Opinion: What we should do if the USA defaults

You can’t use the phrase ‘perfect storm’ these days.  It is a cliché. But how do you express, with sufficient clarity, the phenomenon of a financial tsunami and a financial hurricane happening at the same time?
 
Because we need to start asking how we might cope if the very worst happens – as well it might – and both the US government and key European nations default on their burgeoning debts at the same time?
 
The euro has been rescued by the latest bail-out, but an American default would unravel that and cause a second banking crisis, far more ferocious than the first – and on a scale that makes it quite impossible to bail out just by borrowing more money as we did before. 
 
Going further into debt to tackle a global debt conflagration would also be like throwing petrol on the flames.
 
The danger is that, within a few hours of the crisis hitting, the world’s cycle of speculation, the $3 trillion a day that pours through the world’s wires, will unravel like Tinkerbell when nobody claps.
 
The question is urgent and of course the debates about what should be done have to be done quietly.  We can only hope they are taking place, but – since financial regulation seems to have progressed little further than hoping for the best – it is a good bet that they are not.
 
Let’s not be under any illusions about the risk.  Our economies are now interdependent, and our food and energy so interconnected by related just-in time delivery systems, that a major economic crisis on that scale and immediacy threatens us with serious social disruption.  Possibly even mass starvation.
 
During the Far Eastern debt crisis in 1997, we saw TV pictures of hospital patients thrown onto the street at bayonet point as the health services shut down.  Nearly a decade and a half later, we could witness scenes far more terrifying and closer to home.
 
So what might be done?  It might hasten that moment of catastrophic loss of belief if our leaders were to start talking publicly about what they might do.  But it makes sense for the rest of us to start making plans – and debating them too.
 
So here are the top three things we ought perhaps to decide now if the worst happens:

     

  1. Create the money necessary to pay off the debts – and to create emergency liquidity in the system.  This is not quantitative easing, which was simply snaffled by the banks, as it was when the same thing was done in Japan a decade ago.  It is the modern equivalent of the Treasury bills printed by David Lloyd George to stave off a banking collapse in July 1914.   This would work best by international agreement, so that the money is created by International Drawing Rights and credited to governments to pay off the debts, but it could also be done country by country.
  2.  

  3. Create emergency mediums of payment, as they have in places like Brazil and Uruguay – very low interest and no-interest currencies that can support local economies in the absence of national currency, issued through local government and other institutions. These will emerge anyway, as people turn to internet systems like bitcoin, but it makes sense for central and local government to provide more reliable local alternatives.
  4.  

  5.   Create the social networks capable of supporting people to live their lives, and do so through existing public services – so that every surgery, police station, hospital and housing estate gets their own manned time bank (virtual infrastructure is not what is needed here, and will only benefit the articulate middle classes) to provide mutual support during and after the crisis.

 
But there is one thing that needs to happen now, above all else. We need to establish one central unambiguous truth: the future of humanity, the future of our communities, and of civilized human life, comes before the integrity of the banking system.
 
If the banking system collapses, because of the weight of debt, then the money must be created – as we know it can be – by the world’s central banks to settle the ruinous debts and to start again.  That must happen even if it makes a mockery of the financial system we have built, and even if it risks inflation later.
 
That has got to be our slogan: life before banks.  If that creates moral hazard, then it is better than complete moral collapse.

David Boyle is a fellow of the New Economics Foundation and the co-author of Eminent Corporations.

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32 Comments

  • Robbie Simpson 27th Jul '11 - 3:10pm

    Mass starvation. Really ?

    The US isn’t going to default on its bonds, because the Treasury Secretary isn’t insane enough to destroy the world economy single-handedly. They’ll just suspend wages of federal employees, cut Social Security…
    The effect will be similar to the government shutdowns of the 90s – not a catastrophic global collapse.

    Ironically the seemingly inevitable ratings downgrade ( to AA – hardly to a Greek level ) might encourage investors to buy up undervalued Treasury bonds – this is a political crisis, and the US economy remains more than solvent enough to cover its international obligations.

  • Colin Green 27th Jul '11 - 3:29pm

    Even if you assume there will be no agreement on Capitol Hill, the USA isn’t going to run out of money next week, it will just run out of “overdraft”. Government will still receive money from taxes, it just won’t be able to top that up with borrowings. They will have to spend less. That doesn’t equate to a full scale collapse of the world economic system, just that a few bills will be paid late until an agreement is made.

  • David Allen 27th Jul '11 - 6:41pm

    All a bit apocalyptic. Not entirely the fault of the author. He didn’t invent headless chickens like the Tea Party. However, talking up survivalism and emergency doesn’t help. It is a dangerous kind of mindset, as the Norwegians have found out.

    True, financially driven catastrophes do happen. But panic makes them worse, not better. “The only thing we have to fear is fear itself.”

  • “That has got to be our slogan: life before banks. ”

    It is best to be careful about dissing banks if a) you need to borrow lots of money, like the British government, or b) you need to save money in a bank account, savings vehicle etc.

    But it is true that banks would not be needed if no one needed to save, borrow or transfer ownership of anything.

  • The US won’t default, but part of me wishes it would. Coz, personally, I’m a bit fed up of watching governments screwing their citizens over to prop up a banking system run by incompetents and borderline crooks.

  • Yes, David, there is the question of level of risk and extent of insurance which people are comfortable in dealing with when it comes to paying a premium against their house catching fire, for example. But the problem is that ordinary Joe has no idea just how quickly contemporary (complex) society would unravel, and nobody but nobody understands the system well enough to know what event or sequence of events would combine to trigger a collapse.

    You say “the debates about what should be done have to be done quietly. We can only hope they are taking place” and this intrigues me. I agree with the former in the sense of not stampeding the horses, or instigating panic; and yet it seems hugely irresponsible that the authorities should not inform people of what might be about to take place. In fact, I have sufficient doubts about the wisdom of government to suspect that your hopes in the latter part of the statement I quote would be forlorn!

    When Argentina went belly-up in 2002 local currencies quickly established themselves to support the continued functioning of local economies in the face of national economic collapse. And there is a school of thought that there’s no need to act in advance setting up such things because they will evolve as needs arise. Seems to me it’s as well to be aware of the options available in advance and ready to initiate them… a small premium on risk?

    Kurt Cobb writes well via energybulletin.net on these matters, here’s one example: http://bit.ly/qS74UG

  • Malcolm Todd 28th Jul '11 - 4:51pm

    “taxation is for the provision of public services, not a weapon for social engineering”

    Nonsense. It’s both; always has been. Even the Romans knew that.

  • Jedibeeftrix
    I think indirect taxation is more punitive than a 50p rate for higher earners. Actually, flat rate tax is relatively recent and in conjunction with other free market fundamentalists small government hobby-horses hasn’t delivered. Fact the countries that pulled out of the recession quickest and strongest were either emerging economies or the western economies with stronger labour laws, more social cohesion,and more progressive taxation. France,and Germany, even Iceland isn’t doing as badly as everyone thought it would..
    As for your assertion that Tax is not a tool for social engineering. Utter nonsense. It has always been a tool of social engineering from the notion of democratic representation down to public libaries. And what exactly is wrong with social engineering? We don’t live in caves, hunt and gather, die of dysentery. In fact the biggest disgrace in politics is that we’ve adopted a sort myopic Doctor Pangloss “all is for the best in this the best of all possible worlds” attitude to social policy unless involves stiffing disabled and poor people, coz we are now intent going backwards in that area,

  • “…it generates very little more revenue than it costs to administer…” You may well have a better understanding of the taxation system than I have, but as someone who fills in self-assessment tax returns and deals with PAYE I find it difficult to see how one level of income tax can be more expensive to administer than another, and as the income tax system quite clearly generates massively more income than it costs to administer I don’t understand how the 50p tax level can be so uniquely expensive.

  • Liberal Eye – there are some good suggestions in there. I would like to add in, reform of hedge funds, which as far as I can see is nothing but a more complex pyramid triangle where risk is continually sliced so that people are able to draw out their profit on a complicated mathematical equation that barely any of those trading in could explain.

    Vince Cable is absolutely correct on those Tea Party nutters who are bringing the world to the edge of ruin on false right wing free market dogmatic and ideological policies.

    Dogmatic and ideological right wing free market policies do not work and will lead us all to ruin.

  • It is a connected world. If the Americans default then the world economy may tip into really serious trouble. Greater than the flat lining and recession heading economy state that Osbourne has forced on us * with Liberal Democrat assistance.

    I think I was also alluding to the Conservative free market chicago school economic dogma of Cameron and Osbourne, that details that it is necessary to privatise everything. This dogma is one that the Orange Book section of the Liberal Democratic leadership seem to agree with; and with the coalition agreement again set loose on the country (without an explicit democratic mandate). Of course from rail, electricity, gas and health provision in the states there is no evidence that privatisation does anything but enrich shareholders at the consumers expense.

    But you got that really didn’t didn’t you Jedibeeftrix ? What the American example does provide is how badly wrong things go, with an unfettered freemarket. Again, health care in particular provides a terrific example.

    I don’t want to live in the USA where free market rules and mass inequality reigns. Why is their free market policies being forced on the country here ? Jedibeeftrix, please don’t tell me that the electorate voted for it in a free and fair election because they didn’t.

  • Well I want those free market policies, even if you don’t. And while the electorate may not have voted for them, given our coalition government, it was a free and fair election and i’ll brook no suggestion otherwise.

    Hmm, it seems Jedibeeftrix that you are admitting that the electorate did not vote for the Conservative Coalition free market privatisation of everything policy. The statement above is a contradiction – people are getting what they didn’t vote for but it was free and fair election ? How can be getting something that you didn’t vote for be free and fair ? It is a misrepresentation of views and election won on a largely false platform.

    It is shameful that this privatise everything, free market rules everything can only be enacted under false auspices and misleading the electorate. You may want it JBT, shame there was dishonesty in the way it was achieved. The record of many privatisation has delivered profits for shareholders and poorer more expensive service. I am not sure why you are supporting that ?

    I am glad that you can see the disaster of the NHS bill. The amendments don’t fundamentally change the privatisation and fragmentation of the NHS. It must be stopped to avoid replicating the disaster that is US style health care. Safe in Tory hands ? I don’t think so.

  • So you are saying it is completely OK to misrepresent your platform and your policies and mislead the electorate then.

    I don’t understand your view that this is an acceptable way to behave.

    http://www.guardian.co.uk/business/2011/aug/04/debt-crisis-economics

    Another fantastic day for the unregulated free market.

    What a disastrous mess the US financial and Thatcherite free market deregulation has left us with. Gambling, short selling and pyramid hedge fund triangles dressed up in fancy titles and complicated equations that not even those selling them could explain or understand.

    Your free market JBF is a real marvel.

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