The cycles of debt – debt as integral element of the present economic system

The rule of debt is a universal reality. Virtually every country is in debt, in differing degrees, and some of them are not even capable of paying ιτ back [1]. When a country cannot repay the loans or refuses to do so ‘sovereign default’ occurs. A sovereign default differs debt cyclefrom other types of default in that a sovereign state is the only legal ruler of its own affairs and it cannot be compelled to pay [2].

As we will see later on there are no isolated cases of debt crisis; debt is an integral part of the economic system. Almost all countries have defaulted at different points in modern history [2]. The recurrent nature of debt crises in the same regions reveals the pathological nature of the economic infrastructure. For example, in Europe, Greece has defaulted 5 times while Spain has defaulted 14 times. It is a vicious cycle of debt [2].

Development based on debt

But why did we reach this point, where most of the countries are in debt? This is attributed partly to the dominant Keynesian economics, largely influenced by the theories of John Maynard Keynes. Countries from the 1930s onwards started borrowing money (mostly with the issue of public bonds) in order to finance large-scale infrastructural development (dams, highways etc.). The idea was that high debts can be tolerated as at a later stage when the economy is booming the debt can be repaid through higher taxation [3]. Low interest rates are applied to stimulate borrowing and growth [7].  Indeed, issuing debt is cheap and attractive for governments to finance development [9]. Especially emerging economies like China can issue debt at very low rates and invest it for positive returns. [9]. Nevertheless, debt is accumulated.

global public debt

Public debt in each country in 2011. It is shown as percentage of each country’s GDP. Higher debt is shown in red. Guillard A.

From that perspective, modern development has a high social cost; peoples’ future becomes indebted for the sake of development. Let us not forget the environmental devastation that comes with this type of development. It is hard to find the role of ‘democracy’ or ‘social justice’ in this scheme – these are all agreements between governments, banks and corporations; people are sidelined, marginalized in decision-making processes but then they are brutally forced to pay for the systemic default and live in a degraded environment.

Debt inherent

Debt is an intrinsic element of the economy. Debt starts right from money creation: money is created and lent by banks at interest rates, thus debt is inevitably born [1,4]. Let us think of an isolated society which produces all the needs for life. When they start money creation cycleborrowing money from a bank it is being given at an interest rate. If they borrow 100 euros at 2% rate, then they should pay the 2 euros interest at the end of the year and 98 euros will remain in the real economy of that society. After some years or decades no real money will be left and the debt will be soaring high [1]. This shows that the accumulation of debt is a normal process in this economic system.

Following this syllogism, it came as no surprise that some scholars have actually identified ‘debt cycles’. For instance, Christian Schuter has delineated the cyclic process of recurrent debt crises in the world’s peripheral countries (less wealthy nations) from the 1820s onwards [5,7]. Debt crises occur with different intensity every 15-25 (Kuznitz swings) and/or 45-60 years (Kondratiev waves) [5,6,7]. These cycles are regulated mostly by immigration influx/infrastructural investment, key technological advances and credit cycles [6,7]. Debt crises coincide chronologically with economic stagnation and recession.

States bound to default

Due to a cocktail of reasons such as a weakened productive base, excessive bureaucracy, corruption, huge foreign debts and fraudulent lending among others may drive some countries to default (the most known example at the moment is Greece). cycle of debt crisisAdditionally, when potential lenders and bond holders consider that a country may not be able to repay the money, then they demand a higher interest to compensate for the risk (sovereign debt crisis) [2]. As a result, that country finds itself in an even worse position – it is a downward spiral of economic collapse.

Any country dependent on foreign creditors and global markets is at risk – these mounting debts are impossible to be repaid when the economy is weak and cannot keep debt in a manageable level. When a country defaults, the International Monetary Fund (IMF) usually intervenes to prevent insolvency by imposing an austerity regime [2,3]. That is also to protect the lenders, since sovereign countries cannot be forced to repay the debt if they cannot.

Default remedies poison

In a debt cycle, the point of debt crisis coincides with recession. In recent history it is the IMF that hastens to provide the remedy.  According to Christian Suter the duration and the method of resolving a debt crisis depends on the institutions the hegemonic powers will use to protect their international property rights and regulate the relation between creditors and borrowers. There is a trend towards higher institutionalization he argues [5].

One does not have to be an expert to understand that the IMF is indeed an instrument of hegemonic powers. IMF embarks on ‘debt restructuring’: a reduction of the debt (‘haircut’) is agreed and new loans are provided as funds to repay the debt, because otherwise the creditors will not get their money back (their profits). Lending to a defaulted country is primarily to ensure repayments or to protect the rights of the creditors. The bailout agreement for Greece back in May 2010 is a typical example [2]. A poor nation is artificially kept alive to be plundered while its populace is driven to destitution and despair.

debt dictatorshipThe new funds provided by the IMF (and other institutions like the European Commission) are tied to conditions. These conditions are translated in an austerity regime imposed to a country to ensure repayments. In reality, the austerity regime facilitates the transfer of wealth from the poor to the rich. It includes heavy taxation, dramatic reduction in salaries, removal of workers’ rights, mass layoffs in the public sector and cessation of welfare programmes [2]. Moreover, privatization is a central lever of those policies: the country is forced to sell public lands and other assets (in ridiculously low prices) to repay the debt. These austerity regimes have been criticized by many as they degrade the social and economic capital on which a nation is built [2].

Some economists advise an ‘orderly default’ in case of acute debt crises, like now in Greece. Another proposed solution for Greece is to re-issue its own currency, the Drachma. In such a case, the debt of Greece which is held in Euros would not be repaid because Greece would not have access to foreign currency to redeem the sovereign bonds.

If a country refuses to pay back the money it faces heavy pressure from lending countries for debt repayment (indeed this is currently the case with the European elites blackmailing Greece). If that happens that country may be excluded from further credit and its assets in foreign grounds may be seized. In some cases there is military intervention to enforce rights by invasion, war and occupation [3]. Again, officials in Germany are now discussing about establishing a protectorate in Athens or deploying ‘protection forces’ in the case of ‘political chaos’ after the coming elections of the 17th of June 2012 [8].

People bound to despair

Mass pessimism is also included in the schemes. Scholars found out that debt cycles have a corresponding mood cycle: when there is economic boom, there is optimism, but the debt/GDP ratio rises preparing for debt crisis and recession. People’s expectations, which were raised during boom buoyancy, are not met later during economic contraction [4,7]. Pessimism and desperation take over as it happens at the moment mostly in Greece but also in the rest of Europe. The most convincing sign of radical pessimism is the recent outbreak of suicides in Greece.

Debt and social justice

I am trying insistently to understand where social justice fits in this market-driven, debt-addicted economic model and I cannot find a spot. From a democratic point of view, I see that the power of people, once traditionally devised to their government through voting and representation (e.g. a state like Greece), is now taken further away from them since many decisions are met by international (e.g. European Union) and global institutions (IMF, World Bank etc.).

IMF for instance is not elected by any citizen in the world, yet IMF has affected the lives of millions. It gets even worse for democracy as Transnational Corporations and banks, through severe lobbying and corruption, are affecting the policies, models, rules with which the world is run. What could be a more profound absence of democracy? What could be a more profound alienation of people from politics?

Where is the involvement of people in these models? They are being imposed on them by rulers. Who is driving the developments? The ruled or the ruler? Then why does the ruled have to pay for the economic crisis, the systemic error? That is not to say that people are not responsible, but their main shortcoming lies in that they conformed all these years to their rulers, blinded by material gain and brainwashed by the media – and most of them still conform.

debt slavery

As seen above, debt accumulation is an inherent function of development. It is a question of time for a smaller, weaker country to face default and the international patrons are responsible for propagating this system. Weak countries are satellites of wealthier, dominant countries, banks and corporations, which look for securing their dominant position in the global arena (by providing credit, investments, aid).

Our voices united

In the present situation accepting to repay the debt by trimming salaries, eliminating workers’ rights and privatizing public wealth even further is a defeat of dignity, democracy and social justice. It is a defeat of the people – it is a debt dictatorship.

Politicians even now preach that there is not time for dialogue or negotiation because the crisis is pressing for immediate action (cutting more benefits, rights, jobs etc.). I would argue that now when the economic collapse is real we need more democracy not less. We need to support each other, show solidarity – we need to reconcile ourselves with politics and take on the driver’s seat for a more sustainable future.

A real change will be to break out of the spirals of history, the recurrent debt crises, satellitism, hegemonic rule and social injustice. As debt crises have always been linked to public pessimism we need to start from there and reverse our condition. We can respond with solidarity and rediscover ourselves beyond the position of the passive consumer or the alienated citizen and work for the benefit of all.

Read more in Freegan Kolektiva:

A new generation of landless in the ‘developed’ world

“Some people are so poor that the only thing they have is money”

Democracy fell; a new one is emerging

Conquering a land to save it: Greece is officially no longer sovereign

Sources:

[1] Alain Pilote (1986). The public-debt problem. From ‘The Age Of Plenty (Louis Even). Retrieved on the 25th of May 2012 from:

http://www.michaeljournal.org/plenty34.htm

[2] Wikipedia (2012). Sovereign default. Retrieved on the 25th of May 2012 from:

http://en.wikipedia.org/wiki/Sovereign_default

[3] Wikipedia (2012). Government Debt. Retrieved on the 25th of May 2012 from: http://en.wikipedia.org/wiki/Government_debt

[4] Wikipedia (2012). Criticism of Debt. Retrieved on the 25th of May 2012 from: http://en.wikipedia.org/wiki/Criticism_of_debt

[5] Schwartz HM (1992). Review of the ‘Debt cycles in the world economy: Foreign loans, financial crises and debt settlements’ (Christian Suter, writer). American Journal of Sociology. Retrieved on the 27th of May 2012 from: http://people.virginia.edu/~hms2f/Suter-Debt.pdf

[6] Wikipedia (2012). Kuznets swing. Retrieved on the 27th of May 2012 from: http://en.wikipedia.org/wiki/Kuznets_swing

[7] Wikipedia (2012). Kondradiev wave. Retrieved on the 27th of May 2012 from:  http://en.wikipedia.org/wiki/Kondratiev_wave

[8] German Foreign Policy (2012). On the relevance of democracy. Retrieved on the 27th of May 2012 from:

http://www.german-foreign-policy.com/en/fulltext/58304?PHPSESSID=7pb7rgqct42tognfml5a7e2v61

[9] Anderson N (2011). Why does every country in the world have debt? Retrieved on the 27th of May 2012 from:  http://www.quora.com/Why-does-every-country-in-the-world-have-debt

About these ads

One thought on “The cycles of debt – debt as integral element of the present economic system

  1. Hello, could I have your permission to use your diagram: the money supply in a nutshell for an article I am writing please? I will of course reference it to your article. Many Thanks.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s