Adonis Diaries

Posts Tagged ‘Sovereign Debts

How colonial powers handled sovereign debts of “weaker nations”?

Wars: Uncanny connections to Sovereign public debts

In the 20th century, USA went on a rampage of conquering and occupying nations under colonial powers (Spain) in Cuba, Philippines, Puerto Rico…  and practically controlled nations under French and English  powers until sovereign debts accumulated in WWI and WWII were restituted. 

The motto is a fundamental capitalist system that war is the quicker default alternative to resolving matters with weaker nations.

France, England, the Netherlands, Belgium, Portugal, Spain, Italy and Germany conducted their raids around the world to maintain “exclusive” trade facilities in each country they occupied militarily.

The direct connections among exorbitant levels of accumulated public debts and wars have been recognized for centuries, on black and white.

We witnessed that war is one of the preferred defaulting mechanisms on outrageous contracted debts, particularly when the creditor nation is weaker militarily.

In the last two centuries, the world witnessed 320 defaulting decisions by debtor nations.

Is it a coincidence that the last two centuries experience as many wars?

If you compare the two graphs of dates on defaulting and the timing of subsequent wars then, you realize that there are direct interrelations between the two factors.

1. In 1770, (England sovereign debts amounted to 140% of its GNP)

Adam Smith wrote: “At a level of accumulation of national debts, there are no examples that the debts have ever been repaid.  Public revenues were always freed to be spent, but never to paying off any debts. Governments prefer to default, occasionally admitting the debts, occasionally pretending to have paid off debts, but always incurring a real debt.”

2. In 1716 France, after the monarch Louis 14, was totally bankrupt:

The Scottish John Law convinced the French Regent to issue paper money covered by gold for easy circulation of money and internal trade.  To entice the public into accepting paper money, interests were added, secured by a special perpetual fund called the “General Bank“.

This bank was to be supplied by financial resources converging from the America’s colony of greater Louisiana.  The Mississippi Company, (later renamed the “Western India perpetual company“), was collecting indirect taxes for France.  Speculation by French nobility transformed the central bank into a machine for printing worthless paper money and the collection from Louisiana stopped to converge to France.

In 1748, Montesquieu in  “Of the spirit of laws” wrote:

“There are a few financial specialists disseminating the concept that public debts multiply wealth and increase circulation of money and internal trade.  Facts are, the real revenues of the State, generated by the activities of industrious citizens, are transferred to idle classes.  The consequences are that we make it more difficult on the industrious citizens to produce profit and worst, extending privileges to the passive classes.”

In 1781, Jacques Necker, France minister of finance, proclaimed that “There can be no peace in Europe unless public debts are reduced to the bare minimum:  Public debts are sources for increasing the military capabilities designed for destructive activities; and then more debts are accumulated for the reconstruction phase.  A devilish cycle that is anathema to prosperity and security.

Necker was the first financial official in France to present a transparent statement sheet of all the revenues and expenses for the budget and he encouraged the French monarchy to emulate England by submitting complete budged so that investors and lenders be informed of the financial situation and be encouraged to considering France as a viable country to invest money in.

At the time, England had replaced Holland as the financial center of the world and the central Bank of England was already established.

All indicate that trends in growing sovereign debts in the richer and developed nations are not going to change till 2014.

In that year, it is expected that Japan public debts (mostly internal) will reach 250% of its GNP, Italy 130%, England 100 %,  the USA 100% (or $20 trillion, the interest alone representing 400% of its fiscal yearly revenues), France 95%, and Germany 90% of GNP.  The US will have to reimburse $850 billion in 2012 and finance one trillion.

The emerging States and most of Latin America countries are experiencing steady drop of their public debts to an average of 40% of GNP by 2014.

My question is:  If almost all States have incurred public debts then, who are the creditors?  

China economy has saved 2.5 trillion and Brazil and Turkey less than 500 billion.  All these savings cannot cover the amount of necessary public debts required by the debtor nations.

Fact is, world finance is functioning on worthless paper money and other financial tools transmitted here and there to give the illusion that the system is functioning.

So far, the IMF and the World Bank are controlled by the G8 who can withdraw at will from these supposed to be international financial institutions.  This situation of relying on magical financial illusions cannot persist for long.

A third World War will be created intentionally by superpowers in order to starting from scratch before establishing sustainable financial institutions, rules, and regulations.

If you carry a credit card at an interest rate of over 20% then, you know that the principal could never be paid since the credit limit is 50 times your real annual income  in order to finance a purposeful inflationary policy to give the illusion that the ratio of public debts to GNP is being reduced.

Not only 20% interest rate is exorbitant, but adding unpaid monthly installements to the principal is what all ancient customs forbade.

For example, if people of “independent means”, (called rentier) in French, could invest in a productive businesses generating profits of over 20% they would not have lent their money.  It is imperative that payments on interest should not last more than 7 years and further monthly payments automatically directed to paying off the principal.

Thomas Jefferson recommended, and then imposed his view when he became President to the new Independent America, that loans should never be contracted out by States for longer than 19 years so that future generations do not have to suffer decisions of the living ones.

As life expectancy is increasing, I suggest that Constitutions should force governments and official institutions to restrict the life of any loan to be 5 years shorter of the lower number of the average life expectancy or the age of retirement of citizens in the creditor nation. 

Anyway, if the loan is a private one, the lender should be able to enjoy his placement while alive and not suffer from defaulting decisions.

Note:  Reviewing the history of public debts since antiquity, the consequences of incurring huge public debts are the same:  Whether the dept is contracted out to a person (the monarch) and the debt is cancelled once the individual is dead, or the public debt is shouldered by a sustainable “immortal” entity such as a State, the weaker creditor will be punished.

The militarily weaker creditor will suffer now or later; it is a matter of delayed punishment for loaning a more powerful debtor whether voluntarily or after coercion.

In the French book “We are all ruined in 10 years: Last chance for resolving sovereign debts” Jacques Attali described the history of the creation of sovereign debts since Europe Medieval Age and then the USA.  Chapter 5 offers 12 lessons that a review of this history revealed on sovereign debts.  This post is an abridged article and a few critical opinions.

Lesson one: Public debts are expenses created by current generations to be resolved by the next generations regardless of the consequences they had no saying in it. Public debts are contracted by a supposedly immortal entity that no one is eligible to verify the quality of services offered and this entity can pay only the interest portions indefinitely (without reducing the principal) as long as financial markets are agreeable to.  Public debts are meant to supporting current generation with expected future money generated by later generations.

Lesson two:  Public debts could be used for economic growth. When incurred debts are invested on infrastructure and educational systems then, internal market are expanded and economic growth permits increases in fiscal revenues.  Thus, savings in the budget can be allocated to repaying the interest on debts.  For example, US President James Mason borrowed money from a British bank to pay Napoleon of France the price of the Greater Louisiana colony that Napoleon used to fight England with.  This kind of public debt expanded the territory and the internal market of the US, and prevented France from further meddling on the borders of te US.

Lesson three:  Public debts encourage government for creating financial instruments that will ultimately be use against its advantage. A simple example and so relevent today, creating paper money covered by gold and then issuing more paper money than reserve gold can cover.  The US covers the surplus dollars by threatening with military interventions or enforcing financial embargoes if a State refuses to using the dollar as the main currency in trade and commerce.

Lesson four: External and internal public debts are directly interrelated. When a State decides to default it might start by temporary suspending paying interest on due date if refinancing negotiation failed; coupons of lesser values are issued.  Property values drop 35% within 6 years; share values decline 55% within 3 years; unemployment increases 7% within 4 years, and production rate drop 9% within 2 years.  If you notice that many of these consequences are effectively taking place then, your State has defaulted but was not transparent in declaring the difficult situation.

Lesson five: Public debts are condemned to increase naturally if a government does not take measures to reducing unproductive spending.

Lesson six: Public debts are more sustainable when financed internally. For example, Japan is able to sustain the highest ratio of 245% public debts to GNP because most of the debts are financed internally through the savings of the Japanese citizens and enterprises.

Lesson seven: Debtor States control creditors as much as the latter think they are in control. All indicate that trends in growing sovereign debts in the richer and developed nations are not going to change till 2014.  In that year, it is expected that Japan public debts (mostly internal) will reach 250% of its GNP, Italy 130%, England 100 %,  the USA 100% (or $20 trillion, the interest alone representing 400% of its fiscal yearly revenues), France 95%, and Germany 90% of GNP.  The US will have to reimburse $850 billion in 2012 and finance one trillion.

Lesson eight: As financial crisis is imminent, a government generally considers that his case particular and will eventually get out unscathed. In the medium-term after defaulting, a State witnesses increased internal unrests, in frequency and in violence; government creates a preemptive war on a neighboring State or to a weaker creditor State in order to absorb the surplus unemployed citizens in the lower middle class; and the State is reduced to a vassal position to more dominant creditor nations:  the defaulting State is unable to secure more loans for many years.

Lesson nine: Financial crisis relevant to public debts depends more on subjective confidence of creditor markets than on the ratio level of the debts to GNP or fiscal revenues. Invariably, States unable to generate enough fiscal revenues so that 50% of the budget are dedicated to paying interests on sovereign debts are in deep trouble.  Many developed Nations can sustain up to 300% of debt to GNP for several years (Japan and the USA), while developing countries crumble under 50% ratio, simply because the political system is unstable and unable to bring in at least 50% of the budget to cover paying interest on debts.

Lesson ten: Resolution of public debts gores through 8 strategies; inflation option is always one of the strategies. After WWII in 1945, the public debts of the England was 250% on its GNP, France 110% (which represented 10 fiscal years of revenues), and the USA was 100% of GNP.  These countries adopted the inflation plan for 30 consecutive years, factitiously reducing the ratio.  With steady economic growth, and since when prices of commodities increase they never come down, the average yearly income increased, but it was mostly hidden by the inflation factor. For example, the Chinese worker with a salary less than $1,000 is saving half his earning so that the Chinese government finances the growing external debts of the “rich States” in order to maintaining the “standard of living” of their citizens that effectively reflects 30 years of inflation policy.  Fact is, one of the methods for sustaining inflation was creating credit cards with limits up to 50 times the actual earning of the individual!

Lesson eleven: Almost all  heavily indebted nations end up deciding to defaulting on payments. In 1770, Adam Smith wrote, (England sovereign debts amounted to 140% of its GNP): “At a level of accumulation of national debts, there are no examples that the debts have ever been repaid.  Public revenues were always freed to be spent but never to paying off any debts. Governments prefer to defaulting, occasionally admitting the debts, occasionally pretending to have paid off debts, but always incurring a real debt.”

Lesson twelve:  All responsible governments must refrain financing the functioning of the government by public debts and limit investment on their capability for reimbursement. Thomas Jefferson recommended, and then imposed his view when he became President to the new Independent America, that loans should never be contracted out by States for longer than 19 years (related to life expectancy in those days) so that future generations do not have to suffer decisions of the living ones.  Any public debt contracted for preparing to war or fomenting civil wars is a capital sin that will diminish the power of the State and set the stage for direct meddling in its internal affairs. Generally, other powerful nations will come to the rescue of the defeated creditor State and rob the victor of any short-term benefits.  Consequently, the trade of the defeated State will be transferred to the next dominant powers in order to stabilizing its economy.

It is unavoidable from now on that complete transparency on sovereign debts be mandated to all debtor States since public debts are at the heart of geopolitical considerations and dangers.  Management of public debts must adhere to four principles:

First:  Comprehension of public debts must be disseminated to all tax paying and voting citizens.

Second:  Public debts must be controlled and reviewed at all levels of the government.

Third:  Political discourse must be oriented to discouraging the contracting of further debts.

Four:  Any decision for incurring additional public debts must be discussed at all political and social levels for the pertinent utility of the debts.  Budgets must define the dividing lines between public spending and private spending.

Note:   The emerging States and most of Latin America countries are experiencing steady drop of their public debts to an average of 40% of GNP by 2014 while the “richer and powerful nations” are increasing their public debts.  My question is:  If almost all States have incurred public debts then, who are the creditors?   China economy has saved 2.5 trillion and Brazil and Turkey less than 500 billion.  All these savings cannot cover the amount of necessary public debts required by the debtor nations.  Fact is, world finance is functioning on worthless paper money and other financial tools transmitted here and there to give the illusion that the system is functioning.

I decided to relegate the introduction last. Why?  I have read many articles on the critical problem of Sovereign Debts and what did I discover?  They are basically series of data, abridged definition of convoluted terms, and then nothing.  Without any serious analysis, who cares to consider conclusions that are politically oriented but inconsequential for learning anything?

State public debts may be contracted through external creditors (government funds, institutions, or private financiers), internal resources, and hidden debts such as social security funds…

There are 9 technical ways to resolving or camouflaging excessive sovereign public debts that State governments have invented through centuries of steady accumulation of debts:

Increasing taxes, direct, indirect, and hidden taxes that most citizens are not aware that they are actual taxes.

Decreasing expenditure in the budget and allocating the savings to paying interest on debts.

Increasing production and facilitating internal trades to increasing economic growth, thus, increasing fiscal revenues.

Decreasing the interest rates on contracted debts through financial transparency and political stability.

Increasing consumer prices by forcing inflation and a fictitious decrease of the debt rate compared to GNP.

Creating wars on the “enemy” creditors to defaulting on external debts (principal and interest portions).

Refinancing the debts by decreasing the interest rate or lengthening the due dates:  Creditors are willing to be paid something on regular basis than submitting to lengthy litigation procedures with the World Commerce and Trade organization.

Simply “defaulting” and letting the chips fall where they please (the most frequently adopted decision since the Middle Ages).  In the last two centuries, 320 cases of States’ outright defaults have been registered with frequent consequences of wars, swapping of colonies, and mandated power over military weaker nations.

What are the signs that a State is planning to default?

One: The newer elected government immediately demands refinancing the debts and renegotiating the terms in amount, interest rate, and timetable of payments.

Two:  Banking institutions threaten to declaring bankrupcy; meaning, the banks start to cut down on loans in amount and in numbers; thus, slowing down internal trade and the creation of small new enterprises.

Three:  Foreign creditors stop lending for many reasons.

Four: Financial institutions actually declaring bankrupcy and setting off a financial crisis so that government reacts promptly and comes to the rescue by infusing massive liquidity of the hardworking “citizens’ savings”

Why government generally goes for the policy of accelerated inflation in order to resolving sovereign debts?  First, consumer prices are allowed to increase by increasing tariff barriers for cheaper imports, encouraging monopolistic mergers, increased interest rates on loans, and slowing down internal production.  Inflation diminishes export competitiveness by an over valuation of the currency. Inflation is connected by dramatic rise in Real Estates prices called “bubble”.

What is the rational for creating inflation?

Debts not “indexed” on inflated prices (fiscal revenues are inflated since generated taxes seem to have increased and the nominal GNP shows increases) reduce the ratio of the debt to the GNP and the fiscal revenue, giving the illusion that effective amount of debt was reduced.  An annual inflation rate of 4%mechanically reduces the debt ration by 20% within 5 years.

What are the consequences of inflation?

If the salary is not indexed on the inflation rate then, the purchasing power of an individual diminishes and he has to borrow or find an additional job to making ends meet or be supported by his parents’ savings.  Usually, the State maintains all public salaries unchanged for several years in order to keep spending “under control”.

After WWII in 1945, the public debts of the England was 250% on its GNP, France 110% (which represented 10 fiscal years of revenues), and the USA was 100% of GNP.  These countries adopted the inflation plan for 30 consecutive years, factitiously reducing the ratio.  With steady economic growth, and since when prices of commodities increase they never come down, the average yearly income increased, but it was mostly hidden by the inflation factor.  For example, the Chinese worker with a salary less than $1,000 is saving half his earning so that the Chinese government finances the growing external debts of the “rich States” in order to maintaining the “standard of living” of their citizens that effectively reflects 30 years of inflation policy.  Fact is, one of the methods for sustaining inflation was creating credit cards with limits up to 50 times the actual earning of the individual!

When a State decides to default it might start by temporary suspending paying interest on due date if refinancing negotiation failed; coupons of lesser values are issued.  Property values drop 35% within 6 years; share values decline 55% within 3 years; unemployment increases 7% within 4 years, and production rate drop 9% within 2 years.  If you notice that many of these consequences are effectively taking place then, your State has defaulted but was not transparent in declaring the difficult situation.

In the medium-term after defaulting, a State witnesses internal unrests, higher in frequency and in violence; government creates a preemptive war on a neighboring State to absorb the surplus unemployed citizens in the lower middle class; and the State is reduced to a vassal position to more dominant creditor nations:  the defaulting State is unable to secure more loans for many years.

What kinds of financial mechanisms and financial tools (gimmicks) a powerful State resorts to amortizing the impact of a large sovereign debt?

One, the State may use special right of withdrawal from the International Monetary Fund (IMF), which is starting issuing worthless banknotes.  Two, the State may create special perpetual funds generated by particular taxes designed to repaying the debt (political exigencies always use special funds for missions not intended to it, under the pretext of extraordinary emergency events).  Three, the State may nationalize productive sectors in the industries and then issue bonds on public properties.  Four, the State may declare the land of the nation is public property and all private properties should be rented for a specific period.  Five, all the time, the State is just printing money with decreasing values as long as the sovereign debts is huge.

The financial clubs and institutions that the powerful nations used to recovering their assets were: One, the “Club of Paris” was established in 1956, constituted of all the creditor nations (the G7) and international institutions, to manage the public debts contracted by the third world countries.  As Germany and Japan accumulated surplusses in their economies they tended to convert their dollars to gold; Nixon decided in 1971 suspended the convertability of dollar to gold and starting the devaluation trend of the dollar.  That was the end for the fictitious “Gold Exchange Standard”.  Two, the “Club of London” was established in 1979 in order to gathering all the commercial banks creditors to poorer States.  Thus, debtors States had to first refinance or renegotiate their public debts with the Club of Paris so that the Club of London executes the details with the commercial banks. Three, the International Monetary Fund (IMF) began getting involved after 1983 when major emerging States suffered financial problems.

Invariably, States unable to generate enough fiscal revenues so that 50% of the budget are dedicated to paying interests on sovereign debts are in deep trouble.  Many developed Nations can sustain up to 300% of debt to GNP for several years, while developing countries crumble under 50% ratio, simply because the political system is unstable and unable to bring in at least 50% of the budget to cover paying interest on debts.


adonis49

adonis49

adonis49

December 2020
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
28293031  

Blog Stats

  • 1,442,582 hits

Enter your email address to subscribe to this blog and receive notifications of new posts by email.adonisbouh@gmail.com

Join 784 other followers

%d bloggers like this: