The Coming First World Debt Crisis

199 Pages·2006·0.962 MB·English

by  Ann Pettifor (auth.)

The Coming First World Debt Crisis
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The Coming First World
Debt Crisis
Ann Pettifor
© Ann Pettifor 2006
Softcover reprint of the hardcover 1st edition 2006 978-0-230-00785-7
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in accordance with the Copyright, Designs and Patents Act 1988.
First published 2006 by
PALGRAVE MACMILLAN
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PALGRAVE MACMILLAN is the global academic imprint of the
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ISBN-13: 978–0–230–00784–0 paperback
ISBN 978-0-230-00784-0 ISBN 978-0-230-23675-2 (eBook)
DOI 10.1057/9780230236752
This book is printed on paper suitable for recycling and
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A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Pettifor, Ann.
The coming First World debt crisis / by Ann Pettifor.
p. cm.
Contents: The international financial system : at the root of the crisis ––
Understanding money –– Debt : personal, household, corporate, and
sovereign –– The bubble and the coming de(b)tonation –– Debt and
ethics : an age-old struggle –– What is to be done? –– Conclusion.
I SBN 978-0-230-00784-0 (cloth) –– I SBN 978-0-230-00784-0 (pbk.)
1. Economic history––21st century. 2. International finance. 3.
Globalization. 4. Debts, External––Developed countries. 5. Debts, Public––
Developed countries. I. Title.
HC59.3.P48 2006
332'.042––dc22 2006050315
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 09 08 07
Contents
Acknowledgements vi
Introduction 1
1 Globalization: the House that Finance Built 26
2 Costless Money and Costly Credit 56
3 Easy Credit: Costly Debts 84
4 Poor Country Debt Crises: Causes and Parallels 108
5 Moneytheism and Lawless Finance 120
6 Debtonation? When and Why will it Happen? 145
7 Things Don’t Have to be This Way 163
Index 182
Acknowledgements
This book is an attempt to guide lay readers through the apparently
impenetrable forest of Finance, screened and guarded as it is by formidable
bankers, financiers and orthodox economists. But first I had to find
my own way. I looked for guidance from some brilliant thinkers and
economists; from idealists and pragmatists; from ‘bears’ and ‘bulls’; from
theorists, practitioners and commentators. My guides included Aristotle,
Luther, Marx, Keynes and their followers. But also a range of monetarists
whose concerns about the explosion in credit I share, even though, while
we agree on likely effects, we do not share the same conclusions about
causes. Christian and Islamic teachers were important guides, as were
historians and environmentalists. I doubt that I have done them all full
credit; but I owe them debts of gratitude.
My most immediate guide through the tangled forest was Dr Geoff Tily,
an expert on Keynes’ monetary theory and on the monetary policies he
espoused. Dr Tily is an economist and statistician with a heart and soul,
and with a proper concern for social justice. I am grateful to him for
sharing his research into Keynes’ monetary policies; and indebted for the
guidance he offered through the thickets of economic theory, statistics
and data. While his contribution is credited in the book, he cannot
be held responsible for the way in which I have interpreted theories,
analysed data or presented statistics.
While Dr Tily’s guidance was invaluable, it was the economist and
historian Karl Polanyi, through his famous work The Great Transformation
that initially provided me with the lens through which to examine
contemporary finance and economics. I have since been privileged to meet
and discuss Polanyi’s work with his daughter, the eminent development
economist, Prof. Kari Polanyi Levitt, of McGill University, Canada, and
of the University of the West Indies. I thank her for her support and
inspiration. We have a shared ambition: to establish a Karl Polanyi Institute
in Britain that will further erode Hayek’s intellectual legacy and rival the
Adam Smith Institute in its influence on contemporary economics.
While visiting New York’s Anglican Mission to the United Nations
in 1999 on behalf of Jubilee 2000, I first heard and met Prof. Herman
Daly. Until 1994 Prof. Daly was Senior Economist in the Environment
Department of the World Bank, and is now Professor of Public Policy at
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Acknowledgements vii
the University of Maryland. He is an economist and environmentalist;
but also a philosopher, physicist, theologian, sociologist and chemist.
Hearing him speak with modesty and wit, about his faith, economics
and the ecosystem on that hot summer’s day in New York, was one of
those life-changing moments for me. This book has drawn extensively,
and I hope not too clumsily, on his ideas, particularly those espoused in
his famous work Steady-State Economics.
Another to whom I owe a considerable debt is Michael Hudson, once
a bond trader on Wall Street; but now an authority on ‘the economic
archaeology of debt’. I am humbled by his extensive knowledge of debt
systems, and thank him for generously sharing his work with me, and
for stimulating discussions on subjects as diverse as debt in Babylonian
and Sumerian civilizations and today’s international bond markets.
There are many other intellectuals to whom I owe thanks, including
Eric Helleiner, Jane d’Arista, Dean Baker and Nouriel Roubini. The latter
first introduced me to the wonders of the world wide web back in 1995
with his Stern University (New York) website tracking global economic
developments and later, the 1997/98 financial crisis. Roubini’s Global
Economics Monitor <www.rgemonitor.com> is now as important a start
to my day as Claudia’s cappuccinos.
While I have gained much from these esteemed economists and
thinkers, this book would never have been written without my experience
of a powerful movement of campaigners for social justice, millions of
whom came together under the umbrella of Jubilee 2000. That campaign
taught all of us involved in it, that millions of people could, appropriately
briefed, come to grips with supposedly complex international financial
policies and concepts – policies and concepts that financial elites would
prefer remained elusive and exclusive. Jubilee 2000 campaigners used
their understanding of sovereign debt to challenge powerful international
institutions, officials and politicians – and change their policies. They
gave me the confidence to write this book, and I thank them for that.
Between 2001 and 2004, colleagues at London’s new economics
foundation (nef), including Ed Mayo, Elna Kotze, Andrew Simms and
Stewart Wallis, gave me the chance to recover from the rigours of a global
campaign; to deepen my understanding of international finance; and to
augment and integrate this with an understanding of the limits to our
ecosystem: the need for us all to ‘return to scale’ <www.neweconomics.
org/gen/z_sys_PublicationDetail.aspx?pid=158>. I thank them heartily
for that.
Helen Kersley, who has worked in the UK Treasury and the European
Central Bank, helped me assemble data and material, and check
viii The Coming First World Debt Crisis
references. Our lively discussions over coffee in Saporito’s obliged me
to further hone and refine my arguments, and I thank her for that. I am
indebted to Wanja Githendu who supported me throughout the Jubilee
2000 campaign, and also through the writing of this book with her quiet
calm and administrative efficiency.
My dear partner, and great friend, Jeremy Smith encouraged me, and
gave as always, unstinting practical, intellectual and emotional support
as I worked on the book. I thank him with all my heart.
Finally I must thank Amanda Hamilton of Palgrave for her encourage-
ment and support. This book would not have been written if she had
not egged me on to do it.
Ann Pettifor
July 2006
Introduction
Growing domestic and international debt has created the
conditions for global economic and fi nancial crises.
Bank for International Settlements (2005)
This book foresees a time, in the not too distant future, when the so-called
First World will be mired in the levels of debt that have wreaked such
havoc on the economies of so-called Third World economies since the
1980s. This debt crisis, I argue, will hurt millions of ordinary borrowers,
and will infl ict prolonged dislocation, and economic, social and personal
pain on those largely ignorant of the causes of the crisis, and innocent of
responsibility for it. This book has been written for those potential victims
– ‘debtor-spenders’ – in the hope of deepening understanding of the
causes of the crisis – moral, political and economic – and of stimulating
further debate and questioning.
The book is completed at a time (spring 2006) when stock markets in
both the US and UK are booming; and Japan appears to be recovering
from 15 years of recession and defl ation. In the US (the world’s ‘engine’
of economic growth) home-owners and consumers are still fl ush with
cash, increasingly reluctant to save and alarmingly indebted. In the 1970s
US household debt-to-income increased at a growth rate of less than 1%.
Household debt in the US as a share of disposable income remained below
70% until 1985, with debt-to-income growing at a compound annual
growth of less than 1.25%.
Since 2000 the compound growth rate of US household debt is in
excess of 5%. In the third quarter of 2005 the growth rate reached an
historic high of 13.67%. By 2006, the share of debt to income had risen
steeply to 122%! In 2004, the US household sector borrowed more than
$1 trillion. This contrasts with the period prior to 2000, during which
the household sector borrowed less than half that a year (Papadimitriou
et al., 2006).
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