The Third Debt Crisis

...Less money leaves the country...

...As U.S...

...In fact, the incoming team then labeled the situation "recessionary" in scope, and the President wondered aloud whether he should not declare a state of economic emergency...

...On the shuttle, in contrast to my driver's cab, everyone antes up...

...If Mexico and some fellow-debtors have improved their trade balances, it is because they are importing less...

...News and World Report found this past summer, "U.S.-backed [financial] rescue missions are fanning social and political unrest among debtors large and small...

...everyone else has gained little—or actually lost...

...No longer called LDCs (less developed countries), these nations were said to have become NICs (newly industrialized countries...

...At the zenith of the recent boomlet 7 per cent of our people were out of work...

...In their depressed circumstance the Latin nations discovered that they were in far worse shape than they had realized...

...They needed to do something with their windfall and decided to put it in banks, including our biggest...

...Coming down marble stairs were hundreds of conservatively dressed, faceless people carrying sleek leather portfolios...

...His audience had assembled in Washington to contemplate, among other troubles, one of today's great unsung disasters: the Latin American debt...

...I take them...

...The bankers I know are personally caring, even generous...

...I pick up these four bankers at the Sheraton," he continued...

...They will widen the gap between those who work for wages and salaries and those who live by investments, and will speed the arrival of the slowdown in this country...

...Even in the absence of a Latin debt headache, our massive loss of purchasing power at home would presage trouble...

...In the last two years the matter has become especially complex, for they have also been unable to "service" their borrowings—that is, pay the interest due...

...We will no longer be able to fuel everyone else...

...The top fifth has increased its share substantially...

...Should the generals prevail, the U.S...

...Second, Latin efforts to promote exports by cutting wages and devaluing currencies, must, if successful, add further to our trade deficit...

...In a speech last July he bemoaned excessively high earnings in the industrial world and insisted on the "need for a gradual reduction in the rate of increase in real wages over the medium term if we are to restore adequate investment incentives...

...I was annoyed when the stewardess' request for payment prevented me from learning the outcome of the Battle of the Bank...

...Recent months have brought strikes in Argentina and Bolivia, riots in the Dominican Republic and demonstrations in Brazil—all the result of opposition to harsh remedies prescribed by the IMF as a condition for last-ditch loans...

...We had been told that Mexico would soon be swimming in the riches bubbling up from its oil, that the standard of living was rising in Argentina, that Brazil spawns dozens of new millionaires every year...

...The starting point of this unhappy scenario was our so-called recovery...

...The formula is a simple one: You beat down wages in the poor country to their lowest possible level, then you call for "free trade" in the rich country, thereby pitting the poorest against the less poor in a war for employment and income...

...As he leaves the car, he hands me $2.50.1 remind him about the fare for the others and he says, 'To Hell with them, that's their business.'" "What did you expect...

...So what is happening in Argentina, Mexico and elsewhere can only hasten and intensify the coming crisis...

...Men and women, companies and nations fall so deeply in the hole that they can pay interest only by new borrowing...

...Both estimates are admittedly understated, for capital flight does not always take place out in the open...

...Reagan is obviously not thinking about its frequent role when he lauds the organization for promoting "renewed prosperity and stability...

...In the third quarter it was down to 2.7 per cent, and we also recorded zero growth in consumption, causing a suffocating buildup of inventory...

...Unfortunately, it was the kind of stimulation that brings on a hangover...

...Reagan speaks frequently of "the special importance which the United States attaches to resisting protectionist pressures," but the IMF insists that the Latins try to close their borders to foreign goods...

...they can be collectively mistaken...

...Their peak came in the first quarter of 1984, when the growth rate hit 10.1 per cent...

...Its president, A. W. Clausen, stood at the entrance...

...Measured by unemployment, the drift is certainly unsettling...

...it would have been a cheap shot...

...As the rich were getting richer and salting away their gains, the poor remained mired in poverty, and thus could not form an internal market strong enough to provide long-term support for domestic producers...

...The fellow was spinning a fantasy...

...On the plane I fell asleep instantly...

...For some time, the banking establishment has realized that our southern neighbors would not be able to repay the huge sums they have borrowed from U.S...

...would be in recession by late 1985 or early 1986...

...Why should enterprising American businessmen hire expensive American workers when they can go south and hire Latins for a fraction of the cost —especially if they can do so patriotically, at the behest of the President...

...Finally, in June of this year 11 Latin nations met in Cartagena, Colombia, to state their collective plight and to seek a solution...

...If that were not bad enough, the borrowers found the value of their currencies falling vis-a-vis the dollar...

...Though our government supports them, their impact on us will be disastrous...

...Indeed, if the expansion rate were measured from quarter to quarter, rather than from year to year, everyone would see more clearly that over the past nine or so months it already has fallen off at least 77 per cent—from more than 10 to less than 3 per cent...

...By the second quarter that slowed to 7.1 per cent...

...As evidence, Reagan observed that "The United States has enjoyed 21 straight months of economic growth...

...According to the Bank for International Settlements, between 1978-82 some $50 billion left the region for safer and more rewarding terrain...

...The pessimists—26 per cent of those present—believed that the recession would come next July...

...At some point, this self-propelling machine becomes self-destructive...

...although this was not the fund's original purpose, it makes the bratty little banana republics behave, or put their "house in order...

...No cabbie will take them anyplace till they cough up...

...That's where it's at in much of Latin America...

...Nonetheless, Reagan tells us: "Countries will have to rely less on external debt and more on direct private investment—both foreign and domestic...

...Many economists disagree...

...There is more money in the hands of the investing class and less available to those who provide the market for our "market economy...

...He is under compulsion to find borrowers, to promote indebtedness, because he is handling "other people's money...

...Eventually, the victims find that so large a part of what they earn is committed to creditors, they don't have enough left to live decently...

...Still more jobs will be lost at home...

...As Luis Anderson observes, "the [Latin] military persist in keeping the spending for arms high, or even increasing it...

...If that were the whole problem, the solution would be easy: Send them to school and teach them the corrosive nature of greed...

...When they get out, they tell me their friend is staying and will pay...

...And, ironically, the policies of the International Monetary Fund and of the banking community as a whole will speed up and deepen the coming disaster...

...Thus, barring an unexpected reversal of the trend, 1984 will end up the year of the downturn...

...But our impending economic crisis is actually systemic, the result of letting capitalists have their way...

...As usual, he spoke optimistically, and with good reason: The faces before him belonged to the ruling powers of high finance, but the ears he wanted to reach were those of the voters...

...In plain English, the message is that more U.S...

...Not for everyone, of course—the conditions do not include controls on the flight of capital—only for peasants, workers and such...

...The term is one of those charming euphemisms, like "lavatory"—verbal perfume to deodorize a smelly situation...

...In the course of the current Presidential campaign there has been a great deal of talk about the dangers of the Federal deficit, some $ 180 billion this year, and the trade deficit, approximately $130 billion...

...Today bankers think of the IMF as a "disciplinarian...

...A one-point increase cost them about $2.5 billion annually...

...With some buttering of egos and greasing of palms, loans were peddled the world over...

...We ran a deficit of $69 billion in 1983, and this year the figure is expected to exceed $130 billion—the equivalent of about 4 million lost jobs...

...Both the number and proportion of families living in poverty have risen dramatically...

...Latin economies nose-dived— including those of Mexico and Venezuela, hard hit by the newly developing global oil glut...

...Middle-class America—three fifths of the populace—is dissolving painfully...

...I remained silent...

...We feel that such high spending is deliberate...

...Our prosperity has "rolled out in a rising tide that has reached distant shores" and will" offer this leadership in the future...

...to put the military in a position to repress, if the case so demands, popular protests...

...Reagan's 21 vaunted months date from January 1983...

...First, Latin Americans will buy fewer things from us, a process that is already under way...

...Whoever may be right, the fact remains that eight out of 10 foresaw a slump not many moons away...

...That is the IMF's game today, and the fund's managing director, Jacques de Larosiere, is quite open about it...

...Unless they could lend the deposits to others, they would be ruined...

...The bankers' solution is to find some rich country to help the poor one make its payments—but to arrange the terms of the transactions in a fashion that insures the rich in the rich nation will not be hurt...

...This dangerous transfer of wealth is directly attributable to the Administration...

...our own Federal Reserve sets the figure at $84 billion...

...I'm going to fix them yet," he insisted...

...The next day President Reagan addressed a joint meeting of the World Bank and the International Monetary Fund (IMF...

...As a part of it moves up, catastrophe is overtaking many of the unfortunates left behind: the blue-collar smokestack workers, once the solid base of mass consumption, now forced out of their old j obs and into a service economy that pays them a fraction of what they formerly earned—and spent to nourish the economy...

...I didn't, though...

...I will point out the ones who owe me...

...Still, the next downturn will begin with a base of 7.4 per cent unemployment...

...Three in the rear and one up front, next to me...

...cycles can be changed...

...He sang a paean to free enterprise, especially in its Reagan-era manifestations...

...What happened...

...Its arrival is likely to produce all the horrors of a global depression...

...Once more, we sense the nightmare of the bankers coming down the World Bank's marble stairs confronted by angry cabbies puffing on their incendiary cigars...

...Despite the absence of foreign flags and foreign troops, the multitudes drudge for absentee owners...

...That's life," I told the man, rather inanely...

...The guys in back want to go to a restaurant in Georgetown...

...I ask him and he gives me a 'yes' with his head...

...A rotten day," he growled in Latino accents...

...Nor will it come because of some recurrent cycle...

...As explosions began to burst out everywhere, the targets covered their eyes with their portfolios...

...To Latins, conditionality is a form of old-fashioned imperialism...

...In 1982-83, they paid out more money to foreign investors in interest and profits than they received in loans and net investment...

...The hope is that somehow a short period of suffering will give way to recovery...

...But if the higher level of economic activity accelerates national income, the money must not be used to support social programs...

...The reality is that our southern neighbors are falling ever deeper into debt...

...their riches came from making loans to thousands of individuals who paid legal interest...

...Another scenario assumes that law and order will be maintained by force...

...they think they are starting to smell the odor of stagnation...

...I spoke to my company...

...One scenario foresees revolution or anarchy descending upon the burdened lands, followed by outright repudiation of the debt or by a simple inability to pay it as whole societies go out of control...

...I confined myself to saying, "Good, good...

...The slump will be a full-fledged depression —here, there and everywhere...

...If we consider that our countries are now contracting additional debts just to pay former debts, what will be left for accumulation, to generate wealth...

...It is now faddish to charge the bankers with stupidity, cupidity or both...

...In my dreams I imagined myself in front of the World Bank...

...Ultimately, turmoil in Latin America is bound to have an effect on the United States...

...In 1982, Mexico and then Brazil and then Argentina started to miss their due dates...

...They compel our economies to devote more and more resources to service the external debt, instead of attending to the acute demands of the population for everyday living...

...Given that reducing the value of currency raises the price of imports and of domestically produced goods that use them, the IMF's second condition calls for earnings to increase at a slower pace than inflation, if at all...

...To outsiders, the news is a bit startling...

...Once more, the rich of the rich countries and the rich of the poor countries-are plotting at the expense of the poor of the poor countries and of the not-so-rich of the rich countries...

...corporations should look to the warmer climes, where labor is dirty dirt cheap, taxes for social benefits are being cut, and the dollar goes a long long way...

...Not to worry...

...They were the optimists...

...on the contrary, Latin America and the rest of the Third World will contribute to our own crisis...

...The capitalist money lender is, by definition, someone who wants to make money with money...

...Two years later, at the outset of the Reagan era, the United States—a big purchaser of the region's products—went into its deepest recession since World War II...

...An awful day," I offered fatuously, attempting to ungrump him...

...Besides the failure to halt or reverse deindustrialization, the weakening of unions through the appointment of a Right-wing National Labor Relations Board has further undermined labor's efforts to hold on to a fair share of the national income...

...The slump will not come simply because the business economists expect it to...

...Now 7.4 per cent are—no doubt better than November 1982's level of 10.6 per cent, but hardly an improvement on the 7.4 per cent joblessness Reagan inherited from Jimmy Carter...

...I was tempted to respond...

...imports from the nonoil-producing developing countries rose about 14 percent in 1983, and they're up by nearly 30 per cent for the first half of 1984...

...The theory is that austerity of this sort will help defaulting governments accumulate enough foreign exchange—dollars—to start servicing their debts: Devaluation boosts exports, while it makes imports very expensive...

...Meanwhile, we can no longer easily find customers abroad: Our high exchange rate makes it difficult, almost impossible, for anyone holding such currencies as Deutsche-marks, yen or francs to buy goods made here and priced in dollars...

...The story begins in the Persian Gulf, where the sheiks found themselves drowning in money...

...Third World liabilities "jumped from perhaps $200 billion in 1978 to more than $700 billion in 1982...

...Capitalism is being drained of its lifeblood, of capital...

...When all those bankers come out of their meeting, I will be there...

...The slowdown, it says, is a desirable reining in of forces that could otherwise lead to runaway inflation...

...They didn't become wealthy by cheating cabbies...

...For the level of interest was rising and their "floating interest" loans were tied either to the U.S...

...He wants to go to the World Bank, so I take him...

...Mainly, however, the President spoke of the great "American renaissance...

...The problem feeds on itself...

...families making $80,000 or more will gain $35 billion...

...The Congressional Budget Office notes that tax and expenditure changes under Reagan will cost families making less than $20,000 annually $20 billion from 1983-85...

...The Latin elite started skimming, putting the proceeds into Swiss trusts, Cayman Islands investment companies, and American land and building projects...

...It refers to the conditions the IMF imposes before extending a loan to a troubled country—a prerequisite to securing more money from private institutions...

...more enters it...

...In any such tragedy, we look for villains...

...For a while, all that capital pouring in had a stimulating effect on Latin economies...

...prime rate or to the London Inter-Bank Offered Rate (ubor...

...But to Latin Americans the IMF is the wicked overseer, and for the moment they must play the Uncle Tom because the fund holds the whip called "conditionality...

...Our nation, he said, is and will continue to be the great engine of international progress because of its "rewarding hard work and risk taking...

...This, too, has already started to happen: The President has reported that "U.S...

...True to form, the Administration has tried to make the minus a plus...

...It will come because Reagan's policies have perilously weakened the earnings—the wages and salaries—of most American families...

...Nonetheless, the deluge of foreign cash created sufficient short-term demand to ignite inflation...

...Now, four years later, the magician of the media has managed to turn what was once proof of recession into proof of recovery...

...Similarly, cutbacks of social programs have reduced the buying power of the 30 per cent of the population receiving direct government payments of some sort...

...Moreover, when it comes, Latin America, being dependent on our shrinking market, will collapse...

...and other lending institutions...

...will have to live with the IMF's prescriptions for the Third World...

...In sum, the IMF's policies will be poison for the average citizen of the United States...

...Enter the International Monetary Fund, the banker's Simon Legree...

...Our own banking system would be a modern Humpty Dump-ty who fell from his Wall Street...

...it therefore took more pesos or cruzeiros to pay back each dollar they had received...

...Advancing up the stairs was a mob of faceless Latins, smoking cigars that they were using to ignite bombs...

...Now the banks were drowning in money, and they had to pay the sheiks a proper interest...

...rather, spending has to be slashed...

...In general, the IMF makes three demands: devalue the currency, cut real wages and reduce social programs...

...Then the 1979 oil shock pushed up prices yet another ratchet...

...It is doubtful that fragile Latin governments can succeed in holding down the lid...

...Yet the day before his speech, slightly more than half of the 205 experts at an Atlanta convention of the National Association of Business Economists predicted that the U.S...

...By the end of the 1970s, "30-40 per cent of most major banks' earnings was coming from foreign lending, much of it to sovereign entities," notes Charles R. Morris, a former Chase Manhattan vice president...

...In an effort to meet their obligations they took out new loans, with the inevitable result that the principal owed and the annual interest payments kept swelling...

...Since 1981, our national income has been redistributed in favor of the rich...

...Luis Anderson, secretary general of the Mexican Federation of Labor, speaks for millions when he says: "We stand condemned to toil in order to pay interest and installments...

...The President did refer to this impossible mess—albeit only indirectly and in his standard upbeat manner—by expressing his confidence in an IMF that assists member countries beset by bal-ance-of-payments problems and helps them develop programs "to restore economic and financial balance and creditworthiness...

...Consequently, our own overall trade balance will continue to deteriorate...

...And their reaction is predictable: lighting cigars to ignite their bombs...

...Failure to produce will prompt them to take their cash elsewhere...

...That means lowering the standard of living...

...In other words, real earnings take a header—a positive factor in the fund's view, because manufacturing costs will be lower and hence exports will be more competitive...

...But there has been hardly any discussion of the no less menacing $800 billion owed the United States by the Third World—especially the $336 billion borrowed by our neighbors south of the border, who have openly declared that they cannot pay the interest, let alone the principal...

...With the exception of a few cases, the stabilizing recipes of the IMF conform to patterns that pretend to be the formula for salvation, yet they are really strategies for worsening conditions...