It seems that the international banking cartel, which includes the World Bank and IMF are more than a little nervous that the US will let its October 17 debt ceiling deadline pass without raising the US debt limit, allowing the country to borrow billions of interest burdened dollars to make a payment on the compounding interest on a multi trillion-dollar un-payable loan.
One might think that only a country the size of the US could have such a problem, but the truth is that most of the world is suffering from the same destructive cycle of debt and austerity. That is perhaps what worries the international banks most.
They fear that if the US decides that default is a solution, other countries in the same situation might make the same decision and that would send the international banking system into a tailspin, much like what happened when borrowers stopped making payments on their sub-prime mortgages, gutting the value of those loans, thereby bursting the financial bubble international banks had created when they packaged the very high risk mortgage loans and sold them to investors. They had to know, based upon their own lending criteria that the loans would likely never be paid and at some point the flow of money would be interrupted and the house of cards would fall down.
The same thing is happening again, except instead of high risk sub-prime mortgages, we are talking about high, compounding interest on government debt. The banks don’t care so much if the principle on the debt never gets paid. They do care if the payments on the interest stops because like with mortgage payments, where the interest is also paid before the principle, the interest is the profit that belongs solely to the banks. When they don’t get that money because of any interruption in the cash flow, they fail.
So what we might be faced with is a question of who should fail? Should the governments allow their economies to collapse in order to keep the banks from failing? Should the banks give up their profit to save national economies, big and small?
Or should both realize that the game is over, and make a deal. Just like someone finally looked into the value of those packaged sub-prime mortgage loans and realized they weren’t worth a plug nickel, the people of the world have looked at their worthless currencies and their unpayable debt and realized that there is no reason for them to continue to pay. Just like the home owners realized they couldn’t keep up with their ever-increasing mortgage payments and simply walked away.
It should be clear by now that the world has reached the point that where people have figured out there simply is no point. The banks refuse to invest in job creation in the West or in countries where they are not treated favorably, or rather where they are not allowed to outright enslave the people as indentured servants or debt slaves. Notice the austerity cuts are always in the social services because when countries eliminate social services, they deny people any option except for survival except to work for low wages, for long hours, without benefits and often in unsafe work environments.
Countries have taken on an extreme amount of debt to pay mostly for wars. Wars are not an investment, so they don’t pay a dividend or yield a profit. The loans to pay for the wars are based upon agreements that make the governments owe additional money called interest, which is paid to the banks as a profit for giving the loans. The interest increases by being compounded through a formula that causes it to grow continuously.
Every payment by the government on the loan, goes to pay the interest, not the principle amount of the loan. That means the loan amount increases, the interest increases, but the principle or the amount actually borrowed never decreases, making the loans unpayable.
Because the banks did not keep the promises they made when the people allowed the government to give the banks money so they would not fail after the sub-prime mortgage debacle, there is high unemployment and that means very little tax revenue. As the people lose more and more of their personal wealth, they turn to the government to subsidize their growing costs for food, housing, health care, etc.
The costs are growing because the bank is also printing money and that increases the amount of money in circulation, making the money less valuable. So the value of the currency is also falling and it takes more dollars to purchase anything for that reason. It is called inflation. So, we have a situation where no money is being earned, not by the government and not by the people. Everyone is existing on debt. That means money is not circulating and growing, it is simply going to pay the banks on the debt.
Many people think that this is simply a problem of too many bills or over spending and not enough money from revenue to pay the bills. Because they see the problem that way, it makes sense to them that the solution to the problem is to drastically cut spending by cutting non-essential services paid for by the government.
This cutting off public services and subsidies is called austerity.
Because the problem is not simply a matter of too many bills and not enough money, austerity does not help and actually makes the situation worse. Austerity is equivalent to removing vital organs from a patient dying from losing too much blood, claiming they must be removed because they require blood and the amount of blood is too low.
In fact, austerity actually accelerates the death, or collapse of the economy. It does this by stripping the economy of billions of dollars that produce goods, sustain jobs, finances consumption, which lead to profits, creating incentive for economic activity. Austerity is like taking a bleeding patient and opening up their arteries so they will bleed to death faster. This acceleration in decline also destabilizes societies and can lead to mass social disorder and chaos.
What would happen to world economies if the international banks began to fall like dominoes? Nothing. By refusing to invest in job creation or infrastructure or energy in the West, they have made themselves irrelevant. Just like the major transnational corporations headquartered in the US, they pay such few taxes that countries don’t really depend upon their tax dollars for revenue anymore. The dwindling middle class carries most of the tax burden and as they fall deeper into poverty due to falling wages, the middle class is paying less tax and it is the loss of their tax dollars that is financially crippling western countries who are suffering from record-breaking unemployment.
What would happen if the dying economies were to suddenly collapse as the result of the debt/austerity cycle? Billions of people would be almost immediately reduced to paupers and governments would be reduced to an office with a fax, a receptionist and a lock for the red phone. There would likely be panic and a complete breakdown of social order.
The banks, rich with interest payments would lose nothing and would simply move on to ply their trade in the cash starved developing world. Problem for the banks is that after watching the fall of the largest economies in the world, the leaders of Africa and Asia are not likely to want anything to do with the international central banking system and so the banks will be all dressed up in ill-gotten gains, but will have no place to go.
The solution is to be found in a deal between the international banks and the governments. There are three basic and essential components to any deal that has a hope of success for both the banks and the governments in debt.
1. The compounding interest on the loans owed by the government must be written off by the banks.
2. The cost to fund the government’s budget deficit without any austerity measures and the national debt must be consolidated. To this consolidated amount we must add another amount, which cannot be greater than 20% of GDP.
3. This entire amount must be loaned by the banks to the government for a simple flat fee not to exceed 15% of the total amount of the loan.
Such a deal benefits the bank in many ways. Here are three of the most important ways the banks benefit from the deal.
1. The banks holding the notes can share the amount of compounding interest to be written off and distribute the write off over several years, significantly reducing their tax liability for those years.
2. The old debt is paid off completely, which strengthens the financial statements, significantly increasing the amount of cash and removing the old debt from the books. This gives the banks the ability to make new loans to more people and to make more money, rather than continuing to carry an unpayable debt on its books. They can perhaps triple the size of their loan portfolios.
3. They will not fail due to a major cash flow interruption and will earn a priceless amount of goodwill from the general public, the SEC and the DOJ who might otherwise be compelled to investigate the banks should there be a credit freeze, or the stock market crash, interest rates take a big unexplained jump, or should any other extraordinary economic or financial disruptions take place as a result of a US default on the loan.
When we look at it this way, it’s very easy to see that a deal between governments and the banks to prevent default and economic collapse is a win/win situation. It also creates a new model for economic recovery that removes austerity from the equation and actually allows cash starved governments to access the cash they need without the burden of compounding interest, to get their economies back on the path of growth by creating real jobs.
Courtesy and by: Anisa Abd el Fattah