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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.

After 20 years of these "belt-tightening practices," you manage to pay the bank $200,000 in interest but your old living conditions get even worse. Now without an education your children can't get a decent job either. And the price of watermelons to the bank manager never goes up so you can't possibly get ahead. The question is: Have you or have you not paid your debt? And if so, why won't they forgive it? Is this ethical? Is this just? Are you and your children lazy, shiftless, irresponsible?That's the story of the international debt.

That's why Jubilee USA has pressed so hard for so long to free small nations from the burden of debts their past governments accepted and no government since has been able to pay no matter how much money they pour into it. Generation after generation go without human services to pay a debt that never ends.

…World leaders talk about calling for 100 percent forgiveness of the international debt, but they never do. In the meantime, 240,000 people could be saved each month if the debt service payments were applied to health services. In the meantime, 140 million children globally will not start school this fall because there are no schools to go to, no teachers to teach them, no supplies to give them. In the meantime, the gap between the obscenely wealthy and the obscenely poor nations of the world gets wider and wider.

If the largest creditors -- the International Monetary Fund and the World Bank -- were to cancel the debt from their own vast resources it would cost U.S. taxpayers nothing and harm the banks not at all. But it could help to develop underdeveloped countries. It could rebuild international alliances. It could reduce the terrorism that emerges out of unanswered rage.

What does the rest of the world need to get on its own feet? When George Bush meets with the finance ministers of the seven wealthiest nations in the world at the G7 Summit in Washington Oct. 1, they need to press the IMF and the World Bank to cancel debts.

From where I stand, the situation is not nearly as impossible, unthinkable, obnoxious as they want to make us think it is. On the contrary, debt forgiveness is a Christian obligation. It is a moral imperative. Furthermore, it is even in our own best interests to do so.

Maybe you and I need to send e-mails to the White House before Oct. 1 to tell them that we have finally figured out how simple it really is.

Comments or questions about this column may be sent to: fwis@nationalcatholicreporter.org

-----------------------

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:

Dear Mark:

Is this as simple as Chittister makes it sound?

Mom

>Hi Mom,

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.

Mark

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?

Mom

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?

Mark

National Debt Clocks: Social Security Trust Fund and Gross National Debt by the Second.

http://www.brillig.com/debt_clock/

So, of course, I wrote back:

But, Mark, isn’t that something like kiting checks or opening up several credit cards, borrowing on one to pay your minimum on another? Isn’t that illegal? May I use your words in my blog?

And he wrote back:

Well, kiting checks is against the law. Running deficits is something the government does to support itself. And it IS the law...

Sure, feel free to use my musings and verbiage. Just remember, No warranty is expressed or implied. Your only legal recourse is a full refund of the purchase price if product is found defective or non- serviceable for intended use. Do not mix with bleach. Void on planets contaminated with carbon based life forms.

Thanks, Mark. Now I understand…sort of.

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