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QUOTATION: People often say that, in a democracy, decisions are made by a majority of the people. Of course, that is not true. Decisions are made by a majority of those who make themselves heard and who vote - a very different thing. - Walter H. Judd
2004-09-12 - 2:47 p.m.
Can You Say Ponzi?
The other day when I received Joan Chittister’s From Where I Stand column, urging the World Bank Group to forgive international debt to some of the third world countries, I wrote to my son,Mark Snodgrass, President of Money Tree Software, to ask if it is as simple as she tried to make it sound.
Chittister likened the World Bank to a very well financied credit card system in some ways, but with some notable exceptions:
Unfortunately, there's another part of the process that they didn't tell you: Now your banker comes in and takes charge of your finances. Until you pay off the capital, too, they tell you, you may not own a car, send your children to school, have a telephone, or use your electricity over six hours a day. What's more, where you once grew tomatoes to sell from a stand on the street corner, you must now grow watermelons for the bank manager's children.
Logic told me that this is far too simple. Where did the money for the World Bank come from? Wouldn't those lenders resent not continuing to get their interest. So I sent Chittister's column to Mark and asked:
Is this as simple as Chittister makes it sound?
Interesting article. In a way it is that simple, and in a way it's not.
How's that for a clear answer. I suppose you would need to put the whole issue into some historical perspective to get the rich, complex picture of international finance and politics associated with the World Bank.
Near the end of WWII, the rich and powerful countries started talking about things like the UN, World Bank, Marshall Plan and other multinational ways of rebuilding war ravaged nations and creating a stable process to prevent future wars and help all nations climb the economic ladder.
Imagine a poor country, at the end of the second world war, applying for a loan from the world bank to rebuild war ravaged infrastructure. The bank has a total of 10 billion dollars. Some countries get their 50 million dollars and build roads, bridges, dams, housing and factories. Other countries build, well, nothing. No one can really see where the money went. Oh darn!
The first countries were Chile, Czechoslovakia, Denmark, France, Luxembourg, Poland, and Iran.
OK, so Denmark got it's 50 million and built all sorts of fine stuff and then paid back the loan over twenty years. Cool!
Chile on the other hand, got it's 50 million and Juan Perron and his buddies got fantastically rich. Chile didn't get it's loan paid back, so it rolled over the loan and borrowed more money.
Did Denmark feel stupid or what?
Well, the rules at the World Bank got tougher. Now the bank makes the borrower use the money for the project for which it was borrowed. And also makes rules about how the country runs other parts of it's business so it can arrange to make payments on the loan. Remember that the WB is a bank. It borrows money using bonds, and has to make it's payments to bond holders. Bond holders like Saudi Arabia. Well you may say that Saudi Arabia has all the money it needs, but if you don't pay back the bonds to Saudi Arabia, they won't loan you more money later.
It's a financial circle built on trust. Right now, the World Bank has something like 150 billion in capitol. It loans out the money, and uses the payments to pay interest on it's bonds and to make new loans.
It has programs for countries that have gotten in over their heads:
World Bank Group approves a comprehensive debt reduction package for Tanzania under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The assistance provided by IDA (of US$1.2 billion) will be spread over a period of 20 years, covering 69.1 percent of Tanzania's debt-service obligations to IDA
The world banks major problems are fraud, corruption, and countries that have borrowed more money than they can pay back. It appears to me that they are working very hard to develop programs that will allow overburdened countries significant debt relief while maintaining a high level of trust in the organization and bank's bonds.
It's a big circular money machine, and one of the big problems with big machines is keeping them going. If you mess too much with the machine and people's trust in the machine, the system can break down. It's a bank, not a charity. If funding organizations start to worry about getting their bond capital back, the bank will not have borrowing options.
Right now, the biggest urgent issues are emergency loans for countries that experience natural disasters. The biggest political issue is how to deal with heavily indebted poor countries:
"World Bank and the International Monetary Fund agree that Ethiopia has reached the decision point under the Heavily Indebted Poor Countries (HIPC) Initiative, and becomes eligible for $1.9 billion in debt service
relief. Ethiopia was the 24th country to qualify for debt relief."
If the IMF and the World Bank cancel debts to the 24 HIPC countries, will the other 100 countries with loans continue to make payments? Will wealthy countries and banks continue to loan money to the World Bank?
Will good intentions kill the golden goose? I don't know. But I know it's not really a particularly simple problem. I'm all for debt forgiveness, but I'm not going to suggest that it's just a matter of saying that the rich countries should bail out the poor countries. If they do, the poor countries may never again be able to borrow on the world market. And the World Bank is only as good as it's reputation in the world financial community.
Thanks, Mark. I didn't think it was that simple.
And now that you've solved that problem for me, how does our humongous deficit work? From whence does all this money come?
Oh, the deficit is easy.
The government receives taxes. The government spends money.
When it gets more than it spends, the difference is a surplus.When it spends more than it gets, the difference is a deficit.
When there is a deficit, the treasury borrows money from the public and international financial community by selling treasury bonds. When there is another deficit, it sells more bonds. When the bonds come due, it sells more bonds to pay off the old bonds. When there is a surplus, it can sell less bonds.
The total amount of the bonds and other government obligations outstanding is the national debt. It's about $7.3 trillion. You owe $25,000 for your portion. So do every man, woman and child who is a citizen of this big country.
Now that's only the 'declared' debt. If you take into account the unfunded liability of Social Security and Medicare, the real debt amount is about $45 trillion dollars. But of course the way that Social Security and Medicare are set up, the big payouts to baby boomers like me are going to be paid for by the X, Y and Z generations. You know, the slackers...
What, you question whether the Y & Z generations are going to pay 50% payroll taxes so I can get my social security and Medicare? Well why won't they? You paid your 3% so your parents could get SS. And I paid my 9% so you and Ed get your fabulously extravagant SS and Medicare benefits. Why won't Chelsea and Amy [some of my grandchildre]pay half their income so Pam, Laurie, Marci, Val and I [some of my children]can get our $1,200 a month?
Oh yeah, there are relatively fewer of them compared to their parent's generation than there were of their parents relative to their grandparent's generation. That and now people live quite a bit longer than before. Did you know that when SS was developed, the average retirement survival expectation was all of three years. Ah, but they were golden years...
Oh yeah, right now SS does have a surplus. A little over a trillion dollars. Cool! Where is it? Oh, they loaned it to the US government to help finance the debt... So, when the SS agency needs it, they will need to ask the government for their money back. So the government will need to borrow the money from somewhere else.
Can you say Ponzi?