Not much substantive news was expected to come out of the G-20 meetings
that ended on April 2 in London certainly no good news was even
suggested. Europe, China and the United States had too deeply distinct
interests. American diplomats wanted to lock foreign countries into further
dependency on paper dollars. The rest of the world sought a way to avoid
giving up real output and ownership of their resources and enterprises for
yet more hot-potato dollars. In such cases one expects a parade of smiling
faces and statements of mutual respect for each others position so
much respect that they have agreed to set up a study group or two to
kick the diplomatic ball down the road.
The least irrelevant news was not good at all: The attendees agreed to
quadruple IMF funding to $1 trillion. Anything that bolsters IMF authority
cannot be good for countries forced to submit to its austerity plans. They
are designed to squeeze out more money to pay the worlds most predatory
creditors. So in practice this G-20 agreement means that the worlds
leading governments are responding to todays financial crisis with
planned shrinkage for debtors a 10 per cent cut in wage payments
in hapless Latvia, Hungary put on rations, and permanent debt peonage for
Iceland for starters. This is quite a contrast with the United States,
which is responding to the downturn with a giant Keynesian deficit spending
program, despite its glaringly unpayable $4 trillion debt to foreign
So the international financial systems double standard remains alive and
kicking at least, kicking countries that are down or are falling.
Debtor countries must borrow a trillion from the IMF not to revive their
own faltering economies, not to pursue counter-cyclical policies to restore
market demand (that is only for creditor nations), but to pass on the IMF
aid to the poisonous banks that have made the irresponsible toxic
loans. (If these are toxic, who put in the toxin? To claim that it was all
the natural workings of the marketplace is to say that free markets
curdle and sicken. Is this what is happening?)
In Ukraine, a physical fight broke out in Parliament when the Party of
Regions blocked an agreement with the IMF calling for government budget
cutbacks. And rightly so! The IMFs operating philosophy is the
destructive (indeed, toxic) belief that imposing a deeper depression with
more unemployment will reduce wage levels and living standards by enough to
pay debts already at unsustainable levels, thanks to the kleptocracys
tax avoidance and capital flight. The IMF trillion-dollar bailout is
actually for these large international banks, so that they will be able to
take their money and run. The problem is all being blamed on labor. That is
the neo-Malthusian spirit of todays neoliberalism.
The main beneficiaries of IMF lending to Latvia, for example, have been the
Swedish banks that have spent the last decade funding that countrys real
estate bubble while doing nothing to help develop an industrial potential.
Latvia has paid for its imports by exporting its male labor of prime
working age, acting as a vehicle for Russian capital flight and
borrowing mortgage purchase-money in foreign currency. To pay these debts
rather than default, Latvia will have to lower wages in its public sector
by 10 per cent -- and this with an economy already depressed and that the
government expects to shrink by 12 percent this year!
To save the banks from losing on their toxic mortgages, the IMF is bailing
them out, and directing the Latvian government to squeeze labor all the
more and to charge for education rather than providing it freely. The
idea is for families to take a lifetime of debt not only to live inside
rather than on the sidewalk, but to get an education. Alcoholism rates are
rising, as they did in Russia under similar circumstances in Yeltsins
Harvard Boys kleptocracy after 1996.
The insolvency problem of the post-Soviet economies is not entirely the
IMFs fault, to be sure. The European Community deserves a great deal of
blame. Instead of viewing the post-Soviet economies as wards to be brought
up to speed with Western Europe, the last thing the EU wanted was to
develop potential rivals. It wanted customers not only for its exports,
but most of all for its loans. The Baltic States passed into the
Scandinavian sphere, while Austrian banks carved out financial spheres of
influence in Hungary (and lost their shirt on real estate loans, much as
the Habsburgs and Rothschilds did in times past). Iceland was
neoliberalized, largely in ripoffs organized by German banks and British
In fact, Iceland ( where Im writing these lines) looks like a controlled
experiment a very cruel one as to how deeply an economy can be
financialized and how long its population will submit voluntarily to
predatory financial behavior. If the attack were military, it would spur a
more alert response. The trick is to keep the population from understanding
the financial dynamics at work and the underlying fraudulent character of
the debts with which it has been saddled with the complicit aid of its
own local oligarchy.
In todays world, the easiest way to obtain wealth by old-fashioned
primitive accumulation is by financial manipulation. This is the
essence of the Washington Consensus that the G-20 support, using the IMF in
its usual role as enforcer. The G-20s announcement continues the U.S.
Treasury and Federal Reserve bank bailout over the past half-year. In a
nutshell, the solution to a debt crisis is to be yet more debt. If debtors
cant pay out of what they are able to earn, lend them enough to keep
current on their carrying charges. Collateralize this with their property,
their public domain, their political autonomy their democracy itself.
The aim is to keep the debt overhead in place. This can be done only by
keeping the volume of debts growing exponentially as they accrue interest,
which is added onto the loan. This is the magic of compound interest.
It is what turns entire economies into Ponzi schemes (or Madoff schemes as
they are now called).
This is equilibrium, neoliberal style. In addition to paying an
exorbitant basic interest rate, homeowners must pay a special 18 per cent
indexation charge on their debts to reflect the inflation rate (the
consumer price index) so that creditors will not lose the purchasing power
over consumer goods. Labors wages are not indexed, so defaults are
spreading and the country is being torn apart with bankruptcy, causing the
highest unemployment rate since the Great Depression. The IMF approves,
announcing that it can find no reason why homeowners cannot bear this
Meanwhile, democracy is being torn apart by a financial oligarchy, whose
interests have become increasingly cosmopolitan, looking at the economy as
prey to be looted. A new term is emerging: codfish republic (known
further south as banana republics). Many of Icelands billionaires these
days are choosing to join their Russian counterparts living in London
and the Russian gangsters are reciprocating by visiting Iceland even in the
dead of winter, ostensibly merely to enjoy its warm volcanic Blue Lagoon,
or so the press is told.
The alternative is for debtor countries to suffer the same kind of economic
sanctions as Iran, Cuba and pre-invasion Iraq. Perhaps soon there will be
enough such economies to establish a common trading area among themselves,
possibly along with Venezuela, Colombia and Brazil. But as far as the G-20
is concerned, aid to Iceland and doing the right thing is simply a
bargaining chip in the international diplomatic game. Russia offered $4
billion aid to Iceland, but retracted it presumably when Britain gave
it a plum as a tradeoff.
The IMFs $1 trillion wont help the post-Soviet and Third World debtor
countries pay their foreign debts, especially their real estate mortgages
denominated in foreign currency. This practice has violated the First Law
of national fiscal prudence: Only permit debts to be taken on that are in
the same currency as the income that is expected to be earned to pay them
off. If central bankers really sought to protect currency stability, they
would insist on this rule. Instead, they act as shills for the
international banks, as disloyal to the actual economic welfare of their
countries as expatriate oligarchs.
If you are going to recommend more of this consensus, then the only way to
sell it is to do what British Prime Minister Gordon Brown did at the
meetings: announce that The Washington Consensus is dead. (He might
have saved matters by saying deadly, but used the adjective instead
of the adverb.) But the G-20s IMF bailout belies this claim. As Turkey
was closing out its loan last year, the IMF faced a world with no
customers. Nobody wanted to submit to its destructive
conditionalities, anti-labor policies designed to shrink the domestic
market in the false assumption that this frees more output for export
rather than being consumed at home. In reality, the effect of austerity is
to discourage domestic investment, and hence employment. Economies
submitting to the IMFs Washington Consensus become more and more
dependent on their foreign creditors and suppliers.
The United States and Britain would never follow such conditionalities.
That is why the United States has not permitted an IMF advisory team to
write up its prescription for U.S. stability. The Washington
Consensus is only for export. (Do as we say, not as we do.) Mr.
Obamas stimulus program is Keynesian, not an austerity plan, despite the
fact that the United States is the worlds largest debtor.
Heres why the situation is unsustainable. What has enabled the Baltics
and other post-Soviet countries to cover the foreign-exchange costs of
their trade dependency and capital flight has been their real estate
bubble. The neoliberal idea of financial equilibrium has been to
watch market forces shorten lifespans, demolish what industrial
potential they had, increase emigration and disease, and run up an enormous
foreign debt with no visible way of earning the money to pay it off. This
real estate bubble credit was extractive and parasitic, not productive. Yet
the World Bank applauds the Baltics as a success story, ranking them near
the top of nations in terms of ease of doing business.
One practical fact trumps all the junk economics at work from the IMF and
G-20: Debts that cant be paid, wont be. Adam Smith observed in The
Wealth of Nations that no government in history had ever repaid its
national debt. Today, the same may be said of the public sector as well.
This poses a problem of just how these debtor countries are not going to
pay their foreign and domestic debts. How will they frame and politicize
Creditors know that these debts cant be paid. (I say this as former
balance-of-payments analyst of Third World debt for nearly fifty years,
from Chase Manhattan in the 1960s through the United Nations Institute for
Training and Research [UNITAR] in the 1970s, to Scudder Stevens & Clark in
1990, where I started the first Third World sovereign debt fund.) From the
creditors vantage point, knowing that the Great Neoliberal Bubble is
over, the trick is to deter debtor countries from acting to resolve its
collapse in a way that benefits themselves. The aim is to take as much as
possible and to get the IMF and central banks to bail out the poisonous
banks that have loaded these countries down with toxic debt. Grab what you
can while the grabbing is good. And demand that debtors do what Latin
American and other third World countries have been doing since the 1980s:
sell off their public domain and public enterprises at distress prices.
That way, the international banks not only will get paid, they will get new
business lending to the buyers of the assets being privatized on the
usual highly debt-leveraged terms!
The preferred tactic do deter debtor countries from acting in their
self-interest is to pound on the old morality, A debt is a debt, and
must be paid. That is what Herbert Hoover said of the Inter-Ally debts
owed by Britain, France and other allies of the United States in World War
I. These debts led to the Great Depression. We loaned them the money,
didnt we? he said curtly.
Lets look more closely at the moral argument. Living in New York, I find
an excellent model in that states Law of Fraudulent Conveyance. Enacted
when the state was still a colony, it was enacted in response British
speculators making loans to upstate farmers, and demanding payment just
before the harvest was in, when the debtors could not pay. The sharpies
then foreclosed, getting the land on the cheap. So New Yorks Fraudulent
Conveyance law responded by establishing the legal principle that if a
creditor makes a loan without having a clear and reasonable understanding
of how the debtor can repay the money in the normal course of doing
business, the loan is deemed to be predatory and therefore null and void.
Just like the post-Soviet economies, Iceland was sold a neoliberal bill of
goods: a self-destructive Junk Economics. Just how moral a responsibility
and perhaps even more important, how large a legal liability should
fall on the IMF and World Bank, the U.S. Treasury and Bank of England whose
economies and banks benefited from this toxic Washington Consensus junk
For me, the moral principle is that no country should be subjected to debt
peonage. That is the opposite of democratic self-determination, after all
and of Enlightenment moral philosophy that economic policies should
encourage economic growth, not shrinkage. They should promote greater
economic equality, not polarization between wealthy creditors and
At issue is just what a free market is. Its supposed to be one of
choice. Indebted countries lose discretionary choice over their economic
future. Their economic surplus is pledged abroad as financial tribute.
Without the overhead costs of a military occupation, they are relinquishing
their policy making from democratically elected political representatives
to bureaucratic financial managers, often foreign the new Central
Planners in todays neoliberal world. The best they can do, knowing the
game is over, is to hope that the other side doesnt realize it and
to do everything you can to confuse debtor countries while extracting as
much as they can as fast as they can.
Will the trick work? Maybe not. While the G-20 meetings were taking place,
Korea was refusing to let itself be victimized by the junk derivatives
contracts that foreign banks sold. Korea is claiming that bankers have a
fiduciary responsibility to their customers to recommend loans that help
them, not strip them of money. There is a tacit understanding (one that the
financial sector spends millions of dollars in public relations efforts to
undermine) that banking is a public utility. It is supposed to be a
handmaiden to growth industrial and agricultural growth and
self-sufficiency not predatory, extractive and hence anti-social. So
Korean victims of junk derivatives are suing the banks. As New York Times
commentator Floyd Norris described last week, the legal situation doesnt
look good for the international banks. The home court always has an
advantage, and every nation is sovereign, able to pass whatever laws it
wants. (And as Americas case abundantly illustrates, judges need not be
The post-Soviet economies as well as Latin America must be watching
attentively the path that Korea is clearing through international courts.
The nightmare of international bankers is that these countries may bring
the equivalent of a class action suit against the international diplomatic
coercion mounted against these countries to lead them down the path of
financial and economic suicide. The Seoul Central District Court
justified its decision [to admit the lawsuit] on the kind of logic that
would apply in the United States to a lawsuit involving an unsophisticated
individual investor and a fast-taking broker. The court pointed to
questions of whether the contract was a suitable investment for the
company, and to whether the risks were fully disclosed. The judgment also
referred to the legal concept of changed circumstances, concluding
that the parties had expected the exchange rate to remain stable, that the
change in circumstances was unforeseeable and that the losses would be too
great for the company to bear.
As a second cause of action, Korea is claiming that the banks provided
creditor for other financial institutions to bet against the very contracts
the banks were selling Korea to protect its interests. So the banks
knew that what they were selling was a time bomb, and therefore seem guilty
of conflict of interest. Banks claim that they merely were selling goods
with no warranty to informed individuals. But the Korean parties in
question were no more informed than were Icelands debtors. If a bank
seeks to mislead and does not provide full disclosure, its victim cannot be
said to be informed. The proper English word is misinformed (viz.
Speaking of disinformation, an important issue concerns the extent to which
the big international banks may have conspired with domestic bankers and
corporate managers to loot their companies. This is what corporate raiders
have done for their junk-bond holders since the high tide of Drexel Burnham
and Michael Milken in the 1980s. This would make the banks partners in
crime. There needs to be an investigation of the lending pattern that these
banks engaged in including their aid in organizing offshore money
laundering and tax evasion to their customers. No wonder the IMF and
British bankers are demanding that Iceland make up its mind in a hurry, and
commit itself to pay astronomical debts without taking the time to ask just
how they are to pay and investigating the creditor banks overall
Bearing the above in mind, I suppose I can tell Icelandic politicians that
I have good news regarding the fate of their countrys foreign and
domestic debt: No nation ever has paid its debts. As I noted above, this
means that the real question is not whether or not they will be paid, but
how not to pay these debts. How will the game play out in the political
sphere, in popular ideology, and in the courts at home and abroad?
The question is whether Iceland will let bankruptcy tear apart its economy
slowly, transferring property from debtors to creditors, from Icelandic
citizens to foreigners, and from the public domain and national taxing
power to the international financial class. Or, will Iceland see where the
inherent mathematics of debt are leading, and draw the line? At what point
will it say We wont pay. These debts are immoral, uneconomic and
anti-democratic. Do they want to continue the fight by Enlightenment and
Progressive Era social democracy, or the alternative a lapse back into
neofeudal debt peonage?
This is the choice must be made. And it is largely a question of timing.
Thats what the financial sector plays for time enough to transfer as
much property as it can into the hands of the banks and other investors.
Thats what the IMF advises debtor countries to do except of course
for the United States as largest debtor of all. This is the underlying
lawless character of todays post-bubble debts.
Michael Hudson is a former Wall Street economist. A Distinguished Research
Professor at University of Missouri, Kansas City (UMKC), he is the author
of many books, including Super Imperialism: The Economic Strategy of
American Empire (new ed., Pluto Press, 2002) He can be reached at