Taking Stock: She saw crisis coming
In the first installment of our new interview series "Taking Stock," Kai Ryssdal talks to political economist Ann Pettifor about global debt. She's a fellow at the New Economics Foundation in London and author of "The Coming First World Debt Crisis."
Ann Pettifor (Ann Pettifor)
More on The Economy, International, America's Financial Crisis
Links
- Audio: Taking Stock extended interview with Ann Pettifor
- Ann Pettifor's blog: debtnation.org
Ann Pettifor's blog: debtnation.org
TEXT OF STORY
Two straight months of living in financial crisis mode isn't really healthy, not if you want to get the bigger picture of how we got into this mess and how we might get out of it. Starting today, we're going to step back a little bit and have some conversations about the longer view in a series we're calling "Taking Stock."
As we look around at the state of the global economy, it's pretty clear we've all been spending way too much money. You and me. Wall Street and governments, too. That spending and the debt that goes with it kind of puts an exclamation point on the financial crisis. Here's a great example:
The Treasury Department said the budget deficit for October topped $230 billion. That's the highest monthly total ever and it's happening because Washington's starting to pay out all those billions in bailout money.
Economist Ann Pettifor knows a good deal about debt. And she has done something about it, too. She led an successful effort back in the late '90s to cancel Third World debt. Then she wrote a book called "The Coming First World Debt Crisis." I asked her how she saw the crisis coming.
Ann Pettifor: I had been working for 10 years on the debt crises of poor countries and middle-income countries, countries like Argentina, and the more I looked at the whole global financial systems and tried to understand why it was that countries had got themselves into this mess, the more I realized that actually the debts of the poorest countries were quite small, relative to the debts of rich countries like my own, Britain, and the United States. The United States and Britain had moved from being the world's creditors. From 1945 to 1970, we were both effectively creditors to the rest of the world. And then after that, we became the world's biggest debtors.
Ryssdal: Isn't it sort of OK for countries that have large economies and great economies of scale to have that debt.
Pettifor: It is, of course, OK to borrow, but it's not OK to have a global financial system in which there are grave imbalances, where one country will have a big deficit, like the United States and Britain, and other countries, like China will have an enormous surplus. When these get out of synch, they're likely to just implode.
Ryssdal: What was the mechanism, how did it come to be that the United States and the UK and other Western economies had such great debts?
Pettifor: What happened between 1945 and 1971, we lived within a framework called the Bretton Woods framework, which had been constructed by Roosevelt, President Roosevelt, and John Maynard Keynes and others after the war as a way of preventing the crisis of the 1920s and the '30s. It ensured that when a country built up a deficit, it was then required to, if you like, structurally adjust its economy, cut back and restore itself to balance. And this happened until the 1970s when the United States began to get itself into deficit, very largely because of the Viet Nam War and began to run out of gold, because Bretton Woods, of course, was anchored in gold. And President DeGaulle of France, for example, was demanding to be paid for his exports in gold.
And so what happened was the economists came to President Nixon and said, "We have a problem here." And President Nixon said, "Well, why bother to give gold. Why not just offer them dollars and greenbacks." And they said, "Well, if you did that it would break up the Bretton Woods system." There had been some strains in the system, then too. And he said, "Well, let's do that." With the abandonment of gold, the IMF was charged with finding an alternative to gold. And eventually, they came up with the idea of using U.S. Treasury bills. Now, a Treasury bill is an IOU And, today, poor countries, rich countries all over the world keep these IOU's in the vaults of their central banks. But what that also meant was the United States was then able to just issue these IOU's almost without limit and live off that money, that borrowed money.
Ryssdal: And did that give rise, then, to the debt crisis that we're in now?
Pettifor: What it did was it meant that the United States did not have to structurally adjust its economy and restore it to balance. It was acting, if you like, as the world's banker. And then at the same time internally and domestically as an economy, the United States was building up individual household and corporate debt. So it was a sort of double-whammy, really.
Ryssdal: One of the things you have done was to organize a massive debt-relief movement. About $100 billion of that was written off by the GA, and yet here we are now eight years later with the International Monetary Fund going around and, at the request of a lot of these countries who are in some trouble, handing out tens of billions of dollars in more debt. Do you think we're getting ourselves in a situation as we try to get out of this financial crisis where some sort of debt relief might again be needed?
Pettifor: I certainly do. And one of the things I campaigned for very passionately was for a new international framework to deal with the insolvency of countries, a recognition that some countries do go bust. Iceland has gone bust. And if they bust, they must be treated in the way we treat Macy's or any other company -- I remember Macy's going bust in the '90s.
Ryssdal: But, it's one thing, though, wouldn't you say, for Macy's to go broke, and it's another thing for an entire government and a country to go broke.
Pettifor: Well, it isn't really. We look to the United States, because the United States has got Chapter 11, but it's also got Chapter 9, which dealt, for example, with Orange County, which is, if I'm not mistaken, a county not far from where you are.
Ryssdal: Ummhmm. Ummhmm.
Pettifor: And dealt also with other municipal crises, with governmental debt. And they are different animals completely. But the point is a civilized society finds a way of resolving and restructuring a debt crisis so as not to destroy the debtor, but to allow it to come back into the economy and play an active part. And I've always argued we'll never going to get an insolvency framework as long as long as its poor countries or small countries like Iceland that needs one. But as soon as a rich country gets into difficulty, and I don't see that very far off, suddenly, we'll start talking about a framework.
Ryssdal: Since you saw this debt crisis coming, I wonder if you see a way out. What has to happen?
Pettifor: I say we have to put finance back into its box. We have to say to the bankers, "Thank you, you do us a great service, but your role is to mobilize our savings and to allocate those savings efficiently and appropriately. And we are going to regulate you and we're not just going to regulate the rate at which you create credit, but we're also going to regulate the way in which you move money around."
If government is going to be able to do something about borrowing costs and to manage the crisis, then it's going to have to do something about capital flows and about the creation of credit. So that's my answer and I don't see any other way out of this.
Ryssdal: Ann Pettifor, thank you so much for your time.
Pettifor: Thank you.
Ryssdal: That was Ann Pettifor, she's a fellow with the New Economics Foundation in London. She's also the author of a book called, "The Coming First World Debt Crisis." To hear more from our interview about how governments can deal with global debt check out our Web site, it's marketplace.org.
Comments
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From Louisville, KY, 12/03/2008
When an individual or a government has a surplus, they choose how to invest it. They can buy gold, real estate, businesses, bonds etc. There are risky and safe choices.
If an investment fails, the owner loses money. If I lend you money instead of buying a FDIC insured CD and you go bankrupt, I lose my money. Our government is using tax dollars to provide the equivalent of FDIC insurance for risky investments instead of allowing the corporations who made those dangerous choices to go out of business. This is theft. The US government is big, but it cannot and should not bail out every big company that fails.
Massive amounts of fiat currency will prop up this train wreck and GDP will grow in a year or two. We will then get stagflation because of massive increases in government spending and the cost of servicing our eleven or twenty trillion dollar national debt.
Last month, Americans could have sent home the legislators who voted for the bailout, but chose to reelect them. Big mistake.
We are going to learn a very expensive lesson in economics in the coming decade.
From Elko, NV, 12/02/2008
For what it's worth: If going off the gold standard set us up for this LaLa financial mess, then going back on the gold standard will force governments to be responsible. For example, require the US government to mint 1-oz. gold coins to meet demand, and set the exchange rate as needed. Even now, with the spot market for gold less than $800, you can't find any gold coins to purchase, which means the GLD ETF derivatives may be bogus too. At least with real gold coins, I can protect myself from the government electronic money machines and total collapse of the system like Germany post-WW-I.
From athens, GA, 11/17/2008
Has no one heard of Agora Financial? I don't get an compensation from them or endorse any of their advisory services, but they have been predicting just the mess we're in for the last eight years. Check out their website.
From los angeles, CA, 11/14/2008
what a great interview with a brilliant economic mind! Thanks marketplace. I first liesten to this interview in teh car and had to check it out again online cause I was so moved by Ann Pettifor's comments. In response, first I want to point out how weak President Nixon was for our country. Presidential leadership is the reason why we avoid or overcome such crisis like we are in today and it is the reason why we fall on such bad times. It is not about bankers or economist who all seem to have resaone to avoid fixing our problems and getting us into even more trouble. I think that we need a leader that speaks for the people and Ann Pettifor has just the right blend of experience having studied and worked on the debt problems of smaller nations to represent the ideas of the people. Yes, we all spent and lived wayy beyond our means, but the foundation for that kind of lifestyles was setup by so-called leaders who obviously did not learn anything from past mistakes. I hope that President-elect Obama knows about Ann Pettifor and can use her skills in his Administration.
From Sacramento, CA, 11/14/2008
I appreciate that Marketplace is offering a series that looks at the forest for the tress. I am not an economist but I am a purveyor of media, and I have been more disappointed by the media in the last 3 months than ever before.
The national coverage of the economy has gotten bogged down by the details of the catastrophe – which is necessary of course to some extent but can leave our brothers and sisters in the audience feeling confused, scared and angry.
Interviews like this may not allay the fear so much – but they do offer some visibility through the fog of confusion. Approaching a monster with the lights turned off is a whole lot scarier than approaching him knowing exactly what he is made of and where you stand in comparison.
From Columbus, OH, 11/14/2008
Faith in the gold standard was treated as almost a superstition in the seventies, a sign of the financially unsophisticated, yet the bank that all central banks use: the Bank of International Settlements in Basel Switzerland, still uses gold as a financial instrument and holds reserves in gold. So the security that was called unnecessary for the rest of us is what the central bankers have continued to require for themselves.
From Minneapolis, MN, 11/14/2008
I have read Ann Pettifor's predictions from 2003 and even though she talks about a debt crisis, she predicted a somewhat different crisis. She argued that interest rate hikes will cause the collapse of the markets.
"When interest rates begin to rise again, when debt costs soar both for corporates and households, when defaults and bankruptcies increase more rapidly than now – then the “tipping point” will be reached."
I believe the issue isn't with the interest rates rather than the lack of information that interest rates and prices reflect. No economic actor is able to untangle underlying trends which are caused by uncertainty, repeated government intervention and/or real forces. So Ann's prediction somehow fuels the panic and is a self-fulfilling prophecy in a way.
http://www.opendemocracy.net/globalization-americanpower/article_1463.jsp
From Toledo, OH, 11/14/2008
An extremely interesting interview. One remembers the commentary at the time the Bretton Woods framework was jettisoned, and the link to gold was considered, if anything, anachronistic, and unnecessary under modern conditions, desired only by those with a 19th century mindset. Whether the link to gold was necessary, or desirable, I can’t say, but one wistfully considers that had the U.S. been forced to adjust its economy to restore balance, not only would our excessive deficits and national debt been much less likely, but also the required adjustments might have prevented the export of so much of our manufacturing capacity.
It appears that here, the major problem has been an uncritical faith in the conventional wisdom of free trade, one in which our economic experts appear to have fallen prey to group-think, rather than critical review of its overall effects. I seem to remember from as far back as my undergraduate survey course in International Trade that there were certain caveats to the theory of free trade and its basis of comparative advantage, of which the most paramount was national security. What is abundantly clear now, is the importance of financial security and economic security to our national security, in that a nation with damaged financial and economic systems can not, in the long run, project the military and diplomatic strength necessary to protect its interests.
This once again appears to be a common failure of national leaders, ours and those of other nations, that we see time and time again, and that is the uncritical acceptance of conventional wisdom, often at an almost unconscious level, leading to the greatest errors in judgment and causing the most grievous, but preventable, damage.
Clearly we need to constantly challenge our assumptions, as they far too often escape any perceived need for justification.
From OH, 11/13/2008
There are two different problems here. 1. The vast current account deficit, American borrowing and Chinese/Asian lending that has lead to a massive creation of dollar liquidity. This system can only be solved when Asian countries realize that the dollar is worthless and unwind their positions.
2. Consumer debt such as credit cards, student loans and mortgages. These debts are racked up because of bad lending practices and unregulated securitization that distorts risk. This needs regulation, pure and simple.
The more complicated of these two is the Asian treasury problem which cannot be solved without a catastrophic devaluation of the dollar. Maybe we can work out some sort of dollar/swap between other countries and Asian countries to spread the risk but one has to ask why would these other countries do that and why would Asian countries accept the risk of a thousand different currencies? The only other way is for China to revaluate the remnembi and that would cause a massive depression in China and Stagflation in the US. I see no solutions.
From Needham, MA, 11/13/2008
For a variety of reasons I particularly enjoy the pieces you do that creep ever so closer to the Bretton Woods conference & the forces & players that came together at that remarkable event.
Today Ms Pettifor somehow gave credit to Franklin Roosevelt which is something of a stretch. She almost mentioned Secretary of Treasury, Henry Morgenthau, but clearly couldn't quite go that far.
Obviously for a Brit it is difficult to embrace that at Bretton Woods, their great John Maynard Keynes was bested by Treasury's Harry Dexter White.
From CO, 11/13/2008
Convicts that always blame others for their own lousy choices have the highest recidivism rate. Your commentator correctly sees a national calamity in the excessive debt of consumers, companies and governments. Then, astonishingly, she adopts the repeat offender�s mantra and blames others. Forget those government inducements like the mortgage interest deduction, the bankers made me do it. But if you just keep blaming the liquor store for your booze habit and you�ll never get better.
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