18 December 2009
By Ellen Hodgson Brown,
J.D.
Europe’s small, debt-strapped countries could follow
the lead of Argentina and simply walk away from their
debts. That would shift the burden to the creditor
countries, which could solve the problem merely by a
change in accounting rules.
Total financial collapse, once a problem only for
developing countries, has now come to Europe. The
International Monetary Fund is imposing its “austerity
measures” on the outer circle of the European Union,
with Greece, Iceland and Latvia the hardest hit. But
these are not your ordinary third world debtor
supplicants. Historically, the Vikings of Iceland
successfully invaded Britain; Latvian tribes repulsed
the Vikings; and the Greeks conquered the whole
Persian empire. If anyone can stand up to the IMF,
these stalwart European warriors can.
Dozens of countries have defaulted on their debts in
recent decades, the most recent being Dubai, which
declared a debt moratorium on November 26, 2009. If
the once lavishly-rich Arab emirate can default, more
desperate countries can; and when the alternative is
to destroy the local economy, it is hard to argue that
they shouldn’t. That is particularly true when the
creditors are largely responsible for the debtor’s
troubles, and there are good grounds for arguing the
debts are not owed. Greece’s troubles originated when
low interest rates that were inappropriate for Greece
were maintained to rescue Germany from an economic
slump. And Iceland and Latvia have been saddled with
responsibility for private obligations to which they
were not parties. Economist Michael Hudson writes:
“The European Union and
International Monetary Fund have told them to
replace private debts with public obligations,
and to pay by raising taxes, slashing public spending
and obliging citizens to deplete their savings.
Resentment is growing not only toward those who ran up
these debts . . . but also toward the neoliberal
foreign advisors and creditors who pressured these
governments to sell off the banks and public
infrastructure to insiders.”
The Dysfunctional EU:
Where a Common Currency Fails
Greece may be the first in the EU outer circle to
revolt. According to Ambrose Evans-Pritchard in
Sunday’s Daily Telegraph, “Greece has become the first
country on the distressed fringes of Europe's monetary
union to defy Brussels and reject the Dark Age
leech-cure of wage deflation.” Prime Minister George
Papandreou said on Friday:
"Salaried workers will not pay for this situation: we
will not proceed with wage freezes or cuts. We did not
come to power to tear down the social state."
Notes Evans-Pritchard:
“Mr Papandreou has good
reason to throw the gauntlet at Europe's feet. Greece
is being told to adopt an IMF-style austerity package,
without the devaluation so central to IMF plans. The
prescription is ruinous and patently self-defeating.”
The
currency cannot be devalued because the same Euro is
used by all. That means that while the country’s
ability to repay is being crippled by austerity
measures, there is no way to lower the cost of the
debt. Evans-Pritchard concludes:
“The deeper truth that
few in Euroland are willing to discuss is that EMU is
inherently dysfunctional – for Greece, for Germany,
for everybody.”
Which is all the more
reason that Iceland, which is not yet a member of the
EU, might want to reconsider its position. As a
condition of membership, Iceland is being required to
endorse an agreement in which it would reimburse Dutch
and British depositors who lost money in the collapse
of IceSave, an offshore division of Iceland’s leading
private bank. Eva Joly, a Norwegian-French magistrate
hired to investigate the Icelandic bank collapse,
calls it blackmail. She warns that succumbing to the
EU’s demands will drain Iceland of its resources and
its people, who are being forced to emigrate to find
work..
Latvia is a
member of the EU and is expected to adopt the Euro,
but it has not yet reached that stage. Meanwhile, the
EU and IMF have told the government to borrow foreign
currency to stabilize the exchange rate of the local
currency, in order to help borrowers pay mortgages
taken out in foreign currencies from foreign banks. As
a condition of IMF funding, the usual government
cutbacks are also being required. Nils Muiznieks, head
of the Advanced Social and Political Research
Institute in Riga, Latvia, complained:
“The rest
of the world is implementing stimulus packages ranging
from anywhere between one percent and ten percent of
GDP but at
the same time, Latvia has been asked to make deep cuts
in spending - a total of about 38 percent this year in
the public sector - and raise taxes to meet budget
shortfalls.”
In
November, the Latvian government adopted its harshest
budget of recent years, with cuts of nearly 11%. The
government had already raised taxes, slashed public
spending and government wages, and shut dozens of
schools and hospitals. As a result, the national bank
forecasts a 17.5% decline in the economy this year,
just when it needs a productive economy to get back on
its feet. In Iceland, the economy contracted by 7.2%
during the third quarter, the biggest fall on record.
As in other countries squeezed by neo-liberal
tourniquets on productivity, employment and output are
being crippled, bringing these economies to their
knees.
The
cynical view is that that may have been the intent.
Instead of helping post-Soviet nations develop
self-reliant economies, writes Marshall Auerback, “the
West has viewed them as economic oysters to be broken
up to indebt them in order to extract interest charges
and capital gains, leaving them empty shells.”
But
the people are not submitting quietly to all this. In
Latvia last week, while the Parliament debated what to
do about the nation’s debt, thousands of demonstrating
students and teachers filled the streets, protesting
the closing of a hundred schools and reductions in
teacher salaries of up to 60%. Demonstrators held
signs saying, "They have sold their souls to the
devil" and "We are against poverty." In the Iceland
Parliament, the IceSave debate had been going on for
over 140 hours at last report, a new record; and a
growing portion of the population opposes underwriting
a debt they believe the government does not owe.
In a December 3 article
in The Daily Mail titled “What Iceland Can
Teach the Tories,” Mary Ellen Synon wrote that ever
since the Icelandic economy collapsed last year, “the
empire builders of Brussels have been confident that
the bankrupt and frightened Icelanders must finally be
ready to exchange their independence for the
‘stability’ of EU membership.” But last month, an
opinion poll showed that 54 percent of all Icelanders
oppose membership, with just 29 percent in favor.
Synon wrote:
“The Icelanders may have
been scared out of their wits last year, but they are
now climbing out from under the ruins of their
prosperity and have decided that the most valuable
thing they have left is their independence. They are
not willing to trade it, not even for the possibility
of a bail-out by the European Central Bank.”
Iceland, Latvia and
Greece are all in a position to call the bluff of the
IMF and EU. In an October 1 article called “Latvia –
the Insanity Continues,” Marshall Auerback maintained
that Latvia’s debt problem could be fixed over a
weekend, by a list of measures including (1) not
answering the phone when foreign creditors call the
government; (2) declaring the banks insolvent,
converting their external debt to equity, and having
them reopen with full deposit insurance guaranteed in
local currency; and (3) offering “a local currency
minimum wage job that includes healthcare to anyone
willing and able to work as was done in Argentina
after the Kirchner regime repudiated the IMF’s toxic
package of debt repayment.”
Evans-Pritchard suggested
a similar remedy for Greece, which he said could break
out of its death loop by following the lead of
Argentina. It could “restore its currency, devalue,
pass a law switching internal euro debt into [the
local currency], and ‘restructure’ foreign
contracts.”
The Road Less Traveled:
Saying No to the IMF
Standing up to the IMF is not a
well-worn path, but Argentina forged the trail.
In the face of dire predictions that the economy would
collapse without foreign credit, in 2001 it defied its
creditors and simply walked away from its debts. By
the fall of 2004, three years after a record default
on a debt of more than $100 billion, the country was
well on the road to recovery; and it achieved this
feat without foreign help. The economy grew by 8
percent for 2 consecutive years. Exports increased,
the currency was stable, investors were returning, and
unemployment had eased. “This is a remarkable
historical event, one that challenges 25 years of
failed policies,” said economist Mark Weisbrot in a
2004 interview quoted in The New York Times.
“While other countries are just limping along,
Argentina is experiencing very healthy growth with no
sign that it is unsustainable, and they’ve done it
without having to make any concessions to get foreign
capital inflows.”
Weisbrot is co-director
of a Washington-based think tank called the Center for
Economic and Policy Research, which put out a study in
October 2009 of 41 IMF debtor countries. The study
found that the austere policies imposed by the IMF,
including cutting spending and tightening monetary
policy, were more likely to damage than help those
economies.
That
was also the conclusion of a study released last
February by Yonca Özdemir from the Middle
East Technical University in Ankara, comparing IMF
assistance in Argentina and Turkey. Both emerging
markets faced severe economic crises in 2001, preceded
by chronic fiscal deficits, insufficient export
growth, high indebtedness, political instability, and
wealth inequality.
Where Argentina broke ranks with the IMF, however,
Turkey followed its advice at every turn. The end
result was that Argentina bounced back, while Turkey
is still in financial crisis. Turkey’s reliance on
foreign investment has made it highly susceptible to
the global economic downturn. Argentina chose instead
to direct its investment inward, developing its
domestic economy.
To
find the money for this development, Argentina did not
need foreign investors. It issued its own money and
credit through its own central bank. Earlier, when the
national currency collapsed completely in 1995 and
again after 2000, Argentine local governments issued
local bonds that traded as currency. Provinces paid
their employees with paper receipts called
“Debt-Cancelling Bonds” that were in currency units
equivalent to the Argentine Peso. The bonds canceled
the provinces’ debts to their employees and could be
spent in the community. The provinces had actually
“monetized” their debts, turning their bonds into
legal tender.
Argentina is a large country with more resources than
Iceland, Latvia or Greece, but new technologies are
now available that could make even small countries
self-sufficient. See David Blume, Alcohol Can Be a
Gas.
Local Currency for Local
Development
Issuing and lending currency is the sovereign right of
governments, and it is a right that Iceland and Latvia
will lose if they join the EU, which forbids member
nations to borrow from their own central banks. Latvia
and Iceland both have natural resources that could be
developed if they had the credit to do it; and with
sovereign control over their local currencies, they
could get that credit simply by creating it on the
books of their own publicly-owned banks.
In
fact, there is nothing extraordinary in that proposal.
All private banks get the credit they lend simply by
creating it on their books. Contrary to popular
belief, banks do not lend their own money or their
depositors’ money. As the U.S. Federal Reserve
attests, banks lend new money, created by double-entry
bookkeeping as a deposit of the borrower on one side
of the bank’s books and as an asset of the bank on the
other.
Besides thawing frozen credit pipes, credit created by
governments has the advantage that it can be issued
interest-free. Eliminating the cost of interest can
cut production costs dramatically.
Government-issued money to fund public projects has a
long and successful history, going back at least to
the early eighteenth century, when the American colony
of Pennsylvania issued money that was both lent and
spent by the local government into the economy. The
result was an unprecedented period of prosperity,
achieved without producing price inflation and without
taxing the people.
The
island state of Guernsey, located in the Channel
Islands between England and France, has funded
infrastructure with government-issued money for over
200 years, without price inflation and without
government debt.
During the First World War, when private banks were
demanding 6 percent interest, Australia’s
publicly-owned Commonwealth Bank financed the
Australian government’s war effort at an interest rate
of a fraction of 1 percent, saving Australians some
$12 million in bank charges. After the First World
War, the bank’s governor used the bank’s credit power
to save Australians from the depression conditions
prevailing in other countries, by financing production
and home-building and lending funds to local
governments for the construction of roads, tramways,
harbors, gasworks, and electric power plants. The
bank’s profits were paid back to the national
government.
A
successful infrastructure program funded with
interest-free national credit was also instituted in
New Zealand after it elected its first Labor
government in the 1930s. Credit issued by its
nationalized central bank allowed New Zealand to
thrive at a time when the rest of the world was
struggling with poverty and lack of productivity.
The
argument against governments issuing and lending money
for infrastructure is that it would be inflationary,
but this need not be the case. Price inflation
results when "demand" (money) increases faster than
"supply" (goods and services). When the national
currency is expanded to fund productive projects,
supply goes up along with demand, leaving consumer
prices unaffected.
In
any case, as noted above, private banks themselves
create the money they lend. The process by which banks
create money is inherently inflationary, because they
lend only the principal, not the interest necessary to
pay their loans off. To come up with the interest, new
loans must be taken out, continually inflating the
money supply with new loan-money. And since the money
is going to the creditors rather than into producing
new goods and services, demand (money) increases
without increasing supply, producing price inflation.
If credit were extended for public infrastructure
projects interest-free, inflation could actually be
reduced, by reducing the need to continually take
out new loans to find the elusive interest to service
old loans.
The
key is to use the newly-created money or credit for
productive projects that increase goods and services,
rather than for speculation or to pay off national
debt in foreign currencies (the trap that Zimbabwe
fell into). The national currency can be protected
from speculators by imposing exchange controls, as
Malaysia did in 1998; imposing capital controls, as
Brazil and Taiwan are doing now; banning derivatives;
and imposing a “Tobin tax,” a small tax on trade in
financial products. Making the Creditors Whole
If
the creditors are really interested in having their
debts repaid, they will see the wisdom of letting the
debtor nation build up its producing economy to give
it something to pay with. If the creditors are not
really interested in repayment but are using the debt
as a tool to exploit the debtor country and strip it
of its assets, the creditors’ bluff needs to be
called.
When
the debtor nation refuses to pay, the burden shifts to
the creditors to make themselves whole. British
economist Michael Rowbotham suggests that in the
modern world of electronic money, this can be
accomplished by creative banking regulators simply
with a change in accounting rules. “Debt” today is
created with accounting entries, and it can be
reversed with accounting entries. Rowbotham outlines SEQ
CHAPTER \h \r 1two ways the rules might be changed to
liquidate impossible-to-repay debt:
“The first option is to
remove the obligation on banks to maintain parity
between assets and liabilities . . . . Thus, if a
commercial bank held $10 billion worth of developing
country debt bonds, after cancellation it would be
permitted in perpetuity to have a $10 billion dollar
deficit in its assets. This is a simple matter of
record-keeping.
“The second option . . .
is to cancel the debt bonds, yet permit banks to
retain them for purposes of accountancy. The debts
would be cancelled so far as the developing nations
were concerned, but still valid for the purposes of a
bank’s accounts. The bonds would then be held as
permanent, non-negotiable assets, at face value.”
If
the banks were allowed either to carry unrepayable
loans on their books or to accept payment in local
currency, their assets and their solvency would be
preserved. Everyone could shake hands and get back to
work.
Ellen Brown is a California attorney and the author of
eleven books, including “Web of Debt: The Shocking
Truth About Our Money System and How We Can Break
Free,” available in English, Swedish and German. Her
websites are www.webofdebt.com and www.ellenbrown.com.
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