For years, people have been calling for the world to forgive third world debt. The amount of effort that poverty stricken countries make just to pay interest on their debt while people are starving and living in misery is shameful. Corrupt governments stole big portions of what was borrowed instead of investing it in infrastructure and now these countries must spend generations of labor to pay off the debt instead of growing and developing.
Hopefully one day our government will care about people's suffering more than it cares about investment bankers, but that day is probably a long way off. Look how the harbinger of hope and change, Mr. Obama, has been enveloped in the Wall Street's orgy of greed. However, there is another debt bomb ticking away and it's ready to go off in the first world.
By 2010, total debt of the US Federal Government will finally reach one year of GDP, about 15 trillion dollars. Japan is well beyond that already and European countries like Greece, Spain, Ireland and Iceland are close to financial chaos due to overwhelming amounts of debt. I lived in Argentina in 2001, before Argentina defaulted on its debt. It was so obvious that there was no alternative but to pull the plug, but much suffering had to go on before the obvious was recognized and the default finally occurred.
Total world wealth is somewhere around $160 trillion, and total world debt, public and private, is about the same amount, $150 trillion. Current world GDP is about $60 trillion. More and more, the debt is beginning to drag us down into a dark whole of endless interest payments and more new debt to service old debt.
There are two options. Spend a decade in an austerity program, sacrificing development to pay off most of the debt, while at the same time making big structural changes to our financial system in order to stop the easy flow of credit to people, governments and business. This is a very sound, honest thing to do; hence, it will never happen. No person, government or corporation is willing to succumb to that kind of pain, and for good reason, do we really need to?
One day in the near future, we will wake to our coffee and media outlets and get a very strange surprise. We will have a new world reserve currency, made up of a basket of currencies and commodities, say oil, gold, the Dollar, the Euro, the Yen etc.. This must be done completely in secret, by the world financial elites, or massive speculation beforehand would wreak havoc on financial markets. Some very interesting deals will be struck, fortunes made and lost, but what is certain is that the incredible amounts of dollar denominated debt that China, Japan, and Europe hold will be converted into the new currency.
The smoky room scenario is the most likely, but it is not the only possibility. With the internets organizational capacity, a worldwide movement could begin to insist on a different solution. What is needed is a forum for intellectuals and citizens of the world to discuss and organize our future and not depend on secret deals cut behind closed doors. If there was any doubt about Obama being "our savior' his shotgun marriage to Wall Street should dispel any doubts. We, the citizens of the world, must organize ourselves, as simply citizens of the world, and create the political organization and power to make the needed changes.
What could another solution look like? First, let's define what money is, how it is created, and what debt is. Money is the equivalent of human labor, whether that labor is getting a hair cut, getting crude oil out of the ground, writing a book, building a table or making bread. Interest payments are simply the cost of using money, rent on money. But how is that money created? Is all our work and efforts calculated, an estimate made, then money printed and put in to circulation to represent that effort? No.
Money is created in two ways, fractional reserve banking and quantitative easing.
The Federal Reserve, in the case of America, and reserve banks in general, lend money to financial institutions, i.e. banks and the banks take the money and loan it out keeping about 10% on deposit and loaning out 90%. So if someone deposits $1,000 in Bank of America, BofA keeps $100 and lends out $900, which is eventually deposited somewhere else, where $90 is kept on deposit, and $810 is loaned. At the end of the cycle, the $1,000 deposit becomes $10,000.
There is also the concept that the economist Herman Daly discusses which the absurdity of compound interest is. Simply put, if someone borrows $20,000 to buy a new car, they exchange the money for its equivalent in a machine. But as the years go by, the debt multiplies, while the car depreciates. Why? Nothing else in nature multiplies like that, except money. Gold doesn't, oil doesn't, and computers don't? There is an intrinsic absurdity in compound interest that is rarely addressed.
As mentioned before, total world yearly GDP is $60 trillion, total world debt is about $150 trillion, and world wealth is about $160 trillion. If we assume, and it is a big assumption, that the debt lent and borrowed is evenly divided, if upon creating a new currency we simply payback 50% of what is owed in the new currency and cancel all debts public and private, current liquidity levels would stay more or less the same, and we should have no inflation.
Banks and other financial institutions would have to be re-stocked with currency, enough to keep them, or at least some of them, open. There would be an important loss of equity in financial institutions, but the world would be free of debt, and a new World Reserve Bank would manage future lending to banks, but now the banks would only lend what they have on reserve, fractional banking would end. The extra liquidity in the market would have to be compensated with very high initial interest rates, and taxes would be placed on all commodities, an Eco Tax, to promote sustainability and new energy sources. The big trick would be keep the interest rates and new taxes at the right levels so that inflation is kept under control. This would obviously be extremely difficult to calculate, but that is why we have super geeks and super computers.
Big bummer if all you did was lend money, but then again, at
least you are getting 50% back in a new stable currency, and you are helping
For developing countries, this would mean an instant increase in living standards and quality of life. New infrastructure projects, schools, hospitals etc, must be part of the swap. In exchange for no debt, out goes cronyism and corruption. For the first world, the deal must be a significant decrease in military spending, and big sustainability projects to tackle the coming challenges of a world consuming more than it can possibly produce. We must first get our financial house in order before we can take on the challenge of creating a sustainable world.
The cycle of debt and consumption has turned into a modern slavery that now begins as soon as many young folks step on a college campus, and ends with a reverse mortgage when there is nothing left but equity in their house. Debt is slavery to consumption, multinationals, banks, and spiritually bankrupt advertising, media, and Hollywood culture. Its time to lose the chains.