World Transformation: How to deal with national debt
 How to deal with national debt
picture 2 May 2004 @ 08:59, by ming

From Ming the Mechanic: Here's another history lesson, from an article at Common Dreams, "How Will Bush Deal With the Deficits? Connecting the Dots to Iraq" by Robert Freeman. It is about how George W. Bush's government turned a budget surplus towards a now rapidly growing number of trillions of dollars of debt, with no plan for dealing with it in sight. No country has ever been this much bankrupt, but it is nevertheless interesting to look at how others historically have dealt with such situations.
How, then, does a nation deal with debts that so greatly outrun its ability to pay? There are basically only five strategies. All are unappealing. Most are calamitous.

The most difficult strategy is, not surprisingly, the honest one: raise taxes and pay your bills. This is what King George III did following the Seven Years War with France in 1763. England had quadrupled its national debt in fighting the War and needed money to pay it off. It turned to the richest people in the realm, the Colonists, and began taxing paper, glass, paint, lead, and, of course, tea. The result, as we know, was the American Revolution.

It was the same strategy-raising taxes on the rich-that Louis XVI attempted in 1789. The French national debt had grown 10 fold under the pharoic opulence of Louis's grandfather, Louis XIV. Louis called the nobility and the clergy together and told them they would have to ante up. They, after all, had been exempted from taxes by Louis XIV in order to buy their complicity in his autocratic reign. Indignant, they refused to pay, precipitating the French Revolution, the most explosive upheaval to established government in the last thousand years.

A second strategy to deal with excessive debts is simply to print money. This is what Weimar Germany did to address the crushing debt imposed by the vengeful Treaty of Versailles. Before it was over the government had inflated the money supply by over a trillion times, leading some to comment that it was a waste of ink to put it onto paper worth so much less than the ink itself. The German middle class, whose assets were held at fixed amounts in government pensions, was destroyed. The collapse gave direct rise to Adolph Hitler.

A third strategy for dealing with onerous national debt is to sell off national assets. This is one of the first strategies the IMF imposes on third world countries that have gotten behind in their payments to western banks. Government-run industries, from telecommunications to water systems, are "privatized" and the country's natural resources are sold off to the highest foreign bidder. This is what Great Britain was forced to do in the aftermath or World War II.

Two world wars in only 30 years had ravaged the British economy and the pound sterling. Facing collapse at home (and revolution abroad), the government surrendered almost all of its colonies, from India and Pakistan to Nigeria, South Africa, Zambia and Zimbabwe. These had been among the greatest wealth-producing properties of modern times, the ones that had made the British Empire what it was. Their loss left Britain a second-rate power with only misty memories of its once imperial greatness.

A fourth strategy for dealing with excessive debt is to repudiate it. This was used for centuries in the early days of the modern world and was revived two years ago by Argentina which brazenly refused to pay some $110 billion in debts it had accumulated over prior decades. More ominously, it was this strategy that was used by the Bolsheviks after they took power in the Russian Revolution.

The new communist government refused to be bound by the debts of the overthrown Romanovs. But the French had loaned heavily to the Russian government for decades before World War I and now were left in a lurch. A cascading series of defaults from one bank to another caused a liquidity crisis on the continent, ultimately setting off the Great Depression.

Finally, there is plunder. When a nation's debt load becomes so huge it cannot plausibly reassure creditors regarding repayment, it must seek some source of wealth, any source, to keep the borrowed money flowing. This, naked predation, is what kept the Roman Empire alive for the last two hundred years of its existence. It is the strategy adopted by the Spanish Empire-silver and gold from America-and which eventually destroyed the vitality of its own merchant and civil servant classes.

Which, then, of the five above strategies will the U.S. adopt to deal with its exploding debt problem?

The author concludes, quite reasonably, I think, that Bush's answer will be a combination of solutions 3, 4 and 5. Sell off big chunks of assets to private interests, negate the responsibility for covering future social security, and go and plunder resources in other countries. Not pretty, but one might possibly keep it going for a while before anybody notices. At least until somebody else becomes president, who can then be blamed for it.

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