THE LOOMING FIRST WORLD DEBT CRISIS

By Ann Pettifor and - - Reprint | | Print |

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LONDON, Nov 1 2003 (IPS) - The first of the New Economics Foundation\’s annual reports on the global economy predicts that a giant credit bubble, created by central bankers and finance ministers who engineered decades of \’\’easy money\’\’, has now reached a \’\’tipping point\’\’, writes Ann Pettifor, director of Jubilee Research at the New Economics Foundation (NEF) and editor of Real World Economic Outlook. While globally there is a total of USD100 trillion of debt outstanding, there is only USD33 trillion of income with which to repay those debts. When this credit bubble bursts in the US and UK, it will be middle-class consumers that will first bear the brunt, the author argues in this article. This will be grossly unjust because while central bankers and finance ministers have clamped down on prices and wages, they have used the credit bubble (borrowing) to inflate asset values (stocks, bonds, and property) to extraordinary heights. On the whole it\’s the poor and the middle classes that rely on wages and salaries, while the rich derive their incomes from assets or wealth. The report calls on governments and central banks to take responsibility for their reckless de-regulation of finance, to re-regulate international capital by bringing back exchange controls, and to rein in reckless lending and borrowing.

Jubilee Research at the New Economics Foundation (NEF), the team that spearheaded global awareness of a Third World debt crisis, released provocative new research recently about a looming ”First World” debt crisis. These findings appear in the first of NEF’s annual reports on the global economy, Real World Economic Outlook, which shadows the IMF’s annual World Economic Outlook.

The report predicts that a giant credit bubble, created by central bankers and finance ministers who engineered decades of ”easy money”, has now reached a ”tipping point” at which the ”bubble” of financial assets of the G-7 countries exceed GDP by nine times. This has triggered financial crisis elsewhere. Another ”tipping point”, suggests NEF, would be a rise in interest rates — not unlikely for economies like the US and UK which have massive foreign deficits.

Real World Economic Outlook (RWEO) reveals that while globally there is a total of USD100 trillion of debt outstanding, there is only USD33 trillion of income with which to repay those debts. Recent stock market falls, drastic though they have been, have barely dented the credit superstructure. When this credit bubble bursts in the US and UK, argues NEF, will be middle-class consumers that will first bear the brunt of the financial crash. That will be unjust and unfair, because these consumers have been actively encouraged in their borrowing by the financial de-regulation policies of both central bankers and governments. The impact of a bursting credit bubble will reverberate around the world, and hurt the poorest most.

It will also be grossly unjust because while central bankers and finance ministers have clamped down on prices and wages, they have used the credit bubble (borrowing) to inflate asset values (stocks, bonds, and property) to extraordinary heights. On the whole it’s the poor and the middle classes that rely on wages and salaries, while the rich derive their incomes from assets or wealth.

How did we get into this mess? RWEO challenges standard explanations for the launch of the ”globalisation” experiment. We contest the view that de-regulation of capital flows –the very core of the globalisation project– was brought about by a form of ”spontaneous combustion” caused by new technology. Nor do we share the view of many activists that globalisation is ”corporate-driven”. Instead, we argue, globalisation was triggered by elected politicians, and central bankers in both the US and the UK who disbanded the existing system of paying off debts by exchanging gold, and instead sought to open up (liberalise) capital markets so that the US could borrow to pay off debts.

This new arrangement allowed them to print the money in which they paid off those debts (unlike poor countries who have to repay debts in foreign currencies like dollars or sterling). UK politicians and central bankers were only too happy to act as US intermediaries in the capital markets. Together they constructed a new financial architecture that effectively obliges central banks of both rich and poor countries to lend to the US by buying US Treasury Bills (debt), now effectively the world’s reserve currency, which used to be neutral — gold.

It is this financial system which makes US financiers so confident that the rest of the world will continue to finance their nation’s extravagant spending binge.

We contest that view. There is now a growing consensus that the vast build-up of household, corporate, state, and foreign debts of the US are not sustainable. Some central banks are already switching out of US dollars and into Euros. When capital flows shift away from the US, and there were signs recently of this happening, US Federal Reserve chairman Alan Greenspan may have to raise interest rates to attract capital back into the US — to fund both the growing federal, state and foreign deficits. Indeed the bond markets seem to be signalling that they expect this to happen quite soon. It is when interest rates begin to rise again, when debt costs soar both for corporates and households, and defaults and bankruptcies increase more rapidly than now, that the ”tipping point” will be reached. (see ”The Reemergence of Global Finance”, Cornell University Press, 1994).

For some, the day of reckoning has already come. When it does for the millions more that are dutifully and heroically borrowing and spending, and thereby propping up the economy, great pain and anguish will be inflicted on individuals, businesses, their workers, families and communities. The consequences for the rest of us, and particularly for those in the poorest countries, are frightening.

RWEO calls on governments and central banks to take responsibility for their reckless de-regulation of finance, to re-regulate international capital by bringing back exchange controls, and to rein in ”easy money” –reckless lending and borrowing– to return the economy to scale. Finally, we call on them to compensate those consumers now dutifully propping up the US and the UK economies. This should be done not by taxing the middle classes but by obliging the rich to share some of the incredible gains made over the last two decades, thanks to the actions of central bankers.

Our world has been turned upside down. It is time to put right again. (END/COPYRIGHT IPS)