is the whole world going bankrupt

7/30/2019 Is the Whole World Going Bankrupt

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Is the Whole World

goIng Bankrupt?

Gvnmnt Dbt: What

It Is and Hw It Fnctins

Rosa LuxembuRg Foundation


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2

In the 1990s, it was globalization. Now government debt

is considered the central problem of the world economy. The

reason: for the rst time since the Second World War, it is not

the so-called developing countries that are experiencing a debt

crisis, but rather established industrial countries. In Europe,

a few governments have become insolvent and have to be -

nanced by other states. In the United States, government debt

has grown to levels that are otherwise only reached during wars.

That is whyBild, Germanys biggest tabloid, asked: Is the Whole

World Going Bankrupt? (July 13, 2011), while the headline of the

newsweeklyDer Spiegel(32/2011) asked: Is the World Going

Bust?

In the public discourse, two things seem to be clear: rst,

government debt is bad. And second, there is too much of it.

Saving is therefore the order of the day. States want to be-

come trimmer, public property is being privatized, and nati-

onal wage levels are to be lowered in order to raise the level

of competitiveness of the nation as a location for business.

Government debt thus engenders the same political measures

as the specter of globalization a decade ago.

Now all governments of the industrial countries have resolved

to save more drastically. This affects the poor primarily in the

form of social cuts in all countries. Why is that the case? Where

does all this debt come from? Why do all states incur debt even

though it is generally considered to be something bad? And whynot just cancel these debts, if the whole world is suffering under

them? These are some of the questions that this brochure seeks

to answer. It does not attempt to assert that government debt is

actually not a problem. Rather, it attempts to demonstrate the

purposes that government debt serves, and when it becomes a

problem and for whom. Because ultimately, questions of debt

are questions of distribution: some have to pay, while othersbenet.


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Table of Contents

1 TheThriftyHousewifeasaRoleModel:YouCant

SpendMoreThanYouEarn 2

2 OurGrandchildrenWillHavetoPayBackOurDebts 3

3 WeveAllLivedBeyondOurMeans 5

4 PoliticiansWasteMoneyAfterAll,ItIsntTheirs! 9

5 WeHavetoSave! 12

6 WereBankrupt! 15

7 TheFinancialMarketsTamethePoliticalSphere 18

8 WeShouldJustCanceltheDebts! 22

9 WeNeedStricterRegulations 24

10 Conclusion:SoIsGovernmentDebtGoodorBad? 26

11 Glossary 30

Inthisbrochure,thetermshighlightedincolorareexplainedin the

glossary(seepages3134).


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1

THe THrIFTy HoueWIFe role MoDel:

you CT peD More TH you er

Ataconventionofherparty,theGermanChristianDemo-crats(CDU),inDecemberof2008inStuttgart,ChancellorAngelaMerkelinvokedtheimageofthethriftySwabianasarolemodelforstateeconomicactivity:WeshouldhavejustaskedaSwabianhousewifehereinStuttgart,inBaden-Wrt-temberg.Shewouldhaverelatedapieceofwisdomwhichisasbriefasitiscorrect:Inthelongrun,youcantlivebeyondyourmeans.Itseemssosimpleandtrue.

What Truth is There to That?

Thecomparisonbetweengovernmentandhouseholdbudgetsisbelovedbypoliticianswhentheiraimistoexplainthestatesdistresstothepopulation.Butthecomparisonwiththehousewifeismisleading.Agovernmentbudgetfunctionsac-

cordingtodifferentrulesthanthatofahouseholdbudget.Ifaprivatehouseholdtakesoutaconsumerloan,topurchaseanewwallunitforexample,thenitisanactofanticipatorysav-ing:thehouseholddoesntrstsaveupthemoneyinordertopurchasethefurniture,butrathertakesonaloan,buysthewallunit,andthenrepaystheloantothebankincludinginterest.Theloanthusmakesthehouseholdpoorer(sinceit

paysthepurchasepriceofthewallunit,plusinteresttothebank).Thestate,ontheotherhand,takesoutaloanandusesthemoneytobuildroads,schools,andtelecommunicationnetworks.Itthusimprovestheconditionsofdoingbusinessinthecountryforcompaniesandattemptstoattractinvest-mentandmakeitprotable.Forthestate,incurringdebtisameansofstimulatingeconomicgrowth.Forexample,the

stateprovidessubsidiesforyounggrowthindustries,andusesmilitaryexpendituresasameansofsecuringtheglobalbusinessofdomesticcompanies.Furthermore,debt-nancedexpenditurescanstrengthensocialdemand,sothatacrisiscanbemorequicklyovercome.Thecentralindexforthestateisthereforenottheabsolutelevelofdebtindollarsoreuros,butrathertheso-calleddebt-to-GDPratio.Thisdivides

thetotalgovernmentdebtbyeconomicperformance(Gross


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DomesticProductorGDP).ThisratiomeasureswhethergrowingdebtisaccompaniedbyanincreaseinGDPthuswhetherdebtsfunctionasaleverformoreeconomicgrowth.1Aslongasthatfunctions,governmentdebtisnobigproblemandthestateachievesitsgoal:thegrowthofnationalwealth.Incidentally,abusinessalsocannotbecomparedtoaprivatehousehold:itborrowsinordertobuildacarfactory,forexample.Itinvests,socreditiscapitalforabusiness:externalnance.Thefactoryaccordingtotheplanyieldsaprot.Fromthisprot,thebusinessrepaystheprincipleandinterestonthedebt.Ifthingsgoaccordingtoplan,thebusinessisnotpoorerasaresultofthedebt,butricher.

Soofcourse,agovernmentcanspendmorethanitearnsinthelongterm,sinceitcanincreaseitsincomewiththeexpenditures.Ahousewifecannotdothat.Incontrasttoaprivatehousehold,acountrycanevenbecomericherbytak-ingondebt.Italldependsuponwhatthegovernmentusesthecreditfor.

2

our GrDCHIlDre WIll He To py

BCk our DeBT

TheGermanweeklynewspaperWelt am Sonntag(June26,2011)explainedtoSigmarGabriel,chairoftheSocialDemo-craticPartyofGermany(SPD):Werelivingattheexpenseofourgrandchildrenandgreatgrandchildren,sincetheyhavetopayforallofthat.Ineverytalkshowdebate,theremarkalwayscomesupatleastoncethatwecannotincurdebtattheexpenseofourchildrenandgrandchildren.Thatisare-

quirementofthefundamentalprincipleofintergenerationaljustice.Thedramaticpictureisclear:debtsincurredtodayhavetobepaidbackinafewyearsordecades.Ifnewdebtsaretakenoneveryyear,thenthepileofdebtbecomeslarger.

1 TheGrossDomesticProductisnotthepropertyofthestate,butitrepresentsthewealththestate

canpotentiallydrawuponbymeansoftaxes.


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Themoredebtsaccumulate,accordingtothisargument,thelessmoneythereisforotherexpenditures,forexampleforeducation,roadconstruction,andsocialprograms.


Thispictureisalsowrong.Firstofall,assetssuchasroadsorschoolsthatarenancedbycreditarealsoavailableforusebyfuturegenerations.Secondofall,withgovernmentdebt,noredistributionbetweengenerationsoccurs,butratherredistributionwithinageneration:generally,frombelowtoabove.Howdoesthatwork?Ourgrandchildrendonotjustinheritthedebt,butalsotheclaimsuponthedebt,sotheyalsoinheritwealth.Onecanpicturethisusingtheexampleofafamily:whenthemotherlends100eurostothefather,andbothdie,thechildrendonotjustinheritthe100eurodebtofthefather,butalsothemothersclaim.Sowhoinheritsthedebtandwhoinheritstheclaim?Whohaslentmoneyatinteresttothestate?Andaboveallelse:whopaysthisinterestandwheredoesthemoneycomefrom?

Forexample,intheyear2008,Germangovernmentdebtaloneyielded69billioneurosininterest.Thedebtinstru-mentsareheldoverwhelminglybybanks,institutionalinvestors,andthewealthy.Theylendtheirsparemoneytothestatebypurchasinggovernmentbonds,andcollectin-terestinreturn.Theinterestpaidbythestatecomesfromtax

revenues.InGermany,asaresultofthetaxreformsofthelasttenyears,roughlytwo-thirdsoftaxesarepaidbywageworkers.Thatmeansthatthereisnoredistributionbetweengenerationsoccurring(thesumofclaimsandobligationsbalancesout).Rather,wearedealingherewithatransferofwealthfromthosewhosetaxpaymentsnancetherepay-mentofinterestandprinciple,tothosewhopocketbillions

ofeuroseveryyearasownersofgovernmentbonds.2

2 However,governmentdebtisnotthecauseoftheinterestcollectedbyownersofwealth,butrathertheirwealthitself.Interestincomearisessolelyfromthefactthatsomehouseholdsareinapositiontoaccumulatesavings.Sothereisnoproblemofjusticearisingfromgovernmentdebtthatdidntalreadyexistwithregardtopreexistingdisparitiesofincomeandwealth(NorbertReuter,

Inter-generationalJusticeinEconomicPolicy,PROKLA121/2000,p.547556).


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Bytheway,governmentdebtisnotpaidback;rather,itisserviced.Thatmeansthatthestatespileofdebtisusuallynotpaidofforsettledsothatastateatsomepointagainbecomesdebt-free.Ifadebtbecomesdue,meaningthatthesumoriginallyborrowedascredithastobepaidback,thisoccursintheformofaroll over:topaybackolddebts,newcreditistakenon.Thedebtdueisreplacedbynewdebtinaquasi-permanentprocessthatishardlyeverexplicitlymentioned.Forexample,since1965theFederalRepublicofGermanyhasneverentirelypaidoffitsdebt,butalwaysrolleditoverinstead.Onlynewcreditwhichexceedstheamountrolledovercountsasnewdebt.Thatmeansthatifnonewdebtistakenon,thepileofdebtremainsthesameasbefore.Futuregenerationswillproceedinthesamemanner.Debtswillnotbesettled,butinsteadserviced.Aslongaseconomicperformancegrows,thatisnotaproblem.Itisnotourgrandchildrenwhohavetorepaydebtsinthefuturethatweincurtoday.Rather,thewageworkersoftodaypayforthenancialinvestorsoftomorrow.Thisdistinction

betweenwinnersandlosersofgovernmentdebtisobscuredbythenationalwe.

3

Wee ll lIeD BeyoD our Me3

TheGermanchancellorclaimsthattheGermanshaveincurredtoomanydebts.Bythatshemeansnotprivatebusinessesorprivatehouseholds,butratherthestate.Shenonethelesssuggeststhatthisappliestoeveryone.In1950,thegovernmentdebtoftheFederalRepublicofGermanywasstillat9.5billioneuros.In1990,itwas538billioneuros.

Between2007and2010,debtgrewdrasticallyasaresultoftheeconomiccrisisbyalmost30percent,from1,550to2,000billioneuros.IntheUnitedStates,governmentdebthasrisenbyafourthto16trilliondollarssincethebeginningofthecrisis,andinJapanbyalmostafth,to1120trillionyen.

3 AngelaMerkel(PotsdamerNeuesteNachrichten,May15,2010).


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2.500

2.000

1.500

1.000

500

0

1950 1960 1970 1980 1990 2000 2010

Allofthatissupposedtobeourdebt.Afterall,weareallthestate.4Thisisusuallyexpressedasthepercapitashare

ofdebt.InGermany,thisrosebetween1950and2010from190to24,500euros.IntheUnitedStates,itisabout40,000eurosatthemoment(seepoint10).Inotherwords,wearelivingbeyondourmeans.


Concerningtherstpoint,itistruethatgovernment

debthasrisendrastically.Butwhatdoesthatmean,ourdebts?Inmostcountries,thenanceministrydrawsupabudget.Itpredictsstaterevenuesandexpen-ditures.Whenexpendituresexceedrevenues,thedifference isnancedbytakingonnewdebt,meaningthatthegov-ernmentborrowsmoney.Thebudgetandthenewdebtarethenusuallyapprovedbytheparliament.Thepopulationat

largedoesnotshareinthisdecision-makingprocess.Itcanfollowthebudgetdebatesinthemediaandformitsownopinion.Itcanbesatisedordissatisedwiththestates

4 AccordingtotheGermangovernmentonitswebpageregierenkapieren.DiejungeSeitederBundesregierung(UnderstandingGovernment.TheYouthWebpageoftheFederalGovernment)underthesectionWokommtdasGeldherundwogehteshin(Wheredoesmoneycomefrom

andwhereisitgoing).

Germany:GrowingGovernmentDebt

Grossgovernmentdebtinbillionsoeuros


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nancialconduct.Butithasnoinuenceuponthelevelofnewdebt.

Thestatesdebtisnotthedebtofitspopulation.Ultimately,thegovernmentdebtpercapitaincreasesregardlessofhowthriftytheindividualworkerorunemployedpersonlives.Asaprivateperson,onecannotrepaythedebt,evenifonewantedto.Andwhen,forexample,somebodygoestoabankinGermanyandwantstotakeoutaloan,nobankwillrejecttheloanapplicationwiththewords:butyoualreadyhave24,500eurosindebtthroughthestate!

Governmentdebtmaynotbethedebtofthepopulation.Butultimately,thepopulationisliableforgovernmentdebt.If

debtsaretobepaiddown,thepopulationhastopayhigher

GovernmentDebtandPrivateWealth

Inbillionsoeurosortheyear2010inGermany

Governmentdebttotalwealth

10.000

9.000

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

0

Gvnmnt

Dbt

Financialassets

Tta a

dmstic assts


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taxes,waitlongerforitsretirementpensions,workmore,earnless,orgetbywithlessstatebenets.Thus,thestatemakesitsdebtourdebt.

Concerningthesecondpoint:fromthepointofviewofsocietyasawhole,itcannotbesaidthattheindustrializedcountriesarelivingbeyondtheirmeansthatistosay,spendingmorethantheyaretakingin.Atleast,thatisthecaseifoneconsid-erssocietyasawhole.Thestatesdebtisincreasing,buteveryloanthatsomebodytakesouthasacorrespondingdebtclaim.Everydebtorhasacreditor.IfMs.Alends100eurostoMr.B,thenitisnotthecasethatbothhavelivedbeyondtheirmeans.Rather,Mr.BhasadebtandMs.Ahasaclaim,anancialassetfromwhichsheearnsinterest.Bothbalanceeachotherout(seepoint2).IftheGermangovernmentborrowsamillioneurosfromtheDeutscheBank,thenwehavenotlivedbe-yondourmeans.Rather,thegovernmenthasincurredadebtandthebankhasadebtclaimfromwhichitpocketsinterest.

Ifonetakestheweseriously,andcalculatesallthedebtandnancialassetsofeachmemberofthepopulation,then

oneisforcedtoconcludewithregardtomostindustrializedcountries:wehavenotlivedbeyondourmeans.Weare

nothighlyindebted,butratherrich.LetstaketheexampleofGermany:thegovernmentdebtamountstoabout2,000billion

euros.Privatenetwealth5ontheotherhandwasmorethan

9,000billioneuros,eveninthecrisisyearof2009.6Thatcanalsobecalculatedpercapita:foragovernmentdebtof24,500

europercapita,thereisanetprivatewealthofmorethan

90,000euros.7Sowearewealthy,8atleastonaverage.Inreality,however,governmentdebtisbornebyeveryone,since

itispublic.Wealth,ontheotherhand(andnancialclaims

5 Inthecaseofprivatenetwealth,debtisalreadysubtractedfromthetotal. 6 SeetheDIWWochen-bericht50/2010.Ifonecalculatesonlyprivatenetwealthinastrictersenseso,subtractinginsur-anceassets,aswellaslifeinsurancepoliciesorretirementpensions,andhouseholdwealthsuchasautomobilesorpersonalbelongingsthenonestillarrivesatasumover7,370billioneuros. 7 SeeBaselInstituteofCommonsandEconomics(http://commons.ch/).Thecorrespondingvaluesforgovernmentdebt/privatewealthperresident/householdineurosfortheyear2010,roundedoff,are:Greece(24,000/56,900),Ireland(23,500/74,700),Italy(29,300/120,300),USA(32,800/49,700).However,thenumbersfortheUSAareonlymarginallycomparabletothoseofEurope. 8 Bytheway,ifoneconsidersGermanysnancialpositionwithregardtoothercountries,Germanyhasa

netsubtractingforforeigndebthasapositivebalanceofmorethan1,000billioneuros.


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upongovernmentdebt,forexamplegovernmentbonds,belongtothiscategory)isinthehandsofafewprivateindividuals.In

2007,60percentofthetotalwealthbelongedtotherichesttenpercentoftheGermanpopulation.Ninetypercentofthewealth

belongedtotherichest30percentofthepopulation.9Inother

countries,wealthdistributionisconsiderablymoreunequal.

4

polITICI WTe Moey FTer ll,

IT IT THeIr!

Politiciansaresuspectedofextravagance.Staterevenuesareconstantlyinsufcientfornancingtheirdesiredexpendi-tures.10Theconsequenceishighgovernmentbudgetdecits.Thisisfrequentlyexplainedintermsofthesupposedmyo-piaofpoliticians,11theirquestforgreatness,ortheirdesiretobeguiletheelectoratewithfavors.Thebillarrivesbut

onlyafterthegenerouspoliticianshavelongsinceretired.Forthatreason,theGermanneo-liberalthinktankStiftungMarkwirtschaft(MarketEconomyFoundation)demandsdaringtohavemoredemocracywithoutgifts:letshavesuccessfulpoliticswithoutstrikingSantaClausposes.12


Little.Sure,thereissometimeswaste,andeveryyearvarioustaxpayersassociationsandgovernmentinspectionagenciesaddupthenumbersandcomplain.Butifpoliticiansreallyexclusivelyactedextremelyshortsightedly,itwouldbeawon-deriftheydidnotincurevenmoredebtthantheyalreadydo.Ifpoliticiansactuallyboughtvotes,thentherewouldnotbeanydebtindictatorships,oratleastlessthanindemocracies

(whichisnotthecase).Politiciansdonotjustspendmoneywithouthesitation.Whentheyincurdebts,theydonotignore

9 DIWWochenbericht50/2010. 10 Whydoesthegovernmentincurdebt?Thenanceministerbreaksoutinasweateveryyearwhenfacedwiththenumberofexpenditures.Revenues,althoughtheyaresohigh,arenotenoughtocoverthecosts.Weareliving,asusedtobesaidsonely,beyondourmeans(www.regierenkapieren.de). 11 Governmentshavetonallystartthinkingbeyondthenextelection(Spiegel32/2011). 12 Marktwirtschaft:EhrbareStaaten?ArgumentezuMarktwirtschaft

undPolitik,Dezember2011.


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thewellbeingoftheeconomy;rather,thewellbeingoftheeconomyistheirgoal(seepoint1).However,particularlyinthelastfewyears,thathasnotworked.Debthasgrownmuchfasterthaneconomicperformance.Thisisdemonstratedbythedebt-to-GDPratioinallindustrializedcountries.

Thatwaslesstheresultofahighlevelofexpendituresonthepartofthestate.Onthecontrary:stateexpendituresinGermanyevendeclinedinrealterms(adjustedforination)between1998andthebeginningofthecrisisin2008.Thereweretwootherreasonsfortheriseinthedebt-to-GDPratio:rst,therewerehugetaxcutsinGermanysince1998.The

taxratesforthewealthydeclined,asdidthetaxesoncapitalgainsandtaxesonbusinesses.In2010,theGermanstatewouldhavetakenin51billioneurosmoreinrevenues,iftheoldtaxlawsof1998hadstillbeenineffect.13Thesecond

1. 2. 3. 4. 5. 6. 7.5

0

-5

-10

-15

-20

-25

-30

-35

1. Germany 2. Japan 3. USA 4. UK 5. Spain 6. Greece 7. Irleand

2007 2009 2010

Crisis:LessRevenue,MoreExpenditures

BudgetdefcitsasapercentageoGDP

13 SeethepressreleaseofSeptember8,2011,StaatsausgabentrotzKrisenabwehrrealkaum

gestiegen,bytheHans-Bckler-Stiftung.


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reasonwastheeconomiccrisis.Wheneconomicperformancetankedattheendof2008,businessesnolongerinvestedsomuchandhouseholdsnolongerconsumedsomuch.Thestatejumpedintointerveneinallcountries.Ittookoncredit,rescuedbanks,andsubstitutedstatedemandformissingprivatedemandinordertoamelioratetheeffectsofthecrisis.14Thiswasalsosuccessful.Withouttheseinterven-

tions,economicperformancewouldhavecollapsedevenmoredramatically.Nonetheless:thedebtratioincreased.However,thiswasnotasignofwastefulnessonthepartofthestate,butratherofthefactthatthestatewasusingpublicmoneytokeepthebusinessofprivateenterpriseshalfwayfunctional.Theresult:theprotsofGermanaswellasAmericanbusinessesonceagainreachedrecordlevelsin

2011.GovernmentsinGermanyaswellasinotherEuropeancountrieshaveimposedausterityprogramsinwhichlabor

Debt-to-GDPRatio

GrosspublicdebtasapercentageoGDP

14 ThisisevenmorethecaseforcountrieslikeIrelandorSpain.There,thedebtratiohaddeclinedconstantlyuntiltheoutbreakofthecrisis.Butthenthegovernmentshadtorescuethebanks.Asaconsequence,thedebtratioinIrelandandSpainbetween2007and2012increasedfrom28percentto113percentand42percentto80percentofGDP,respectively.Thisshowshowabsurd

theaccusationofwastefulnessis.

2005 2006 2007 2008 2009 2010 2011

68.6 68.1 65.2 66.7 74.4 83.0 81.2

66.7 64.0 64.2 68.2 79.2 82.3 85.8

105.4 106.1 103.1 105.7 116.0 118.6 120.1

43.1 39.6 36.2 40.2 53.9 61.2 68.5

67.9 66.6 67.2 76.1 89.7 98.6 102.9

42.5 43.4 44.4 54.8 69.6 79.6 85.7

186.4 186.0 183.0 191.8 210.2 215.3 229.6

Gman

Fanc

Ita

ain

u

Gat

Bitain

Jaan


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andsocialbenetsaremostimpactedbycuts.15IntheUnitedStates,suchastepisexpectedfor2013.

5

We He To e!

Inlightofincreasinggovernmentdebt,politiciansandeconomistsdemandthatgovernmentssavemore.Conserva-tiveeconomistssaythatthestatehastodecreaseitsexpen-ditures.Leftisteconomistssaythatthestatehastoincreaseitsrevenues.Bothpathscanbeusedtodecreasethelevelofindebtedness.


Savingisnotthateasyforastate.Astatecansimplycutitsexpenditures,butthenitnolongerplaystheroleofconsumer.Thestatebuyslessschools,roads,tanks,etc.Oritcanlayoff

employees,whothenbecomeunemployedandbuyless.Oritcutspensions,whichdecreasesthepurchasingpowerofretir-ees.Inallofthesecases,thetotalconsumerdemandofsocietydecreases.Thesituationissimilarwhenthestateraisestaxes,forexamplethevalue-addedtax.Thatmakescommoditiesmoreexpensive,andthebuyingpowerofconsumersdeclines.

AdrasticexampleofthisistheausterityprogramsofGreecesincetheyear2010:thegovernmentcutpensions,salaries,laidoffthousandsofpublicemployees,raisedtaxes,andatthesametimecutitsexpenditures.Theconsequence:consumerspendingcollapsedandwithit,economicperfor-manceasawhole.Withthat,thetaxrevenuesofthestatealsodeclined.Furthermore,thestatehadtospendmore

moneyontheunemployed.TheendeffectwasthatAthensdidnotreduceitsdebt;onthecontrary,itincreased.Radicalausteritycanalsoruinaneconomy.

15 Soingeneralonecansaythatinnormaltimes,governmentdebtserveseconomicgrowth.Intimesofcrisis,itservestopreventanevenmoredrasticdeclineineconomicperformance.Warsareaspecialcase.Here,thestatenolongertakesintoconsiderationtherelationshipofGDPtogovern-

mentdebt,butratherregardsitsexpendituresasabsolutelynecessary.


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Thatiswhyinmostcasessavingdoesnotmeanthatthestateonlyspendsasmuchasittakesin,orthatitspendsevenlessthanittakesin,andsavesthedifferenceforarainyday.Thisoccursonlyintimesofcrisisorunderpres-sure,asisthecasewithGreece.Butusually,statesavingsisnotaquestionofspendingalotoralittle,butratheraquestionofwhatshouldmoneybespenton?Whenagov-ernmentsaves,itrearrangesitsexpendituresandrevenues.Bymeansofausterityprograms,theconditionsofdoingbusinessforcompaniesissupposedtobeimproved,inordertoincreaseeconomicgrowth.Theaimisnottoreducethelevelofdebt,butratherareductioninthedebt-to-GDPratiotheratioofdebttoGDPbyincreasingGDP.

Correspondingly,austerityprogramsusuallylooklikethis:taxesonbusinesses,wealth,orcapitalarenotraised.Instead,thegovernmentcutssocialexpendituresandwages(prima-rilyinthepublicsector),andraisestaxesinthesphereofconsumption(thesalestaxorvalue-addedtax).Additionally,

thestateattemptstodecreasewagelevelsbymeansoflegalregulationsinordertocreatebetterconditionsofinvestmentforbusinesses,sothateconomicperformancegrowsandthedebt-to-GDPratiodeclines.16

InEurope,theseprogramsexistundersuchnamesasEuropeanSemester,Euro-PlusPact,andEurope2020.

TheirmodelistheGermanAgenda2010oftheformerSPD-Greengovernment,theexplicitgoalofwhichwastoliberalizethelabormarket,increasepressureontheunemployedandthusputdownwardpressureonunitlaborcosts.Withsuchprograms,Europeissupposedtobecomethemostcompeti-tiveregionoftheworld.Withtheso-calledscalpactanddebtbrake,theEuropeanstatesarealsosettingstrictlimits

toexpenditures.Allofthisservesonepurpose:winningbackthecondenceofthenancialmarkets;inother

16 AnexamplefromGermany:In2002,federalnanceministerHansEichel(SPD)raisedwarn-ingsaboutatickingtimebombofgovernmentdebt(ARD-MagazinPanorama,episodeofApril18,2002).Between2003and2005,drasticlabor-marketreformswereimplementedandregula-tionsoftemporaryworkwereloosened.ThiscontributedtothefactthataveragewagesinGermany

stagnatedfortenyears.


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words,makingEuropeattractiveasasphereofinvestmentorincomepropertyfornancecapital,sothatgovernmentscanonceagainborrowmoneyatlowratesofinterest.Withasceticismandanimpoverishmentofthepopulation,theEu-ropeanstatescompeteamongandwitheachotheragainsttherestoftheworldforcredit,foraccesstoglobalmoneycapital.Thismoneycapitalinturnistobeusedtoimprovetheconditionsofthesecountriesaslocationsfordoingbusiness.Thegeneralaimisso-calleddebtsustainability,theabilityofacountrytoserviceitsdebtspermanentlyandsecurely. 17

Theconsequenceofallthisisthatwageworkerspayforthecrisis.Thetaskofbusinessesandthenancialmarketsontheotherhandistoearnalotofmoneyandthusstimulateeconomicgrowth.Soitisnotthecasethatweallhavetosave.Savingisaprogramofredistribution.

Suchausterityprogramshavetobepoliticallyimplemented.Debtcanbeusefulinmakingthepopulationpreparedto

tightentheirbelts.Politiciansareveryawareofthis.TheGermaneconomistPeterBongerwrites:Ifonewantstorestricttheroleofthestate,itsnancialresourceshavetobetakenaway.[]Asarststep,comprehensivetaxbreaksarecarriedout.[]Thisleadstoanincreaseofnewindebted-nessinthecaseofanunchangedlevelofexpenditure.Ifatthesametimeonenurturesagreatfearofgovernmentdebt

inthepopulation,atonceahighlevelofpoliticalpressuretocutexpendituresiscreated.18

Itshouldbenoted:ifthestatesweretoatsomepointstopincurringdebt,thenancialmarketswouldhaveahugeproblem.Withalltheirriskyspeculationinderivatives,commoditiesmarkets,andstocks,nancialinvestorsknow

ofonesafeharbor:governmentbonds,thestablevalueofwhichtheycanrelyupon.Theindustrializednationsalonehaveissuedbondsamountingto33,000billionUSdollars,whicheffectivelyconstitutethefoundationofworldnan-

17 See,Kaufman,Stephan,2011,Sellyourislands,youbankruptGreeks(http://www.rosalux.de/

publication/37664/sell-your-islands-you-bankrupt-greeks.html). 18 WSI-Mitteilungen7/2008,p.351.


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cialmarkets.Modernnancialsystemsarereliantupongovernmentbonds.19Thiswasdemonstrated,forexample,inAugustof2011:thedebtcrisisandfearsofarecessionledtoacollapseofstockmarkets.InvestorsedforsecurityinthegovernmentbondsofGermanyortheUnitedStates,forexample.Thepricesforthesegovernmentbondsreachedrecordhighs,whereastheirinterestratesfell.Andthat,inspiteofacrisisofgovernmentdebt!Thatshowsthatwithoutgovernmentbondsthuswithoutgovernmentdebtthewholenancialsystemwouldfalter.

6

Were BkrupT!

AccordingtoapollbytheGermannewsweeklySterninMayof2012,governmentdebt,with62percent,ledthelistofworriesofGermans.Isthewholeworldgoingbankrupt?

askedthetabloidBildinJulyof2011,inlightofthegrowingamountofdebtinEuropeandtheUnitedStates.Andsincethebeginningofthe2010,expertsareconstantlyassertingthatGreeceisbankrupt.InJulyof2011,JohnBoehner,RepublicanspeakeroftheUSHouseofRepresentatives,said,listen,werebroke.

What Truth is There to That? Onethingisclear:thewholeworldcannotbebankrupt

becausethesumofglobaldebtisjustashighasthesumofglobalclaimsondebt,orbettersaid,ofwealth(seepoint3).Thesituationisdifferentforsomeindividualstates.Twoquestionsarise.First:whenisastatebankrupt?Andsecond:whatdoesthatevenmean?

Bankruptisadifcultconceptwhenappliedtostates.Inthecaseofabusiness,itislesscomplicated:thermcanno

19 Governmentbondsplayanoutstandingroleasameansofsecurity,avehicleforpreservingsavingsforretirementandasaninstrumentforsecuringliquidityandequitymanagement[]thecallraisedinsomequartersfordebtreliefforgovernmentswouldnotonlyconsiderablyaffectsmall

investors[]butthenancialsystemasawhole(DIWWochenbericht44/2011,p.9).


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longerpayitsbillsorinterestonloans,andthusreceivesnomorecreditfrombanks.Insolvencyproceedingsfollow.Iftheliquidatorcomestotheconclusionthatnothingcanbesaved,thebusinessisliquidated.Whatevercanbeissoldoff,andcreditorsareservicedfromtheproceedsofthesesalesasbestaspossible.Thenthecompanynolongerexists.

Butwhenisastatebankrupt?Thiscannotbeestablishedonthebasisofthelevelofdebt,andalsonotonthebasisofthedebt-to-GDPratio.In2010,Greecesdebtlevelwas140percentofGDP,anditwasregardedasbankrupt.Spain,withalevelof60percentofGDP,wasregardedasbeingindanger.Japan,ontheotherhand,withadebtlevelof200percentofGDP,wasconsideredrelativelysolid.

2012 (according to IMF predictions)2007

200

150

100

50

0

1. Spain 2. Germany 3. Great Britain 4. Belgium 5. USA 6. Ireland

7. Italy 8. Greece 9. Japan

1. 2. 3. 4. 5. 6. 7. 8. 9.

HigherDebtLevelsinAllCountries

Publicdebtasapercentageoeconomicperormance

Theinterestburdenratiotheamounteachstatehastopay

eachyearforinterestisnotaclearindicatorofinsolvency.AsGreecewentintocrisisattheendof2009,ithadtopayinterestatthelevelofvepercentofitsGDP.Thatisalot,relativelyspeaking.Butintheyear1996,itsinterestburdenratiowasdoublethat.

Furthermore,whatdistinguishesgovernmentsfromprivate

householdsorbusinessesisthattheycanindependently


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determinetheirexpendituresandrevenues.Iftheyaremiss-ingmoney,theycansimplyraisetaxesor,forexample,lowerexpendituresfortheunemployed(thatalsohasitslimits,ofcourse.Seepoint5).Or,agovernmentcanattempttoborrowmoremoneyontheinternationalnancialmarkets.Ifthatdoesnotwork,itcansimplyforcedomesticnancialenter-prisestolenditmoney.20Inanemergency,astatecanalsoborrowfromitself:thegovernmentissuesabond,andthecentralbankofthecountrypurchasesthebond.Inthiscase,thecentralbankprintsmoneyandlendsittothegovernment.Mostcentralbanksoftheworlddothistoagreaterorlesserextent.Intheyears2010/2011,theUSFederalReserveboughtUSgovernmentbondstothetuneof900billionUSdollars.21Asaresultoftheeurocrisis,eventheEuropeanCentralBank(ECB)temporarilyresortedtothisactuallyforbiddenmeasure.InordertolowertheinterestburdenforprimarilySouthernEuropeancountries,theECBboughtgovernmentbondsintheamountofmorethan200billioneurosthroughthemiddleof2012,andannouncedfurtherpurchases.Soa

governmenthasmanywaysofsecuringitssolvency. 22Soonecouldsay,asovereigndefaultisapproaching:

whenagovernmenthasahighlevelofdebt; whenithastocontinuetakingonnewdebtsinorderto

nanceitsexpendituresandserviceitsolddebts; whenitonlyobtainsthisnewcreditathighratesofinterest,

sothatthedebt-to-GDPratioofthecountryincreasesmorerapidlyandanincreasingamountofstateexpendi-turesareusedtoservicedebt.

Sowhetherornotstatesareinsolventisthusdependentupontheassessmentoflendersandthenancialmarkets.Theyarethejudges;theydetermineinterestratesforcredit

(seepoint5).Ifthenancialmarketslosecondenceinthe

20 Thistacticisknownasnancialrepression(http://en.wikipedia.org/wiki/Financial_repression).21 TheFeddidnotbuythesebondsdirectlyfromthegovernment,butratherfrominvestorswhohadalreadypurchasedthem.Buttheeffectwasultimatelythesame.22 Thisisthecaseforlargeindustrialcountries.Developingcountriesthatincurdebtinforeigncurrencieshavelessroomtomaneuver.SoifadevelopingcountryhasdebtdenominatedinUSdollarsandhastoserviceit,it

cannotsimplyprintdollars.


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solvencyofacountry,interestratesrise,whichcanleadtoadebtcrisis,likeinGreecefrom2010untilnow.

Butasopposedtoabusiness,astatecannotjustdisappearfromthefaceoftheearthinthecaseofabankruptcy. 23Bankruptcythusmeansthatagovernmentnegotiatesaneas-ingofthedebtburdenwithitscreditors:debtsareextended,cancelled,orinterestratesarelowered.Ifcreditorsmostlybanksagreetothis,thedebtleveldeclines,andthecountryisonceagainsolvent.Germanyalsoprotedfromsuchdebtreliefinthepast:in1953,halfofitspre-warforeigndebtwaswaived.Thebankruptcyofastateisthusapoliticaldecision:thegovernmentofanoverlyindebtedcountrydeterminesthatitsdebtistoohighanditwillnolongercarryit.24Andforeigngovernmentsrefusetosupportthecountryintheformofcheapcredit.So,countrieslikeGermanyandtheUnitedStatesarefarfromgoingbankrupt.

7

THe FICIl MrkeT TMe THe

polITICl pHere

Market-liberalintellectualsinparticulararehappythatnancialmarketsexist.Afterall,thesemarketslendmoney

tostatesandpermanentlycheckwhetherastatesolidlymanagesitsbudget,andthuswhetheritearnsthetrustofthemarkets.Themoresolidastatesnancesarejudgedtobe,thelowertherateofinterestthemarketsdemandforlendingitmoney.Ifastatetakesonalotofdebt,interestratesrise;servicingitsdebtsbecomesincreasinglydifcultandnewcreditmoreexpensive.ThiswasthecaseinGreece,

Ireland,andPortugalintheyears2010/2011,wheninterestratesincreasedsomuchthatthesecountriescouldnolonger

23 Exceptionsprovetherule:whenNewfoundlandwasover-indebtedinthe1930s,theparliamentandgovernmentdissolvedthemselvesandtheindependentstateofNewfoundlandbecameaprov-inceofCanada. 24 Astatecanalsorefusetoserviceitsdebts.Forexample,aftertheUnitedStatesoccupiedCubaaftertheSpanish-AmericanWarin1898,itrefusedtorecognizethedebtsoftheSpanishpredecessorgovernment.SincetheUnitedStateswereverypowerful,Spainwaspowerless

toimposedebtpayments.Sodebtisalegalrelationship:mightmakesright.


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payfornewloansandthereforefacedbankruptcy.Thiswastheinterestratetruncheon,gushedtheGermandailyFrankfurter Allgemeine Zeitung.Thisistheonlylanguagepoliticiansunderstand;onlythisforcesthemtoreact(August16,2011),whichmeansreducingdebt.AndJensWeidman,presidentoftheGermanBundesbank,seesrisinginterestratesasanimpetustoforcepoliticianstodotheirhomeworkandtowinbackthecondenceofthenancialmarketsbymeansofreforms(Reuters,April18,2012).


Inthenancialmarketsbanks,investmentfunds,insur-ancecompanies,etc.themoneyoftheworldiscollected:themoneyoftherichandthatofthecommonpeople,whoforexamplesaveforretirementthroughtheirlifeinsurancepoliciesorprivatepensions.Onbehalfoftheirclients,orbytheirownaccord,nancialinstitutionsinvestthismoney.Inshort:theywanttoincreasetheamountofthismoney.Toachievethistheybuy,amongotherthings,government

bonds,debtcerticatesfromstates,fromwhichnancialinstitutionscollectinterest.Governmentbondsarebelovedbyinvestors,sincetheyareregardedasasafebet.Afterall,thestateisareliabledebtor,sinceitincontrasttobusi-nessesorprivatehouseholdscansimplycollectmoneybydecreefromitspopulation.

Financialinstitutionsbuygovernmentbondsandcanalsoselltheminstantly;namely,onthestockexchange.Theyareallowedtodothis.Governmentbondsarepermanentlytraded.Theyhaveapricethatchangesconstantly.Sogovern-mentbondsareobjectsofspeculation.Investorsinspectthestatesrevenues,itsexpenditures,itsdebts,itseconomicgrowth,itspolicies,itswagelevels,etc.Thustheycheckto

seewhetherastateconstitutesaworthwhileinvestment.25Tothatextent,onecouldsaythatnancialmarketscontrolpolitics,whichmovedJoschkaFischer,theformerforeign

25 Theratingagencieshelptheminthisendeavor.Ratingagenciesconstantlyjudgethecredit-wor-thinessofstates.Variousfactorsplayaroleinthis.Forexample,theratingagencyStandard&PoorsloweredthecreditratingforVenezuelainAugust2011,amongotherreasonsbecausePresidentHugo

Chavezsillnessfromcancermadethepoliciesofthegovernmentunpredictable.


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20

ministerofGermany,tostatethatonecannotpursueany

policiesinoppositiontothenancialmarkets(BadischeZeitung,September3,2009).

However,nancialmarketsarenotasingle,uniedagentthatevaluatesthesolvencyofstates.Rather,nancialmarketsarethesumtotalofallinvestors,whoallwantthehighestpossiblereturnontheirinvestment.Thatiswhyherdbehaviorand

speculationdominatethenancialmarkets. 26In2009,forex-ample,therewasdoubtatthebeginning,justdoubt!con-

20

18

16

14

12

10

8

6

4

2

0

retunsinpecent

Gc Gman

WhenInvestorsLoseCondence

Returnson10-yeargovernmentbonds

Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May July09 09 10 10 10 10 10 10 11 11 11 11

26 Herespeculationmeansthatbuyingandsellingonthenancialmarketsisbaseduponexpectationsofthefuturevalueofnancialassets.Soasecurityisboughtbecauseanincreaseinitspriceisexpected.Ifmanyagentsonthenancialmarketsactinthisway,thenthegrowingdemandforsuchsecuritiesleadstoanincreaseinitsmarketpricethemarketpricerisesbecausearisein

pricewasexpected.


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cerningGreecessolvency.Asaresult,someinvestorsgotridoftheirGreekbondsbecausetheywereafraidtheywouldlosevalue.ThisfearoflossesbyitselfpusheddownthepricesofGreekbonds.ThatwasthesignalformoreinvestorstogetridoftheirGreekbonds,whichcausedthevalueofthesebondstodeclineevenfurtheraclassicexampleofherdinstinct.

Thislossofvalueofgovernmentbondsinturnhasaneffect

uponthestatesnances.How?Hereisaverysimpliedexample:thestatepaysaxedrateofinterestonthebond,letssayvepercentonabondofoveronemillioneuros.Sotheinvestorlendsthestateamillion,andpockets50,000eurosininteresteveryyear(vepercentofamillioneuros).Ifthepriceofthebondfallsby20percentonthenancialmarkets,aninvestorcanonlysellitfor800,000euros.Therateofreturnonthebondhasthusrisen,sincethestatecontinuestopay50,000eurosininterest.Thenewrateofreturnis6.25percent(50,000eurosonaprincipleof800,000).Ifthegovernmentwantstooatanewbond,the

interestrateisbaseduponthereturnontheoldbond.Sothestatenowhastopromiseinvestorsnotvepercent,butrather6.25percent(seetheGlossaryforfurtherinforma-tion).WhenGreekbondscollapsedatthebeginningof2010,therateofreturnshotintothestratosphere,andnewloansbecameveryexpensiveforAthens. 27

ThisinturnwasinterpretedonthemarketsasasignthatGreecemighthaveproblemsrepayingitsdebts.Theconse-quence:thevalueofbondsdeclinedfurther,returnsin-creased.Thisisaviciouscircleinwhichnancialmarketsdonotneutrallyevaluatethecredit-worthinessofstates;rather,thisevaluationdamagestheircredit-worthiness.Investors,expectingGreecetohavenancialproblems,droppedthe

bonds,thusprecipitatingthecrisis.Atthesametime,othercountrieswereinfected:inordertoavoidexpectedlosses,investorsthrewPortugueseandIrishbondsontothemar-ketwiththesameconsequences.Tothatextent,itistruethat,withregardtotheirfunding,statesdependuponthe

27 Forthereasonsbehindthecollapse,seeKaufman,Stephan,2011,Sellyourislands,youbank-

ruptGreeks(http://www.rosalux.de/publication/37664/sell-your-islands-you-bankrupt-greeks.html).


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judgmentofthenancialmarkets.However,itisnottruethatthemarketstamethestateslikesomewildanimalasifwildstatesstoodoppositerationalinvestors.28Firstofall,nancialmarketsarenotrational.Herdinstinctsandself-fulllingpropheciesdominatethiscircus.Secondofall,eveninnormaltimes,investorsevaluatethestatesoftheworldaccordingtoaverysimplestandard:thehighestpos-sibleandmostsecurereturns.Theytreatpeople,workplaces,countriesandentirecontinentslikemachinesforperma-nentlyaugmentingtheirmonetarywealth,andsubmitthemalltothisstandard.Thatisrationalaccordingtothelogicofmaximizingprot,butwhatisreasonableaboutthat?

8

We HoulD JuT CCel THe DeBT!

Ifdebtissuchaproblemfortheeconomiesofsomany

states,fortheworldeconomy,andforhundredsofmillionsofpeople,thenthisraisesthequestion:whynotjustcancelallthesedebts?Thentheproblemwouldbesolved!


Firstofall,debtswhichputsomuchpressureonthestatesarewealthtosomebodyelse.Forcreditors(banks,invest-

mentfunds,insurancecompanies),governmentbondsarecapitalmoneycapital,asumofmoneythatyieldsareturn.Ifthestatesweretoberelievedbycancellationoftheirdebts,thenthiswealthwouldbedevalued.29Abankcouldquicklygobankruptinsuchasituation.

Secondly,thereistheriskofadominoeffect,aswasthe

casewithGreecein2011.TheEuropeanUniondecidedtoreleaseGreecefromsomeofitsdebtorextendthematurityofitsdebt.Thatmeantlossesforcreditors,meaningbanks,

28 ButtheGermannewsweeklyDer Spiegelthinksthisisthecase:Theominousnancialmarketsareneithergoodnorevil.Theysimplyactrationally(Spiegel32/2011). 29 Incidentally,thisalsohappenswhenonlytheinterestonbondsisloweredforthesakeofdebtrelief,sincethevalueofa

bondismeasuredbytheamountofitsreturn.Ifthatdeclines,sodoesthevalueofthebonditself.


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andinvestmentfunds.NowmanyofthesecreditorsfearedthatPortugalorIrelandwouldalsobereleasedfromsomeoftheirdebt.Asaconsequence,theysoldtheirPortugueseand

Irishbonds,whichmadethesituationinthosecountriesevenmoreacute(seepoint7).Acrisisofthenancialmar-ketscanalsoariseinthismanner.Thirdly,ifastaterefusestoserviceitsdebtsorcancelsitsdebts,itcanbesurethatlenderswillnoticethis.Itscredit-worthinesswouldbeshot,atleastforawhile.Andeverystateknows:soonitwillneednewloans.Butacancellationofdebtsfrightensinvestors

andthusendangersthenancingofthestatesprograms.

Inexceptionalcases,creditorsagreetoacancellationofdebts,whichmeansareductionintheirclaims.ThiswasthecasewithGreecein2011. 30Thecreditorsassumethatastate

TheRiskoftheBanks

900

800

700

600

500

400

300

200

100

0

Caims f ean bans in biins f sagainst ctain cntis (as f 2010)

1. 2. 3. 4. 5. 6.

1. Greece 2. Portugal 3. Ireland 4. Spain 5. Italy 6. France

30 See,Kaufman,Stephan,2011,Sellyourislands,youbankruptGreeks(http://www.rosalux.de/

publication/37664/sell-your-islands-you-bankrupt-greeks.html).


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issohighlyindebtedthatitcannolongerserviceitsentireaccumulateddebt.Thecancellationofapartofthedebtissupposedtoputthestateinapositiontoreliablyservicetherestofthedebt.Debtcancellationdoesnotservesimplytorelievethedebtor.Rather,thisreliefisintendedtorescuetheremainingclaimsofcreditors.Debtcancellationthereforefunctionsonlywiththeagreementandforthebenetofcreditors.Itisthereforecorrespondinglyseldomandsmallinamount.

9

We eeD TrICTer reGulTIo

In2009,Germanyincorporatedaso-calleddebtbrakeintoitsnationalconstitution.Itissupposedtolimitgovernmentdebtandbindinglyregulatethereductionofdebtfrom2011on.Newdebtcannotexceed0.35percentofGDP.German

states,regionalgovernmententities,cannottakeonanynewloansatall.Thereareexceptionsfornaturaldisastersoraneconomicrecession.AttheinitiativeofAngelaMerkelandFrancesformerPresidentNicolasSarkozy,asimilardebt-brakewasadoptedforotherEuropeancountrieswithintheframeworkoftheEuropeanFiscalCompact.Germanywasabletoachievethatonlythosecountrieswouldreceive

nancialassistanceundertheEuropeanStabilityMechanismwhichhad,amongotherthings,implementedthedebtlimitationsforeseenbythecompactintotheirownrespectivenationallaws.Theideabehindthisisthatifpoliticianswontbudgetthriftily,theyhavetobeforcedtobylaw.


Itisstriking:therealreadyexistvariousregulationsthatlimitstateexpenditures,forexample,theStabilityandGrowthPactoftheEuropeanUnion.TheStabilityandGrowthPactestablishesthataeurocountrycanonlyhaveamaximumamountofnewdebtofthreepercentofGDPandamaxi-mumdebt-to-GDPratioof60percent.However,manycountrieshadalreadyviolatedthisruleinthepastparticu-

larlyGermany.31

Sotherealreadywereplentyofregulations


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25

andinstrumentsthatweresupposedtolimitagovernmentsexpenditures.Whyaresuchregulationsunabletoguaranteeadeclineingovernmentdebt?Andwhywillnewregulationsorprohibitionsdolittletochangethat?Thereasonissimple:thestabilityofstatenancesisnotsomethingthatcanbeenactedbydecree.Economicdynamicsdonotproceedaccordingtodirectives,andcrisesdontmakeappointmentswithministriesofnance.Sure,regulationscansimplylimitstateexpenditures(orraiserevenues).However,undercertainconditionsthisisharmful,forexamplewhenthebusinesscycletakesanosedive.Then,thestatehastotakeoncreditandspendmoneyinordertopreventthesituationfromgettingworse.Ifitdoesnot,inordernottoviolatesuchregulationsondebt,thecrisiscandeepen.Thisinturnleadstoafurtherdeclineineconomicperformance,andthedebtsituationmeasuredintermsofdebt-to-GDPratioisexacerbated,preciselybecausethestateadheredsostrictlytotherules.32

ThatiswhyattheEuropeanlevel,ifthereisenoughpoliti-calpressure,therulesareregularlymodied:France,forexample,wasabletoensurein1997thatthestabilitypactdemandedbyGermanywouldonlyberealizedasaStabil-ityandGrowthPact.AgrowthcomponentwasalsotackedontotheFiscalCompactof2012underpressurefromothercountries.Atthesametime,itsalmostcertainthatthe

regulationsinvolvedwillalsobeviolated.Somaybearegula-tionlimitingdebtdoesnotmaketoomuchsense.However,sucharegulationmakesiteasyforgovernmentstoimple-mentspendingcutsortaxincreases.Itcansimplyrefertotheregulationandthusjustifyitspolicies:thelawrequiresthisstep;thegovernmentshandsaretied.ThesituationissimilarwiththeEuro-PlusPactadoptedbytheEuropean

Union,whichobligatesmemberstatestobecomemorecompetitiveandlowertheirdebtlevels.TheEUregardsunit

31 AsopposedtocountriessuchasItalyorSpain,whicharetodayregardedascrisiscoun-tries. 32 ThatiswhymanyeconomistsexpectthatGermanywillatsomepointabolishitsdebt-brakeorsoftenit.Forexample,DennisSnower,headoftheeconomicresearchinstituteIfW:ItiscompletelyuncleartomewhyacountrylikeGermanyissubmittingitselftoaharddebt-

brake,andevenwantstoexportthismodel(BerlinerZeitung,August26,2011).


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laborcostsasanimportantindicatorofcompetitiveness.ThePacthasprovisionsforaninspectionofwagedevelop-mentsinallmemberstates.Thegoalismoderatewageagreements(particularlyinthepublicsector),taxreliefforthelaborfactor,andlabormarketreformsthatmakelaborexible,thatistosay,cheap.ThroughtheEuro-PlusPact,thesewagedecreasesnolongerseemlikepoliticaldecisions(subjecttocriticism),butrathersimplylikeaconsequenceofthelegalsituation(withnoalternative).Stricterregulationsarethereforeaformofauthoritarianstabilization:alterna-tivesaresimplyexcluded.

10

CoCluIo: o I GoerMeT DeBT

GooD or BD?

Ifonelistenstopoliticians,debtappearstobesomething

bad;theirmainargumentisthatthestatehastouseanincreasinglylargeportionofitsrevenuestopayinterest.Forthatreason,thelevelofdebtshouldbereduced.Everyftheuroisusedtopayoffinterest[]onlywhennonewcreditistakenoncanthealreadyaccumulateddebtbeslowlypaidoff,thusreducinginterestpayments.Thestatewouldthusbeabletodomoresensibleandusefulthings[]Whata

niceidea.33

Ontheonehand,debtisregardedassomethingbad.Atthesametime,thestateconstantlytakesonnewdebt.Thisapparentcontradictionisresolvedwhenoneregardsgovern-mentdebtforwhatitis,aninstrumentwithwhichthegov-ernmentattemptstoreachacertaingoal:economicgrowth.

Withborrowedmoney,thestatenancesitsexpenditures.Aboveall,itattemptstoimprovelocalconditionsfordoingbusinessandtostimulateeconomicgrowth.Concerningtheappropriatevolumeofgovernmentdebt,howmuchdebtisallowed,onecannotsaymorethan:nottoomuch.

33 Accordingtotheself-portrayaloftheGermanfederalgovernment(seewww.regierenkapieren.de).


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Thistoomuchissubjectinpracticetoasinglemeasure:economicgrowth.Governmentdebtissupposedtoservegrowth,andshouldnotharmit.Thequestionofwhethergovernmentdebtisgoodorbadthereforeamountstothequestion:howgoodorbadiscapitalisteconomicgrowth?

35.000

30.000

25.000

20.000

15.000

10.000

5.000

0

GDp er resident Government debt er resident

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

DebtandEconomicPerformance

GovernmentdebtperresidentandGDPperresidentineuros

(FederalRepublicoGermany,fguresuntil1990notcountingthe

GermanDemocraticRepublic)

Thatgovernmentdebtcanincreaseeconomicgrowthisnotsubjecttodebate,butratherafact.Itdoesnotmatterwhetherthedebtispassivelyaccepted(inthecaseofalossoftaxrevenue)orintentionallytakenonasapartofactiveeco-nomicpolicy.However,itisalsoafactthatitisaproblem

whenhigherdebtsarenotaccompaniedbyhighereconomicperformanceandhigherrevenuesforthestate,andagreaterportionofthestatesbudgetisthereforeallocatedforservic-ingdebt.

Sogovernmentdebtislikethedebtofbusinessesasort

ofpre-nancedgrowth.Bymeansofstateborrowing,govern-

mentsandtheirlendersthenancialmarketsspeculate


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thatdebtwillgenerategreatereconomicperformanceandmorerevenuesforthestate.Withitsdebt,thegovernmentmakesitspopulationliableforthesuccessorfailureofthiswager.Thisliabilityisillustratedbythestatisticalgureofgovernmentdebtpercapita.

Itismistakentoaskwhethergovernmentdebtisaproblemforusorforacountry,sincepeopleareaffectedinverydifferentwaysbythisdebt,accordingtotheirpositionandfunctioninsocietyandintheeconomy.Forcreditors,gov-ernmentdebtismoneycapital,wealththatcanbeincreased.Theyprotfromthedebtburdenintheformofinterestpayments.

Whethertheirwagersucceedsistheresponsibilityofothers.Thatisparticularlyclearwhenastatehasproblemswithservicingitsdebtandwantstosave.Thissaving,logi-cally,alwaysimpactsthesamegroupofpeople:recipientsofgovernmententitlements,workers,andconsumers.Onthe

otherhand,driversofgrowth,i.e.businessesandnancialinstitutions,aresupported.Theyaresupposedtoinvestandmakeloans,theyaresupposedtoearnmoneyfromthis,theyaresupposedtocreatejobsandthusincreaseeconomicperformance.Thatincreasesinthesalestaxanddecreasesinwagesandpensionsleadtoadeclineinthepurchasingpowerofthemasses,thusreducingsocialdemand,thus

impairinggrowth,isacontradictioninthisprogram(seetheexampleofGreeceinpoint6).Allthismakesitclearwhobearsthebruntofsavingwheneverthereistalkabouthowwehavetosave.34

Itshouldalsobenoted:thereisconstantcomplainingabouthowthestatespendstoomuch,buttherevenuesideis

seldomcriticized.Yettherearetwodevelopmentsworthyofcriticism.Firstofall:itisclearthatthestatecouldtaxnancecapitalinsteadofborrowingfromitandpayinginterest.Yetitdoesnotdothis,oronlytoasmallextent.In

34 HowcanitbethatthereishagglingovereveryadditionaleuroforrecipientsofHartzIV[collo-quialtermforlong-termunemploymentbenetsinGermanytranslatorsnote],butthefailureof

afewbankersisenoughtoopenthestatescoffers?(SddeutscheZeitung,September30,2008).


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29

Relievingth

eBurdenonProfts

andWealth(Germ

any)

Sharesintaxrevenues

,Source:FederalBoardofver.di,EconomicP

olicyDivision

40pecent

30pecent

20pecent

10pecent

*)Cpateincme

tax+businesstax+assessedincmetax

Capitalgainstax+

inteestincmetax+

taxnassets

uce:atinale

cnmicaccunts,Fedealtatisticalofce,authscalculatins

taxnptsan

dassets

incmetax

value-addedand

cnsumptintax

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


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Germany,sincethegreatnancialreformof1969,creditisaregularinstrumentfornancingstatetasks.Secondofall,itisremarkablewhothestatetakesmoneyfrominordertopayitsdebtswhopays(theintereston)debt.Here,developmentsareunmistakable:since1977,thetaxburdeninGermanyandnotonlythereisincreasinglybornebywageworkers(whoalsopaysalesandconsumertaxesforthemostpart).Theburdenoncapitalgainsandwealth,ontheotherhand,hasbeendeclining.Thetrendhasbeenthatthetaxratehasdeclined,whilewealthhasgrown.Soitisclear:taxpolicyisessentiallyapolicyofredistribution.Thistrendhasbeenexacerbatedbythecrisis:politicians,inordertoconsolidatestatenances,haveincreasinglyfavoredtaxingconsumption;thevalue-addedtaxhasbeenconsiderablyincreasedinalleurocrisiscountries.

Wageworkers,ontheotherhand,whobearabouttwo-thirdsoftheentiretaxburden,paynotonlyforthegreatestshareofgovernmentdebt.Theyarealsosupposedtocurbtheirwage

demandsandatthesametimehavebeenexpectedtoaccepttheconsequencesofcutstostatesocialservicesforyears.

Sothequestionofdebtisaquestionofredistributionandnotleastaquestionofpower,astheGermansociologistsJensBeckertandWolfgangStreeckhaveformulatedit:AstheincreasesinGDPduringthelastthirtyyearshaveben-

etedprimarilytheupperlayersofthepopulation,thedebtcrisisraisesthequestionofwhetherandwithwhatmeansthewell-to-dowillattempttodefendtheirposition,evenatthepriceofamassivesocialandpoliticalcrisis(FrankfurterAllgemeineZeitung,August20,2011).

11

Glory

Bondmarketsandstockexchangesarewherenancialinstrumentssuchasstocks(sharesintheownershipofacompany,whichpaydividends),governmentbonds,or

derivativesaretraded.Largeexchangescanbefoundin


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NewYork,Chicago,London,Tokyo,orFrankfurtamMain.Bondandstockmarketsareessentiallysynonymouswithnancialmarkets(seebelow).Here,buyersandsellersofsecuritiesmeeteachother.Thesumofmoneyforwhichabondorstockistradedisitsprice(orcourseinthecaseofastock).Investorsusuallybuysecuritiesbecausetheythinktheycansellthematahigherpriceinthefutureandthusmakeaprot;theysellthemwhentheyexpectalossinvalue.Soexpectationsaredecisivehereandusuallybecomeself-fullling.Hereisoneexample:traderAbuyssecurityBbecausehethinksthatitsvaluewillrise.IfalotoftradersalsoexpectthatsecurityBscoursewillgoup,theybuyit,too.ThehighdemandforsecurityBcausesitscoursetogoupthemerelyexpectedincreaseinitsvaluebecomesareality.Thereverseisalsothecase:iftradersexpectthatasecurityspricewillfall,theysellitandmaketheexpectedlossafact.Butitisnotjustexpectationsthatbecomerealityonstockandbondmarkets;thesituationisevenstranger.AtraderwillonlysellsecurityBifheexpectsthatalltheother

tradersexpectitscoursetogoup,becauseonlythenwillthecourseactuallygoup.Sotheexpectationsofinvestorsareconstantlyorientedtotheexpectationsofotherinvestors.Themarketsactinacircularmanner.Forthatreason,theeconomistJohnMaynardKeynescomparedsecuritiestrad-ingwithabeautycontestinwhichjudgesdonotvoteforthecandidatetheyndthemostbeautiful,butratherfortheone

thattheythinkalltheotherjudgesndmostbeautiful.

TheDebt-to-GDPratioindicateshowhighthetotalindebted-nessofacountryisinrelationtoitseconomicperformance.Germanystotaldebtisabout2,000billioneuros,anditsGDPisabout2,400euros.SoitsDebt-to-GDPratioisabout83percent(2,000:2,400).Thebudgetdecitexpresses

thenewdebtinayearinrelationtoGDP.InGermany,thefederalgovernment,states,andmunicipalitiesinthersthalfof2011hadrevenuesofover555.1billioneurosandexpendituresofover570.7billioneuros.Sothenewdebtwas15.6billion.Economicperformance(GDP)was1.274billioneuros.Thebudgetdecitwastherefore1.2percentofGDP.Onespeaksofabalancedbudgetwhenrevenuesand

expendituresareequal.


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Financialmarketsarethosemarketsonwhichnancialproductsaretraded.Thetermrstemergedinthe1970sandusuallyencompassescapitalmarkets(forsecuritieslikestocksandbonds),themoneymarket(forshort-termtrans-actionsbetweenbanksandthecentralbank),andtheforeignexchangemarketforcurrencies.Themarketinderivativesisalsousuallycountedamongthenancialmarkets.Deriva-tivesaresecuritiesderivedfromotherassetsderivedinthesensethatwithderivatives,onecanspeculateontheriseorfallinvalueofothersecuritiessuchasstocks,bonds,in-terestrates,orcommodities.Actorsonthenancialmarketsareprimarilybanks,investmentfunds,pensionfunds,(life-)insurancecompanies,andwealthyindividualinvestors.Incommonparlance,thenancialmarketisusuallysynony-mouswithitsactors,forexample:nancialmarketsarelosingcondenceinGreece.

Agovernmentbondisasecuritywithaxedrateofinterestandthemostimportantforminwhichstatesborrowmoney

onthenancialmarkets.BondsoftheFederalRepublicofGermanyareissuedbytheGermanFinanceAgency.TheAgencybelongstothefederalgovernmentandimplementsdebtmanagement.Abondhasafacevalue.Itisissuedatthisvalue,andthisisthevaluethatitsxedrateofinterestisbasedupon.Forexample,toraisecreditofamillioneuros,theFinanceAgencyissuestenbondswithfacevaluesof

100,000euroseach.SinceGermanyisregardedasasafedebtor,itdoesnothavetopaysomuchinterestatthemoment,around2.2percent(inthefollowingexample,forthesakeofsimplication,letssay2percent).Thedurationofabondisusually10to30years.Duringthisperiodoftime,ownersofbondsreceiveannualinterestpayments,twopercenton100,000euros,meaning2,000euros.Afterthe

endofthebondsduration,thefacevalueofthebondisre-paidtorepaybonds,thestateusuallytakesonfreshcredit(arollover).Bondsarealsotradedduringtheirduration,meaningboughtandsoldonexchanges,butnotnecessarilyattheirfacevalue.Hereisasimpliedexample:ifthecredit-worthinessofGermanydropsandithastopayahigherrateofinterestforfreshcredit,thentheoldbondswillonly

beboughtiftheyyieldanequallyhighreturn.Otherwise,


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investorswouldbestupidtobuythelessprotablebonds.Whatdoesthatmean?If,inthecaseofanewlyissuedbondof100,000,theinterestraterisesfromtwopercenttofourpercent,theownerofthebondreceives4,000eurosannu-ally.Thatisdoubletheolderbond,despitetheequalfacevalue.Sotheolderbondcannolongerbesoldfor100,000euros,sincenobodywouldbuyit.Ifthecurrentmarketinter-estrateisfourpercent,tradersaskhowmuchabondwouldbeworthifityieldedareturnof2000annuallyataninterestrateoffourpercent.Thosearetheconditionsinthecaseoftheolderbond.Theresult:abondwithavalueof50,000euroswouldyieldthisreturnatarateoffourpercent.Thatmeansthateventhoughtheoldbondhasafacevalueof100,000euros,itcanonlybesoldfor50,000.Thatmeansitsprotabilitywouldbeequaltothatofthenewbond.Thismechanismisalsoineffectwheninvestorsexpectahigherinterestrateandarethereforenotwillingtopaythefullfacevalueofabond.ThathappenswhennewspapersrunheadlineslikeYieldsonGreekBondsSoar.Conversely,the

declineofabondscourseisregardedasanindicationthatinterestrateshavetoincrease;thecreditornolongerexhibitsgoodcredit-worthiness.Intherealbondtrade,otherfactorsaretakenintoconsiderationthedurationofabond,forexample.

Thegovernmentbudgetisthebudgetbymeansofwhich

thepublichandnanciallyorganizesitsexpenditures.Itencompassesrevenuesandexpenditures,butisnotabal-ance,notaprotandlossstatementinthebusinesssense.Rather,thestatedetermineswhichservicesmustandshouldbenanced.Increatingabudgetplan,asortofbalancedueisdeterminedthatneedstobenanced.Thisisplacedoppositerevenues.Ifexpendituresarehigherthanrevenues,

thestatehastonancethemwithcredit.Itcreatesabudgetdecit.Thisbudgetdecitcorrespondstonewdebt.

GrossDomesticProduct(GDP)isthesumofgoodsandservicesthatareproducedwithinacountryinayear.GDPisregardedasthemostimportantindicatorofeconomicperformanceandgrowth.


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Theinterestburdenratioexpressestheshareofinterestpaymentsinrelationtototalstateexpendituresorinrelationtoeconomicperformance.In2010,theinterestpaymentsoftheGermanstateamountedtoabout2.7percentofGDP(debtpaymentsof65billioneurosdividedbyGDPintheamountof2.400billioneuros).Theinterestburdenratiomostcloselyexpresseswhatiseagerlyreferredtoasthelimitationonthestatesroomformaneuver.Itspeciesthesumthatagovernmenthastopaycreditors,thesumthatthereforeisnotavailableforfundingotherexpenditures.Theinterest-to-taxratioontheotherindicateshowhightheshareoftaxrevenuesisthatgoestointerestpayments.

Theacquisitionofcapitalgoods,suchasmachinesorbuild-ings,withtheaimofofferinggoodsorservicesisreferredtoasinvestment.Themoneyexpendedforthis,however,onlycountsascapitaliftheaimofincreasingtheoriginalsumofmoneyinvestedisactuallyachieved.Thestatedoesnotinvestwiththegoalofmakingprot.Itsinvestmentsare

intendedtomakecertainuse-valuesavailable(schools,roads,etc.).However,stateinvestmentsaresupposedtoimprovetheconditionsofvalorizationforcapital.

Therateofreturnexpressestheprotinpercentageofanancialinvestmentandisusuallyannual.Forexample:ifaninvestorbuysasecurityfor100euros,whichheearnsve

euroson,thereturnisvepercent.Therateofinterestisthemostwell-knownreturnindicator.Theinterestrateisthepricethataborrowerpaysforborrowingmoney.

Ratingagenciesareprivatebusinesses.Theyregularlyevaluatethecredit-worthinessofstates,municipalities,andbusinesses.Theyissuegradesforthiscredit-worthiness:rat-

ings.Financialinvestorsorientthemselvestotheseratings:agoodgrademeanshighercredit-worthinessandthusmoresecurityfortheinvestor.Businessesandstateswithgoodratingsthereforepaylowerratesofinterestthandebtorswithbadratings.Iftheratingdeclines,theinterest-raterises.Sothejudgmentsofthethreebiggestratingagencies,Standard&Poors,Moodys,andFitch,areimmenselyimportantto

governments.


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puBlICTIo I eGlIH

ell your IlD, you BkrupT Greek

20 popular fallacies concerning the debt crisis

(also in greek and finnish language)

Its that time again! Greece needs more loans and the governments

in Europe are arguing about whether its really necessary and who

should foot the bill. There is widespread opinion in Germany that

Greece itself is to blame for the problems it now nds itself in.It rst of all cheated its way into the Eurozone, then the govern-

ment spent too much and the governed worked too little, many

believe. Latently nationalistic patters of interpretation of this kind

have been nourished by German politicians and the media, who

have no end of proposals for how to solve the crisis. For examp-

le, the Greeks should save more, work more and sell their public

property and if all of these measures do not help, then Greecewill just have to leave the Eurozone or declare itself bankrupt. The

stupid thing is, neither are the causes of the crisis that have been

named actually correct, nor will the proposed ways out of the crisis

achieve their goal.

Download:www.rosalux.de/publication/37664


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puBlICTIo I eGlIH

BeuTIFul Gree WorlD

on the myths of a green economy

luxemburg argumente no. 3 by Ulrich Brand

In the UNs Rio+20 conference in Rio de Janeiro in June 2012, the

green economy was about to become a new central concept of

global policy. The conference took place on the 20th anniversary of

the 1992 United Nations Conference on Environment and Develop-ment, where the magic formula sustainable development was

coined. In 2012 the green economy was on everyones lips. For

20 years now people have been rhapsodising over the greening of

capitalism. At the same time it is clear that somehow sustainable

development is not faring so well. CO2 emissions are increasing.

Biological diversity is contracting. Famine, impoverishment and

social inequality are increasing in many countries. The much fetedconciliation of ecology and economy is proving hard to cons-

truct. The green economy is not what many want to see it as: a

magical formula which will offer solutions on a silver tray for many

problems.

Download:www.rosalux.de/publication/38457


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Imprint

luxemburgargumenteno.1

revised4thedition

Berlin,December2012

ISSN2193-5831

Authors

StephanKaumannandIngoSttzle

Photos

cover:guano/Flickr

back:A.E.I.O.U.

Translation

AlexanderLocascio

Publishedby

Dr.AntonellaMuzzupappa,Dr.SabineNussRosa-Luxemburg-Stitung

Franz-Mehring-Platz1,10243Berlin

Contact

Dr.SabineNuss,Tel.+493044310-448,[email protected]

Dr.AntonellaMuzzupappa,Tel.+493044310-421,

[email protected]

Copy-editing

TEXT-ARBEIT,Berlin

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is the whole world going bankrupt

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