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Date: 2024-05-21 Page is: DBtxt001.php txt00000598

AlJazeera English ... Opinion
Global Economy
Liberating nations from public debt

An alternative solution to the financial crisis is to create a single global currency to manage debt requirements.

There is a widespread view that the global economy is in dangerous territory. The economic establishment has not been successful in making progress in solving the problem of excessive sovereign debt, and the capital markets are very nervous. It is about three years since the surprise bankruptcy of Lehman Brothers sent the world financial system into panic, and the concern is that a relatively small sovereign default, specifically by Greece, could result in another and even worse panic

In this context some economic thinkers are putting forward thinking that is 'out of the box' and this essay is in that mode. The underlying thinking has a lot in common with some of my own thoughts, but the practical recommendations are quiter different from my own. They are a very intersting stimulant for thought about a meaningful solution to the current global economic problem.
Peter Burgess

An alternative solution to the financial crisis is to create a single global currency to manage debt requirements.

IMAGE The IMF could be restructured into a global bank with the potential to solve debt crises when they occur [EPA]

The near collapse of the international financial system in September 2008, and the Great Recession which followed, have highlighted the need for economic, political, social and cultural change around the world.

The crises have proved that the old model of economic and financial management, based on the philosophy of self-regulating free markets, is inefficient and unfair. Today, tens of millions of workers are still without jobs in the West; and the negative consequences of the recession have affected the lives of hundreds of millions more, leaving them without hope.

Capitalism is an economic system that served many nations well throughout the industrial age; and democracy is a political system that served many nations for generations. However, in the 1980s, capitalism was hijacked by the 'free market' system, causing old capitalism to lose its production spirit. And US democracy was hijacked by money and lobbyists intent on manipulating elections and corrupting politicians, causing democracy to lose its social mission.

As a consequence, the two major organising principles of western society were undermined. While the free market system has failed to create jobs for the unemployed or distribute the fruits of economic growth fairly among social classes and nations, democracy has become a dysfunctional system serving the interests of mostly corrupt and narrow minded politicians.

The Great Recession and the 2008 financial crisis forced many countries, including the United States, to bail out troubled banks and some failing corporations, leading numerous states to adopt expansionist policies to stimulate contracting and stagnating economies. As a result, borrowing to cover deficit spending increased substantially, causing the public debt of all affected nations to rise rapidly.

'Today, none of the highly indebted nations is able to repay its debt or even serve its debt without going deeper into debt.'

In view of the near default of Greece, Ireland and Portugal, global awareness of the threat posed by a rising public debt to economic growth and political stability was heightened. States were faced with a serious dilemma: how to stimulate economies, reduce budget deficits and contain fast-growing public debts at the same time. Since there is no formula in economic text books to achieve these contradictory goals, a new formula has to be invented to free all nations from the debt monster.

Today, none of the highly indebted nations is able to repay its debt or even serve its debt without going deeper into debt.

This essay intends to articulate a plan to free rich and poor nations from the debt burden, restructure the international monetary system, and create certain conditions to facilitate sustainable global economic growth - while guaranteeing fairness. The plan has come as a result of deep thinking about the woes of our times; the duty to help poor people and desperate children climb out of poverty; the need to save students from debt and inadequate education; the responsibility to liberate undereducated and oppressed young women and men from economic and social enslavement; and the need to liberate future generations from the burden of a debt incurred by previous generations.

Overview of the debt problem

The globalisation of capital, investment and trade markets has caused worldwide economic changes that led to undermining the traditional monetary and fiscal tools to deal with national economic recessions and financial crises. For example, in response to the latest economic and financial crises, the US government spent more than $1.5tn to bail out banks and to stimulate its economy - and the Federal Reserve lowered interest rates to near zero without any discernible results.

All nations subscribing to the free market system are today in a bind. The goals they seek to accomplish are contradictory; and the actions they must take are incompatible. While reducing budget deficits to contain debt requires reducing spending and raising taxes, stimulating stagnating economies requires more spending and tax reduction.

Resorting to 'austerity' to reduce budget deficits, while the global economy is hardly growing, has complicated the economic and social problems most nations face today. Austerity tends to hurt the people who need help most and undermine governments’ abilities to invest in people and vital social programmes. For example, it seems particularly harmful and short-sighted to raise public university tuition fees and reduce government allocations for public schools.

'No nation can live on borrowed money or time forever.'

These are blind and self-defeating policies; while they save some money in the short run, they guarantee more poverty, less human and social capital, and weaker middle classes in the long run.

At the same time, it is hard to imagine how capitalism and democracy could be saved while the public debt grows rapidly, unemployment remains stubbornly high, the income and wealth gaps keep widening, and the middle class continues to shrink. And what is true of the US is largely true of Britain, France, Italy, Spain, Germany and many other states. No nation can live on borrowed money or time forever; eventually, every nation will have to reduce reliance on imports to satisfy domestic demand, deal with its debt problem and balance its budget.

Mr Georgen Elmeskov, the OECD Deputy Chief Economist, said a few months ago that the public debt of OECD member states has surpassed 100 per cent of their gross domestic product (GDP) - and is still rising rapidly. The US public debt has already exceeded 100 per cent of US GDP and is projected to reach 112 per cent of GDP in 2012. As a percentage of GDP, the debt estimates for some of the other world economic powers are as follows; Japan - 225, Canada - 82, France - 97, Italy - 130, Britain - 89, Germany - 87, Ireland - 124, Portugal - 111, and Greece - 157. As for the Euro area as a whole, the debt to GDP ratio is about 95 per cent, and for the OECD states, it exceeds 102 per cent. As for China, Brazil, India, Russia, and South Korea, the ratios of debt to GDP are 17 per cent, 67 per cent, 75 per cent, 11 per cent and 24 per cent, respectively.

As for the world, the combined GDP of all nations is estimated at $63tn, and the total public debt is estimated at $53tn - or about 84 per cent of GDP. And while the industrialised western states and Japan have a combined GDP of some $41tn, their debt is about $44tn, or 107 per cent of GDP. China, Brazil, India, Russia, South Korea and Taiwan have a combined GDP of approximately $12.5tn and a debt of $5tn, or 40 per cent of GDP. The major oil-exporting states have a combined GDP of some $2tn and a debt of $400bn, or 20 per cent of GDP. The rest of the world, which includes several fairly large states such as Bangladesh, Egypt, Indonesia, Mexico, the Philippines, South Africa and Turkey, has a combined GDP of some $7.5tn, and a debt of $3.5tn, or 46 per cent of GDP.

As mentioned above, the global debt is about $53tn. Interest due on this debt until maturity is hard to estimate because interest rates change continuously and vary from one place to another. However, assuming an average annual interest rate of four per cent and an average maturity period of eight years, the accumulated interest on the global debt would be about $20tn, making the total debt obligations of all nations about $73tn, of which $61tn is owed by the western industrialised nations and Japan, about $5tn is owed by developing nations, and $7tn is owed by the industrialising and major oil-exporting nations.

Liberating nations from debt

Today, all nations, with few exceptions, face mountains of debt and huge budget deficits that hinder their abilities to create jobs for the unemployed and help the poor, causing poverty to spread, allocations to educational and social programmes to be cut, and a sense of hopelessness to overwhelm a majority of people in many parts of the world.

To deal with the debt problem and address the social ills it has precipitated, I present below a plan that defies conventional wisdom and challenges traditional ways of thinking. The plan calls for no default by any state and asks no investor to lose a penny; it is designed to help everyone and hurt no one. The plan is as follows:

To designate the IMF as a global central bank, with the power to issue an international currency to be called the “Ramo”, divided into 100 cents, and to buy and sell securities issued by member states;

To set the value of the Ramo at the rate of the IMF Special Drawing Rights unit; this actually means converting the virtual IMF currency to a real one;

To give each state the opportunity to repay its debt and interest due until maturity now - by issuing money notes and credit certificates in its own currency payable to the IMF;

To authorise the IMF to open a trust account or an escrow account in which all such funds would be deposited and kept to meet the debt obligations of member states; the IMF would pay all debt notes on behalf of its members as notes become due;

To ask each state to pay an amount equivalent to ten per cent of its total public debt obligations as management fees in order to have the hard currency needed to cover the poor nations’ debt obligations and initiate programmes outlined hereunder;

To require each state to reduce its budget deficit by at least half a percentage point annually and balance its budget within ten years; in fact, many states would see their deficits evaporate the moment they pay their debt; some may even have surpluses because most budget deficits are caused by interest payment on the public debt;

To establish a $1tn educational fund to build 50 new universities, with a mission to promote peace, cultural diversity, tolerance, free speech and critical thinking, encourage creativity, innovation and environmentally friendly technologies; universities would be strategically located to serve as many regions of the world as possible;

To establish a $1tn humanitarian fund to help victims of war and natural disasters such as hurricanes, tsunamis, earthquakes and disease epidemics worldwide;

To establish a $5tn Sustainable Development Fund to assist all developing nations to grow out of poverty and dependency and join the industrialised world; and

To create a few international corporations and agencies under the supervision of the World Bank to help Third World nations develop and join the industrialised world.

The moment a nation pays its debt to the IMF, it becomes free of debt and the IMF assumes full responsibility for its debt obligations. Since a global economy needs a global central bank to function properly, the new role assigned to the IMF and the issuance of the Ramo would restructure the international monetary system, basing it on a “new gold standard”. Since the IMF does not have enough gold, a golden Ramo, backed by the good faith and currencies of all member states, would become the international standard against which all currencies would be pegged, making them more stable and less susceptible to speculation and manipulation.

Exporters of oil and other minerals and major commodities will be able to set the prices of their exports in Ramos, enabling states dependent on revenues from such exports to forecast future incomes more accurately and manage expenditures more efficiently. Using the Ramo to price oil will also guarantee fairness; no nation would pay less as the value of its currency appreciates against the dollar; no nation would pay more as its currency depreciates against the dollar.

Concerns and fear of inflation

Many economists will probably argue that paying off the public debt in this manner amounts to printing money and issuing credit certificates not backed by solid assets. This is largely true, but so is the printing of dollars and euros and pounds and yen today; these are currencies backed by the good faith of the states issuing them, not by gold or other assets. The Ramo will be backed, not only by one state, but by all IMF member states.

Furthermore, if the debt is not repaid now, any debt payment in the future will be made in dollars or euros or another currency. All loans are made and repaid in regular currencies that lack material backing. Therefore, the means to pay today as well as later are the same; the only difference is to pay today and free all nations from the debt burden, or wait until the economies of some of the highly indebted states begin to collapse under the heavy weight of indebtedness.

Some economists might argue further that creating so much money would ignite inflation and hurt consumers everywhere. This is simply not true. The IMF has no mandate to spend the money it will receive except as outlined above. This arrangement changes the identity of the debt payer, not the amount to be paid or when it should be paid. And while the IMF is required to pay debt notes as they become due on behalf of member states, it could arrange, in coordination with concerned states, to rollover some loans to maintain national price stability.

The notion that increasing the supply of money would cause prices to rise rapidly and ignite inflation is based on assumptions that are no longer valid or operable. Such assumptions include the notions that national economies are largely closed, money is not free to cross state borders, and trade is subject to restrictions. The major cause of inflation is supply shortages of essential goods, not excess supplies of money. People often have money but have no desire or need to spend more; therefore money alone cannot ignite inflation. For example, in response to the Great Recession and the 2008 financial crisis, the Federal Reserve and the US government increased the supply of money by $3.5tn within 30 months, without igniting inflation.

If demand for essential goods increases quickly or shortages of such goods are suddenly felt, inflation will be ignited, even in situations of tight money. Since the world’s capacity to produce most essential goods exceeds its capacity to consume such goods, no shortages are expected to occur and cause inflation. Food and energy products are the exception, and their prices are hard to control because shortages are caused by bad weather or monopoly or price manipulation and political instability.

Inflation, however, remains a threat to poor states struggling to feed their populations and grow their economies - and where states are largely corrupt, with essential commodities monopolised by a small group of greedy merchants. The plan to pay the debt of all nations is also a plan to deal with this problem. It provides developing states with the capital, knowledge and technical resources to develop their economies, improve food security, and restructure their cultures. Nonetheless, no plan can guarantee that corruption and price manipulation will disappear; the issue of moral hazard will stay with us for as long as we live. No rich or poor nation is immune to it.

'There are many forces that have transformed inflation from a real threat to a mere ghost.'

In the late 1990s, Mr Alan Greenspan, the former chairman of the Federal Reserve began to raise interest rates in fear of inflation. Since I saw no inflation coming, I wrote a short paper under the title, “The Ghost of Inflation”, in which I argued that inflation no longer presents a real threat to the industrialised states; it has become a ghost to be feared, but not to be seen.

There are many forces that have transformed inflation from a real threat to a mere ghost; they include the internationalisation of capital and investment markets, free trade and the ever-growing industrial capacity of Asia. While it may be unwise to declare that inflation is dead, inflation has lost most of its teeth; it may be able to bite, but it cannot hurt. Unfortunately, none of the newspapers that received my paper at the time bothered to publish it. Had the paper been published, the situation we are in today might have been different; and the unintentionally engineered recession of 2000/2001 could have been prevented.

Some bankers and hedge fund managers might argue that creating so much money might undermine the values of major currencies and thus their assets. On the contrary, the issuance of the Ramo as a standard currency will help stabilise all currencies, and substantially reduce risks associated with exchange rates fluctuations.

It is now widely accepted that the cost of bailing out any state in the future will be shared by the banks and investment funds that made the loans. Thus, lenders are today at greater risk of losing a significant portion of their assets than before. The issuance of the Ramo and the payment of debt will remove the risks associated with possible state defaults. Meanwhile, the establishment of the Sustainable Development Fund will expand international trade and create millions of new investment opportunities worldwide for investors to exploit.

Would repaying all debts and creating the Ramo weaken the US dollar? This question has two sides; one positive, the other negative. The issuance of the Ramo would stabilise the dollar and other currencies, make it difficult for politicians and traders to play one currency against another, and free all currencies to play their traditional monetary roles.

However, the Ramo is expected to weaken the attractiveness of the dollar and the euro as reserve currencies. Nevertheless, a policy to allow the value of the dollar to decline in order to encourage US exports is no longer beneficial; it tends to help few exporters, hurt many producers and all consumers, and weaken the competitiveness of other US companies.

As the value of the dollar declines in relation to the euro and the yen, the prices of imports from states using these currencies rise accordingly, causing US consumers and producers to pay more for imports. On the other hand, every decline in the value of the dollar causes the relative prices of goods priced in dollars such as oil to decline in states using the euro and the yen, while keeping such prices the same in the United States - as well in states whose currencies are pegged to the dollar.

As a consequence, US producers will pay more for everything they import to manufacture final products such as cars, heavy equipment and planes - as well as for spare parts - while industries using a lot of oil, like the airline industry, will become less competitive compared with its European and Japanese counterparts.

Sustainable development fund

The rapid economic development of several Asian states has caused the industrial production capacity of the world to surpass its consumption capacity, creating a wide gap between the global supply of and the global demand for most goods and services. Without expanding global demand to narrow this gap substantially, it is not possible to create enough jobs in the West or stabilise the world economy. And without growing the economies of the developing states and making the global economy fair, it will be even less possible to expand the world’s markets and produce enough food to feed the world’s poor.

Trillions of dollars need to be invested in the poorest states to create hundreds of millions of jobs and generate trillions of dollars in new demand. If helping poor nations was a luxury in the past, it is a necessity today. Political stability will not be sustained, and radicalism cannot be contained without economic growth and a fairer distribution of income among social classes and nations. Economic aid and charity cannot create enough jobs for the unemployed to undermine radicalism or increase global demand to stabilise the world economy.

Failure to acknowledge this fact and expand global demand by helping poorer nations develop will heighten our vulnerability to recurring recessions, financial crises, worsening trade gaps, and the many social and political ills associated with them. Since our world has become a global village, no nation is able to live in affluence for long unless other nations feel at least economically comfortable; and no nation will feel secure unless its neighbours feel secure as well.

As mentioned earlier, the debt obligations of all nations, including interest are estimated at $73tn. The ten per cent debt management fees would generate about $7.3tn, of which about $6tn will come in hard currencies. $2tn of the fees would be used to launch the educational and humanitarian initiatives, and $5tn to launch the Sustainable Development Fund (SDF). As a consequence, SDF would have two programmes, one to invest the balance of money it receives in national, largely unconvertible currencies, and the other to invest the balance of funds it receives in hard currencies.

The money paid by each developing state would be invested in the same state, and the money paid in hard currencies would be used to help develop all states. A societal development plan would be prepared by the World Bank for each state, and money would be spent over 20 to 25 years to build and purchase whatever is needed to foster national development plans. The following goals define the mission of SDF:

To help all nations build modern roads, railways and safe airports, bridges and dams, as well as electrical grids and water and sewage systems;

To modernise agricultural farming techniques and irrigation systems, train farm workers, and develop rural industries and communities;

To build enough schools, hospitals and clinics, and train enough teachers, physicians and nurses to meet the needs of all urban and rural populations;

To design special training programmes to enable workers to acquire the right attitudes and technical skills to keep a growing economy functioning properly and fairly;

To support national universities and establish specialised research institutes committed to identifying national and local problems and finding home grown solutions;

To increase the size and effectiveness of civil society organisations, and train judges and media professionals to help empower the courts to fight corruption, enforce the rule of law and protect people’s rights;

To improve the quality of education and healthcare and environmental awareness;

To facilitate the creation of a large and confident middle class in each state as well as a new, socially responsible entrepreneurial class;

To strengthen food security programmes at the national and international levels; and

To launch a genuine sociocultural transformation process in each state.

I strongly believe that no economic restructuring plan can succeed in a traditional society without being preceded by or accompanied with a genuine sociocultural transformation plan. Development is a comprehensive societal process, not just an economic, political, educational or infrastructural programme.

Spending about $7tn over a 20-25 year period should create hundreds of millions of jobs and expand world demand substantially to absorb almost all excess supplies of goods and services; it, therefore, should vastly reduce the chances of worldwide economic recessions. SDF should also lift more than one billion people out of poverty and train millions of scientists, engineers, thinkers and artists to keep the world economy growing and enrich the lives of all peoples.

Within the coming 20 to 30 years, several industrialised societies in the West and East are expected to reach a state of equilibrium, where national economies and domestic demand grow at a slow pace. Several factors are contributing to creating this reality; many states have already built the big national projects that had to be built, have population growth rates at near zero, with aging populations that prefer leisure over work and whose needs are limited and desires are hardly growing.

In addition, I believe that within the same period few other nations will enter a largely permanent state of diminishing expectations, where people expect less in the future and are resigned to accept the less that is expected to come. These anticipated developments will have a moderating impact on both global demand and global supply. Germany is a good example of a nation that is fast approaching a state of equilibrium; Japan is an example of a nation about to enter a rather permanent state of diminishing expectations.

Concluding remarks

In the 1980s, a $1.2tn Third World debt was considered a serious threat to worldwide economic growth and political stability, leading the rich states, the World Bank and the IMF to intervene and impose economic restructuring programmes on the indebted nations and cause many of them to lose a decade of economic growth. If the 1980s were a lost decade for many African, Asian and particularly Latin American nations - due primarily to having borrowed approximately $1tn - the decade that started in 2006 could be catastrophic for the industrialised states - which have already borrowed $44tn.

While the 1980s were Latin America’s lost decade, the 1990s were Japan’s lost decade, and the first decade of the 21st century was Italy’s lost decade. The experience of these nations seems to indicate that a nation that loses a decade of economic growth is unable to fully recover and resume growth as before.

Based on the debt obligations of western states and Japan, no highly indebted state, including Germany, is able to repay its public debt in the near future, or even service its debt now without going deeper into debt. On the other hand, forcing interest rates to stay low, while failing to invigorate struggling economies, causes the gap between the rich and the rest to widen further, deepens poverty everywhere, and undermines confidence in the world economy.

In contrast, allowing interest rates to rise causes budget deficits and the debt to increase. So, neither option promises to prevent a bad situation from getting worse. Public debt is a serious problem that demands immediate action, and since the world has never had a problem of this magnitude before, it has no tested tools to deal with the current crisis.

For example, If Greece, which has a population smaller than the official number of unemployed workers in the US, were to default, many European and US banks and investment funds would fail. As a consequence, many nations and countless individuals holding dollar and euro assets will become utterly poor or poorer overnight and the international trading system would be paralysed, causing the world economy to sink into a deep recession. The ensuing global social, economic and political consequences would be devastating.

Experience dealing with economic, social and political issues is normally a good thing to have; nevertheless, all experience is limited in scope and time. If we were living in a traditional state in Africa or the Middle East where societies change very slowly over time, past experience would be all that a traditional leader would need to have to manage the challenges his community may face. But in a world that changes every second, experience rooted in the past is more of a liability than an asset.

'Experts' tend to think of the future as an extension of the past, and thus to remain hostages to old ways of thinking and doing things. Since we have never lived in a world as complicated and integrated as the one we live in today, measures used in the past have become largely invalid. Global challenges require global answers; and new times require new ideas.

If the global debt is not repaid now as proposed above, it is doubtful that it will ever be paid; the sheer size of the debt and interest payments have already become crippling. This may be the last chance to solve this problem in its entirety before we face wholesale defaults no one can manage, and the consequences of which no nation can escape. The captains of the international monetary system at the IMF acknowledged during a closed meeting in February 2011 that they do not know how to deal with a new financial crisis, or what might trigger such a crisis, or how it might unfold.

Nevertheless, they believe that the mounting public debt is likely to instigate the next financial crisis, with severe global economic, social and political consequences no one is able to measure or plan for.

Dr Mohamed Rabie is an author and a former professor of international political economy. He has studied, lived and taught in four continents, and lectured at more than 60 universities and research institutes worldwide. He has published 26 books and more than 50 academic papers, and has written more than 1,000 newspaper articles. In addition, he has participated in over 80 conferences around the globe. Dr Rabie’s interests, writings and activities reflect a commitment to peace, freedom and human development, as well as to dialogue among different peoples and cultures.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

Source: Al Jazeera

Mohamed Rabie
Last Modified: 24 Sep 2011 17:17
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