There’s a bully on the block. A financial bully. And we’re all beholden to him. He is tougher than a Mafia Don’s loan shark and more insidious. With his financial power, he can dominate everyone’s life. His influence on credit permeates every financial transaction, foreign and domestic. He is the first to be paid and the last to be understood. We all must respect him and honor his contract.
He is like the silent ghost in Dickens’ classic hinting at the doom that awaits us in the future if we do not change our ways. He looms in the shadows waving his finger, warning us like the Devil that we must acknowledge our deal with him or suffer the grave consequences if we don’t. Nowhere can we escape the fury of his untimely shake-down. We are not prepared for that moment. Nor can we ever be. It may be too late for us, because we are the ones who signed the contract and are benefitting from it. However, I’m afraid that we may not be the ones to suffer the most.
Is this the beginning of some weird horror story? Or another hollow, apocalyptic threat by religious zealots conjured up to terrify and reform us? Or a politician’s tactic designed to frighten or worry us about some unseen, unscrupulous enemy? Or a promise of a very stern reprimand from some moralist for our deleterious ways? No! None of the above. This is merely a serious warning to look into the blase way we smoke the drug of easy credit!
It attempts only to reveal to the unsuspicious, the danger behind our country’s secret power that we have used to the detriment of the rest of the economically vulnerable world. It tries to explain how the system works because no one can resist the lure of easy credit for long. It suggests that we try to understand how the loosely controlled use of credit facilitates our hedonistic, materialistic life style and makes us the envy of the citizens in the poorer countries of the world. And therefore subject to a concerted effort to retaliate, should they find a way to mount a resistance movement one day. (And they did on 9/11/2001). The possibility still exists, because the difference between the haves and have-nots is widening rapidly.
Extending credit was always behind the accumulation of wealth. Being a small “debtor” was usually a sign of weakness, but being a big “borrower” was always a sign of strength. The hope for any business enterprise to make a profit far in excess of the interest charged on the capital invested has driven expansion in the world from time immemorial. It’s a good thing, economists say, when borrowed money is used for a “sound” investment. But a dubious thing if loans are used primarily for consumption and speculation.
The theory (that a modest growth in the amount of credit along with a modest increase in the rate of inflation are very healthy conditions for a growing economy) has been accepted by most economists. Especially for our growing economy in the US! We have utilized foreign and domestic credit extended with favorable terms that other countries couldn’t arrange. Those terms include the most important, but unwritten, one: no one shall dare call a loan granted to the financial bully. Especially if this bully has the largest debt of all. And who is that? The United States of America!
With the demise of the over-extended Soviet economy, the world’s political balance of power has been altered. The leaders in the U.S. have gleefully anointed this country with the crown of last-standing superpower. But these daring leaders have reluctantly accepted the many responsibilities that go with that crown. No one has worn the imperialistic crown for long in “modern” times.
In acting this way our leaders are ignoring the fact that this country is not the geopolitical center of the Earth’s human and natural resources. Without those resources our leadership (business with government) are striving to become the economical center of the world in an effort to dominate those scattered resources. Since all power today is based on perceived wealth AND the legal right to own that wealth backed by legally constituted police and military forces capable of defending this right, we citizens must understand the basic role that extending credit plays in creating the wealth supporting our power base.
There are no more debtor prisons. That they existed in the first place showed how poorly understood the extension of credit was. The humiliation that went with being incarcerated for failure to pay off loans has been replaced by the presumed humiliation of legal bankruptcy. Now that this modern form of debtor humiliation has run its course, credit institutions in our society are looking for new laws to tighten the screws on defaulting debtors. Pending bankruptcy law revisions and new legal procedures will be the most common solutions, like the new steps taken to collect child support from non-paying spouses through their employers. Of course, any new bureaucracy is costly, inefficient, and slow to respond. But nothing can milk blood from the proverbial stone right away!
No one feels sorry for the unfeeling, gigantic creditors, though, nor for the ultimate creditor: the central banks of the world. (These are funded by their governments, who in turn are funded by their taxpayers.) For example: look at the pressure being put on the IMF and the World Bank by compassionate political groups. The “better-off” citizens want these institutions supported by the central banks of the richest countries in the world to forgive significant Third World debt. Such forgiveness undermines the seriousness of the existence of any financial entity whose purpose is lending money. If the leaders of any poor country can borrow money without believing that they must eventually pay it back, they would have a license to steal! The basis of extending credit – trust in the debtor to pay his debt – would be eliminated.
We all understand very well the position of the debtor, however. He has an important financial obligation: to make the periodic payment to his benevolent creditor his first priority. (Unless, by falling into default, he learns that creditors sometimes can be more lenient than most of us suspect. But not forever! The day always comes when the piper must be paid.)
Today, no debtor goes to jail unless it can be proven that the debtor was fraudulent in his application for a loan or criminal in his use of the funds. And even sending these kinds of perpetrators to jail happens rarely because “white-collar” crime is seldom prosecuted except to recover the losses. Corrupt government leaders of debtor countries that cannot repay their international debt can only suffer removal from office. Of course, future lending to that country is likely to be curtailed, at least for awhile. But, sooner or later, optimism (falsely construed as political compassion) enters the heart of a flush lender and new loans are extended – with tougher terms, audits, and oversight committees.
I would like to offer a couple of simple illustrations of how wealth is increased or created by extending credit. When you buy a house it receives an evaluation (usually the sales price) upon which a mortgage loan is based. If the values of other properties in your neighborhood or local community increase due to the law of supply and demand as has happened in the Bay Area of Northern California, so would the value of your property if it has been properly maintained.
This increased “market” value can be used to justify a home equity loan, whether or not you choose to use the funds from the loan to make improvements to your house. More money is thereby available to you to spend in the economy. Similarly, if your stock portfolio has increased dramatically, you can borrow against that “equity” and buy more securities with the loan proceeds. In both of these examples, your wealth appears to increase without any new “income” from productive efforts. When you spend the money you receive from these loans, someone else receives an income. So does the financial institution who loaned you the money. Their income is from the interest or loan costs you pay.
In both these examples we have “created” wealth by marking up our net worth based on the assumed value the housing and stock markets put on the assets we own. There was no “service” rendered, no production of other assets, nor any increased productivity involved. The system “generated” money that could be spent to buy goods and services in any marketplace in the world that accepts U.S. currency. What other countries can claim that kind of respect for their currency? There are a few, of course, but not one of these is a Third World country.
Where do the banks or lending institutions get this easy money that they are so aggressively offering via tax-sheltered equity loans? Originally your local bank was required to have a combination of capital and “reserves” that amounted to one fifth of their portfolio of outstanding loans. Our Federal Reserve Bank permits your bank to borrow their “reserves” from the federal government.
Today (year 2000) banks are borrowing “reserves” from the Federal Reserve at an annual interest rate of 6.5% and making loans to their best customers at a rate of 9.5%. Credit card customers usually pay a much higher rate of interest, primarily because their accounts are unsecured and they are customers with little clout. The difference in the rate of interest charged depends on how much trust the bank has in its customer. The higher the anticipated risk of not recovering their funds, the higher the rate of interest is charged. That’s fair, isn’t it? There used to be a cap on the amount of interest that can be charged, but that is gone and almost forgotten.
Now where does the federal government get its money, besides from its taxpayers? From proceeds that come from selling notes, bonds, and other securities guaranteed by itself. These are sold periodically to U.S. citizens, financial institutions that accumulate money that they don’t need right away like insurance companies, and foreign investors: foreign governments, speculators in foreign currencies, and even citizens and businesses of foreign countries.
Foreign investors are particularly interested in owning U.S. securities because they are dealing with the largest financial institution in the world with the deepest (perceived) pockets that is most unlikely to delay payment or default on its promise to pay. This awesome reputation allows our federal government to have trillions of dollars of debt outstanding without feeling the breath of ubiquitous collection agents on its neck. It will just “roll over” the maturing debt by issuing new obligations with future maturities.
No small country has the possibility to pay its debts with its own “local currency.” Unlike the U.S., a deficit plagued Third World government cannot sell its securities to foreigners in order to raise more funds for their local use unless these securities are repayable in dollars or another strong world-recognized hard currency. To obtain foreign currency or our U.S. dollars, this poor country must export more value than it imports to build up the foreign currency reserves necessary to retire its debt at maturity. Unless, of course, it can arrange new loans – not an easy thing for a Third World country to do! The U.S. on the other hand, who is constantly importing more than it exports, just issues more dollar denominated obligations and increases its overall debt. We taxpayers will be happy to pay the interest on this increase, won’t we?!!
Americans are in a very fortunate position. As Daddy Deep-pockets, we can underwrite very large contributions to NATO, the United Nations (whenever we settle on the correct amount due), the World Bank, and the IMF. We can arrange bail-outs to countries like Mexico, Brazil, and other friendly governments with stressed economies. We can pressure leaders of other countries to abide by our financial advice, and we can cut off credit to unfriendly nations and boycott their exports.
If this isn’t a bully’s position, I never faced one while I was growing up. What we don’t realize as citizens is that by possessing this financial power, we automatically become natural enemies of the poorer nations even when our government happens to be “generous” toward some. As compassionate as are the concerned citizen and church groups who donate money in times of severe emergencies, the image of a rich Uncle Sam whose economic power dictates to the world is far more prevalent to the man on the street in foreign countries than the image of an altruistic society sincerely trying to help the indigent and oppressed.
To do something to soften our image abroad goes against basic human nature. Those who have wealth will always want to keep their wealth, their privileges, and their numerous advantages. While those who have less will demand a sharing of the others’ “ill-begotten” riches. The Gospel of Matthew quotes Jesus as saying: “For ye have the poor always with you…” (Chapter 26, verse 11.) And so it has been with the Malthusian population growth we have experienced.
“Poorness” is relative, I accept, but wealth generated by those privileged to exploit the availability of easy credit should be considered by honest appraisers as ill-begotten. It may be just as hard to keep the governments of the rich nations from taking advantage of their ability to create credit as it is to keep poor individuals from reproducing themselves in the debtor nations. But we must decide sooner or later to spread our wealth or it will be spread for us on someone else’s terms in the future.
The rich nations are reluctant to participate in resolving the strife in poorer countries except when the violence threatens to spill over into the rich nations’ hegemony. Our media voices refrain from covering these foreign problems in depth and rarely offer well-considered solutions. Their voices may shout about selling arms to the starving combatants, sending food to the growing masses of refugees, and negotiating peace. Yet these voices hardly move us and our indifferent government representatives to take concrete steps to address the problem of poor nations who do not have the resources to feed their people nor the borrowing capacity to pay for food and its distribution costs.
If someone actually did something to help a starving country, there is no guarantee that this country’s healthier population would stop having so many children. In the U. S. the near-sighted leaders of some political groups are still insisting that we continue to withhold our dues to the United Nations unless that entity curtails family planning education in those countries that need it most!
Is there something someone can do to halt this vicious spiral of borrowing from the future?
To be continued in Part 2