Ellen Hodgson Brown, J.D.
December 7, 2009
Total financial collapse, once a problem only for developing countries, has now come to Europe. The International Monetary Fund is imposing its “austerity measures” on Iceland and Eastern Europe, with Latvia the hardest hit of the “Baltic Tigers.” But these are not your ordinary third world debtor supplicants. Historically, the Vikings of Iceland repeatedly repulsed British invaders; and Latvian tribes repulsed even the Vikings. If anyone can stand up to the IMF, these stalwart northern warriors can; and today they might even find an ally in each other.
Dozens of countries have defaulted on their debts in recent decades, the most recent being Dubai, which declared a debt moratorium on November 26, 2009. If the once lavishly-rich Arab emirate can default, more desperate countries can; and when the alternative is to destroy the local economy, it is hard to argue that they shouldn’t. That is particularly true when the legal grounds for imposing the creditors’ claims on the government are highly questionable. Both Iceland and Latvia have been saddled with responsibility for private obligations to which they were not parties. Economist Michael Hudson writes:
“The European Union and International Monetary Fund have told them to replace private debts with public obligations, and to pay by raising taxes, slashing public spending and obliging citizens to deplete their savings. Resentment is growing not only toward those who ran up these debts . . . but also toward the neoliberal foreign advisors and creditors who pressured these governments to sell off the banks and public infrastructure to insiders.”
Eva Joly, a Norwegian-French magistrate hired to investigate the Icelandic bank collapse, calls it blackmail. As a condition for receiving IMF loans and membership in the European Union, Iceland is being required to endorse an agreement in which it would reimburse Dutch and British depositors who lost money in the collapse of IceSave, an offshore division of Iceland’s leading private bank. But these are not debts the government is legally bound to assume; and Joly warns that succumbing to the EU’s demands will drain Iceland of its resources and its people, who are being forced to emigrate to find work.
Iceland’s economy contracted by 7.2% during the third quarter, the biggest fall on record. Latvia forecasts a 17.5% decline in the economy this year, with major cutbacks in public spending. As in other countries squeezed by neo-liberal tourniquets on productivity, employment and output are being crippled, bringing these economies to their knees.
The cynical view is that that may have been the intent. Instead of helping post-Soviet nations develop self-reliant economies, writes Marshall Auerback, “the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells.”
But Iceland and Latvia could call the bluff of the IMF and EU, following the lead of Argentina in 2001. In the face of dire predictions that the economy would collapse without foreign credit, in 2001 it defied its creditors and simply walked away from its debts. By the fall of 2004, three years after a record default on a debt of more than $100 billion, the country was well on the road to recovery; and it achieved this feat without foreign help. The economy grew by 8 percent for 2 consecutive years. Exports increased, the currency was stable, investors were returning, and unemployment had eased. “This is a remarkable historical event, one that challenges 25 years of failed policies,” said economist Mark Weisbrot in a 2004 interview quoted in The New York Times. “While other countries are just limping along, Argentina is experiencing very healthy growth with no sign that it is unsustainable, and they’ve done it without having to make any concessions to get foreign capital inflows.”
To find the money for its remarkable development, Argentina did not need foreign investors. It issued its own money and credit through its own central bank. Earlier, when the national currency collapsed completely in 1995 and again after 2000, Argentine local governments issued local bonds that traded as currency. Provinces paid their employees with paper receipts called “Debt-Cancelling Bonds” that were in currency units equivalent to the Argentine Peso. The bonds canceled the provinces’ debts to their employees and could be spent in the community. The provinces had actually “monetized” their debts, turning their bonds into legal tender.
Issuing and lending currency is the sovereign right of governments, and it is a right that Iceland and Latvia will lose if they join the EU, which forbids member nations to borrow from their own central banks. Latvia and Iceland both have natural resources that could be developed if they had the credit to do it; and with sovereign control over their local currencies, they could get that credit simply by creating it on the books of their own publicly-owned banks.
In fact, there is nothing extraordinary in that proposal. All private banks get the credit they lend simply by creating it on their books. Contrary to popular belief, banks do not lend their own money or their depositors’ money. As the U.S. Federal Reserve attests, banks lend new money, created by double-entry bookkeeping as a deposit of the borrower on one side of the bank’s books and as an asset of the bank on the other.
Besides thawing frozen credit pipes, credit created by governments has the advantage that it can be issued interest-free. Eliminating the cost of interest can cut production costs dramatically. For a discussion of some new technologies that could make even small countries self-sufficient, see David Blume, Alcohol Can Be a Gas.
For the full text of this article, see www.webofdebt.com/articles.
Ellen Brown is a California attorney and the author of eleven books, including “Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free,” available in English, Swedish and German. Her websites are www.webofdebt.com and www.ellenbrown.com.