Last month, the House of Representatives showed leadership in the fight against global poverty by passing the Jubilee Act for Responsible Lending and Expanded Debt Cancellation, which would extend lifesaving debt cancellation to more poor nations around the globe.
Too many of the world’s poor children needlessly starve or go without education because too many impoverished nations – even after the laudable debt relief provided to date – are still funneling scarce resources to multilateral banks instead of paying for needs at home.
The world community has found crushing debt to be akin to a modern-day apartheid, and has responded with debt cancellation. Unjust debt leaves developing nations at the behest of the powerful. Shall we let the children of Africa and Asia die of curable disease, prevent them from going to school and limit their opportunities for meaningful work – all to pay off unjust and illegitimate loans made to their forefathers?
I look with horror on those who maim their own children to cause them to be more successful in begging. I see a scary and similar thing with many impoverished countries; their leaders keep them poor and dieing so that they can skim, or outright take, the gifts of sympathy which flow into their countries.
It is because I hate poverty that I hate the use of it for the benefit of a few as particularly abominable. Those that pimp the poverty of their own people should be subject to international justice.
Don
Unfortunately the biggest debtor of all is the US government, who pays for its debts with Treasuries owed to the poor of India and China. The US will almost certainly renege on those debts over the next 10 -20 years, either by printing money or by outright renunciation of debts.
Actually I think it would be a very good thing for folks to go back to a biblical standard in lending, with cancellation of all debts at the end of 7 years. This would result in much more prudent lending, and would make the excesses and abuses both by the governments of poor nations, as well as those of rich nations, and of lenders much less common.
“Much of this debt originates from loans made to corrupt and oppressive regimes that did not benefit the population”
Unconditional debt cancellation undercuts existing IMF and other programs that condition debt cancellation on concrete steps towards democracy and governmental honesty and transparency. These programs reward governments that are willing to reform.
Unconditional debt cancellation would benefit “corrupt and oppressive regimes” as much as anyone else by giving a clean slate to the world’s unrepentant Mugabe-style scoundrels.
Bad government is the single most powerful force for perpetuating and exacerbating poverty. Who would want to encourage it?
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“Unjust debt leaves developing nations at the behest of the powerful”
It would be interesting to hear Abp. Tutu define “unjust debt.”
Developing countries got into deepest debt during the 1970s, when nationalist (and usually leftist) regimes touted borrowing from foreign banks as a patriotic alternative to foreign equity investment. It was a disaster. And it was done in the name of sovereignty, self-sufficiency, and national pride.
“I think it would be a very good thing for folks to go back to a biblical standard in lending, with cancellation of all debts at the end of 7 years. This would result in much more prudent lending” —Clueless [#2]
It would certainly result in much LESS lending, which might or might not be desirable. No lender would finance the sort of long-term development that would take years to generate profits.
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“The US will almost certainly renege on those debts over the next 10-20 years, either by printing money or by outright renunciation of debts”
What does “printing money” mean in this context?
Depending on the country and government, infusion of aid from abroad or the absence of it makes little difference on the ground. The ruling leaders pocket the money and salt it away in Swiss bank accounts. Donor countries need to do a better job of dispensing the aid. Attach strings? You bet. Get more involved directly? By all means. Tell the rulers: this is what we are going to do, but =we= are going to do it and make sure it gets done; take it or leave it. If they selfishly resist, tell the world.
We are one of the most generous countries in the world when it comes to aid, but the intended recipients often hate us. They see us enriching their chief malefactors. We can change that.
w.w.
“Printing money” is what we are already doing. We sell treasuries which are essentially IOUs to unsuspecting nations like China and Japan who anticipate using them (Ha Ha) to pay for their retirement.
Japan/India/China whatever give us rupees/yen/yaun taxed from their hard working peasants.
We convert the rupees etc to brand new crispy greenbacks (printing money) which we use to fund our current needs in medicare, warfare, political payoffs, various business supports, and periodically we send a few million of these newly issued greenbacks to India Burma etc when we notice they have had a more devastating earthquake than usual.
This is a Ponzi scheme that assumes that there will always be a greater fool willing to give us money earned from labor in exchange for IOUs. When the greater fool fails to materialize we will likely (assuming we haven’t already done so simply print money to pay back our debts ala Zimbabwe or pre WWII Germany). (Some folks think the sudden appearance of mysterious Carribean “hedge funds” who have a unaccountable appetite for our long term treatury debt (46 billion/month currently) is due to the fact that we have already started printing money in earnest.
If I give away free milk to the poor out of the excess of my store room that is generosity. If I give away free milk out of my children’s food for tomorrow, knowing they will go hungry that is not a good thing. If I borrow my neighbors’ children’s milk to give to the poor and never pay it back it is theft. If I pay back my neighbor with “milk” created with a little food coloring and tap water (printed money) it is still theft not generosity.
America used to be a generous nation back when we were a nation of savers who helped the world out of our own savings. We lost that around 1971 when we started running up the national debt and unilaterally broke Bretton Woods, taking the entire world off the gold standard, by unlinking our dollar from it. As Nixon said at the time “It’s our dollar, but it’s your problem!”
Shari [#6]: I agree that chronic trade deficits and Bush-style deficit spending are unsustainable. You are also right in classifying government borrowing as a type of IOU.
But your comment evinces many misconceptions. For example:
— The U.S. government does not borrow rupees and yen, much less borrow them abroad. It borrows dollars at auctions conducted at the Federal Reserve Bank of New York.
— The Chinese government and other foreign buyers of U.S. Treasury securities are not “unsuspecting.” They know what they are buying, and they disagree with your predictions of imminent doom.
—Going off the Bretton Woods gold-exchange standard did not cause deficit spending. Huge, chronic government deficit-spending became a pattern only after Ronald Reagan took office in 1981.
— U.S. Treasury borrowing is no Ponzi scheme. This fiscal year the government will have $2.65 trillion in revenue and $2.87 trillion in spending, for a deficit of some $200 billion. Revenue covers 92.4% of spending. The deficit amounts to 1.4% of the nation’s total output of goods and services. Relatively modest tax increases and spending cuts could, over time, eliminate the deficit and begin to pay down the debt.
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If you were to read the medical equivalent of your economic-information sources, you would gag.
Your figures regarding 2.87 in spending do not count the monies supposedly socked away in our “social security/medicare trust funds” . This is because we supposedly owe this to ourselves. However as those bills come due we are unlikely to renege on ourselves (at least not openly). Thus we will either have to default to overseas creditors (what will they do, go to war against us to get their money back?) or print money.
I agree that chronic government deficit spending became the pattern only after Ronald Reagen took office, however the problem’s roots lay in the Great Society and Vietnam war programs where promises were made that were unsustainable, and where taxes were not raised high enough to pay for the promises made. No president since Carter (who paid dearly for it) has had the courage to be truthful with the American people. But I agree that the deficits did not begin until Reagan.
As to the US government borrowing rupees, of course it borrows dollars at the Federal Reserve (which is independent in name only). However the Federal Reserve then sells these IOUs to other nations (as well as naturally to millions of Americans who keep them in their retirement plans, in the belief that they are “safe”).
There is no such thing as a safe IOU from a debtor who has been running deficits as massive as we have run for years.
The 2005 deficit was 760 billion in 2005 not the 318.5 billion reported. (The 2006 and 2007 figures are higher still). The discrepancy results from the fact that the government uses “cash” accounting instead of “accrual” accounting. This means that the government does not report future spending promises like federal employee pensions or veterans benefits or monies promised for the war in Iraq.
Cash accounting tells you what’s in your bank account, Accrual accounting tells you both what is in your bank account and what is on your credit card.
If Social Security and Medicare are factored in, (if the “trust fund” really was a trust fund, then the true deficit was 3.3 trillion in 2005 and is far higher now.
This is not sustainable. The interest payments alone (as with homeowners who take out mortgages they can’t afford) will kill us.
Shari [#8]: The Social Security trust fund receives money from FICA taxes and invests it in Treasury securities. Those securities are liabilities of the Treasury and assets of the trust fund.
You write that the $2.87 trillion spending figure [#7] “do not count the monies supposedly socked away” in the trust fund. That statement confuses spending (which relates to the government’s income statement) with assets and liabilities (which relate to the government’s balance sheet).
The Social Security trust fund receives more money from FICA taxes than it pays out in benefits. Federal budget accounting is set up so that the trust fund’s net revenue does not conceal the government’s operating deficit.
If we EXCLUDE the trust funds, the government had $2.0 trillion in revenue, $2.4 trillion in spending, and a deficit of some $400 billion. This is shameful but by no means a Ponzi scheme. The nation still has time to recover—if it has the political will to do so.
RE: “Unconditional debt cancellation undercuts existing IMF and other programs that condition debt cancellation on concrete steps towards democracy and governmental honesty and transparency. These programs reward governments that are willing to reform.”
I agree.
My solution would be to either 1) forgive all debts to a country, and then no longer lending to that country for a period of 25 years, and until such time as needed reforms occur, or 2) cease forgiving debts.
I would also be happy to cut lots of spending from the US budget, but that’s another matter.
“My solution would be to either 1) forgive all debts to a country, and then no longer lending to that country for a period of 25 years, and until such time as needed reforms occur . . .” —Sarah [#11]
Note that unconditionally forgiving a recalcitrant government’s debts leaves that government free to borrow from other lenders and repeat the cycle of high-level kleptocracy and grassroots misery.
The real 2006 budget deficit was 4.6 trillion in 2006, not the previosly reported 248.2 billion (according to the 2006 Financial Report of the US Goernment as released by the Treasury Dept. Taxing 100 percent of all individual wages and corporate profits will not eliminate a deficit of this magnitude.
The difference is the way that the 4.6 trillion number was calculated using generally accepted accounting practices that all other busienesses are expected to make, while the 248.2 billion number was gimicked up by placing fictitious values on assets that have no clear value (much as folks were sold subprime mortgages under a AAA lable)
“The real 2006 budget deficit was 4.6 trillion in 2006”
Shari [#13]: You are evidently confusing the government’s publicly held debt (a liability) with the fiscal 2006 deficit.
The $4.6 trillion figure appears on page 158 of the printed report (page 162 of the PDF):
http://www.gao.gov/financial/fy2006/fy06finanicalrpt.pdf
For an analogy, take the case of a business that last year had $14 million in revenues, $8 million in expenses, and $6 million in operating income. After taxes and interest expense, it had net income of $3 million, which it paid to its shareholders. The firm began and ended the year with $30 million in assets and $15 million in liabilities.
The firm earned a $3 million profit. But under your apparent reasoning, the firm had a $15 million “deficit” because it ended the year $15 million in debt.
“The firm earned a $3 million profit. But under your apparent reasoning, the firm had a $15 million “deficit†because it ended the year $15 million in debt.”
The difference between the USA’s deficit/debt and your fictitious business is that our “assets” although real, are non-liquid. Our debts come due all too soon with the Boomers retirement. As that happens, we will need to turn our paper “debt” into actual cash that retired people can use at the grocery store. The fact that we happen to have signficant “assets” like our national parks, national museums, a good deal of architecture like the White House, Smithsonian Institutes, Congressional buildings etc. etc does not mean that these “assets” can be sold off at need (as per the business model) to pay for debts. The firm with 30 million in assets and 15 million in debt, is more liquid. If it has debt that requires payment in the near future, it could at need sell its expensive office space, and take up residence in cheaper quarters or even liquidate the entire firm if need be.
By contrast it would be very difficult to persuade whoever occupies the White House to simply move to the local Motel 6, – preferably in a cheaper city (Morganstown, West Virginia comes to mind) in order to conserve cash to pay off debt. Similarly, while it is unquestionable that our various SAC bases, and nuclear submarines are “assets” they are not terribly easy to convert if the Federal Government finds that it has a shortfall in paying Federal pensions. suppose Iran might be willing to buy them from us if we were hard enough up, but would that be a terribly good idea?
If not, then one is faced with either declaring bancruptcy or (if one is a government) printing money so as to pay off debt in cheaper dollars.
This is why when debts need to be paid in cash in a very short period of time (the next 20-30 years) it is irrelevant that one might have a very large resevoir of non-liquid assets. My education is an asset that is non-liquid. There is no question that it is an asset, and indeed I use it to earn money on a daily basis. However if I ran up my credit cards there is no possibility of my offering to sell my medical school diploma to Bank of America. I would have to either greatly cut back my standard of living, perhaps breaking promises that I have made to my children regarding their futures, or I would have to declare bancruptcy. So with the USA
“The difference between the USA’s deficit/debt and your fictitious business is that our “assets†although real, are non-liquid”
Shari [#15]: Assets are a balance-sheet item, only indirectly related to surplus or deficit. The government’s deficit (although inexcusably high) is much less than you thought. A $400 billion deficit amounts to 2.8% of the nation’s total annual output of goods and services.
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From what I’ve read on your website and in your comments, you seem like a wonderful, cheerful, loving, giving person. Don’t needlessly torment yourself with bad economics.