Debt: A Fairy Tale

In #GlobalRevolution, Madrid, Spain on 12 October 2012 at 12:56

October 12

Dear people,

For Spain, every week is debt week. It may explain why the ‘Debt Week’ as it was organised worldwide didn’t attract particular attention here in Madrid.

There were manifestos throughout town which announced the slogan ‘We don’t owe, we don’t pay’ but which didn’t announce any particular event until today. After intensive research I was finally able to find out that certain things had actually been organised, but I don’t know of anybody who went there.

One thing that’s gaining attention is tomorrow’s Global Noise pan bashing. It will pass over the monumental Paseo de la Castellana from the European Union offices to Sol. It’s not going to be as big as last year’s Global Revolution Day, but it’s going to be on all continents except for Antarctica. The sun won’t set on this one for a good 24 hours.

The ultimate goal of the ‘We don’t owe, we don’t pay’ campaign is to create a civil screening of the debt. People are convinced the debt is illegitimate. On the website, the organisers have tried to explain why.

First of all, it denounces last year’s change of the constitution, which was adopted in record time under pressure of international financial institutions. Article 135.3 states that ‘Repaying the national debt is absolute priority.’ Over anything. Social expenses, education, health care.

Now the question is, where does the debt come from? Until a few years ago, it was hardly a problem. Everything seemed to be booming.

The anti-debt campaign explains the context of neoliberal policies as they have been gradually implemented throughout the world since the 1970s. Tax cuts for businesses, deregulation of financial markets, privatisations, flexibilisation of the work force.

The crowning achievement of this effort in Europe was the common currency, emitted by the newly founded European Central Bank around the turn of the century.

The scope of the ECB is to control inflation, not to eliminate it. Inflation is a built-in growth stimulus. But it’s counterproductive when it gets out of hand.

To do its job, and to maintain its independence, the ECB cannot lend money directly to the national governments. Instead it lends to private banks at a low interest rate. This way money is cheap, which should encourage growth.

The private banks act as mediators between the ECB and the national governments. They borrow money from Frankfurt at 1%, and they lend it to Berlin at 4%, or to Paris at 5%, to Rome at 7%, to Athens at 15%. It’s perfect business, like running a casino. You can never lose.

The interest rate the banks demand on their loans to national governments depends on the financial health of the nation. If the government enjoys confidence, the interest rate will be low. You have little risk and so you will make a low but steady profit. If a government can’t meet its financial obligations, like Greece, the interest rate is much higher. This extra profit should make up for the risk you are taking of investing in a country that may default. It’s completely logical. The less money you have as a government, the more you will have to pay in interest. The more you have to pay, the more likely a default becomes. The more likely a default, the higher the risk for investors, so interest rates on loans go up, which makes it even more difficult for a country to pay them back, etc. It’s a vicious circle.

Such a country has to be bailed out with public funds from healthy economies like Germany or Holland or Finland. This money doesn’t even touch the countries in need of support. It directly goes to finance the private banks who are speculating on the economic troubles of the nation in question.

And so on and so on. There is a lot more to it, but this is one of the basic mechanisms. If the ECB were allowed to lend to national governments directly, the Greeks would be able to accede to loans at 1%, and maybe, just maybe, they could start to recover.

Or maybe not. There is another problem with a common currency. Some nations are net exporters of goods and services, like the Germans and the French, and others are net importers, like the southern European countries. Net exporters generally make more money than they spend, and net importers spend more money than they make. To finance this difference, the net importers have to borrow money and so they accumulate debt. It’s an old story. Until a decade ago, the net importers could control their debt by periodically devaluating their national currency. As a side effect, this made their products cheaper to buy, it stimulated manufacturing and export and it helped to balance their deficit. One way or another, they got along.

With the common currency issued by the ECB and controlled by private vultures, this is no longer an option. The southern countries have to adhere to German financial rigour, or they go broke.

For an investor, bankruptcy of your debtor is the big risk. Fortunately, in the last twenty years the financial markets have evolved in such a way that they found a method not only to protect themselves against this risk, but to turn default in just another way to make money.

Here in the Spanish Revolution nerve centre, you will find Jack. He is the man behind our 24 hour news channel, among many other revolutionary activities. He is a mathematician and an ex Wall Street banker, one of the people who built the credit bomb in the mid 1990s. Today he is implementing the same strategies that created the financial boom of the early 2000s to spread the meme of global revolution.

He can tell you the story of how Wall Street works. I myself once tried to do so through the characters of Donald Duck and Uncle Scrooge.

It went like this, more or less.

Uncle Scrooge is the richest man in the world. His nephew Donald Duck is the man in the street, perpetually at odds with his creditors in his struggle to provide himself and his three nephews with a decent living standard.

As a lower middle class duck, Donald has frequent dreams of luxury and fortune. He would love to own a yacht.

Scrooge has the ability to turn everything into money and power. He issues his nephew a loan of ten million dollar to buy a yacht. And not just his nephew. He rounds up all the homeless he finds in the park, and grants each of them a multi-million dollar loan.

These debts are worthless. But uncle Scrooge pays his credit rating agencies to give the loans triple A status, which allows him to sell them as a good deal to investors under form of CDOs (Collateralized Debt Obligations).

Scrooge knows that the debtors will default. It’s not his problem anymore, because he sold off all the debts, but he knows of a way to make even more money out of thin air. His financial minds have invented something called a CDS (Credit Default Swap). This is an insurance against your debtor going bankrupt. But the curious thing with a CDS is that it you don’t have to be the creditor in order to buy this insurance. You can bet on anyone else’s debtor going bankrupt.

So Scrooge goes to an insurance company and takes out a Credit Default Swap on Donald going bankrupt. It’s a sure bet, he issued the loan himself.

After a month, Donald and all the homeless of Duckburg fail to make their payments. Scrooge cashes in on his CDSs from the insurance companies. Both the banks to whom he sold the trash loans and the insurance companies where he placed his bets go bankrupt.

At this point it’s a full blown economic crisis. If the banks fall, everybody’s savings are at risk. It’s a disaster. The government has to step in to bail out the banks and the insurers to guarantee people’s pensions and avoid economic collapse, chaos, civil war, revolution. In other words, it has to pay the bill of Uncle Scrooge’s perverted profits with public money.

The government has no choice. It depends on Uncle Scrooge, because Uncle Scrooge is the richest duck in the world. He owns everything. He makes the law, and he says: ‘Look, there is a way out of this. You just need to adopt the following austerity measures. Lower taxes on my enterprises, raise taxes on the common people through VAT, lower pensions, sell me your hospitals and infrastructure at bargain prices. Etc. etc.’

Change the name of Uncle Scrooge with Goldman Sachs, and Donald’s name with your own, and this is more or less what’s happening right now.

Good night again, and good luck 🙂



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