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(Unpayable Debt and the International Credit Cartel)

by Dan Armstrong

Imagine a wondrous new machine, strong and supple, a machine that reaps as it destroys. It is huge and mobile, something like the machines of modern agriculture but vastly more complicated and powerful. Think of this awesome machine running over open terrain and ignoring familiar boundaries. It plows across fields and fence rows with a fierce momentum that is exhilarating to behold and also frightening. As it goes, the machine throws off enormous mows of wealth and bounty while it leaves behind great furrows of wreckage.... It is sustained by its own forward motion, guided mainly by its own appetites. [And] it is accelerating.... This machine is modern capitalism driven by the imperatives of the global industrial revolution.

-William Greider (from One World, Ready or Not)

There is a war being waged this very moment. A global civil war. North against South. It may be that the bombs are few and the gunfire sparse, but the casualties are high. It is a social war with a trickle down of debilitating debt from the wealthiest to the poorest. The war machine is modern capitalism. Driven by the imperative that money must make money. The war rooms are offices on Wall Street, the financial districts of Tokyo, London, and Berlin. The field officers are stock brokers, financial planners, bankers, and currency traders. It is subtle. It is polite. It is silent. It is war just the same. The Third World War.

The First World, led by the Group of Seven (G7)(1), has funded Third World development over the last forty years through a variety of commerical, multilateral, and bilateral loans. In the ideal, these development loans were to provide the wherewithal for the LDC's (Lesser Developed Countries) to build infrastructure, social programs, schools, raise health standards, a viable economy and, eventually, a place in the global market. What we have today is a gross perversion of that ideal.

Presently tiers upon tiers of interest payments on these development loans swarm like locust across the globe, eating the heart out of three-quarters of the world - starting with the weakest and youngest. Every Third World country labors under debt - for most, it is vast crippling debt. Generations of loans and restructuring programs enslave whole populations to poverty, strip social programs of funds, and place needless rush on the harvest of natural resources. Development has occurred, but piece meal, and causing, in more instances than not, as much devastation as progress. Something has gone wrong.

The numbers have only a limited relevance. Over time, relative values of dollars loose sense, but the compounding nature of the problem is revealed by a few bulk figures - that multiply every few years. In 1974, for instance, the worldŪs LDC's debt totalled 135 billion dollars. By 1980, it had grown to $567 billion. Between the years of 1980 and 1992 indebted LDC's paid $1.6 trillon to their creditors. In that same time, the total LDC debt rose from $567 billion to $1.4 trillion. Similarly, between 1982 and 1996, the combined Latin American and Caribbean region paid out $739 billion in debt servicing - more than its entire debt in total, and yet that debt continued to grow. All that is ever paid is interest and service charges. The principal sits like a hungry beast behind the treasury doors gobbling up every dollar of export revenue and slurping down funds targeted for needed social services. Real economic growth has stagnated, and the emerging Third World markets flounder in the global economy like lifeboats around the Titanic. Today the LDC's debt tops the $2 trillion mark and continues to grow like a virus. For better or worst, some kind of change is in the offing.

Sympathy for this predictament is hard to find among the fortunate. From the perspective of the First World, these Third World financal problems look like bad management, careless spending, and waste. But the situation is more complex than corrupt government officials or self-interested dictators siphoning loan money to build private mansions or Swiss bank accounts. As much to blame are the banking practices of the last twenty-five years and the rapacious appetite of capitialist expansion.

Economic growth is everything to western finance. Despite the seeming benevolence of the G7's gift of development to the Third World, it is naive to imagine that the capitalist machine is driven by anything but self-interest and profit. A margin here, a margin there, percentage gains make the capitalist world go round. In the eyes of commerce, the development of the LDC's is primarily the expansion of markets because the growth-based economy must forge new frontiers. That is, money looking for ways to become more money.

Capitalization through loans and credit is the universally accepted method of Third World development. It has been going on in one form or another since the end of the Second World War. Records show, however, that once a loan is re-serviced and economic conditionalities are imposed, things get very tough on the debtor country. Only a select few of the developing nations (South Korea was once considered one of these) have been able to escape the initial pit fall of loan reconstruction and then its economic quicksand. It's true. Examples of failure greatly outnumber the successes. Development is an economic tightrope in the free market arena - especially if you are entering the G7 monetary system (2) from the outside.

Credit has been extended and extended again to the Phillipines, Indonesia, Malaysia, Mexico, really all of South America, and the sub-Saharan African nations. In a pattern that began when the United States established the Development Loan Fund in 1957 and John Foster Dulles announced that all further U.S. foreign aid would be as a loan not as a grant, over and over again developing countries have fallen victim to the international credit cartel's ponzi-like system. Old loans threatening to default are invariably propped up by new loans that are saved yet again by another new loan. Because the principle is more than ninety percent žsynthetic,Ó there is no real limit to how much žcredit moneyÓ can be created to sustan timely loan payments. After many generations of loan restructuring, which is frightfully common, something of the principle of the original loan gets lost to abstraction - only the steady demand of interest remains real. The bank cares little of the principle anyway. All but a small portion of that is merely pixels on a computer screen. It is the loan fee and the interest payment that make the wheel go round.

The international credit cartel had a firm grip on the LDC's by the late 1960's, but the loans seemed to be working then. There was development. In the early 1970's, however, an increasing Vietnam War debt forced the United States to take the dollar off the gold standard. In response to this, the Organization of Petroleum Exporting Countries (OPEC) raised the price of crude oil seventy percent because oil prices were set in American dollars - which had begun rapid inflation when floated against the other currencies of the world. This resulted in a surge of dollar influx to the oil exporting countries, but at a reduced dollar value. So, as part of the agreement made with the G7 when OPEC raised its prices, the OPEC profits were invested in special high interest twenty and thirty-year certificates of deposit in American banks.(3)

Huge portions of this OPEC money, multiplied by the methods of fractional reserve banking (a one billion-dollar reserve expands into more than $30 billion in loans!), were then loaned by the American banks to developing countries all around the world. (This was known as žpetro-dollar recyclingÓ because these loans would then allow developing countries to afford oil at the new price.) In many cases, because the money was there to be loaned, eager bankers offered sums well beyond the reasonable carrying capacities of the borrowing countries. Ten years down the line, as sliding interest rates doubled and tripled in an effort to arrest an inflating US economy, the most indebted of these nations, beginning with Mexico, were pushed to the edge of default on their loans. Such were the size of these loans (in excess of $800 billion then) and the extent of their diversification into other banks and holding companies, the world financial community, in its desperately complex interdependence, could not allow these LDC loans to fail - for fear of bringing down some large and very important banks. In other words, they needed those LDC interest payments to keep the whole system afloat.

Noted journalist William Greider details this story in his book on the Federal Reserve Bank, The Secrets of the Temple (a Los Angeles Times book prize winner in 1988):

In a formal sense, this was the starting point for what became known as the international debt crisis - actually, a continuing series of crisis points, as one country after another approached the brink of insolvency, then appealed for relief from the Fed, the international lending agencies and private banks. Within the next year, fourteen other nations would undergo the same trauma that Mexico experienced in August of 1982 - accepting new conditions of domestic austerity in exchange for new credit from the IMF (International Monetary Fund) and the international banks. Each time a nation approached default, the international banking system was threatened anew, and each time, Paul Volcker (Fed Chairman) and his aides from New York and Washington would play the crisis managers.

In a more fundamental sense, the debt crisis had its origins in the collision of purposes with the Federal Reserve itself. In the late seventies and early eighties, the Fed and other regulators had failed to impose prudent limits on the money-center banks and their zealous lending to the Third World. They had issued mild warnings occasionally, but they had not tried to stop the risky lending. Then, starting in 1979, Volcker launched his aggressive campaign to break inflation, rationing money tightly and imposing stern discipline on the world economy. The global liquidation collided with the mountain of LDC debt.

What began as big banks making excessive loans - because there was money to be made off the OPEC price increase - initiated dynamics that would eventually enslave three-quarters of the world wtih unpayable debt. As the LDC's lined up one after another at the loan window of the IMF or the World Bank, the bankers became trustees in each country's economy as part of the new refinancing program. That is, in the intricate web of international finance, new loans were procured so that interest payments on old loans could be maintained, so as not to bring down some of America's biggest banks (Citibank, Chase Manhattan, Chemical Bank, Morgan Guaranty, Bank of America, to name a few) and the rest of the international banking community with them. Stipulated in these new loans was that the IMF would send its own financial managers, as economic supervisors, to the LDC in question to make sure this new loan was used properly. Unfortunately, in many cases, a third and fourth such žausterityÓ loan was necessitated to keep the system afloat. This method of maintaining these generations of loans became a horrid strike against the people, the resources, and the environment of the LDC's, as substantiated by the World Food Summit Technical Papers in November of 1996:

During the mid-and late 1980's, the conditionality required by the IMF and the World Bank on stabilization and sectoral adjustment loans were perceived as stringent, rigid, and unbending. The resultant belt-tightening and austerity were often associated with wrenching drops in real incomes and levels of living, primarily hurting those least able to adjust. Some countries rebelled at the severity of the adjustment measures imposed by the IMF and the World Bank, often in the face of civil unrest in opposition to imposed austerity.

In an effort to revitalize the LDCs economies and to accelerate the loan payments, the IMF managers instituted programs that borrowed heavily from the futures of these Third World countries. Thus to service loan repayments, currencies were devalued; forests were sold off to transnational lumber companies to be clear cut; mineral rights were sold off to be strip mined; social programs were reduced back to bare bones; and critical imports, food and medical supplies, were cut for lack of funds. Though employment temporarily climbed as outside companies came in to reap the harvest, it was at reduced wages and with eventual lay-offs after the resource had beene exhausted. Generally, all fiscal sources were squeezed to service these debts - that were generated out of žsynthetic moneyÓ created by loans that were fool-hearty in the first place! In some cases half a country's export earnings went (and still do go) to paying interest on these re-serviced debts. Michael Renner of the Worldwatch Institute describes this in State of the World 1997:

Most people in highly indebted African and Latin American countries suffered a severe drop in living standards during the eighties. In Mexico, for example, real wages declined by more than 40 percent in 1982-88. In 1983, a basket of basic goods for an average family of five cost 46 percent of the minimum wage; by 1992 it cost the equivalent of 161 percent. Deepening disparities have widened the political riffs; one result was the uprising of impoverished peasants in the southern state of Chiapas in early 1994.

In his own vivid language, Subcommandante Marcos, resurrection leader in Chiapas, expressed this ignored reality of these debt stresses to the rest of the world via the internet from the La Lacandona Jungles in August of 1992:

In Chiapas, Pemex (the national oil company) has 86 teeth clenched in the townships of Estacio'n Jua'rez, Reforma, Ostuaca'n, Pichucalco, and Ocosingo. Every day they suck 92,000 barrels of petroleum and 517,000,000,000 cubic feet of gas. They take away the petroleum and gas, and in exchange leave behind the mark of capitalism: ecological destruction, agricultural plunder, hyperinflation, alcoholism, prostitution, and poverty.

Loans made in the name of development and economic independence have become shackles. These over žzealousÓ loans of the 1970s were unwarranted, at least in size, from the beginning. They placed undo pressure on LDC's to industrialize more quickly than their situation allowed, and, in some cases, went into the hands of corrupt LDC leadership who took the money for immediate gain, while mortgaging away their country's hopes for the future. For the rest of the world, these loan pressures apply needless hurry to the harvest of Earth's natural resources and exacerbate an already precipitous financial stratification of the global populace.

In retrospect, the situation seems ludicrous. When the validity of the loan will eventually depend upon the long-term health of the borrower, we have loans literally assuring long-term economic malaise. Instead of using these loans to influence a sustainable economy, the financial institutions went for strip mining in order to protect its leger sheets - at the cost of all involved. Even education, the clearest gift of industrialization, has been sacrificed. And for the most part, all of these loans remain in serious doubt today, screaming again and again for restructuring every few years.

And yet there is another layer of dubious propriety to these LDC loans. In her book Lent and Lost: Foreign Credit and Third World Development, Cheryl Payer makes a sound argument that World Bank and IMF conditionality loans are a form of entrapment:

The use of credit to pry markets open is also obvious in the žconditionalityÓ of the IMF and the World Bank.... Import liberalization represents the surrender of all or part of the domestic market to foreign sellers and is, incidentally, about the worst possible policy that can be imagined for any counry short on capital. But to sellers, credit is considered a cheap way to buy markets.

Like the credit cards that stream through the US mail, the offer of credit is a hook, a way to ensnare borrowers of questionable risk in a cascade of accruing interest. Credit in the developing world is no different - except more is at stake. IMF austerity programs for loan restructuring are just that - imposed austerity. In addition to the trimming of social programs, education, and unwarranted resource harvest, the catchment of import liberalization adds insult to the injury. The strongest national economies of the world today, the United States, Germany, Japan, attained their success through heavily protectionist import/export laws and tariffs. Import liberalization and trade conditionalities imposed from the outside are not the way to build economies. They are certain strikes against the emerging LDC markets. It is First World colonialization disguised as financial assistance.

Import liberalization assures that loaned money will return quickly to the G7 conglomerate via trade. This effectively turns these loans into grease for the wheels of large exporting economies. Markets are pried open and the kind of trade protection that is necessary for an emerging economy to survive is undermined. In short, the billion dollar loans that come from the IMF and the World Bank are only granted through the auspices of G7 trade advantage. That is, the US Congress will not sanction an IMF loan if the conditions of the loan are not imminently profitable for US business interests. As long as this is part of the loan restructuring apparatus, then these loans are not really granted in good faith to the original constitution of Bretton Woods Institutions like the IMF and World Bank. In the long run, imbalance of trade in conjunction with tiers of interest are a sure formula for economic failure and a nation's eventual impoverishment - the exact opposite of the ideals espoused by the IMF and the World Bank - i.e., Third World development. Instead, we have a sign on the dotted-line war of attrition and devastation waged by new age carpet baggers armed with the G7's money monopoly.

In the end, loan pressure cuts into the very things deveolpment is supposed to provide, social progress and economic independence. Compounding interest and trade liberalization thus become the silent oppressors of three-quarters of the world. Add that real interest rates around the world are hovering at an unprecendented and usurious four percent, the international credit cartel is laying a heavy and brazen hand upon the land and its people.

William Greider sums it up aptly in his Secrets of the Temple:

In time, when future generations are able to look back on this system with clear eyes, they may recognize its true ugliness: the rich nations of the world are acting like ancient usurers, lending money to the desperate poor on terms that cannot possibly be met and, thus, steadily acquiring more and more control over the lives and assets of the poor. This is done mainly by commerical banks and private capital, but amplified and policed by public lending institutions. Citizens on the wealthy end of the global system may claim to be innocent of these practices, but their ignorance and indifference make them complicit, too.

In recent years, there has been outcry for the need to forgive some or all of these LDC loans. An international coalition by the name of Jubilee 2000 is one critical force behind this concern. Originally conceived in 1990 by Martin Dent, a political economist at the University of Keele, Jubilee 2000 receives its inspiration from the Year of Jubilee as described in Leviticus 25 and the Christian concept of the forgiving of obligations every fifty years. Dent's campaign intially drew its support from communities of faith, but in the last three years, secular and non-governments organizations have picked up the cause.

The Jubilee 2000 platform is aimed at the debts of all impoverished nations, but focuses on 41 countries, 33 of which are in Africa, that fall into the category of Heavily Indebted Poor Countries (HIPC). The platform calls for the complete cancellation of debts that qualify as unpayable. (Unpayable debts are defined as debts more than two and a half times a country's annual exports.) The cancellations are not to be tied to structural adjustment programs. There must be an understanding that both the lender and borrower share responsibility for the original debt, and that the main benefactors of the relief will be the common people.

Presently the coalition has sixty offices worldwide. It has collected some twenty million signatures on their petition for debt cancellation and has staged massive demonstrations at recent G8 summit conferences, including 70,000 protesters at the summit in Birmingham, England in 1998, and 40,000 at Koln, Germany in June of 1999. Due to this pressure, there has been movement in the G8 on debt relief. What just ten years ago would have been unthinkable is being considered. An initiative for HIPCs was launched in 1996 in Washington, DC by concerned world leaders and Washington social institutions. In 1998 the World Bank and the IMF attended the HIPC intiative meetings in Paris and for the first time entered into the dialogue. A month later, the first of these new debt relief programs was offered to Mozambique.

Unfortunately, the IMF's new HIPC arrangements do not meet the conditions of the Jubilee 2000 platform. It is not complete cancellation and the package still contains structural adjustments. There is even suggestion among IMF critics that the new debt arrangements benefit the international lending institutions more than the HIPC. That is, the restructuring really amounts to further assurance that the credit cartel will continue to receive its interest payments and that the debt reductions were only to keep the HIPC solvent enough to remain a viable source of bank income. For all the žfeel goodÓ trappings of these concessions - even with President Clinton's public statements on the need for debt cancellation, there is no reason to believe that the international lenders will ever forgive these debts entirely. What is going on is really a lot public relations and smoke, veiling a powerful credit cartel.

For all the view points that complicate this discussion, there is historical precedent for debt foregiveness of this magnitude. It is not something that should be considered unreasonable charity in this age of captialist rule. The London Agreement in 1953 vastly reduced Germany's debt to England from World War II. This was relief from a war debt generated by one of the most despicable of all despotic regimes. In another extreme instance, the United States paid an estimated $1.36 trillon in the 1990s to bailout several of its largest banks after the massive savings and loans fraud of the late 1980s. This amounted to a wholesale forgiveness of what was really unconscionable acts by greedy bankers. And most of the bailout money came from US taxpayers. (Incredibly, $1.36 trillion would be enough to eliminate nearly three-quarters of the Third World Debt! An act of charity for the world's most needy individuals - not a bunch of profiteering go-go bankers and sleezy real estate agents.)

At the very least, there is provision in international law for the cancelation of what is called žOdious Debt,Ó debt incurred by corrupt dictatorships for personal gain. When these LDC loans are reviewed, it is apparent that large portions were granted to the likes of Marcos in the Philipines, Suharto in Indonesia, Somoza in Nicaragua, Mobutu in Zaire, or the apartheid government of South Africa. But this almost seems secondary to the larger question. These debts are simply mathematically unpayable under the trade conditionalities that the lenders demand. They are also illegitimate because of the economic conditions (a huge international oil deal) surrounding the loans of the mid-1970s and the outside factors (the cost of the Vietnam War) that caused the interest rates to double and triple over the period of payment. Moreover, they are immoral because of the high percentage of government revenues that must go to pay them, the resulting lost social programs, the exploitation and devastation of the environment that debt pressures incur, and the present usurious interest rates that are being charged. If the intent was development, then why must the value of the original loan be paid ten times over?

To continue to milk the Third World for interest payments on generations of debts that go back as far as the origin of the Vietnam War is criminal, especially considering the circumstances that now exist in the LDC's. It is no far stretch to say that all these debts are odious. What the international credit cartel and its backers are doing is nothing less than war. A heinous war as ugly and every bit as devasting as any the world has seen. The death tolls, though they accumulate slowly through infant mortality, improper medical attention, and malnutrition, will eventually exceed the death tolls of all wars ever fought. And it is not soldier against soldier knowingly at war. It is the impoverished slowly squeezed to death by the hunger of international finance. In effect, huge portions of the Third World have become prisoners of war camps, contained by an invisible barb-wire as real as synthetic money.

The ambiguity and hypocrisy of the situation is nauseating. Forty years ago, one of the stated purposes of Third World development was population control. Concerns for over-population and dangerously high Third World birth rates came to public awareness in the late 50s and early 60s. Along with dissemination of birth control devices, it was believed that development brought about social progress, education, and demographic transition - that is, when increased awareness through education brings about population restraint by choice. Unfortunately, as long as the payment of these debts is prioritized over the advance of social programs and education, demographic transition does not occur. And population control becomes something considerably different. The excess of people are simply starved off the face of the earth through crushing interest payments.

At the bottom of this dark situation breeds a dangerous elitism. Suggested is that there is something superior in the First World. It makes the rules. It monopolizes the creation of money, and, in its own roundabout way, it decides who has and who doesn't. All of this undermines the ideal of a global democracy. It reinforces the strength of our world feudal state. And it widens the gap between classes of people. There is a certain social polarization in progress. It is time for the monied aristocracy to find benevolence. If they can not, their greed will torch the anger of their working class subjects. Without change, without letting up on the yoke of unpayable debt, the feudal lords and their credit managers risk testing the tenets of Mr. Marx anew. It will take only a single spark to start a pairie fire.

(1) The Group of Seven has added the former Soviet Union to its number making eight. For the purposes of this essay, however, the G7 have been the sustaining force behind the international banking community.

(2) The G7 fractional reserve monetary system is a system of "credit money." It allows a bank to extend credit in great excess of its banked reserves. (Generally, a bank needs only three percent in reserve of what it loans out - i.e., a $3,000 reserve entitles a bank to loan out $100,000.) In this way, "credit money" or "synthetic money" is created whenever a loan is made. It appears only as a deficit on an electronic ledger and disappears as it is paid back. In other words, the only thing that is real about the money loaned is the bank's judgement of the financial potential of the borrower - can they make this money work? Meaning, the banks risks only some small portion of the loan in return for a borrower's fee and the regular payment of interest.

(3) Yes, one hand shakes the other. The United States, the world's largest importer of oil, accepted the new oil prices only on the condition that OPEC's profits would be placed in American Banks. In a round about way, the increase in oil prices was given back to the United States by allowing American bankers to make money off OPEC's profits. Think of this, Standard Oil buys a billion dollars worth of crude for its refineries from Saudi Arabia. Saudi Arabia then places that billion dollars in Chase Manhattan Bank, which is partly owned by the Rockefeller's of Standard Oil. Chase Mnahattan then loans this money out and earns back many multiples of the original expense of the crude oil. OPEC gets its price increase, and the Rockefeller's make percentage gains on every dollar of that increase. One Rockefeller's money buys OPEC crude, and then OPEC gives that same money to another Rockefeller to invest. In a sense, Standard Oil gets the money coming and going. Meaning the crude is simply free grease for their money making machine.