Tag Archives: IMF

D is for Debt Part I: Human History

1-2debt-slaver As our government returns to work and prepares for the next debt debate it seems the world has spent the years since 2008 stumbling from one debt crisis to another.  If we include the Third World debt crisis, which affected most human beings on the planet, the world has been in continual debt crisis since the 1970’s.  This might seem like a new period of human history brought on by virtual credit but a broader view shows credit and debt have been the predominate form of money in the world.  In Mesotopamia, elaborate credit systems predate coinage by thousands of years. The remarkable thing is that they were able to maintain these system without a large state but instead relied on two aspects: honor and overarching insitutions typically religious in nature.

Honor held most agreements together as merchants needed to develop reputations of integrity.  Not just of paying their debts and being a pillar of the community but also forgiving other people of theirs if they were in difficult times.  Thus driving the idea that money was not the most important thing. This allowed merchants in Ethiopia and other Indian Ocean trading posts to avoid written contracts preferring to seal contracts with a handshake and ” a glance at heaven.” If there were problems they referred to Sharia Courts who had no power to arrest anyone but could destroy someone’s reputation or “credit worthiness.”

The religious institutions, which were larger than states, ensured that debt didn’t fly out of hand. Periods of history dominated by credit money where everyone realized that money is just a promise or “social agreement” need some mechanism to protect those in debt. Often Mesotoapia kings would declare slates clean and simply start over when debates became to great.  In Judea traditions this became known as the seventh year Jubilee.  In the Middle Ages Islam and Christianity both put restrictions on debt bondage making trade possible as ordinary people  knew they would not be entirely impoverished and had the ability to make purchases. These religious institutions then became the foundations for honor and trust while protecting the citizens who had fallen into debt.

Trojan-Debt-Horse

This explains our current global debt crisis. We have established a global system of debt through the International Monetary Fund and S&P (who manages U.S. credit rating)  which protects the creditors and not the debtors.  There is no debt forgiveness, and the people cannot restart.  As developing nations pay off interest worth 10 times their GDP and many Americans fall into debt bondage we should look to our past for inspiration.

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Who’s Afraid of the IMF?

fiscal-cliff-cartoonWith the debt ceiling debate in the news, it’s a good time to ask what the global institutions charged with regulating the international economy have to say about U.S. fiscal policy.  When countries borrow money from the International Monetary Fund, what the IMF says can affect markets and policies of those governments. But the U.S. receives only advice and no funds so how much leverage can the IMF have with its largest shareholder?

The goal of the IMF is to make sure that nations are adopting policies that prompt a stable currency and produce economic growth.  Starting in 1999 the IMF began publicizing report cards on countries in order to engage their politicians in a policy minded debate.  The IMF review and its impact was seen when the review was published in July of 2011 and then the debate between Congress and the White House was settled in April of the same year.

Much like criticizing your boss, when the IMF talks about the policies in the U.S. there is a tendency to stress the positive. Lately however this has not been the case. The 2011 IMF  report called the U.S. model “unsustainable” and recommended an array of changes including raising the retirement age, cutting Social Security and nationalizing the sales tax.  With changes to the social safety net and increasing protections for labor, the recommendation had something for everyone.  Despite this, there were few in Congress that took to the report and no mention of it by the White House.

Just because information is available doesn’t mean it will find its way into the hands of policy makers.  Just as the IMF wishes the U.S. would learn from the debt ceiling debate in 2011, it needs to adapt how its message gets out there.