The solution to the global debt crisis
Source Charles Brown
Date 11/07/25/13:26
The solution to the global debt crisis
by juliohuato

Paul Krugman has been blogging his head off dealing with various
manifestations and aspects of what I call the global debt “crisis”
(read my rationale for this in the next paragraph). Debt arises when
people who need to spend today don’t have the funds to do so and are
granted credit by those who have funds today but don’t feel like
spending them immediately. The counterpart to this is that debtors
will be able to draw from the stock of goods available today (for
consumption or productive use) beyond their current means, while the
creditors will willingly reduce their corresponding claims on today’s
goods in exchange for — if things go as planned — more of them in the

To examine the issue, I propose (see my opening statement above) that,
instead of looking at the U.S. public debt “crisis,” the Greek debt
“crisis,” etc. separately, we view them all as what they truly are,
namely manifestations of one and the same global debt “crisis.” Here
is a way to think of this: Consolidate the balance sheets of all
households in the globe into two: (1) the balance sheet of the
extremely rich (.0001% or so of the global population) and (2) the
balance sheet of the rest of us. Assume that everything (asset or
liability) is ultimately held by households (or by individuals, it
doesn’t matter). And let each household take a flat proportion of its
corresponding government(s)’s net worth (negative, if public
liabilities overwhelm public assets). Simple arithmetic. (This
division, by the way, will intersect almost exactly with the social
division that Marxist economists and sociologists emphasize between
those who own wealth as capital, the “capitalists,” and those who
don’t and, hence, must make a living mainly via their labor income,
the “workers.”)

Then we’ll clearly see this pattern: The rest of us are net debtors
and the extremely rich are net creditors. This is to be expected. It
follows from the definition of extremely rich. In other words, the
U.S. public (and household) liabilities, Greek public (and household)
liabilities, etc. – all the debt issued by the rest of us one way or
another — will be assets of the extremely rich. They hold that debt
in their portfolios as an asset. This, by the way, suggests that the
extremely rich are in a perfect position to demonstrate their love of
humanity by forgiving that debt (or a small portion of it), which
would amount to an immediate solution of the debt “crisis.” But let
me not get ahead of myself here….

Why is this a “crisis”? (At this point, I should probably remove the
quotation marks. I don’t want to give the impression that this crisis
is merely an illusion that we can dispel by closing our eyes. The
point of the quotes is to note that the debt issue can and should be
separated from the employment issue, at least in theory.) Well, it is
a crisis (see? — no quotes now) because the extremely rich are
extremely nervous about the ability of the rest of us to repay it, and
they do not want to admit that the debt is worth less than they
thought it was worth when they got into it — and take a haircut. When
they lent the funds, they expected benefits from it (think some
handsome real interest, real as in adjusted for inflation), but now
they are questioning their judgment. What were they thinking?

What Keynesians like Krugman are saying to the moronic ideologists of
the extremely rich that just don’t get it is: “This doesn’t require
the added grievance of unemployment except in your twisted minds. In
fact, unemployment will make it harder for the rest of us to repay
that debt. So, give us a break! Unemployment can only make matters
worse, since then the rest of us will have even lesser means to repay
the debt. So lend more money to governments, have governments spend
that money to reduce unemployment, and then the whole debt will look
smaller (as a proportion of an augmented economy) and the problem will
get under control.” (And this is aside from whether we should keep
military expenditures at their current level, which — in the U.S. case
— are at record high levels!)

The Keynesian approach (fiscal and monetary expansion), if conducted
seriously (as Krugman says, WWII suggests what kind of fiscal
expansion is necessary to lower the unemployment rate to decent
levels), will translate into moderate inflation. The neat thing
about this approach is that inflation will sanction an effective
redistribution of wealth from the extremely rich to the rest of us,
but it will do it behind the scenes, as it were. It will be something
happening in the obscure guts of a monetary economy, which most
mortals find as enigmatic as black magic. So the populace won’t get
ideas, you know. The sacred institutions of private ownership,
markets, and social inequality will remain in place. In fact, they
may even regain some of the credence and legitimacy lost in the
crisis. It seems like a reasonable deal for the extremely rich: The
angle of your slice will be narrower by just a few degrees, but
because the whole pie will expand (and the system will avoid more
radical challenges), you’ll wind up eating more pie. And people won’t
notice how that really happened.

But the moronic wing of the extremely rich don’t care for that. They
hate it when the pecking order gets disrupted. If the extremely rich
remain extremely rich, and even grow richer in absolute terms, but
they become relatively a tiny bit less rich by comparison with the
rest of us, that is just unbearable for them. They care a lot about
preserving the pecking order. Anything that disrupts it, that
flattens the social hierarchy is intolerable for them. So, no go.
Their “solution”? Unemployment! Liquidate, liquidate, liquidate! —
which (as the Keynesians note) can only makes the debt “crisis” worse.

But unless the rest of us become richer (compared to the extremely
rich), we won’t be able to honor our debts to the extremely rich.
Catch 22! So, one way or another, the solution will consist of some
form of wealth redistribution. Talking about Greece, allow me an
abrupt digression here: I recently read about what is perhaps the
first documented case in history in which a solution to a debt crisis
occurred. Apparently (I’m no expert on these historical matters and
I’ll be glad to stand corrected if a better version of events comes
forth), Solon’s reforms (Solon being one of the Seven Sages in Ancient
Greece) in the emerging stages of the Ancient Greek civilization
ushered for the the first time in documented history the legal
framework of what we know now as private ownership. Well, it turns
out that, as a result of these reforms, after a spin of the wheel,
households and the Greek proto-state accumulated very high debts that
made creditors extremely nervous. Before private ownership rights
were introduced, people were just used to helping, and being helped
by, one another without keeping a precise tab of what they gave or
took. Clearly, this arrangement wasn’t good for Greek society at this
point, and that’s why private ownership was adopted. I would claim
that what was necessary in Ancient Greece is proving to be intolerable
today, but let me leave that argument to my posts on socialism.
Suffice it to say here that, at some point, this polarization in
wealth holdings forced Solon to push the reset button and decree the
elimination of all debts, so that they could get things going again!

I believe that some enlightened minds among the extremely rich that
read Krugman (and understand him) can see that some version of Solon’s
reforms are called for now. I mean, the two of them who read and
understand Krugman. Given the situation, they ought to be willing to
accept the haircut, as long as people don’t notice. They just want
for this solution to disguise what actually happens — modest wealth
redistribution at their expense. Perhaps this debt ceiling political
brouhaha will help some of the moronic ones come around to the
Keynesian approach. Again, that approach will use inflation and
financial wizardry to disguise the fact that wealth is being taken
from the extremely rich and given to the rest of us to the point where
the extremely rich feel less nervous about our ability to repay the
debt, so they are willing to keep the capitalist casino open.

Krugman has referred to FDR and WWII repeatedly. FDR’s case is, of
course, a recent reenactment of Solon’s reform of his reforms. But I
can think of another case: Mexico in the late 1980s. It is well known
that Carlos Salinas commits electoral fraud to become president in
1988. As a result of low oil prices, high public debt service, and US
Treasury/IMF-imposed contractionary macro policies that devastate the
country for over half a decade, the Mexican government finances and
the Mexican people’s tolerance are about to snap. Fidel Castro tries
to organize an international revolt against the banks in Latin
America, the banks respond with divide-et-impera, and Fidel’s
initiative doesn’t get much traction. Soon after his inauguration,
Salinas sends his people to negotiate with the banks. While the
negotiations are taking place, back in Mexico City, Salinas calls his
ministers to a carefully choreographed urgent “secret” meeting. A
good actor, Salinas tells his ministers solemnly that “secrecy” is of
the essence and that Mexico will default if the negotiation team comes
back empty handed. Even Cuauhtémoc Cárdenas, leader of the opposition
and victim of the electoral fraud, will come around to support him.
The country should get ready for a default and deal with Wall Street’s
rage. Banks learn of the “secret” plan and fold meekly. Mexico’s
foreign debt is effectively slashed by one fifth or so. Mexico’s
economy can breath again. Solon and FDR applaud from the high
heavens. The banks insist on one condition though — do not make
public this violation of the sacred rules of private ownership, keep
it all shrouded in secrecy, and/or — since you can’t cover the sun
with your thumb — use a series of sleight-of-hand, creative financial
deals (a few “Brady bonds” here, a few “swaps” there, and similarly
obscure schemes) to pretend that banks aren’t taking a substantial
haircut. No big deal is made of the affair. In 2003, Argentina
forces foreign banks to a similar “restructuring” of its debt, but the
Argentinians are more vocal about it — which the banks hate.

So, if history is any guide, some form of wealth redistribution in our
favor will ensue, sooner or later. But, like in Mexico’s case, the
later it happens, the more the extremely rich and their nasty
political minions will make our lives miserable for that. There is
nothing like a prolonged economic depression to show people who’s
boss. That’s what they have for us in store. But, why don’t we —
“the rest of us” — try and get ahead of this tragic game?

I mean, What are we? Chopped liver? Isn’t it time to revolt and push
everywhere we can for one version or another of debt repudiation? We
need to force the Solons of today to push the reset button again.
But, if we’re going to get into that trouble, shouldn’t we try and go
for more? How about working to remake the whole global economic

History cannot be just an endless going on this ever-more-wasteful
merry-go-round. We need a truly democratic — i.e., a socialist —
economic arrangement. Pronto.

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