Debt - a global scam

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Debt – a global scam

Most people want to punish the people who borrowed all the money and made the financial crisis happen. So are the people who lent them money responsible too? Dinyar Godrej asks.

Almost always when we think about debt, we think first about something people pay back. Then, later, we think if this ‘should’ or ‘must’ be paid back, how this should happen, and if it is possible to pay it back.

Large personal debts – for example getting a mortgage to buy a house when houses are expensive – can make even the strongest person feel very worried and hopeless. We feel we are responsible for the debt.

We have all learnt to think of debt in a moral way.

But there are other moral views too. I was a schoolchild in India in the 1970s, and I remember many of the stories we read during Hindi lessons. Many of the stories were about old values and how we need to change them. Many stories were about moneylenders, who everyone hated.

I remember one story about a poor father who has to borrow money from a rich moneylender. The poor man has to pay a very high rate of interest, so his family gets poorer and poorer. At the end, he tries to avoid the moneylender. So the moneylender goes to the family’s poor house. He calls to get his money, but the family try to hide inside. So he pulls down a curtain to take as part of the debt, but finds the very poor women behind it who are almost naked. The moneylender feels ashamed he has taken everything from them, and goes away with nothing.

This made me think about what is wrong. Was the debt wrong? Was it wrong for someone so rich to destroy the life of someone so poor? Wasn’t it dishonest and criminal? Shouldn’t the poor man have had help? It was very clear to me that the debt was not something that had to be paid back – it was just exploitation for no reason.

The élite who take everything

This story may seem extreme but it shows the kind of debt that controls the world’s financial system today. A very small group of people who lend money are getting richer and richer; but the world is getting poorer and could collapse. And no-one feels ashamed. David Graeber, in ‘Can debt spark a revolution?’: ‘Debt is how the rich get money from the rest of us, at home and abroad.’

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Speaking the naked truth - this Greek protester brings his anti-austerity message to parliament in Syntagma Square Athens. (John Kolesidis/Reuters)

The big story of our time is that the one per cent are getting much richer. And debt is one of the main reasons for this. After the financial crash, they got more money and assets than before, and debt is very important in making the top one per cent much richer than all the other people. The people who caused the financial crisis are getting even more money, and they will probably use this in more destructive ways unless someone stops them.

The one per cent are the super-rich, but the more important point is that they are the only ones with money in a world that everyone says is full of debt. Graeber said, they are ‘people who can make their wealth become political influence and then make their political influence become wealth again. The most important thing the government can do is to do everything possible, using everything possible – fiscal, monetary, political, even military – to stop stock [or share] prices falling. The most powerful empire on earth [the US] seems to exist mainly to guarantee the stream of wealth coming all the time to that very small part of its population who have money.’

This is using the power of money to protect wealth in the most socially unproductive way possible – to use wealth and property to make more money (or destroy the world trying). US economist Michael Hudson describes it as making industrial capitalism become finance capitalism. He writes: ‘The finance, insurance and real estate (FIRE) sector has started to create “balance sheet wealth”; not by real investment and employment, but financially by getting money from debt and rent.’ This type of capitalist has the name “rentier”. ‘Their plan is to turn land rent, natural resource rent and monopoly privileges into loans, stocks and bonds,’ according to Hudson. Is there any productive activity in this?

All the effort goes into making the prices of assets and property rise, creating more debt so that rent can be taken from anyone who isn’t already too poor to participate.

Before the 2007 financial crash, debt was almost something positive – house prices would always rise through the magic of the market, credit was always available even if people could not pay it back. If interest could be paid, the bankers could charge. The idea of saving money changed into paying back debt. The other side of this ‘participation’ was that the State was not involved: there was more privatization, less public organisations and financial regulation.

There is a lot written about how banks and other financial institutions used so much risk to get more profit.

Financial “products” became more and more complicated, and they used creative ways – almost black magic – to avoid checks. No-one understands it. In a recent BBC documentary, many experienced financial journalists and former bankers all said how no-one could understand the risks taken because the mathematics was too complicated for the poor human brain.

bonds: an IOU with a specific repayment date and fixed interest. They can be given by companies, banks or governments to make money and banks and investors buy and sell them.

debt leveraging: is using debt (borrowed money) to add to investment which can make profits – and losses - bigger.

shorting or short-selling: when investors borrow an asset, and they think price will fall, to sell to someone else. The aim is to buy back when the price falls and keep the difference, then give the asset back to the owner.

A thousand cuts

But the main results of the crash are less complicated: in a globalized financial system the fire that started in the US soon spread worldwide; for the poor there is little hope because governments are giving so much public money to support banks and trying out mad plans to make things return to normal– return to housing and financial bubbles asap, for example – that they refuse to invest in public goods; for the people in the middle, material life has got worse; the super-rich can make money from any mistake – like hedge fund manager John Paulson who earnt $15 billion by “shorting” sub-prime mortgages when the US housing market collapsed in 2007.

One in seven US citizens has a debt collector following them. The average office-worker’s household only keeps 20-25 per cent of its income after debts and taxes. And the US administration creates trillions of new debt to keep the old finance-created debt, and gives so much money to banks.

And in Britain, the number of £ millionaires almost doubled in the last two years, and the chancellor actually lowered the tax rate for high earners. But people on low-to-middle salaries have earnt less, so it will take until 2023 to earn the same as salaries before the crisis. There are many news reports: marital breakdown in couples over 50 with debt problems has doubled, and the number of people who need to use food banks has trebled to half a million in only one year. Mark Goldring, the chief executive of Oxfam, said: ‘There have been too many cuts to social support. This has caused a lot of poverty, difficulties and hunger. We cannot accept this in the seventh richest country on the planet.’

Wave after wave

The crisis we have now is the first to affect the rich world. But it is only the latest of many crises caused by the rise of risk capital (unlike capital that is invested in new production) after the liberalization of financial markets in the 1970s. Since then, countries have ended currency controls and protections to allow money to flow freely. This means trading in currency is now 30 times greater than ‘real economy’ trade in goods. When exchange rates rise or fall just a little, foreign traders jump to quickly sell lots of currency for profit. They often rely on computer systems where everyone follows like sheep.

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To live with a job or die fighting’: the message of this Tunisian protester demonstrating against unemployment. The country needs investment but has too much debt. (Hassene Dridi/AP/Press Association Images)

Financial investment is often a game of numbers. But there are consequences in the real world. If a lot of money enters a country quickly, this raises the value of the local currency and property prices, and changes how competitive its products are. If a lot of money leaves a country suddenly, this causes collapse –like the Asian economic crisis of 1997.

Financial liberalisation wanted growth at all costs, but it has failed. A 2011 research paper for the Bank of England said: ‘The current system has coexisted, on average, with: slower, more volatile, global growth; more frequent economic downturns; higher inflation and inflation volatility, larger current account imbalances; and more frequent banking crises, currency crises and external defaults.’

As the current financial crisis in the rich world affects everything, new debt crises are building up in the Majority World as their exports are affected and international investment leaves or comes as risk. More low-income countries are looking for loans and their debt repayments will rise as well.

Suggestions for change

A lot of things must change. The political class in the rich world needs to stop being controlled by the rentiers. Finance always wants to make money quickly, and forgets about the crisis afterwards. That ideology is failing in this crisis. Supporting the wealth of a few super-rich, with the rest of the population paying the debt, the poor paying for the mistakes of the rich – how long before this becomes violent? And now the super-rich are demanding tax relief, and there are more cuts to social support – this will deflate the economy. It doesn’t make sense.

Then we have “quantitative easing”, where a central bank creates a huge amount of new money to try and stimulate growth in the economy. In the US $2.3 trillion was created for this purpose, followed since September 2009 by monthly creations of $40 billion. Britain has created $575 billion - one of the main effects of this is very big holes in pension funds. When there is more money to help people buy houses, this has the effect of keeping the house prices and debts too high. Everything has a bad effect on the public.

When thinking people suggest solutions to the many debt crises, they think of changing the financial system first. Some people say we need global financial governance like the UN – but we would need to change the economic system first because it prefers liberalization, privatization and no rules. But it would be good to limit the ability of high finance to move to another country when regulations change.

Debt campaigners have suggested a “debt court” for a long time. Here, countries could ask for their loans (which should never have been made) to be cancelled. Up to now, the main options have been to go through the IMF to get debt relief or to not pay the debt. And countries can only do this if they have support from several other countries. When Tunisia’s former dictator Zine El Abedine Ben Ali ran away, he left the country with $18.55 billion debt to foreign countries. Tunisia’s yearly debt repayments are 15 per cent of government revenue. When someone suggested last year that the new Tunisian government should study the debt to see which of these loans should never have been given, credit ratings agencies quickly warned the country that they would drop its ratings grade if it did so. This would make it difficult to get investment and would make unemployment worse.

Don’t bank (rely) on it

Other suggestions are: that the banks change to total public ownership (which, they say, would allow ‘governments to deliver the monetary policy central banks are unable or unwilling to deliver’); greater regulation (this has not happened yet, even though many politicians have talked about it); not allowing them to get ‘too big to fail’ and then allowing them to fail (still waiting for this, unless you live in Iceland); and being tough on rich bankers. About the last suggestion, a British survey in April of employees working in finance found that the nearly all of them thought that people at the top were paid too much and that bankers were still encouraged to take too much risk with the reward structures.

Governments should certainly be quick to separate investment banks, which can be risky, from commercial banks where ordinary people used to save their money and where they now try to pay their debts. Money creation should not be controlled by banks and they should be required to keep larger reserves of money to make them more stable. And what about ‘derivatives trading’? Its only purpose is to make money from money by selling groups of loans and default insurance in very complicated, risky and unregulated forms. People say it is worth $708 trillion to $1.2 quadrillion (or $1,200,000,000,000,000). This is far more than the entire world’s GDP ($71.83 trillion). Even the shadow banking sector (including hedge funds) has recovered from the crisis in good health and is currently estimated at $67 trillion. Where is the regulation, the transparency, the control?

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Under attack: police cut off the HQ of the European Central Bank in Frankfurt, Germany, during the anti-capitalist ‘Blockupy’ demonstrations this June. (Ralph Orlowski/Reuters)

Then there is the small problem of tax. If you had to pay only 0.2 per cent tax on unproductive currency and shares trading, there would be less risk. If there were no bubbles, society would gain a lot. Rentiers now have $11.5 trillion in offshore tax havens – the annual income tax that is not paid on this is, according to Tax Justice Network, five times as much as what the World Bank thought we need to halve world poverty by 2015.

We could say a lot more about the changes we need, but the main problem is a social one. We are seeing higher levels of wealth than ever before of very few people, and we are allowing them to control economic policy. They think they deserve all this money, like gods, and they will continue making others pay them. In the richest countries of the world, people think it is normal that bright young people pay off debts for half of their working lives – if they can get jobs – just to get an education.

As I write, The Economist’s global debt clock said the world was $50.8 trillion in debt – in 2007, the year the current crisis started, it was $29 trillion. Every 10 seconds another million dollars is added. Even countries that are not in debt overall have a lot of government debt. The website asks: ‘Does it matter? After all, world governments owe the money to their own citizens, not to the Martians.’

In the future, government debt should become less important – people accept that it will never be paid completely but will rise and fall – as long as the government uses the money productively, working towards a social and dynamic economy that helps most of the people. When the crisis began, the rightwing media put pressure on the Australian government to run a budget surplus which would have taken billions out of the economy and only encouraged a lot of joblessness. Instead, the Rudd government’s stimulus packages used debt to strengthen the economy.

Debt to other countries is much more dangerous if it cannot be managed, but even here it is better for everyone if they agree on a productive solution, not destroy the debtor. The current crisis has shown the mixing of private, national and international debt through a corrupt financial system. Most people who talk about the crisis say that the only solution is growth, and that the only sustainability we should try to achieve now is the sustainability of growth.

The logic seems to be to be keep giving credit (which leads to more debt) to encourage growth, which then needs even more credit to keep growing – this will continue for ever until presumably the planet explodes.

We need to completely change the way we look at everything to face up to the future environmental debt. This change will only be achieved if we see that wealth is in the products of the earth and the work of its people; that the financialization of money is a trick. It will be achieved by governance for the 99 per cent and fighting for more equality; and a balance, not imbalance, of wealth. It is the time for the social moment now– we are still trying to work out the detail of how we can change, but we cannot let that stop us.

As this article has been simplified, the words, text structure and quotes may have been changed. For the original, please see: http://newint.org/features/2013/07/01/debt-keynote/