New Internationalist

The First World Debt Crisis

I’m tired of listening to pundits who seem quite happy to admit that they have no idea what’s going on. For me, the inescapable cliché is déjà vu all over again.

Here are some random jottings of my own – please feel free to add yours…

So the Masters of the Universe and their attendant professional politicians don’t recognize the world they were trying to create in their own, incredibly mean and parochial image.

Poor souls. A little humility, a little less confidence that by renaming them they could replace their debts with ‘leverage’, and we’d all stand a slightly better chance of enlightenment.

What I can’t help seeing is a relentless migration of ‘debt crises’ from the ‘Third World’ (primarily Africa and Latin America) in the 1970s and 1980s, via the ‘Second World’ (primarily the former Soviet Union, Japan and Southeast Asia) in the 1980s and 1990s to the ‘First World’ (primarily Europe and the US) in the 2000s and beyond.

I really don’t want to go there.

For a start, the migration has run out of worlds to go to. And since the earth is beset by closely related ailments – finite resources and accelerating climate change – it might be worth glancing, straight in the eye for once, at the ugly truth.

Unsurprisingly, the saga begins and ends with oil.

The first oil shock in the 1970s generated vast quantities of windfall cash for the oil-producing OPEC countries (or rather, their rulers). This cash had to go somewhere. So ‘petro-dollars’ were recycled by fledgling Masters of the Universe on Wall Street and in the City of London.

Much of it went to a motley crew of like-minded despots, chancers and oligarchs in the Majority World. They duly squandered it on themselves.

When it came to paying the money back, between them all they precipitated the ‘Third World Debt crisis’.

This first ‘debt crisis’ established the principle that debts incurred for private gain – not least, by the private banks of the Minority World - should at some point be transferred, via governments, to the public at large.

The growing world empire of private finance thereby took control of the economies of Africa and Latin America, via its agents in the International Monetary Fund (IMF) and World Bank.

Politically, this meant subjecting these regions to whatever form of repression might best serve their purpose.

Economically, it meant subjecting them to ‘structural adjustment’ and the privatization of everything. To pay back their oppressors’ debts, the people of these countries were required, all at once, to export whatever they could, which in good measure turned out to be commodities like copper or oil. The resulting ‘fool’s glut’ of commodities on world markets made them incredibly cheap.

At much the same time – and particularly with the end of history after the Cold War – corporate globalization twigged that cheap commodities could be matched with cheap labour, in places like China or Mexico, to produce cheap consumer goods.

Together, these two cheap things could remove the threat of price inflation in the Minority World  and give birth not just to a globalized consumer society but to low interest rates and cheap money.

With this money, the Masters of the Universe ‘leveraged’ and bought anything that came to hand, including money itself. In this way they levitated into a fantasy of wealth based on (insider) ‘knowledge’ and (profitable, private) ‘services’ which knew the price of everything and the value of nothing.

In this world, the crude realities of trade and budget deficits (particularly in the US and Britain) mattered not at all.

But the scarcity of oil in particular and finite resources generally (including fertile agricultural land) grew along with their consumption, so that their cheapness could no longer be assured. Countries with trade surpluses (notably China) began to accumulate vast ‘Sovereign Funds’. For a while they might underwrite the debts of the Minority World, but at some point the deal would go sour.

That is what has now happened – places like China won’t lend to private banks any more.

Deceit, bewilderment and mistrust had replaced ‘confidence’.

And, all the while, the accelerating pace of climate change highlighted the self-destructive instincts of prevailing orthodoxy.

Quite where this will take us no-one with a loud voice seems to know. Those who currently shout the loudest are those who made the mess.

The idea that ‘regulation’ devised by them will now clean it up is fatuous.

Anyone for privatization now?

A spot of ‘stuctural adjustment’ from the IMF and World Bank (how strangely quiet they are!)?

Why, the British Government could have acquired the British banking system in its entirety for less taxpayers’ money than it is spending on propping it up.

What is the point of having a private banking system that can only function with the backing of public funds?

How secure can depositors in banks sensibly feel when the ‘guarantees’ offered by governments are backed by the expectation of future revenues from a worldwide ‘tax consensus’ that promotes tax havens and is grossly regressive and unjust?

Iceland may not be the last government to go bust.

Whatever else, the neoliberal ‘model’ is in ruins - the empty, deformed, valueless shell it always was.

Regulation’ is not a technical fix but an act of supposedly democratic control. How far this can accompany a retracing of the ‘debt crisis’ saga so far – in which control is now shifting to the trade-surplus countries of the ‘Second World’, and from there may yet shift back to the resource-rich countries of the ‘Third World’ – remains to be seen.

But we could do worse than listen to those who live where it began, particularly in Latin America.

When recession hits jobs, you don’t have to walk away – you can take over, occupy, form co-operatives. When banks don’t work, or steal your money, you’re better off with a credit union, a mutual society (all the building societies that ‘demutualized’ in Britain have now vanished). When trade is desirable, the most trustworthy agreements may have less to do with freedom than with fairness. When the political process is out of your control, you take it back.

For me, the most useful clues to the future lie in sustainable self-reliance, not cancerous growth.

Self-reliance refers not so much to individuals as to neighbourhoods, communities, cultures.

Some people call this the post-carbon society.

It may not be cheap, but it’s the only one on offer.

Debt does, after all, mean living beyond your means.

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  1. #1 Phillip Smith 11 Oct 08

    Well said, David... And, per your note:

    ’Debt does, after all, mean living beyond your means.’

    ... it too surprises me that some folks in the US (and elsewhere) think that the debt can go on forever.

    But that debt comes due eventually. And that is a sad day for those who are not in the top 1%.


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About the author

David Ransom a New Internationalist contributor

David Ransom joined New Internationalist in 1989 and wrote on a range of issues, from green justice to the current financial crisis, before retiring in 2009. He was a close friend of Blair Peach, once worked as a banker in Uruguay and continued to contribute to New Internationalist as a freelancer until shortly before his death in February 2016. He lived on a barge on the waterways of England’s West Country.

His publications include License to Kill on the death of Blair Peach in 1979 and The No Nonsense Guide to Fair Trade. He also co-edited, with Vanessa Baird, People First Economics.

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