markets, modernity issues from the growth of rationality and the rationalization of society and economy. The upshot is that markets are seen as able to economically assess any nation or culture based on the extent to which it has become the input of this general function. Accordingly, then, the market presumes that forms of national economic, political, or social policy that stray too far from this model engender risk. The market routinely applies terms such as nonmarket, socialist, state-controlled, excessively bureaucratic —terms that it considers pejorative—to decisions by gov-

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ernments to regulate trade or foreign investment, provide job relief by hiring more state employees than functionally necessary, or extend economic emancipation through social welfare programs such as state-sponsored housing projects. The agents of the global money market perceive policies such as these as magnifying the level of objective risk and thus placing a quantifiable strain on their interest rate and currency models. Such added risk motivates a contraction of finance capital, which in conjunction with increasing monetary volatility can precipitate a devaluation of a nation’s currency. What is more, to many in the academic world, blind to the power of speculative capital and derivatives markets, such problems come about because those on the periphery lack the statecraft to create and use institutions that encourage free trade and open markets by channeling the efforts of interest groups in productive directions. The result is a form of encompassment and domination that is nearly absolute because the very determination of these systems of circulation is founded on western forms of intellectual and technological capital. The basis of the modern state has been its enhanced administrative capacities, its unification of a territory, its more direct control of and intervention into the territories and populations it has embraced, its reliance on popular political participation, and its assertion of clear boundaries rather than frontiers (Calhoun 1997, 66). As Skocpol (1979), Giddens (1984), and others have emphasized, modern states have sought to engender internal integration and homogenization, especially in democratic governments, less through direct coercion than through the inculcation of the social imaginary of citizen-subject and common political culture (for example through the education system). A critical feature of such political consolidation has been the integration of the economy on a national level. The contemporary world has thus

imagined the state as a semi- and selectively permeable sovereign territory where the citizens of the state control governance, however disproportionately. The result is that the modern period has conceptualized international relations as external and politically determined relationships among sovereign states, and therefore that congresses of states (such as the United Nations), state-ratified treaties (the European Union), and state-run warfare have dominated regional and transnational relations. In the state context, global issues always have a leadership and an address (consider the example of the g-7), making the resolution of global problems inseparable from negotiations among the leaders of sovereign states. On this model, the state is also the site of realizing democratic governance and furthering a democratic political culture (as through constitutional guarantees to an open public sphere). The growth of cultures of circulation is having a powerfully transformative effect on the capacity of states to organize economic relationships, for example by fixing the value of their money or using formed capital, because the circulatory system now in ascension is virtual, deterritorializing, and not state-centered. The question posed by the rise of new forms of connectivity is less whether the state will simply wither or retreat—importantly because these cultures of circulation capitalize upon some of the functions of the state —than how they will reconfigure the politics and power of states and among them. The ascension of circulation as a quasi-autonomous sphere is displacing critical determinants of local economic well-being to a temporality and space beyond the influence of the citizens and elected officials of each state. They also lie beyond the purview and power of most coalitions among states, especially for the postcolonial world. For metropolitan states and interstate organizations designed to promote economic stability, the derivatives market provides a new, apparently objective, and seemingly transpar-

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ent means of measuring and monitoring economic progress within a state; and consonantly, a government’s success in implementing capital-enhancing policies, such as privatization, that presumably spur economic growth. The derivatives market allows multilateral accrediting and lending institutions, such as Moody’s and the imf, to assess the creditworthiness and aggressive capitalism of a state’s government at every moment in time. In reified and misrecognized form, in ways that appear entirely separate from the business of trading, the western agents who participate in the culture of the circulation of derivatives both embody and objectify the social ontology and ideology of the Euroamerican tradition, to the point where western notions such as those of person and collectivity, agency and constraint, reason and representation, and value and quantity are becoming increasingly inscribed in these cultures of circulation as regimes of interpretation and regulation. In the relationship of the politics of economy, the culture of the circulation of derivatives apprehends democracy as a market of choices, economic and political, and it defines the true mission of governance strictly in terms of maintaining civil procedures and individual rights. Those who trade, create, and underwrite derivatives denounce government interference into markets of any type (whether of stocks, housing, property, or jobs) and indeed view as antidemocratic and anti-capitalist any attempt by government to tax the market for social welfare purposes. The imagination of risk as a transversal concept, whose properties, price, and power transcend the limits of locality, also undermines the modern notion of the state. To engender unity and project a notion of ‘‘we-ness,’’ states have sought to collect, consolidate, organize, and distribute information about the operation of the economy. This process encompasses an array of qualitative and statistical information rang-

ing from calculations of gross national product and rates of (un)employment to prices of goods and services and levels of industrial production. These forms of information not only presuppose the existence of a fully sovereign citizen-state, they performatively iterate this act of totalization because they attach economic and moral values to it (by assuming, for example, that laid-off illegal aliens are not entitled to unemployment compensation). However, within the circulatory net of financial capital the state has no part in collecting and redistributing information. So the circulation of risk-bearing derivatives and speculative capital continually subverts the state’s attempt to totalize itself through its control over determinative economic information. All its forms of economic classification, laws, and regulatory agencies and codes (such as those for accounting and taxation) are ignored, are clouded over, or make little sense within a world of virtual circulation. This retreat of the state is particularly apparent when, as in the implosion of Enron, the state bureaucracy has no control or knowledge of the derivative-trading practices of a firm based and incorporated in the United States. Transnational circulation thus challenges the very principles of production by which the state produces itself, in this instance those that underwrite the construction and dissemination of information about the national economy. The growth of financial derivatives and other electronic markets is also fracturing the internal tempo and rhythms of the democratic state by disrupting the interrelationship between the temporality of economic change and the speed of deliberative democratic response. There is an ever-widening gap between the circulatory time in which transnational markets devalue a nation’s currency, elevate the cost of money, or relocate significant sums of capital and the political time needed to make democratic decisions about implementing

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structural adjustments in domestic cycles of production. Where a materially significant devaluation (10 percent or more) of a currency can occur almost overnight—exemplified by a nearly 50 percent devaluation of the Turkish lira in three days—the time necessary to reach a democratically based decision and then make economic changes is measured in months if not years. Since financial derivatives determine the availability, cost, velocity, and value of capital itself, they exert an influence over the entire economy; their effects are infinitely more pervasive than market contracts that focus on single commodities, such as timber, wheat, iron ore, or rice, which influence the economy in a more limited way, and then only with respect to primary production. An important dimension of Bretton Woods was that it lengthened the temporalities of change. By subordinating the market to the political process and functionally recalibrating exchange rates in a deliberative fashion, Bretton Woods greatly aided states in coordinating economic and political time—what today seems an impossible luxury. The ability of global financial markets to impose sanctions, veto policies approved by and responsive to the will of a nation’s citizens, and censure or remove democratically chosen officials in effect decouples the relationship between legitimacy and consent. The democratic state can garner consent for its actions only on the condition that its citizens see consent as legitimately arising from the people, a proposition that is compromised by the perception that the state is organized by, and responsive to, foreign agents and institutions, a perception that seems to assume an almost occult form when the external power boasts nothing but an electronic address. There appears to be a worldwide, if widely differentiated, attempt to personify the cause of financial distress (as in the increasingly popular Middle Eastern notion that a Jewish conspiracy organizes the derivatives markets) and rediscover a

countervailing power able to defend the collectivity. Perhaps it is just a coincidence that 1973 marks the beginning of a stunning resurgence of religious fundamentalism that will profoundly affect every continent in its quest to mobilize the divinity in the moral interests of redeeming the spirituality and solidarity of the community, imagined and otherwise.1 The nature of the financial circulatory system all but guarantees that the habitus, the ownmost space of the practice of everyday life, will embody the global as an increasingly constitutive moment in its own self-production. That these transversal forces now influence the price, velocity, and liquidity of money in any given nation, in even its most remote locales and quotidian parts of the economic life, should make them important topics of conversation for the public sphere. But reactions to the circulatory system, especially in the postcolony, characteristically take shape in the public sphere only in their most misrecognized forms—as a grievance against elected officials for their failure to make the national currency function properly, as assaults by occult and supernatural forces, as consequences of spiritual impurity and cultural infidelity, or as a Euroamerican, state-directed result of the policies of international agencies under western control (recent demonstrations against the World Trade Organization epitomize this response). The rising tide of dissent is an index of the power of capital markets; the direction of the discourse an index of their relative invisibility. The perspective created by and in the practice of everyday life, no matter how revealing, also conceals everything that is not visible from that vantage point—in this case, the abstracted instruments of abstract power. And there can be no public discussion, no popular dissent, and no incisive resistance at the citizen-state level or quotidian level against that which is too virtual to be visible. Just as importantly, the financial markets are not an Other for the state or its citizens to

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act upon. There is no apparent way to organize either strategic or tactical forms of influence. In a world composed of nationstates, especially self-interested capitalist and often mutually noncooperative ones, the circulatory markets can always keep their distance and immunity from the states and peoples they affect. This anonymity, the cloak of distance and complexity, suggests that there is no way for local forms of agency to influence the behavior of global capital markets. There is no language and there are no pathways for communicating with these markets, even if doing so were ever an intention. There are several grounds on which this is particularly devastating, especially for postcolonial nations. It robs them of any way to coordinate their responses—actions appear ad hoc, unconnected, not built up over time. The derivatives markets neither effect a wholesale retreat of the state from international and domestic politics nor instigate a process in which the market simply replaces the functions of the national state. The state, and especially the postcolonial state, continues, but in a progressively decomposed and disarticulated manner. The structures of circulation seem to undermine the unity of the state, citizens’ faith in its ability and authority to govern, and the state’s wherewithal in negotiating international waters. The ascendance and increasing power of circulation are eating away at the techno-economic functions of the state, particularly its attempt to regulate money, credit, international commerce, and, especially in the postcolony, the influence of alien interests on its internal relations of production. But even more, the cultures of circulation now in motion also immediately inform the political functions of the state—its policies of taxation, privatization, legislative oversight, and welfare practices, and indeed any projects that may affect the economic interests of global markets. The collective agency of the market, driven by the logic and laws of profit, shaped by a view

of governance that conceives it as minimal and procedural, can and does forcefully punish states whose politics aim at other objectives. It likewise follows from this logic that states should involve themselves in sociocultural projects—such as those that build communal solidarity, insure dignity, and affirm social identities—only insofar as they do not compromise the profitability of the market. Proliferating technologies of circulation also mean that the state loses much of its control over mass communications and the public media. The pressure radiating from global capital markets to hollow out the state does not assure that states will go gently. Indeed, in the person and projects of their elite, states struggle to find ways of gaining control over and against markets whose only accountability is that imposed by the market itself. But even more importantly, the cultures of financial circulation want states to be strong in one crucial respect: they want states to assume responsibility for policing and suppressing internal conflicts and disorder, because social and political unrest tends to increase counterparty risk, making it more difficult to price derivatives efficiently and, in the case of a chain reaction set off by default, for the participants to get paid. Our analysis of the culture of the circulation of derivatives is not intended as a critique or prediction about the future, but as a statement about the political economy of contemporary emerging countries. Beginning in the spring of 2001, for example, the currency markets in conjunction with the International Monetary Fund decided to remove the democratically elected president of Indonesia, Abdurrahman Wahid. Though of course neither the fund nor the currency markets have a constitutionally validated voice in the internal politics of Indonesia, they are influential beyond measure. An imf report critical of President Wahid’s economic policies instigated an accelerating and further decline in the Indonesian rupiah on the transnational currency markets. This decline

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in the rupiah then led the fund to withhold the disbursement of $400 million in scheduled assistance. Horst Kohler, the managing director of the imf, emphasized that the fund’s response to the crisis of governance in Indonesia was part of an ‘‘early warning system’’ to identify and expose weaknesses in the political economy of emerging nations. The institutional mechanism of the warning system would be none other than the derivative markets, especially those determining exchange rates. The behavior of the market would signal the presence of an impending crisis, leading the imf to institute structural reforms whose success would in turn be measured by ‘‘investor confidence.’’ Moreover, the imf and the U.S. Treasury stated at the time that what the markets wanted was bank reform, privatization, and the cessation of wasteful social programs. While Turkey and Argentina are perhaps the most dramatic recent examples of the effects of the new cultures of financial circulation, South Africa is an example of how the continuing crisis impedes countries struggling to stay afloat in the currents of global capitalism. Thomas Koelble (1998) has shown how the global economy influences the course of democracy in South Africa: how the notion of democracy articulated by agencies such as the World Bank fixates on institutional arrangements and ontologically saturated western concepts such as elections, freedom of speech and association, and human (individual) rights even as it pays little attention to the content of emancipation and socioeconomic redistribution that are critical if not determinative aspects of the popular local conceptions of what democracy means. In particular, much of the local populace associates democracy with education and housing programs, especially important in that many areas have squatter settlements, substandard housing, and too few schools. According to a consensus existing across South Africa, the nation requires a democracy that incorpo-

rates critical measures of social justice. The understanding is that the formerly disenfranchised portions of the population cannot forge interest groups, evaluate their elected officials, or develop a sense of nationness if they do not possess the income, education, and basic standards of living necessary to do so. Moreover, a notion of democracy that incorporates the social and the economic—now manifested as a desire for emancipation, reconciliation, and redistribution—is much closer to an African vision of how collectivities work, a point underscored by Koelble (1998, 174–78) and illustrated in the exposition by Hales (1998) of black political thought on democracy in South Africa. Despite popular and intellectual support for this broader concept of democracy, the government is reluctant to pursue emancipatory and redistributive goals on the understanding that doing so would amount to ‘‘socialism’’ and offend transnational corporations, scare away the financial capital needed to develop the economy, and run afoul of the budgetary spending limits mandated by the imf. Indeed, it has been made clear that the unrestrained pursuit of emancipatory aims would increase the perceived level of risk, which would in turn lead to a contraction in foreign funding, higher interest rates, and a devaluation of the rand. Accordingly, the government has to walk a fine if not impossible line: it must embrace a social-justice notion of democracy, providing enough housing, education, jobs, and medical services to meet the expectations of its constituency, even as it must accede to a Euroamerican conception of democracy to maintain access to the economic resources that fund emancipatory and redistributive programs. So though the end of apartheid and the advent of democracy have exponentially increased people’s subjective freedom, globalization, here in the form of the derivatives markets, has if anything increased their state of objective dependence.

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In the latter half of 2001, the culture of financial circulation began to wreak havoc on the South African economy. At first, the South African rand, which had been losing ground to the dollar and ecu for several years, began to slide at a more precipitous pace. Given that the domestic economy had grown during this period, there appeared to be no economically fundamental reasons for the decline. Several economists noted, however, that the rand’s prolonged slippage resulted from the failure of the government to privatize state-owned companies rapidly enough. The state’s decision to privatize these firms in ways that did not aggravate an already socially injurious unemployment rate failed, according to the financial markets, to conform to their ideology that economic considerations always trumped social and political ones. A second reason cited for the rand’s decline was the political problems in Zimbabwe, which shook the market’s confidence that Black Africans were capable of governing a sophisticated economy. Conventional economic theory predicts, of course, that an economy characterized by increasing growth and declining inflation, as South Africa’s was, should attract Euroamerican capital, its inflow leading to a rise in the rand’s value as foreign investors exchange dollars and ecus for South African assets.2 Well beyond the limits of this logic, impoverished by their lack of culture—most conspicuously, the absence of any concept of representational processes—Euroamerican investors did not divert funds into South Africa. To the contrary, figures assembled by the Bureau for Economic Research at Stellenbosch University indicate that not only was there little direct foreign investment, there was net disinvestment. A dialectic was in play in which the currency markets assigned to South Africa an abstract risk premium based on its socialism and racial makeup. Thus the forward contracts predicted a continuing decline in the value of the rand, the seemingly unending depreciation discouraging for-

eign investment, which pushed the rand ever lower despite improving economic fundamentals. Then in December 2001, seeing the absence of foreign investment, the rising tide of economic turmoil incited by the rand’s decline, and the market’s cascading momentum downward, torrents of speculative capital attacked the rand, leading to a further devaluation of 12 percent for the month. For the year, the currency markets had taken the rand down by more than 30 percent. In a kind of self-fulfilling prophecy, the repercussions from the rand’s devaluation—predicated on a social objectification of abstract risk (that is, the risks caused by a failure to privatize, the counterparty risk posed by a Black African government on a continent where government failure is endemic, the risk that the aids epidemic would siphon off too much government funds)—caused the economy to stumble. Once under control and declining, inflation accelerated as domestic producers shipped goods abroad to capture the exchange rate differential, and the cost of necessary imported goods became prohibitively expensive in rand. The crucial factor in understanding the effects of devaluation is that the temporality of production is glacial compared to that of circulation. Although depreciation almost instantaneously increases demand for exports, the expansion of production operates on a much longer temporal string and in some cases is relatively inelastic (for example, past a certain point there is not much that one can do to increase wine production). In decoupling the value of the rand from South Africa’s economic fundamentals—meaning the state of labor-based production—the global markets also detached the temporality of the currency from that of production. Since the currency and economy were disconnected, there was no reason why, just as local producers increased production capacity to meet surging export demand, the rand could not turn around and appreciate equally rapidly against rival currencies, thereby eroding

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the competitive advantage that domestic producers briefly enjoyed. Circulations and Conclusions

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We have tried to show that speculative capital, a socio-historically specific concept of risk, and derivatives have become the very center of the financial clockwork that turns the hands of contemporary capitalism. Grasping the character and culture of the circulation of derivatives is important, because though a slew of commentators have asserted that the modern economy outruns the political, and have worried about a capitalism allowed to remake the world in its own economistic image, they have mostly grasped (post)modern capitalism in terms of the further disenchantment of labor, the migratory flight to the metropole and urban capitals, and the new florescence of magical materialism; but this is only a quantitative change and does not really suggest what is the structurally transformative difference about this (post)modern economy. If the contemporary world is a place where power operates more diffusively, across manifold sites, then few things so represent and embody this reality as much as speculatively driven derivatives. Derivatives are part of the new sociostructural imaginary of capitalism in its latest act of self-destruction and self-resurrection: unlike futures exchanges of the past, such as Osaka’s seventeenth-century rice exchange or Chicago’s wheattrading exchange of the eighteenth, derivatives markets have nothing to do with the physical production or delivery of a concrete use value. Rather, they constitute a quasi-autonomous sphere of circulation that they simultaneously presuppose and are instrumental in creating. They accomplish this by developing forms of objectification and subjectivity that draw upon the existing social forms of production-based capi-

talism to engender a new social ontology geared to the character of connectivity. The unmistakable implication is that we can no longer grasp the world economy as commerce among sovereign states (that is, international trade); rather, we must grasp the global economy in terms of translocal and transversal sites of connectivity. The emergence of circulation underlines that capitalism in its present-day form is progressively shifting out of alignment with certain surface-level segmentations, particularly the nation-state. It is useful to envision the imaginary of the nation-state as a set of overlapping topological spaces—economic, political, religious—that may be continually brought into alignment by commonalities of language, the performativity of engaging in the same set of everyday practices, and the institutions and policies of the state. In this respect, a certain fundamental premise of democratic governance has been the capacity of the elected to regulate and oversee the structures and structuring of economic relations. Democracy as we know it has always assumed that the topological spaces of the economic and the political, while seldom in complete alignment, were sufficiently congruent to provide social goods, such as justice, social welfare, education, and health care. To fund such projects required the capacity to tax effectively, print money, and to regulate the use and value of money. The realization of democracy also requires a sufficiently sovereign space in which citizens elect leaders responsible and responsive to their interests, in which state regulation of the economy is exemplified by its control over money and other financial instruments, and in which civil society pursues the emancipatory objectives that would allow citizens to genuinely participate in the democracy. Derivatives are a part and product of a circulatory system that undercuts key dimensions of the construction and reproduction of democratic governance. The larger sugges-

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tion is that the ascendance of circulation is radically transforming the interrelationships between the economy (here exemplified by derivatives) and culture (exemplified by diverse and historically specific political cultures), by simultaneously disrupting the national relationship between the state and civil society and the international relationship among nation-states. The suggestion is that the directional dynamic of modern capitalism is in the process of creating a sphere of influence and operation that serves to disempower statebased politics and national democratic governance. Forms of direct access characteristic of modern-day democracies, in which strangers, because they are nonetheless citizens, imagine themselves involved in a common project that presupposes and creates solidarity, are being not so slowly subsumed by forms of connectivity in which no common project exists or can even be imagined. It seems something of a conundrum that democracy and democratization appear to be in full swing worldwide even as the modern home of democratic governance, the sovereign state, has never been more imperiled. Innumerable commentators across the political spectrum have underlined what appears to be a paradox, among them Touraine (2000), Held (1995), Shaw (2000), Diamond and Plattner (1996). The discourse that was once so alarmingly popular in conventional economic quarters (led by the Chicago school)—that closed authoritarian regimes were better suited to creating the conditions for capitalist growth because they can better manage expectations and demands—has all but disappeared. In the mid-1970s there began a shift toward the view that the open democracy was the preferred governmental system of capitalism. The open, externally exposed, market-oriented democratic state is the preferred form of governance of speculative circulatory capital. What the participants of the derivatives market desire is fully transparent financial structures within

states even as their activities remain invisible and unsupervised. We are thus suggesting that the Euroamerican push for democracy, and specifically a vision of democracy whose heartbeat is the openness of internal markets and government accounting, a vision of democracy in which those on the periphery play by ‘‘international’’ rules, is being driven by the needs of circulatory capital and the players of the derivatives markets. In this respect, the installation of contemporary versions of neoliberal democracy in regions such as Southeast Asia, and metropolitan support for them, are themselves part and product of the new hegemonic process. Should we be surprised to learn that this shift by conventional economists, political scientists, and the leadership of the metropole began just after Bretton Woods had crashed and the derivatives market was taking off ? It is indeed unfortunate that for those who live beyond the walls of the metropole, there has yet to be invented a derivative that could offset the risk that they will be progressively encompassed by, and subordinated to, a global finance capitalism with an indelibly Euroamerican stamp. To an accelerating and unpredictable degree, the capitalist culture of the circulation of derivatives is a power that seems answerable to no other power.

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Glossary

Asian Currency Units (acus). Eurodollars deposited in East Asian financial institutions. Arbitrage. The simultaneous purchase of a financial instrument in one market and the sale of the same instrument (or nearly the same instrument) in another market. In the money markets, arbitrage may denote (1) a situation in which a trader buys one security and sells a similar security in the expectation that the spread in yields between the two instruments will narrow or widen to yield a profit, or (2) a situation in which a trader makes a profit in one currency by utilizing another currency and swapping it on a fully hedged basis. Arbitrageur. A trader who takes advantage of profitable opportunities arising out of pricing anomalies. Asset allocation. Dividing investments among markets to achieve the highest possible return in relationship to the risk assumed. Bear market. A prolonged declining market for a given type of security, such as stocks or bonds. Bull market. A prolonged rising market for a given type of security. Call. An option that gives the holder the right to buy the underlying security at a specified price during a fixed period. Cash settlement. A provision that settles an option’s contract through the transfer of cash as opposed to transfer of the underlying security. Technically, the securities purchased are delivered against payment in Fed funds for the same day the trade is made. cboe. Chicago Board Options Exchange. cbt. Chicago Board of Trade.

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Clearinghouse. An affiliate of an exchange that matches and guarantees trades and holds collateral placed by participants. Contract. The standard unit of trading, it implies a legal obligation. Counterparty risk. The risk borne by one party to a contract that the other party will not fulfill the terms of the contract. Country risk. The risk that attaches to a financial instrument issued by or in a country other than the investor’s own country. Credit risk. The risk that an issuer of a security involving debt will default on its obligations or that the issuer will not make payment on the sale of a negotiable instrument. Cross-currency swap. An interest rate swap in which interest payments are denominated in different currencies. Currency swap. A contract that commits the principals to (1) exchanging streams of interest payments in different currencies or (2) exchanging principal amounts in different currencies at a preset exchange rate. Debt leverage. The amplification in the return earned when an investor finances the investment with borrowed funds. Delta. The sensitivity of an option price to changes in the price of the underlier. Derivative. The generic name for any security whose value is tied to an underlier; there are as many kinds of derivatives as there are forms of connectivity. Disintermediation. The investing of funds that would formerly go through a financial intermediary, such as a bank, directly into a type of security. Diversification. Dividing investments among a variety of securities that have independent rates of return. Eurobonds. Bonds issued in Europe outside the regulatory oversight of any national capital market. Eurodollars. U.S. dollars deposited and invested outside the United States. Event risk. The risk that a security will decline in market value on account of an unpredictable external risk. Exchange traded. Said of a derivative transaction where the instrument is bought or sold on a regulated exchange, such as the London International Financial Futures and Options Exchange or the New York Mercantile Exchange. Exercise. To invoke the right to buy or sell granted under the terms of a derivative’s contract. Exercise price or strike price. The price at which an option holder may buy or sell the underlying security.

Exposure. The vulnerability of a portfolio to changes in the prices of the securities held. Foreign exchange risk. The risk that a position in a foreign currency might, because of the adverse movement in the relevant exchange rate, have to be closed out at a loss. Forward market. A market in which the participants agree to trade some security or foreign exchange at a fixed price at some future date. Hedge. To reduce risk by taking a position in futures equal and opposite to an existing or anticipated cash position, or by shorting a security similar to the one in which a long position has been taken. Hedge funds. Private investment pools that invest, usually by increasing the level of risk, in numerous types of markets. Despite their name, hedge funds rarely hedge. Interest rate risk. The risk that the value of a security may change adversely because of a rise in interest rates. Interest rate swap. An exchange by borrowers of interest rate payments at two different rates, usually one of which is floating. Leverage. An investment position subject to the multiplier effect in which a small change in the value of the underlier has a relatively large effect on profits or losses. Liquidity. The ability of holders of an instrument to convert the instrument easily and rapidly into cash with only a minimal price concession. Liquidity risk. The risk that the holders of a security will not be able to sell that instrument at the price they would obtain by soliciting competing bids. Money center bank. A bank sufficiently large and powerful to play a decisive role in every sector of the money markets. Option. A call option is a contract that gives the holder the right to buy from the writer of the option, over a specified period, a specific amount of the security at a given price. A put option is a contract that gives the holder the right to sell to the writer of the contract a specified amount of a security at a specific price. Principal. The face amount of a security. Settlement date. The date on which trade is cleared by delivery of securities against funds. Short sale. The sale of a security borrowed but not owned by the seller in the expectation that the price of that security will fall (so that the seller can buy it back at a profit before returning the borrowed security), or as part of an arbitrage.

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Swap. On the foreign exchange markets, the purchase of a currency at the spot price while simultaneously selling it forward. This entails the exchange of the two currencies at the conclusion of the contract and a reverse exchange of the same two currencies at a date in the future. Swaption. An option on an interest rate swap. Underlier. The economic object against which an option or derivatives contract is written. Value at risk. A determination of the financial exposure assumed by the owner or seller of a security or portfolio based on its volatility. It is an estimate, with a given confidence level, of the maximum loss that a fixed portfolio might sustain. Vega risk. The risk of change in the value of a derivative because of changes in the volatility of the underlier. Volatility. The amplitude of the price movement of a security over any given period. The volatility measure is a proxy for the expectation of risk embodied in a financial instrument. When determining the price of a derivative the value of the volatility variable represents the amount of risk that the participants are willing to accept.

Notes

1

Global Flows and the Politics of Circulation

1 This point will be pursued in a book entitled From Primitives to Derivatives, which develops a sustained argument about the ascension of circulation as a quasi-independent sphere of the capitalist economy. The analysis underlines how a new regime of objectification and subjectivity is coming into being in the propulsion toward novel forms of connectivity. The effect of these forms, in simultaneously decomposing and knitting together a form of capitalism that was once defined by national and state boundaries, is to engender a new form of the striving toward totality, imbuing capitalism with a determinately directional character. The center of the account is our endeavor to define the performative subject and to grasp how the character of the performative subject in capitalism is distinct from the forms of economic life that defined all non-capitalisms in all their many and characteristically nonuniversalizing forms. 2 There are those who argue that the level of world trade is no greater now than it was during some earlier historical periods (e.g. Block 1990; Hirst and Thompson 1992). If the standard of trade is finished goods, especially finished manufacturing goods, then this is true. It is also completely irrelevant, because it assumes that ‘‘trade’’ consists of domestically produced goods which nations then exchange with one another. The reality is that domestic production is all but extinct, even if it continues to appear in economic statistics and trade agreements.

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This is particularly true in the fastest-growing segments of the world economy, such as technology and communications. But even in the production of something as pedestrian as clothing (such as men’s cotton shirts assembled in places like the Maldives, Honduras, and India), the design, licensing agreements, materials production, weaving, computerized technology, capital formation, distribution networks, and more usually involve transactions in multiple currencies (frequently ten or more). One cannot help asking what it means when a French-based corporation whose largest shareholders are British and Saudi uses German capital to enter into a joint venture with an Egyptian firm to purchase cotton from local growers, and then, supplementing this purchase with cotton from other regions assembled by an Israeli broker, sends the material to Morocco to be woven into fabric and Tunisia to be dyed, the finished materials delivered on Liberian ships to the Maldives, where a design licensed from an Italian ‘‘house’’ and delivered by means of a computer program (licensed from an American company) is used to sew the cotton into a shirt, which is then packaged and distributed to an international assortment of wholesalers and direct purchasers. 3 The U.S. Treasury official Robert Altman, in a passage that has drawn considerable attention, argues that derivatives are the economic equivalent of nuclear weapons because they are ‘‘capable of obliterating governments almost overnight’’ (1998, 34). To make matters even worse, when currency devaluations in countries such as Indonesia and Argentina ensnare them in financial quicksand, the structural adjustments demanded by the imf in exchange for an infusion of capital, particularly the elimination of barriers to monetary flows and the adoption of Euroamerican accounting standards, make the countries even more vulnerable to future devaluations. The general manager of the European Investment Bank articulates the Euroamerican view, noting that the risk of rapid currency devaluation, even for ‘‘countries with sound [economic] fundamentals,’’ is ‘‘the price to pay for reaping the benefits of globalization’’ (Steinherr 1998, 180).

2

Derivatives, Risk, and Speculative Capital

1 The irony is that by defining its rationality in terms of the positive science of stochastic modeling, the touchstone of portfolio management,

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5

3

the financial field is able to reprobate the irrationality of the speculative action called gambling. Focusing on the emergence of circulation would also give to analysis a perspective from which it could begin to reframe an issue that continues to haunt production-based accounts of metropolitan economies, especially those emanating from a Marxist theoretic (e.g. Brenner 1998): given that there has been a steep decline in the average rate of profit for manufacturing capital leading to an equally steep slowdown in the ‘‘growth of investment and output’’ (1998, 7), why has the gdp of Euroamerican nations and the net worth of their major corporations increased so substantially over the same period (oecd 2000)? Why, if metropolitan manufacturing is in the throes of a secular decline that seems to only gain speed with each passing year, epitomized by the impending collapse of the steel industry, is its lion’s share of world product and incomes increasing at an unseemly rate? The answer lies in the reality that the metropolitan source of profits and control is shifting toward circulation and away from manufacturing. It should be clear that theories of capitalism focusing on the relationship between nature and labor, land rent, and the accumulation of property are categorically irrelevant to the character of derivatives. The international gold standard (1870–1914) and the Bretton Woods System (1944–73) were monuments to the hegemonic dominance of first Great Britain and then the United States; indeed, Keynes’s theory of money can easily be read as his attempt to theoretically ground a linkage that he, as the principal architect of the postwar monetary system, was helping to create. For Bernstein (1992), Steinherr (1998), and many others the origins of capitalism and the propensity to employ derivatives are coterminous with the origins of Western civilization itself, no less than the philosophers and society of ancient Greece.

Historical Conjunctures

1 To foreshadow a connection that we will make in a moment, note that Paul McCracken, the author of the report, was also a member of the Trilateral Commission at the time. His analysis, which strongly advocated a neoliberal approach, underlined the absolute necessity of restraining

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government expenditures on welfare programs and a concerted effort by all concerned to restrain the escalation of real wages, especially in those nations confronting the economic turmoil instigated by the rise in oil prices. The report also specifically ruled out corporatist solutions in favor of those provided by the market. 2 An untold and deeply sublimated part of the story is that however much neoliberal economics attributed its growing dominance to the theoretical power of its models, this was only the view from within the economic field. Indeed, the great irony is that although neoliberal economics was opposed to political intervention in economic affairs, especially interventions of the welfare state, its own rise as the reigning economic theory is inseparable from the political interventions on its behalf by investment banks, hedge funds, and other institutions involved with circulatory capital that profit from the liberalization thesis. 3 There is already a kind of ontological slippage in the conventional formulation: for it makes it appear as if there is a mean around which the price fluctuates, much like a sun around which the planets orbit. In reality, because the mean is derived from plotting the points of variance, it changes historically according to shifts in the magnitude of volatility. 4 We will, later, more thoroughly examine certain of the assumptions. The Black-Scholes equations assume that at the expiration date of the option, the price of the underlying asset is lognormally distributed, meaning that its deviation from the mean is equal to the measurable volatility multiplied by the square root of the elapsed time. The equations also assume that the markets for the underlying assets and the options are frictionless (there is no cost to the transaction itself ), competitive (there is no collusion among the market participants), and continuous (there is perfect and constant liquidity). Observe that these mathematical assumptions implicate and in turn rest upon a set of socio-historical assumptions about the behavior of individuals and institutions.

4

The Institutional Basis of Derivatives

1 The claim that derivatives are simply a continuation of international finance as we know it reminds one of the perhaps (un)intentional par-

ody of the academe in the original Japanese version of Godzilla: a professor of zoology from an unspecified university, assessing the creature just minutes before it levels much of downtown Tokyo including the financial district, notes that it is nothing more than a reptile—albeit one created from the unregulated and irresponsible use of nuclear energy. 2 See, for example, Alan Greenspan’s Humphrey-Hawkins testimony on 5 June 1995 (reported in the Wall Street Journal, 6 June 1995), in which he argues that governments would be making a mistake by ‘‘singling out derivative instruments for special regulatory treatment.’’ Note also that the secretary of the Treasury in the late 1990s, Robert Rubin, his successor, Paul O’Neill, and the present vice president, Dick Cheney, all commanded companies that are architects of, and principals in, derivatives trading. 199 5

Deriving the Derivative

1 A liquid market is one in which the sheer quantity of trades makes it easier and less costly to both initiate and exit a position in a security.

7

Derivatives and the Stability of the State

1 Speaking of the rise of a fundamentalist political Islam, Eickelman (1997) notes that the 1970s unleashed ‘‘market forces that favored Islamization from below’’ (27). In the same vein, Lancaster (1988) observes that the economic turmoil of the early 1970s ignited conversions to Protestant fundamentalism across Latin America. Among Muslims, Christians, Hindus, and Buddhists there will be a call for a return to a more puritanical past in order to mount a more effective challenge to Euroamerican domination. This Euroamerican world was described in a letter of warning in 1974 from the most influential Moroccan Islamic fundamentalist, Abdessalam Yassine, to King Hassan, his country’s West-leaning leader, as having ‘‘no spiritual principles whatsoever.’’ 2 Henri Cauvin (2001) quotes Benjamin Smit, an economic specialist on South Africa, who observes that ‘‘there is no clearly identifiable reason why we should have an exchange rate crisis like this.’’

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Index

American Express, 137 Appadurai, Arjun, 6 arbitrage, 37, 38 assets, underlying derivatives, 24–35 Baldassare, Mark, 106 Bank for International Settlements, 138, 159 Baron, Atilio, 172 Basle Accord, 144 Black and Scholes equation, 142, 147 Blake, David, 130 Brazil, 58–59 Brenner, David, 7 Bretton Woods system, 70–71, 103, 178 Buffett, Warren, 104 Calhoun, Craig, 174 capital: accumulation of, 8; forms of, 113–18; valorization of, 89 capitalism, 53; casino, 85; over-production under, 19;

production-based, 8, 60; production displaced by, 6, 8 catastrophe, 3 Cauvin, Henri, 60 China, 20, 164 circulation, 8–10, 88, 125–29, 144–45; metropolitan responses and, 13–18; nation-state and, 17; politics of, 153–57; trade vs., 87–90 Crane, D., 130 Comaroff, Jean, 7, 50 Comaroff, John, 7, 50 Coronil, Fernando, 74 counterparty risk, 56; summary images of, 57–58 currency devaluation, 49 currency derivatives, 38–43 democracy, 12, 26 derivatives: creation of money and, 88–89, 133–34; defined, 33– 34, 112; democracy and, 4, 6, 12, 176, 170–80; exchange rate theory and, 60; fetishization of,

derivatives (continued ) 139; global importance of, 47; naturalization of, 107–8, 138; objectification of, 24, 112; options vs. futures, 35; pricing of, 54, 136; secrecy of, 62; state power and, 6; swaps, 36; totalization and, 111–12; treadmill effect and, 38; types of, 110–11; users of, 43–44 developing economies, 4–5; discontent in, 11 division of scientific labor, 62–64, 80–81 208

Eatwell, John, 72, 172 economistic view, 55–56 Edwards, Franklin, 45, 52 Enron, 3, 61, 137 Federal Reserve Bank, 70, 72, 85–86, 95, 159 Fligstein, Neil, 7 Galbraith, John Kenneth, 25 GE Capital, 91 General Motors Acceptance Corporation (GMAC), 91 generative schemes, 94 Giddens, Anthony, 174 globalization, 1–2, 11 glocalization, 10 Greenspan, Alan, 86 Group of Thirty, 138 Habermas, Jürgen, 32 Harvey, David, 7, 43 hedge funds, 45, 52, 91 Held, David, 52, 188 Hobsbawm, Eric, 6

Hunt, P. J., 57, 147 India, 20 Indonesia, 57, 181–82 International Monetary Fund (IMF), 5, 38, 76, 165, 181–82, 183 J. P. Morgan Chase, 23, 159 Kane, E. J., 130 Keynes, John, 72 Koelble, Thomas, 182, 183 Lee, Benjamin, 13 leverage, 24–25, 48; ratios, 159 LiPuma, Edward, 13 Long Term Capital Management, 3, 4, 85, 106, 136, 158 Maltz, A. M., 133 markets, 71; accounts of, 14–17, 138–39; crisis contagion and, 90; deregulation of, 101; fetishization of, 131; governance and, 55–56; institutional basis of, 7, 93–96, 98–99; participants in, 90–93 Markowitz, Henry, 77, 142–43 Marston, R., 71 mathematics, 109–10, 148 Mbembe, Gregory, 168, 173 Miller, M., 130 Millman, Gregory, 73 modernity, 173 momentum trading, 45, 48 monetary emergence, 166–67 Norris, Floyd, 137 neoliberalism, 162–63 notional value, 157–59

OPEC, 67–68; petrodollars and, 68, 98 over-the-counter (OTC) market, 35, 46, 90, 94, 104–5, 154; naturalization of, 29, 139 Perez, Carla, 7, 163 performatives, 60 Peterson, Eric, 6 political instability, 74 precision, accuracy vs., 110–11, 136 production, global reorganization of, 19–20 Rawls, John, 32 risk, 23, 30, 54, 69, 126, 134; abstract, 142–45; character of, 53– 59, 81, 127; circulation of, 150– 53; commodification of, 148– 50; connectivity and, 122–25; institutionalization of, 86; naturalization of, 54, 81, 130, 155; objectification of, 77, 156; postcolony and, 141–42, 157, 173; in production-based capitalism, 152; social abstraction of, 119–22 Rosenberg, Barr, 147 Rubinstein, M., 108 Saber, Nasser, 21, 125 Salsburg, David, 149 Sassen, Saskia, 6, 102 Schama, Simon, 8 Sharpe, William, 143 Shaw, Martin, 188 Silber, W., 130 Skocpol, Theda, 174 Soros, George, 10, 49, 103 South Africa, 57, 59–60, 112, 182–85

speculation, 44, 91; culture of, 42–43, 44–45 speculative capital, 23, 87, 98, 113, 116–19, 123, 127, 152; postcolony and, 165; time and, 124 Spiro, David, 69 states, 170–86; constitutional change and, 26; economic information and, 176–77; national currencies and, 60–61; regulation of derivatives and, 48; stability of, 12–13, 171, 175 Steinherr, Alfred, 81, 86, 90, 133 Stiglitz, Joseph, 10, 49 Stigum, Marcy, 57, 79, 130 Strange, Susan, 43, 85 structural adjustment, 22 systemic risk, 4, 55, 104–5, 135, 144, 157–60 Taylor, Charles, 47 Taylor, Francesca, 57, 138, 172 Thailand, 26 Touraine, Alain, 188 Treasury Department, 92,Trilateral Commission, 75 Van Dormael, Armand, 70 violence, 50, 69, 76, 166; abstract symbolic, 26–28, 107, 168–70 Virilio, Paul, 32 volatility, 42, 50, 142–44, 146–47 war machines, 169 wealth disparities, 10, 49,Whitman, M., 130 World Bank, 20, 43, 68, 164, 165 world-space, 11–12 Zevin, Robert, 87

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Edward LiPuma is a professor of anthropology at the University of Miami. Benjamin Lee is a professor of anthropology and philosophy at the New School for Social Research. Library of Congress Cataloging-in-Publication Data LiPuma, Edward, 1951– Financial derivatives and the globalization of risk / Edward LiPuma and Benjamin Lee. Includes bibliographical references and index. isbn 0-8223-3407-0 (cloth : alk. paper) isbn 0-8223-3418-6 (pbk. : alk. paper) 1. Derivative securities—Social aspects. 2. Derivative securities—Political aspects. 3. Financial services industry—Risk management. 4. Globalization. I. Lee, Benjamin, 1948– II. Title. hg6024.a3l56 2004 332.64'57—dc22 2004005068