A New Third World Debt Crisis? The Need for System Change

Yves here. Emerging economies fall into debt crises usually for one of two reasons. The first is borrowing in foreign currencies, often to obtain lower interest rates or bigger loan amounts, only to see the debt cost rise greatly as the value of the domestic currency falls against the borrowing currency. This can happen even with borrowers that think they are being prudent, as in borrowing in foreign currencies only in proportion to foreign income….and then see that income fall due to sanctions, regulatory changes, or shifts in buyer appetite.

A second big reason developing economies fall prey to debt crises is hot first world money. BRICS and other central bankers would complain to the Fed about this, only to be ignored. The short version is in times of low interest rates, advanced economy money rushes into emerging economies seeking higher yields. This drives interest rates lower than they should be on a risk-adjusted basis and promotes speculative investment and other capital misallocation. Then when interest rates risk, the foreign capital whooshes out, driving rates way above where they “ought” to be, and hitting businesses that borrowed short term, at floating rates, or facing near-term debt rollovers very hard.

Problem 1 is not easy to solve, but problem 2 is the direct result of Fed indifference to the rest of the world. It’s another reason the so-called Global South has to resent and oppose dollar hegemony. We’ve been at best bad stewards.

But even worse is that  the World Bank aggressively evangelized developing countries to open their doors to foreign investments by setting up capital markets rather than relying mainly on domestic banks and foreign direct investment, which is sticky. A former McKinsey colleague, daughter of the chairman of Aramco, went to the International Finance Corporation to be one of the globe-trotters pushing these programs. I am not sure the intent was Machiavellian, even though the results were; this was a hot idea during the 1990s Peak Neoliberalism.

Anyway, much more from Geopolitical Economy report regulars Radhika Desai and Michael Hudson and their special guest, the esteemed economist Anne Pettifor.

By Geopolitical Economy Report

RADHIKA DESAI: Hello and welcome to this 12th Geopolitical Economy Hour, the fortnightly show on the political and geopolitical economy of our times. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: And today we are joined by Anne Pettifor to discuss an urgent issue of our time, that of the third world debt crisis. As we record this, this is the topic of the Summit on New Global Financing Pact called by Emmanuel Macron in Paris.

And we couldn’t find a more authoritative guest for this show. Anne Pettifor does not really need any introduction, and I’m only going to give one to remind ourselves of the range of her contributions.

She’s a prolific writer on issues relating to debt, finance and development, and is also an activist and has intervened in politics to great effect.

Anne launched the Jubilee campaign for debt forgiveness for the poorest countries at the end of the last century, earning the support of the likes of Pope John Paul II, Muhammad Ali, Tony Blair, Bono, Gordon Brown and Bill Clinton.

She served as an advisor to prominent British Labour Party figures such as Margaret Beckett in the past, and more recently, between 2016 and 2019, she was an advisor to John McDonnell, MP, who was shadow chancellor when Jeremy Corbyn was the leader of the Labour Party.

Then in 2021, Anne was appointed to the Scottish government’s Just Transition Commission, chaired by Professor Jim Skea of the Intergovernmental Panel on Climate Change, the first government to prepare for the green transition.

In 2006, moreover, she had authored the very famous book, The Coming First World Debt Crisis, which predicted the 2008 financial crisis well before anyone did, and at a time when no one expected the crisis.

Anne is also the co-author of the Green New Deal in 2008, which was subsequently adopted by the social justice democrats such as Alexandria Ocasio-Cortez and others as a major plank in their election bid. And of course, since then, it’s been more widely adopted as well.

She’s the author of many books and articles, including Debt, the Most Potent Form of Slavery, and The Production of Money, How to Break the Power of Bankers.

Right now, Anne also has a substack, it’s called System Change, and this is going to form the basis of her new book on the need to transform the international financial system, both for social justice as well, of course, as ecological sustainability. So welcome, Anne.

ANNE PETTIFOR: Thank you very much for that very generous and lengthy introduction. I’m really grateful to you.

RADHIKA DESAI: So let me just say a few things to frame what we are going to discuss. In the 1980s, of course, the world experienced a major and very consequential third world debt crisis, which began when Argentina, Brazil, and Mexico declared that they were unable to pay their debts following the Volcker shock.

And then they were followed by many Latin American and African countries. And the effects of this financial crisis marked the world for at least two decades, if not more.

There were repeated reschedulings, which only resulted in ever greater flows of finance going from the third world to the first world in the opposite direction to which most first world countries say is happening.

That is, they say the international financial system exists to transfer finance from the first world to the third world, and the opposite was happening.

Practically every major third world country in the world was put under a structural adjustment program which restricted government expenditure, devalued their currencies, massively increased their exports and so on.

And this resulted in two lost decades of development. There was massive income deflation in third world countries. In many countries, there was even economic retardation.

That is to say, economies shrank from one year to the next. And meanwhile, the first world was flooded with extremely cheap exports from third world countries.

This was the reason for the extremely low inflation in first world countries. And of course, the volume of exports grew while the value of exports either did not grow or actually declined.

Now, the new century seemed to bring some relief. There was increased lending from first world countries to third world countries. There was also increased equity investment in the same direction.

The IMF and the World Bank, which had essentially acted as the bailiffs for the private financial corporations who had lent to third world countries in the 1980s and 90s, began to lose clients as more and more countries in the third world realized what they were doing and began to have options.

So essentially, the portfolios of these institutions began to shrink. And this was an era of considerable third world growth, which also marked the weakening of the imperial system of the West.

But then after the 2008 financial crisis, you saw a new turn taking place. Financial flows abroad began to reduce. Growth began to slow. Commodity prices began to fall. Third world countries’ products, whether they were primary commodities or cheap manufacturers fell, trade slowed down.

And to that was added the pandemic. And then now the Western sanctions and other measures in its proxy war against Russia, which have reduced massively or which have increased massively the burdens on third world countries in terms of rising prices of commodities and so on.

So this has brought on fears of a new debt crisis. So are we going to see a rerun of the great third world debt crisis of the 1980s? Are we facing two more lost decades of development in third world countries?

Another strengthening of the dollar system on the backs of vast flows of capital from third world countries to first world countries? Another decade of low inflation on the backs of third world producers who are forced to work harder and longer for less and less returns for their labor and products?

Or is there a difference between then and now?

Certainly one big difference is China. There’s absolutely no Western commentary on the current debt crisis, which does not somehow finger China as the real cause of it and and therefore also the cause of the West and the world’s inability to resolve that crisis.

But clearly, there’s something much more complex going on. So what is it? What’s the real story today? And Michael and I hope to unravel it for you by asking the following questions.

What is the genesis of the 1980s debt crisis?

What are the causes of the debt crisis today?

Are third world countries responsible for their own plight, as is implied by so much dominant discourse?

Has debt been turned into an instrument of world power and imperialism?

Is China putting third world countries into a debt trap?

What does the debt crisis have to do with the dollar system and what is the way out?

These are the questions and perhaps, Michael, we will start with you on the first one. What are your views on the genesis of the debt crisis?

MICHAEL HUDSON: Well, we’re seeing the end of a long process that was dysfunctional from the beginning and was bound to lead to widening economic polarization and crisis.

Today’s international financial rules were set in 1944 and 45 by the U.S. geopolitical strategists, and they designed the World Bank and the IMF in a way that served America’s creditor position at the expense of Britain’s position and the world’s former colonies and at the expense of countries that were debtors, because the United States from the very beginning used this creditor position to exert control over debtor countries.

That’s what creditors are able to do. I explained all of this in my book, Super Imperialism, at the outset, so I’m not going to go over that here.

But to be specific, the World Bank sought to steer the global south economies into dependency on U.S. food exports and other products. The way the World Bank was set up, it could only make foreign currency loans, not domestic currency loans.

And yet for third world countries, now we call them the global south, to develop, they needed domestic spending in their own currency.

The United States essentially said, well, we’re really only going to lend to finance exports.

Most Latin America and Africa, we’re told to export plantation products. The one thing the World Bank was told not to lend for was for their own domestic food production.

Every IMF mission said you have to do what America’s done with its agricultural system, provide agricultural services, marketing agreements, rural education, seeds.

The World Bank said none of that. If they produce their own food, then they will compete with American exports.

We want them to produce only goods that America doesn’t produce and let them all compete with each other to lower the price of debtor country products so America can monopolize the price of creditor country products, mainly food, manufacturers, and high technology.

So needless to say, this forced countries into balance of payments deficit. And that’s where the IMF came in and said, well, once you have a deficit, you’re going to have to devalue your currency unless we make you a loan.

So we’ll make you a loan, but you have to somehow agree to compete with other countries by putting the class war back in business. You have to be more competitive by lowering wage rates because after all, world prices have the same prices for raw materials, for machinery, for credit.

When a country devalues, it’s really devaluing its labor. And the IMF started a process that’s now gone on for 75 years of continually lowering the exchange rate of third world labor to make it cheap for American investors.

And of course, by imposing austerity, this didn’t really help them pay their debts at all. It made them even further in debt.

And then the IMF said, well, you have to privatize and sell off your raw materials, your mineral rights, your oil rights, and your public infrastructure to foreigners so that they can, by buying out your means of production, that you can use these dollars to pay the foreign debts that you’ve run up by following our bad advice.

So it was a losing game from the beginning. And that’s why in 1982, Mexico announced that it couldn’t pay.

Behind all of this was, starting in 1953, the CIA began overthrowing governments that aimed at land reform, starting with Guatemala.

There was a decision made that countries starting land reform are inimical to the United States, and you had U.S. government interference in other countries to sort of force them into what became known as the Washington Consensus.

And it was all self-destructive and destructive. And that really began in 1972. And it was obvious that there was going to be the breakdown.

And I worked for Chase Manhattan Bank as their balance of payments economist. And in the mid-1960s, I was asked to look at the balance of payments of Argentina, Brazil, and Chile. How much could they afford to borrow to repay as a market?

And I could see that they couldn’t afford to take on any more debt. They were already loaned up before the big crisis came up.

And so there was a meeting at the Federal Reserve, and the Federal Reserve told the banks, we know that they can’t pay, but we will simply lend these countries the money to pay their foreign debt. We will call it foreign aid.

And if you look at the American foreign aid, a lot of foreign aid increasingly went to debtor countries to pay the U.S. banks. It was a circular flow. And the solution to debt was yet more debt. They borrowed their way out of debt.

And finally, that reached an end in 1982. And that really became the debt crisis that exploded.

RADHIKA DESAI: Anne, that’s really great, Michael. So Anne, please go ahead.

ANNE PETTIFOR: I would agree with a great deal of what Michael said, but I think my orientation would be slightly different.

I absolutely agree that the U.S. has been using its imperial powers since the Second World War, perhaps earlier even, to control, if you like, resources for the United States at home and abroad.

But I would take a different orientation. I would argue that instead of putting the United States in there, I would put Wall Street in there. Instead of putting the IMF in there, I would put Wall Street in there.

And Wall Street, in my view, is responsible for much of the mess that the world finds it in at the moment.

Now, let me begin at the beginning. I’m a Keynesian. I’m a Keynesian monetary theorist. And I believe that Keynes is far more radical than he’s ever given credit for. He believed in a form of liberal socialism, if you like.

And he’s often defined as being exclusively concerned with fiscal policy, tax and spend. But he was actually overwhelmingly concerned with monetary policy. It’s after all The General Theory of Employment, Interest and Money. And money and interest come first.

So in 1919, at the Versailles Treaty, he’s in the negotiations. He’s a young economist and he’s struggling to get his voice heard. But he’s also overwhelmed by the tragedy of Europe in 1919.

He’s working strangely with the South African president at the time. And he’s traveling across Europe and seeing the devastation. And he comes up with the idea that actually the problem for Europe is the system.

Wall Street financed the First World War. And he believed that Wall Street would not finance the recovery. Or if it did try and finance the recovery, it would do so at very high real rates of interest for which you could read real high rates of return.

And so he proposed instead that there ought to be public provision of credit for Europe for the recovery in 1919. In other words, he proposed that the United States, Britain and France should issue a bond, a promise to pay, I think was about a million pounds, a lot of money in those days, which would go to Germany and be used in recovery.

And Germany would repay that bond over time. He proposed the same for Eastern European countries.

Now what we did not know at the time was that the United States President Wilson was accompanied by a big shot from Wall Street, who drafted the letter of rejection to Keynes in the name of President Wilson and said, thank you for your bright idea, but really we don’t want it.

He was so disillusioned with that. And what he was proposing was system change. Rather than Wall Street financing the war and the recovery, he wanted to use public authority to raise the finance needed for recovery in Europe.

He was defeated hopelessly. He then struggled on. He wrote The Economic Consequences of Peacein a fit of very bad temper. And some of it is very personally insulting. And you know, it’s not a perfect text, but it’s a text that’s never been out of print.

And he sort of gave up after that. He didn’t give up, but he despaired. And then Britain, by mistake, fell out of the gold standard in 1932. And then in 1933, Roosevelt is elected as president.

And on the night of his election, Roosevelt decides he’s going to dismantle the gold standard. And he proposes to close the banks on the Monday after. And he wants to close the banks then, and that’s Saturday night, on the night of his inauguration.

And he starts saying, you can’t because it’s a holy day tomorrow. You can’t do this. So you do it on Monday. And whereas most people think of the closing of the banks as a reason for saving the banks, in fact, it was a reason for dismantling the gold standard.

And banks were instructed to hand over all their gold to the Treasury. And indeed, the public were invited to hand over all their gold. And gradually, he moved the dollar of gold. He began to fiddle with the value of the dollar, in fact.

Anyway, he’s not perfect. He made some big errors, he even decides to reverse course in 1937 and embark on a period of austerity. So, and of course, there’s an awful lot wrong with what Roosevelt did. And he was racist or he complied with the racist norms of the Democrat Party.

And he was a bit of a misogynist. He didn’t include women in, for example, his camps for growing trees and helping with nature’s recovery. And so there we are.

So then in 1944, Keynes goes to Bretton Woods and is defeated by White and the president’s representative over the issue of who will control the world’s reserve and how will you manage the world’s reserve currency?

He proposes an independent bank with a clearing bank that would operate, if you like, above and beyond individual states and not draw on the imperial power of a single state. And he’s defeated by the Americans who want the dollar.

And the reason I’m telling this tale is to disagree to an extent with what Michael is saying, because it’s the power of the dollar that is the problem. And the dollar is part of a system that is generating vast, vast amounts of both private and public debt, which are unsustainable.

And this has been done in cahoots with Wall Street and also, of course, with the Saudis. [Though] that deal seems to be breaking up, the petrodollar. So the point is this, I campaigned long and hard to get 100 billion dollars of debt canceled for about 30 of the world’s poorest countries in nominal terms.

And that’s small beer, really. But nevertheless, it was an achievement. And in 2005, I worked with the Nigerian government and we cleared 30 billion dollars of debt for Nigeria under a finance minister Ngozi Okonjo-Iweala, who is now head of the WTO.

What I learned from that lesson is that canceling the debt is a shallow process. It’s something that can be done. But so long as the spigot of debt is still turned on, the tap is still flowing.

And as long as the debt is, I mean, a large proportion of the debt today of low income countries is due to the strength of the dollar. And the dollar strengthened. Number one during the great financial crisis and number two during the pandemic.

So whenever there’s a crisis and even when it’s caused by the United States and is located in the United States, the dollar strengthens.

And automatically, this affects the exchange rates of poor countries and elevates their debt. And so I’m at the point where I really don’t want to talk about debts cancellation.

Although of course it’s either going to be canceled or defaulted or paid down. Those are the only choices we have. I would rather talk about changing the system.

I felt that throughout the Jubilee 2000 campaign, when we were campaigning in the process, I began to realize, look, you can cancel the debt, but it won’t break the circularity of the system.

And so I began to argue that we should have an independent debt negotiation process between creditors and debtors, similar to an insolvency process where an independent judge judges whether or not the creditor is as guilty as the debtor, and if so, that the losses should be shared.

We don’t have such a system. So the burden of losses always falls on the debtor, never on the creditor. The creditor in the international sphere, not in the domestic sphere, but in the international sphere, is always the beneficiary of a default, is always backed up by state resources.

So I tried to get that process through. For a minute, in 2001 to 2003, the IMF went along with the proposal for a sovereign debt restructuring mechanism, mainly because they were mired in the mess that was Argentina and was their creation.

And they thought, Ann Krueger, who was at the time the number two at the IMF, thought that would be a way of extricating the IMF from that mess. But that was defeated.

I went to a conference in 2003 at the IMF and was invited to speak. And that proposal came up. It was defeated on the one hand by Wall Street, which was well represented.

I had lunch. I was at lunch table with Paul Singer of the vulture fund, Elliott Associates, but most importantly by the finance minister of Mexico, who is now the head of the BIS, the Bank for International Settlements, [Agustín Carstens].

Hsaid, I’m sorry, I don’t want to upset my creditors. Mexico loves her creditors. We want more creditors. And so I’m not going to support this.

And because Mexico was such an important debtor and was so influential, it was agreed that the whole idea should be scuppered. And it was. Now, there have been attempts to go back on it, and there have been dribs and drabs of here and there.

But fundamentally, the balance of power between international creditors and sovereign debtors has not been altered. But what has happened is we’ve had crises and this has worsened the sovereign debt crisis. So I hope that’s not too long.

RADHIKA DESAI: No, no, that’s really great. And I just want to add just a couple of thoughts to that, because, the question is, what were the origins of the debt crisis of the 1980s?

And I would say the debt crisis, the 1980s was the first crisis of the post-1971 highly financialized dollar system. Because if you think about it, as I think, Anne, you rightly remind us of Keynes and what he proposed at Bretton Woods.

And I really feel everyone should study those original proposals, because by studying them, you realize just what’s wrong with the system that we have right now, because Keynes’s proposals were based on promoting balanced flows, whether of trade, of capital, etc.

Whereas by rejecting that, and essentially, I think, Anne, you also said something else very important, which is that at Bretton Woods, we are often told that Keynes lost and White won.

But actually, all proposals for a sensible international monetary system, which would not unreasonably empower any one state, which would not rely on imbalances, were rejected by the Treasury Department, by the US government, etc.

Of course, the very imbalances that the US system produced, the dollar system produced in the post-war era, led directly to its breaking the link in 1971, because of the Triffin dilemma.

The United States ran deficits in order to provide the world with liquidity. And the greater the deficits were, the less valuable the dollar became. And so the system was unsustainable. And so the gold link was broken.

But then what happened is that in order to counteract the Triffin dilemma, essentially counteract the effect of the US deficits on the dollar, what the United States did is vastly expand their financial activity.

And that expansion of financial activity increased the demand for dollars for financial reasons, not for productive reasons, for speculative reasons and predatory reasons. But they increased the demand for the dollar.

And essentially, since then, what we’ve seen is periodic expansions of financial activity in one form or another, which have kept the dollar system going. And so you can see how ruinous it’s been. So to me, the debt crisis, both then and now, is the result of the imbalances necessary for the dollar system to function.

So in the case of the 1980s, essentially what you have is a situation in which the United States, in the turmoil that followed the collapse of the gold link and everything, what you had is the rise in oil prices and then the United States persuading the oil exporting countries to, rather than creating an IMF supervised facility that might have helped the oil importers, they said, please deposit your oil surpluses in our financial institutions.

ANNE PETTIFOR: I think they threatened.

RADHIKA DESAI: They threatened. Exactly. They threatened, they cajoled and they managed to get essentially dollars which were earned by the OPEC countries to be deposited in Western financial institutions.

And then, of course, if the Western financial institutions saw this tsunami of deposits, they had to lend. And so in the 1970s, these financial institutions went on a lending spree. They lent to third world countries, to even communist countries.

They essentially became touts of loans, “borrow from us”, because they had to earn interest if they were going to pay interest.

And in the 1970s, therefore, there was essentially a kind of, the balance of payments restrictions on third world countries developments were lifted. Third world countries could borrow money, essentially practically free money, because in the 1970s is where you were going through an era of negative real interest rates very often.

So these countries borrowed and they were financing their industrialization, which was actually undermining the United States’ relative dominance of the world economy as well.

So by the end of the 1970s, you get a major event that puts a stop to all this. So the Volcker shock, the decision of the Federal Reserve under Paul Volcker to allow interest rates to rise as high as they would rise. You know, at one point they even went up to 20 percent in first world countries, forget what they did in third world countries.

In order to quell inflation, but also in order to restrict the power of labor in first world countries and restrict the power of an increasingly assertive third world that was demanding fairer terms, a new international economic order and all these things.

So the Volcker shock essentially interrupted all this.

And then, as you rightly say, in the debt crisis that followed the reschedulings and renegotiations that followed, the principle, which is that there is creditor core responsibility for adjustment, for dealing with the debt crisis, was completely eliminated and debtor countries were made primarily responsible for the debt crisis.

So in that sense, I would say that this was the real origin of the third world debt crisis. And then it was resolved by essentially, like I was saying earlier, through structural adjustment programs which promoted de-development.

And that’s the other thing about the international financial system, which caused the 1980s crisis and is causing the current crisis. And that is that essentially the money, debt can be a force for good. Credit can be a force for good. It can finance development.

But essentially, on the one hand, the IMF and the World Bank impose policy priorities which are actually de-developmental. They do not permit countries to undertake the sort of investments that are necessary to create development.

So first of all, they remove the possibility that developmentalist policies can be followed. And then they lend for essentially debt repayment or, just to keep going, etc., to keep a system that is designed for subordination to first world countries.

So this is the real origin. That is to say, it’s not just that there is debt, but the debt is designed to be of the worst kind, not developmental and so on.

So I think this is, that’s to me, some of the main points that we should establish. And I also, by the way, agree that in this process, it is private power, Wall Street, that is really the driving force behind these. Wall Street needs to lend in order to earn money from third world countries.

And that is why they do everything in their power to expand such lending, whether countries may need it or not. And then, of course, when there is a crisis, the governments of first world countries essentially end up backing Wall Street and getting that, making sure that they do not lose from their own irresponsibility.

ANNE PETTIFOR: Right.

RADHIKA DESAI: Would anyone like to add anything before we go to the next crisis, which is what do you think is the cause of the crisis today? Perhaps we can talk about that. Anne, would you like to go first?

ANNE PETTIFOR: Yes. I mean, I want to say that the thing is, the thing has moved on. I first of all want to say that total debt, public and private, as far as I could tell, it was quite hard to get the actual numbers here, is about 300 trillion dollars of debt.

Global income is around 90 to 100 trillion dollars. So we have just twice as much debt as we have income. And so we know those debts are never going to be repaid.

But the proliferation of debt is no longer something that is a feature of the main street, the high street banking system. It’s now a feature of the shadow banking system.

So Wall Street has both on the one hand led to the privatization of assets across the world and privatizing those assets has enabled massive surpluses and savings to be accumulated by the asset management funds, the private equity funds, insurance companies, the pension funds and so on that operate in the shadow banking sector.

And they engage in a form of credit intermediation and so forth. And as a result, they are actually becoming the creators of new credit. But beyond the regulatory boundaries of democratic governments or undemocratic governments, for that matter.

So we now have these massive amounts of debt. We have huge quantities of financial assets in the hands of these corporations managed mainly by Wall Street. And we have, if you like, the deregulation of markets. And one of the reasons we have a crisis at the moment.

And by the way, the Volker shock, the Volker shock was a consequence of Volker’s very low interest rates prior to and his highly accommodative process towards Wall Street.

And there’s a wonderful book I’ve just had recently. I was trying to look at its title. I think it’s called Lords of Easy Money.

It’s by a monetarist, a right wing ex-central banker who argues that he created the conditions that led to the buildup of inflation, i.e. too much easy money effectively, and then clamped down them and in the process, both created the crisis and then destroyed, nearly destroyed the American economy.

And that is such a reverse of the story that we get told. And what’s so awful is that we’ve seen that process reproduce itself as we live now.

We have this long period of very low rates, highly accommodative monetary policies towards the shadow banking sector, the bailout of the shadow banking sector, which, after all, was the cause of the 2007-09 crisis and had to be bailed out again in 2018 and in 2020 at the height of the Covid crisis.

And is basically guaranteed and backed up by central bankers. So we have too big to fail banks. We have something called private equity, which, as Carolyn Sissoko has argued, is neither private nor equity.

Not private, because it’s backed up by too big to fail banks, which in turn backed up by taxpayers. And then their investment is not therefore private. And it’s not equity. It’s debt.

They used to be you know, they used to have a very different branding. They used to be basically debt creators and they’ve just rebranded themselves.

So we have this deeply unbalanced and unstable system, which I know is going to collapse. I wish I knew when. Everyone is quite now really worried about commercial real estate and the fact that, A, there are people working from home and B, the value of these properties are falling.

And we know that a massive amount of debt has been leveraged against these finite and limited assets. So they daren’t rent out their buildings at less than the going rate, because that would indicate that the value of that collateral is lower and would automatically increase the value of the debt.

So that’s what happened to Silicon Valley Bank. And that’s why Silicon Valley went down. So these commercial real estate guys are hanging on to their real estate.

I walked down Bond Street the other day, which, as you know, must be the wealthiest street in the whole of London. The number of voids was quite extraordinary. The number of empty buildings.

And what they had done was put fancy posters up in the windows, to make it look lively and interesting. But it was clear there was no business going on behind those posters.

They will not rent out those buildings at a lower rate to artists or to any other kind of business that could afford to move into and would love to move into Bond Street, because doing so, they would admit that the collateral that they held had declined in value.

That would increase the demands of creditors for repayment of that debt. And so they’re sitting tight.

This is going to break quite soon. And the question is when, if we knew we could make a lot of money out of it.

But anyway, we’re reproducing the Volker crisis right now. Today, our central bank has hiked up rates again, which is a form of sadistic economics in the rich countries. Never mind what it will do to the poor countries.

Because what will it do? It will worsen the strengthening of currencies like sterling and the dollar. These high rates of interest and money will flood out of, for example, the country of my birth, South Africa, towards the city of London and towards Wall Street and weaken those currencies and therefore increase their debts as well.

So, I feel as if we’re going over this all over and over again. But this time the scale is greater than it’s ever been.

And that could be the final straw, it seems to me. But who knows? You know, these institutions are immensely powerful.

Michael will back me up on this. But the US Congress is effectively in the hands, has been bought by Wall Street. So they have immense political and therefore military power.

So, the idea that they are going to be damaged or lose money might seem from someone like me to be just delusional. But the fact of the matter is the cost of maintaining this incredibly unstable and unbalanced system.

And, just to come back a bit, Radhika, to what you were saying about Keynes’s proposal. Keynes proposed that you would penalize both those with surplus accounts as well as deficits.

You would say, look, China should not have a surplus. Germany should not have a surplus. And the United States should not have the deficit that it has. So he would have insisted that they ought to.

And that would require a certain amount of discipline. But of course, the United States wasn’t going to have that.

MICHAEL HUDSON: Well, what Anne spoke about in both her comments was the ability to pay. How should debts be brought within the ability of countries to pay? And if they can’t pay, is it a bad loan or is the debtor at fault?

The creditors demand that debts be paid regardless of the effect on society. And this intransigence of creditors is what’s the basic underlying cause, which is what we’re discussing.

But there are also particular causes right now. Anne just mentioned the rising interest rates of the U.S. That raises the dollar’s exchange rate.

So a foreign country has to earn the money to pay in its own currency. And it costs more and more of a peso or another local currency to buy the dollars to pay the debts. Countries should only owe the debts in their own currency because at least they can always print the money for that.

But if they owe it in a currency that’s rising in value, then the amount that they owe keeps going up even more than the interest rate. So that’s partly it.

Anne blames Wall Street. And I always want to point to what the government’s done wrong, too. And certainly the U.S. government has given a shock to the economy that is as bad as the Volcker shock. And that’s the anti-Russian sanctions.

These sanctions against Russian oil and gas have increased world energy prices. So all of a sudden the debtor countries have to pay more for their energy, which U.S. diplomacy is based on control of the oil industry.

Gas is used to make fertilizer and fertilizer prices have gone up. So food prices have gone way up. That’s squeezed the debtor countries. And the problem is that these countries owe more than they can possibly pay.

Well, what Anne suggested, you need some kind of international judge to say, how do we bring the debts back into line with the ability to pay?

This is fought against not only by Wall Street, that obviously it wants to collect the debts no matter what. It doesn’t care about the effect on the third world country.

But the United States has been imposing these rules because it says the more Wall Street makes, the more the U.S. economy makes. And that’s what gives us our world diplomatic power.

The fact that other countries owe us dollars give us the ability to do any U.S. diplomacy we want, including the military diplomacy of running an enormous balance of payments deficit for military reasons.

That’s all financed largely by the predator position of the United States, extracting the money from the global south.

ANNE PETTIFOR: One of the most striking things about the Roosevelt administration was that they understood that they were moving the government from Wall Street to the Treasury secretary’s office in Washington.

That was an admission that the government was owned by Wall Street. And I would argue, Michael, Wall Street owns the American government.

MICHAEL HUDSON: I would never disagree with that.

ANNE PETTIFOR: I find it hard to make the distinction there. And can I just say, I think you and I are going to differ on Russia, because I think Russia did invade Ukraine and its territory, blah, blah.

But what I’m very clear about is that it was absolutely unacceptable for the United States to freeze Russian foreign Russian reserves. That is that you know, that is a great public good. It is the assets of the people of Russia.

It’s not even one of their exports. It is one of their public goods. And it’s like freezing the sanitation system of a country because you’re going to war with them. I mean, that was totally unacceptable.

And that has led to this major realignment, geopolitical realignment that’s going on that will harm the United States.

MICHAEL HUDSON: That’s the silver lining of all of it. The one silver lining is that this is the idea that dollars are safe.

ANNE PETTIFOR: Yeah, no, absolutely. No, no, I think we agree absolutely on that. So here am I again, I’m saying Wall Street owns the government.

So I want us to call out Wall Street here. If only because Wall Street so often just gets away with this. You know, they like to be invisible. The shadow banking system is invisible.

It’s very hard to explain to the woman in the street. Look, there’s a shadow banking system. Did you know that? Can I explain it to you? You know, it’s out there in the stratosphere. And I’m sorry you can’t see it, and your government has that.

But it becomes very real as it has now when global commodity prices go berserk.

Now, I’ve had a real battle here in Britain to assert that we have inflation, not because wages are rising unreasonably. And this government is hell bent on a class war. And so is the governor of the Bank of England. Right.

And nobody talks about global commodity markets, which are, transactions are dealt with at the Chicago Mercantile Exchange. So everyone says, oh, the war in Ukraine. And everyone says, oh, President Putin put up the prices.

He has no power. The Russians are victims of the price of oil. Yeltsin never had the kind of oil revenues that Putin enjoys at the moment. He never had the power that Putin has at the moment. The Saudis don’t fix the price of oil.

And furthermore, the price of oil is not a factor of supply and demand. Right.

Because what happened was there was a brief, a brief choppy up cut in supply because the war started. But very quickly, the Americans started downloading their oil reserves.

And grain appeared from other parts of the world and supply and demand evened out. It took time and there were supply shocks. I’m not denying that.

But the fact of the matter is that was not what was reflected in the price. It was the speculation that the price of those essential commodities would keep.

That a wall of money and it’s all that shadow banking money and asset management funds in pension funds, in insurance companies, in private equity aimed at Chicago, aimed at the global climate and our governments and our economists refuse to talk about those global markets.

And when you explain to people, sorry, the market in your energy is not determined here or supply and demand. It’s got nothing to do, well, it’s got something to do with the war, but it’s largely to do with speculation. And this was brought home to me.

If I could just quickly tell you a story, because I’m on the Scottish government’s just transition commission. We went to the outer Hebrides, to the Isle of Lewis, to look at a community owned turbine, a wind turbine.

And it was a really impressive community. I mean, they had borrowed money from a Spanish bank, Santander, because the Brits wouldn’t help. And they spent 15 million dollars, I think, on this huge turbine to get on the island.

They had to rebuild the roads to get up. Blah, blah. And they’re allowed to not give money from the production of that energy to individuals, but they can provide it to the community.

And then we interviewed the citizens, Stornoway, of the island, and we said, what do you think about all this one for wind energy? And they said, we hate it.

We hate it because we have these enormous turbines in our back gardens. But we do not pay the price of that cheap energy. They’re able to generate energy almost for nothing. They feed it into the grid and the price of it becomes the price of the gas price fixed. A global price. Right.

And so while we have this cheap energy on our doorstep, we are paying a global price for energy. And that brought home so clearly that these markets have nothing to do with what’s going on in our country.

They’re global. And who are they managed by? By speculators based largely in Wall Street in Chicago. So, I’m trying to explain here the link between the international and the local.

RADHIKA DESAI: And I think this is exactly, the point is that essentially, when you say Wall Street runs things and then Michael says it’s the government.

And then you rightly point out again that and we all agree that the American government is in the pockets of the pocket of Wall Street. OK, all this is great.

And what is their purpose? What is the overall purpose of their foreign policy? It is to create a world that is as dependent on the decisions of private capital as possible.

That is to say, they are not allowed to do what this little island did, which is exactly what all third world countries should do is actually to create their own productive power and through developmentalist policies in a way that makes them independent of the the web of financial transactions, which is basically now what American capitalism amounts to.

And so this is the thing. But I just wanted to bring us back a little bit because I think we’ll probably have to end on this question, but let’s just fully discuss the specificity of the current crisis, its difference from the 80s crisis and more generally, its implication in the international financial system.

So I would say that, of course, many superficial similarities to the current crisis versus the previous crisis. One of them is, a period of easy money followed by a period of higher interest rates and so on.

There is also the role of the Federal Reserve. The usual IMF World Bank stuff is going to go on. But there are also important differences.

I would say that one really big difference is the following. That in the 1980s, what happened is that the United States and the Volcker shock essentially were aiming to put an end to what had been a very impressive and extremely genuine spurt of third world development.

And today, what we have is a situation in which after sort of collapsing in the latter part of the 20th century, international lending was revived. A lot of it took place under private auspices with securitized lending and so on.

So this lending took place. However, it took place in a context where after two decades, 80s and 90s and into the 2000s, decades of structural adjustment policies, neoliberal assault on developmentalism, this money was being lent to countries that had already bought into neoliberalism in a substantial way.

So this money that was lent did not have the same developmental effect. Yes, many third world countries grew during this period, but it was thanks to a benign period for the prices of third world resources in particular and so on.

So the current debt crisis is actually coming, is going to be in many ways more costly because it’s not coming after a period of healthy development, etc. So that’s another very important thing.

And then a third really critical difference is that, in both cases, both debt crises came at the end of challenges to the imperial system, because to me, the most important challenge you can make to the imperial system is for successful development.

And, of course, imperialism has sometimes we fought with guns. But I think the most important weapon against imperialism is development.

And today what we see is that China in particular is in the forefront of having been able to develop and it has been developed.

Well, it has developed precisely because it has shielded itself from the effects of the system of international governance, whose prime purpose is to impose development to keep third world countries less developed. So it has done that.

And by the way, one thing we haven’t mentioned, has done that through various means, but that includes capital controls. We have also come at the end of so many decades during which the lifting of capital controls was the holy grail that was pursued by the US government.

So the presence of China, not only as an important developed, developing country, but also as now a major lender to third world countries is another big difference.

And this debt crisis is going to look quite different because it’s taking place in a context where the presence of alternative sources of finance, principally China and to a lesser extent, the BRICS institutions that are being created in other multilateral institutions that have been created.

So these are some of the key differences as I see them.

Now, the resolution of this crisis is going to be very difficult, particularly in the aftermath of the pandemic and then the current crisis created by sanctions, et cetera.

I would say that this is going to exact a huge price from third world countries and some kind of initiative is needed to deal with it. But I think that the international atmosphere to create any sort of initiative that benefits third world countries is extremely fraught.

So I just wanted to put those things there. So, yeah, go ahead.

ANNE PETTIFOR: I agree with all of that. But I would say there’s one other big difference, and that is the ecological crisis.

In order to repay these debts, those countries are going to have to strip their forests. They’re going to have to fish their seas. They’re going to have to degrade their land. They’re going to have to exploit their people.

And the more they do that, the more they degrade the ecosystem, not just for their own countries, but for the world and for the United States.

And it’s that blind spot that you can’t go on extracting and extracting wealth from the poorest countries in the world without hurting yourself, without hurting Americans, without hurting Western nations.

That hasn’t fully dawned on the IMF and on all those powers that be. That is a huge development. It’s not a new development. It’s been there a long time and it’s been an issue since the beginning of time.

But now it’s a crisis point. And at this point to demand, that for me is the big problem with debt is that it requires extraction of real assets in order to be repaid.

It is itself, as Frederick Soddy argued, a mathematical concept. But the repayment of debt requires physical extraction of assets. And it’s that which is not possible. It’s just not possible. It’s not going to happen.

And if it does happen, God help us all. And I think it’s that failure to understand that grave, grave risk. And it’s not as if the ecosystem is going to collapse. It is in the process of collapse already. We’re there.

You know, we have here what they call an insect apocalypse. I count the number of bees on my garden. I think I’ve got four. Right. This is a crisis for nature and for our survival, for human survival.

And, we know the seas are warming and we know there are going to be more floods and there’s wildfires in Canada, Radhika, not far from where you are. I mean, this is crazy.

And in that those circumstances demand further extraction of Earth’s finite assets seems to me suicidal, essentially.

MICHAEL HUDSON: Yeah, I think you’re right about the characterization of the crisis. And the question is, why can’t the world deal with it?

Well, we’re back to the question you raised at the beginning. What’s wrong with Wall Street taking control of government?

If the financial sector lives in the short run, if the financial sector and Wall Street took a long term view, wouldn’t it help to avoid global warming? Wouldn’t it help to have third world countries and the global south develop?

Of course it would. But that the financial sector lives in the short run. They only care about three months or at most one year. And so the crisis that you talk is a world crisis over time.

And Wall Street says, wait a minute, our crisis is three months from now. This is not a problem. Three months from now, we want to get paid. And we want to get paid. But I’m sorry, you’re going to have to cut down your forest to pay, because that’s what you owe right now.

We’re talking about the difference between short term and long term perspective. And that’s the problem of Wall Street. Short term perspective.

You’d think that the government can take a long term perspective. And as Radhika just pointed out, that’s what makes China in a strong position because the government runs the central bank instead of the central bank running the government.

So this story of the submersible seems to me to symbolize the idea of billionaires that they can defy the laws of nature and sink two and a half miles down or go out like Elon Musk into the stratosphere and survive. I mean, it’s that delusionalism.

RADHIKA DESAI: Exactly.

ANNE PETTIFOR: That you can defy the laws of nature.

RADHIKA DESAI: I’m so glad that, of course, you mentioned the climate crisis, because I also see that there’s a deep connection between the climate crisis and the crisis of what I call neoliberal financialization.

Because neoliberalism is always regarded as sort of free markets. But actually, what neoliberalism, the only thing neoliberalism could amount to in our time at the particular stage of the evolution of capitalism was financialization.

And as you guys were talking, I was reminded of a book that actually came out, I think, in the 80s, I could be wrong, maybe the early 90s, by Elmer Altbacher. And this was actually entitled The Future of Socialism, but it was about many things.

And he pointed out, you made the same point, I think, very well in that book, which is that the problem with the shift to finance is this short termism, because any capacity to deal with climate issues, ecological issues requires a long term perspective, which finance simply does not have.

And by the way, well, anyway, that’s another point.

But, Marx also said at the beginning of the section on rent in Volume 3, he said, with private ownership, you cannot have a rational agronomy, which is to say a rational way of dealing with the land, of managing the land and so on.

And I think he was dead right.

And what I want to add to that is that, people talk about degrowth as an important solution, and I’m not disagreeing with what they mean, but I do want to take a little bit of issue with what the words they are using.

Because the thing is, if you actually look at a chart of world growth, a chart of world growth descends actually after the onset of neoliberal policy. So the world is growing less fast.

ANNE PETTIFOR: The neoliberals are the best degrowthers in the world.

RADHIKA DESAI: That’s right. So they have actually already imposed degrowth. But every index of ecological destruction, whether it is climate change, pollution, loss of biodiversity, you name it, every index is actually rising steeply only after 1980.

So actually, the less growth has gone side by side with the spoliation of nature, the absolute rape of nature, precisely for the reasons I think that both of you have mentioned, which is that the financialization actually involves the abuse of all the resources of the earth for the privilege of a tiny minority.

And this is the financial system that we have created. And this is the financial system that has caused this new debt crisis, as well as the old one.

However, we are nearly at a one hour limit. So what I would suggest is that we should end for now and pick up this discussion.

We are only at question two and we have five more questions to answer, including the critically important question of what is the solution. And we have already hinted at it, but it deserves fuller discussion.

So I think what we might do is end here. If both of you wanted to have any quick say, please do. But otherwise, we can end here. And we can pick it up next fortnight when we just continue this discussion next fortnight in a second part.

ANNE PETTIFOR: I think that’s great. And no, I don’t have anything to add. I think it’s been a really fascinating discussion. So thank you.

RADHIKA DESAI: Yeah. Thank you. And that’s just been your great addition to our usual natter that Michael and I have. So that’s great. And so thanks, everyone, for watching. Thank you. And thanks to Michael. Thanks also to our videographer, Paul Graham. And we’ll see you in a fortnight. Bye bye.