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The Vicious Circle of Debt and Depression: It Is a Class War

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The attitude of the international financial parasites and their collection agencies such as the IMF regarding the disastrous consequences of their "restructuring" conditions is instructive.

An IMF official was quoted as acknowledging that the Fund's austerity packages have often led to debt-collection without economic growth. But he added: "the Fund is a firefighter not a carpenter, and you cannot expect the firefighter to rebuild the house as well as put out the fire." Obviously, what the "firefighter" tries to save from burning are external debt claims, not the economies or livelihoods of the indebted.

Another component of the IMF/World Bank's "adjustment program" to service external debt is called elimination of "price distortions," or establishment of "market-based pricing." These are fancy, obfuscationist terms for raising prices on essential needs such as food, water and utilities. They also include elimination of subsidies on healthcare, education, transportation, housing, and the like; as well as curtailment of wages and benefits for the working class. In essence, these are roundabout ways of taxing the poor to pay the rich, the creditors.

Where such belt-tightening measures have made living conditions for the people intolerable, they have triggered what has come to be known as "the IMF riots." The IMF riots are "painfully predictable. When a nation is, "down and out, [the IMF] takes advantage and squeezes the last pound of blood out of them. They turn up the heat until, finally, the whole cauldron blows up,' as when the IMF eliminated food and fuel subsidies for the poor in Indonesia in 1998. Indonesia exploded into riots. . . " [2]. Other examples of the IMF riots include the Bolivian riots over the rise in water prices and the riots in Ecuador over the rise in cooking gas prices. As the IMF/World Bank riots create an insecure or uncertain economic environment, they often lead to a vicious circle of capital flight, deindustrialization, unemployment, and socio-economic disintegration.

Only when the riots have tended to lead to revolutions, the parasitic mega banks and their debt-collecting bailiffs, the IMF and/or the World Bank, have been forced to accept less onerous debt-servicing conditions, or even debt repudiation. The Argentine people deserve credit for having set a good example of this kind of debt restructuring.

In late 2001 and early 2002, they took to the streets to protest the escalated austerity measures imposed on them at the behest of the IMF and the World Bank. "Political demonstrations and the looting of grocery stores quickly spread across the country. . . . The government declared a state of siege, but police often stood by and watched the looting "with their hands behind their backs.' There was little the government could do. Within a day after the demonstrations began, principal economic minister Domingo Cavallo had resigned; a few days later, President Fernando de la Rua stepped down. . . . In the wake of the resignations, a hastily assembled interim government immediately defaulted on $155 billion of Argentina's foreign debt, the largest debt default in history" [4].

Argentina also freed its currency (peso) from the US dollar (it had been pegged to dollar in 1991). After defaulting on its external debt and dropping its currency peg to the dollar, Argentina has enjoyed a most robust economic growth in the world. Debt re-structuring a la Argentina, that is, debt repudiation, is what today's debt-strapped nations in Europe and elsewhere need to do to free themselves from the shackles of debt peonage.

Having subjected many nations in the less-developed countries of the South to their notorious austerity measures, international knights of finance are now busy applying those impoverishing measures to the more developed countries of the North, especially those of Europe. For example, the Greek government has in recent months announced a series of wage and benefit cuts for public workers, a three-year freeze on pensions and a second increase this year in sales taxes, as well as in the price of fuel, alcohol and tobacco in return for a bailout plan promised by the IMF and the European Central Bank.

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Debt collectors' austerity requirements in a number of East European countries (such as Latvia and Lithuania) have been even more draconian. Thomas Landon Jr. of The New York Times recently reported that, threatened with bankruptcy, "Lithuania cut public spending by 30 percent -- including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. . . . And the government didn't stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent" (April 1, 2010).

As these oppressive measures led to the transfer of nine percent of gross domestic product (euphemistically called "national savings") from domestic needs to debt collectors, they also further aggravated the economic crisis: "Unemployment jumped to a high of 14 percent, from single digits -- and an already wobbly economy shrank 15 percent last year" [Ibid.].

In Latvia, another victim of the predatory global finance, the recessionary consequences of creditor-imposed austerity measures have been even more devastating: "Latvia has experienced the worst two-year economic downturn on record, losing more than 25% of GDP. It is projected to shrink further during the first half of this year. . . . With 22% unemployment . . . and cuts to education funding that will cause long-term damage, the social costs of this trajectory are also high" [5].

While the debt crises of the weaker European economies such as Greece, Latvia, Lithuania, Spain, Portugal and Ireland have reached critical stages of sustainability, the relatively stronger economies of Germany, France, and UK are also in danger of debt and deficit crises. Indeed, according to a recent IMF estimate, even in the more advanced economies of Europe the debt-to-GDP ratio will soon rise to an average of 100% [6].

Of course, the United States is also burdened by a mountain of debt that is fast approaching the size of its gross domestic product (of nearly $13.5 trillion). A major difference between the United States and other indebted nations is that the US is not as much at the mercy of its creditors or the IMF as are other debtor nations. Therefore, it can reasonably be argued that, on the basis of national or public interests, it could embark on an expansive fiscal policy, that is, a more aggressive stimulus package, that would take advantage of the power of "government as the employer of last resort," more or less as FDR did, thereby creating jobs, incomes and economic growth. This would also add to government's tax collection and reduce its debt and deficit.

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Judging by the record, as well the budgetary projections, of the Obama administration and the lobby-infested Congress, however, such an expansionary fiscal policy seems very unlikely. Not only has the bulk of the government's anti-recession assistance been devoted to the rescue of the Wall Street gamblers, but also the relatively small stimulus spending has largely been funneled into the pockets of the private/financial sector--through wasteful and ineffectual programs such as "cash for clunkers," tax credit for new homebuyers, tax incentives for employers to hire, and the like. This stands in sharp contrast to what FDR did in the earlier years of the Great Depression: creating jobs and incomes directly and immediately by the government itself.

Not only is the administration's feeble stimulus package soon coming to an end, but the government also recently imposed a three-year spending freeze on all public outlays except for military spending and the so-called entitlements. As their tax revenues, along with their traditional shares of federal assistance, are dwindling many states (especially California, Florida, New York, Arizona, Nevada and New Jersey) are facing serious financial difficulties. And as they curtail or shut down essential services at the libraries, museums, parks, schools, art centers, and hospitals, and give pink slips to their employees, the recessionary conditions are bound to exacerbate.

The wrenching economic hardship in the debt-ridden countries is not so much due to insufficient or lack of resources as it is the result of the lopsided and cruel distribution of those resources. It is increasingly becoming clear that the working majority around the world face a common enemy: an unproductive financial oligarchy that, like parasites, sucks the economic blood out of the working people, simply by trading and/or betting on claims of ownership.

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Ismael Hossein-zadeh is a professor of economics at Drake University, Des Moines, Iowa. He is the author of the newly published book, The Political Economy of U.S. Militarism His Web page is http://www.cbpa.drake.edu/hossein-zadeh

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If you want any excuse for something that's inexcu... by Jill Herendeen on Monday, Jun 7, 2010 at 11:14:34 AM
If you pay attention how the elected officials pai... by Steven G. Erickson on Monday, Jun 7, 2010 at 12:52:53 PM
This is the typical perpetrator behavior of blamin... by thepiffler on Monday, Jun 7, 2010 at 1:00:56 PM
Great summary of the bankster corruption and rulin... by Kent Welton on Monday, Jun 7, 2010 at 1:18:19 PM
This is an excellent summary of the world's politi... by JimZ on Tuesday, Jun 8, 2010 at 10:41:52 AM