US Debt: Fantasies of the Grand Ponzi scheme
By Waqar Khan Kauravi
For those who are always overawed by the might of the West, especially the US, it may be informative to view the US debt debate and how it will affect the future of our next generation. The fantasy part of US economy is that it is robust, dynamic and has an aura of magic about it that can solve all the problems of Continental US as well as rest of the world. We in Pakistan have always been indebted to the US, at least publically (on papers), not realizing the cost paid.
Thanks God, sense has prevailed and Pakistan for the first time in her history has come out with the cost of the war fought on behalf of the US; $60 billion still counting against $18 billion. Who actually paid this paltry sum of $18 billion to Pakistan? The US! NO SIR, it may have been China, Saudi Arabia, Switzerland, Venezuela, Libya, Iran, Iraq, Bahrain, Qatar, Ecuador, Indonesia, Algeria, Gabon, Nigeria, Bahamas, Bermuda, Cayman Islands, Panama and even Pakistan. How come! This is the list of countries and Banking Systems who have loaned $4.4 trillion to the mighty US. In this Ponzi game of debt, Pakistani black money owned by the rich and the mighty (some estimates put it at $160 billion in Swizz banks only) may have been loaned by Swizz banks to the US treasury and in turn only 10% of this amount was doled out to Pakistan very generously by the Bush-Obama administration.
What is a Ponzi scheme? Referring to Wikipedia,(named after Charles Ponzi,1920s fraud case) “Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going”. Is the Bretton Woods System led by the west a grand Ponzi scheme being played on the economic chessboard of globe? This may require a complete book to answer, for brevity we move to the question of US debt.
The US debt debate is an interesting subject; some estimates put it at $14.5 trillion that is exactly the current US GDP. Therefore, the US public debt is 100% of the GDP. This does not stop here as it is expected to surpass the GDP and may become 200% of the GDP within the current decade. Interestingly, the US economy has been a war economy since the birth of the United States. Out of 44 presidents from George Washington to Barrack Hussain Obama, Andrew Jakson(1839-1837) was the only president with zero debt. The exponential growth of US public debt in current times can however be attributed to some important factors.
- One, the outsourcing of manufacturing sector to oversees countries like China and ASEAN block.
- Two, digitization of currency where the credit card made the dollar disappear from the minds of American public.
- Three, unending cycle of wars which was renamed as the Long War to mark the American intervention in Middle East and Afpak.
- Four, habit of borrowing, from White House to a poor American household living on credit is considered fashionable and smart.
- Five, the foundation of economy based on interest and spending aka MACWORLD cannot bear exogenous shocks that the US is experiencing now a days.
The poor health of US economy can affect countries like Pakistan in many ways. As dollar loses its luster and shine globally, there are calls by emerging economies to make the dollar part of basket of currencies. As per Wikipedia, “A high debt level may affect inflation, interest rates, and economic growth. A variety of factors are placing increasing pressure on the value of the U.S. dollar, increasing the risk of devaluation or inflation and encouraging challenges to dollar's role as the world's reserve currency. If another currency or basket of currencies replaced the dollar as the reserve currency, the U.S. would face higher interest rates to attract capital, reducing economic growth for the long-term”.
The Economist predicted in May 2009: “Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors”. Countries too much dependant on US dollar as the mainstay of Forex Reserves may be badly affected by slide of the dollar, if they are not maintaining alternatives. The option of default is on the cards with the Obama administration, for the time being that has been put on the back burner; however, it still remains an option with Ben Bernanke with potential to generate a tsunami of recession in the west. The US is not alone in the debt crises, the debt to GDP ratio of some TIGERS is as following, Japan 204%, UK 94%, France 99%, Germany 94% and Italy 130%. If economy is one guide for national power than logically all western countries including the US are basket cases for recession.
Visualizing the long-term effects, my advice to the economic managers of Pakistan (who happen to be a product of Bretton Woods System) would be to start a gradual disengagement from this house of debtors and increase engagement with creditors (including China, Venezuela, Saudi Arabia, Iran and Brazil). This falling house of cards has the potential to drag everything associated with it to ground; watch before you are made to cry like Greece. The Bretton Woods system and its capitalist cohorts have miserably failed the test of time; Pakistan needs a fresh blood of innovative economic managers who can exploit the hidden potential of its economy without dictates from the decaying financial institutions of the west.