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

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Never before has so much debt been imposed on so many people by so few financial operatives--operatives who work from Wall Street, the largest casino in history, and a handful of its junior counterparts around the world, especially Europe.

External sovereign debt, as well as occasional default on such debt, is not unprecedented [1]. What is rather unique in the case of the current global sovereign debt is that it is largely private debt billed as public debt; that is, debt that was accumulated by financial speculators and, then, offloaded onto governments to be paid by taxpayers as national debt. Having thus bailed out the insolvent banksters, many governments have now become insolvent or nearly insolvent themselves, and are asking the public to skimp on their bread and butter in order to service the debt that is not their responsibility.

After transferring trillions of dollars of bad debt or toxic assets from the books of financial speculators to those of governments, global financial moguls, their representatives in the State apparatus and corporate media are now blaming social spending (in effect, the people) as responsible for debt and deficit!

President Obama's recent motto of "fiscal responsibility" and his frequent grumbles about "out of control government spending" are reflections of this insidious strategy of blaming victims for the crimes of perpetrators. They also reflect the fact that the powerful financial interests that received trillions of taxpayers' dollars, which saved them from bankruptcy, are now dictating debt-collecting strategies through which governments can recoup those dollars from taxpayers. In effect, governments and multilateral institutions such as the IMF are acting as bailiffs or tax collectors on behalf of banksters and other financial wizards.

Not only is this unfair (it is, indeed, tantamount to robbery, and therefore criminal), it is also recessionary as it can increase unemployment and undermine economic growth. It is reminiscent of President Herbert Hoover's notorious economic policy of cutting spending during a recession, a contractionary fiscal policy that is bound to worsen the recession. It is, indeed, a recipe for a vicious circle of debt and depression: as spending is cut to pay debt, the economy and (therefore) tax revenues will shrink, which would then increase debt and deficit, and call for more spending cuts!

Spending on national infrastructure, both physical (such as roads and schools) and social infrastructure (such as health and education) is key to the long-term socioeconomic developments. Cutting public spending to pay for the sins of Wall Street gamblers is bound to undermine the long-term health of a society in terms of productivity enhancement and sustained growth.

But the powerful financial interests and their debt collectors seem to be more interested in collecting debt claims than investing in economic recovery, job creation or long-term socioeconomic development. Like most debt-collecting agencies, the IMF and the states serving as banksters' bailiffs through their austerity programs may shed a few crocodile tears in sympathy with the victims' of their belt-tightening policies; but, again like any other debt-collecting agents, they seem to be saying: "sorry for the loss of your job or your house, but debt must be collected--regardless"!

A most outrageous aspect of the debt burden that is placed on the taxpayers' shoulders since 2008 is that most of the underlying debt claims are fictitious and illegitimate: they are largely due to manipulated asset price bubbles, dubious or illegal financial speculations, and scandalous conversion of financial gamblers' losses into public liability.

As noted earlier, onerous austerity measures to force the public to pay the largely fraudulent external debt is not new. Benignly calling such oppressive measures "Structural Adjustment Programs," the International Monetary Fund and the World Bank have for decades imposed them on many less developed countries to collect debt on behalf of international financial titans.

To "help" the indebted nations craft debt-servicing arrangements with external creditors, the IMF imposed severe conditions on the way they managed their economies--just as it is now imposing (in collaboration with the European and American bankers) those austerity policies on the debtor nations in Europe. The primary purpose of such restrictive conditions is to divert or transfer national resources from domestic use to external creditors. These include not only belt-tightening measures to cut social spending and/or raise taxes, but also selling-off public enterprises, national industries, and future tax revenues.

Calling such fire-sale privatization deals "briberization," the ex-World Bank chief economist Joseph Stiglitz revealed (in an interview with the renowned investigative reporter Greg Palast) how finance ministers and other bureaucratic authorities in the debtor countries often carried out the Bank's demand to sell off their electricity, water, transportation and communication companies in return for some apparently irresistible sweetener. "You could see their eyes widen" at the prospect of 10% commissions paid to Swiss bank accounts for simply shaving a few billions off the sale price of national assets [2].

The IMF/World Bank/WTO "structural adjustment programs" also include neoliberal policies of "capital-market liberalization." In theory, capital market deregulation is supposed to lead to the inflow and investment of foreign capital, thereby bringing about industrialization, job creation and economic expansion. In practice, however, financial liberalization often leads to more capital outflow (or capital flight) than inflow. To the extent that there is an inflow of capital it is not so much productive or industrial capital as it is unproductive or speculative capital (also known as "hot money"): massive amounts of capital that is constantly in transit across international borders in pursuit of real estate, currency, or interest rate speculation.

To attract foreign capital to the relatively vulnerable markets of debtor nations, the IMF frequently recommends drastic increases in interest rate. Higher interest rates are, however, both anti-developmental and detrimental to the goal of debt servicing. Higher interest rates tend to destroy property values, divert financial resources away from productive investment, and increase the burden of debt servicing.

For example, in the Philippines, which in 1980 adopted the IMF's Structural Adjustment Program, "Interest payments as a percentage of total government expenditures went from 7 percent in 1980 to 28 percent in 1994. Capital expenditures, on the other hand, plunged from 26 percent to 16 percent." By contrast, "the Philippines' Southeast Asian neighbors ignored the IMF's prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995. . .while the Philippines barely grew and gained the reputation of a depressed market that repelled investors" [3].

A major condition of the IMF/World Bank/WTO's "restructuring program" is trade liberalization. Free trade has always been the bible of the economically strong, self-righteously preached to the weak. It enables the strong to use their market power for economic gains, thereby perpetuating an international division of labor in which the technologically advanced countries would specialize in the production and export of high-tech, high-value added products while less developed countries would be condemned to the supply of less- or un-processed products. It is not surprising, then, that such a lop-sided policy of trade liberalization is sometimes called "free trade imperialism."

Taking advantage of the so-called Third World debt crisis, the IMF, World Bank and WTO imposed free trade and other "adjustment programs" on 70 developing countries in the course of the 1980s and 1990s. "Because of this trade liberalization," points out Walden Bello, member of the Philippines House of Representatives and president of the Freedom from Debt Coalition, "gains in economic growth and poverty reduction posted by developing countries in the 1960s and 1970s had disappeared by the 1980s and 1990s. In practically all structurally adjusted countries, trade liberalization wiped out huge swathes of industry, and countries enjoying a surplus in agricultural trade became deficit countries." Bello further points out, "The number of poor increased in Latin America and the Caribbean, Central and Eastern Europe, the Arab states, and sub-Saharan Africa." By contrast, in China and East Asia, where the neoliberal free trade and other Structural Adjustment Programs were rejected, significant economic development and considerable poverty reduction took place [3].

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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