A miscalculation could plunge the world into an unparalleled financial debacle. Will the crisis be averted? Can the West survive?
NEVER have we faced a world crisis like this one. Descending rapidly on us is the specter of a world debt collapse. Countries in Latin America, Africa, Asia and Eastern Europe have amassed an incredible debt of about $700 thousand million in loans. And it appears they can't pay them off. At the time of writing, the overheated financial caldron was threatening again to explode. For the last year and a half, the International Monetary Fund (IMF), the U.S. Federal Reserve System under chairman Paul Volcker, and' numerous government and private agencies, have struggled to stave off a major disaster. As one economist told The Plain Truth. a debt collapse could "plunge the Western world into the deepest depression in recorded human history." The person on the street, if asked, seems blissfully unaware of the fiscal dangers. Until now, the situation has remained relatively hidden on the financial pages of daily newspapers and financial periodicals-hardly the daily reading of the general public. Yet, if major debtor nations go into default, the ensuing debacle would engulf economies that today appear stable. Economist Eliot Janeway ominously warns: "One official default is all it will take to stampede the other busted borrowers into a full-fledged cartel of defaulting debtors." Continuing, he declared: "The situation is spinning out of control and poses a clear and present danger for the entire international financial system comparable to the one preceding [the] 1929 [depression]." Mexico, Brazil, Poland and a number of other developing nations have come. under sharp scrutiny-one by one they have failed to make payments on time. Only narrowly has disaster thus far been averted. The stakes are extremely high! If a significant amount of these debts went into default, several U.S. and European banks would instantly become insolvent. The nine largest American banks have loaned about 113 percent of their stockholders equity to Mexico, Argentina and Brazil alone (all with overdue payments)! Couple this with the fact that a recent rescheduling of payment from Latin America involved capital from more than 1.400 separate banks. Chairman Volcker warns that the fiscal and political risks "are without precedent in the postwar world." Denis Healy, former British Chancellor of the Exchequer, warns, "The risk of a major default triggering a chain reaction grows every day."
How It Got to Be This Bad
The burgeoning debt of the major developing nations in question nearly exceeds the combined gross national products (GNP) of Canada, the People's Republic of China and the United Kingdom. Spread across the world, this enormous debt would provide every man, woman and child alive with more than $150 a person. In retrospect, it appears inconceivable that normally conservative private banks would have allowed this situation to develop, much less crest at today's crisis level. Several economists and financial experts lay the blame squarely on those American and European bankers whose loan share has been roughly 60 percent of the total. "Bankers were foolish and greedy," explains one major American newspaper, "and have only themselves to blame for forcing money on countries that obviously could not repay." The roots of the situation lie in the early 1970s. In 1973 oil-dependent economies worldwide rocked in the wake of a major crude oil price increase. The Organization of Petroleum Exporting Countries (OPEC) flexed its muscles and almost overnight shot many government deficits into the financial stratosphere. As governments worldwide scrambled to cope with the shock, private bankers realized an opportunity to ease the crisis. The OPEC nations, because of the price explosion, were suddenly awash with Western money. Many Third World nations, on the other hand, desperately needed to finance their now-ballooning balance of payment deficits. Saudi Arabia, the United Arab Emirates, Kuwait and other OPEC nations began depositing their surplus oil money in Western banks for reinvestment. The banks, in turn, quickly loaned these deposits out to nations whose soaring oil bills were crippling their economies. At first, it appeared both lucrative and safe. "Countries don't go bankrupt" was the widespread belief.
The Rush Begins
As the world neared the end of the 1970s, soaring inflation and rising interest rates lured private bankers more toward international loans. Instead of mere millions of dollars, hastily assembled financial consortia in America and Europe pressed thousands of millions of dollars into the hands of governments in Latin America, Asia and Africa. Called "jumbos" in banker's language, these massive loans quickly increased the private sector's loan share to about 60 percent of the total. The result? International loan debt skyrocketed 850 percent! In barely a decade, Eastern European and Third World countries increased their obligations by more than 700 percent.. What would justify such an incredible risk? The developing countries borrowing the vast sums looked to inflation for assistance in repayment. With the United States and Europe locked into double digit inflation, it appeared that the loan could be cheaply repaid with depreciating currency. On the bankers' side, there was an incredible amount of money to be made. A major American business magazine adds, "Major banks [also] earned fat fees for arranging those megabuck loans."
The Roof Caves In
Having recycled the petrodollars from the 1973-74 oil crisis, bankers settled back. Despite a few minor fluctuations, many thought a solid source of income had been hit upon. However, shock waves reverberated through European and American corporate boardrooms when, following the 1979 worldwide recession triggered by a second major oil price increase, Poland informed its creditors that it couldn't make the U.S. payment due in 1981. As banks scrambled to hastily reschedule the Polish repayment, it quickly became obvious to those on the inside that much of the international aggregate debt was anchored to a base of fiscal quicksand. Quietly, many financial institutions began to press American and European governments for some safeguards in the event of an impending disaster. The international debt again blazed across the front pages of newspapers in late summer of 1982, when Mexico announced that it couldn't 'keep up interest payments. Brazil is now barely able to keep its head above the financial morass, and Argentina floats in the same boat. Add to this that dozens of other developing nations queue up almost daily asking banks to reschedule their interest and principal payments.
Where will It End?
Many banks have made no secret of their desire to cut loose and pull back from the brink. After the Mexico crisis, bankers began to put pressure on President Ronald Reagan to increase the U.S. quota to the IMF by 50 t6 100 percent. If something terrible happened to the international loan structure, they reasoned, the additional money in the IMF could cover the bad debts. As Mexico teetered on the brink of fiscal disaster, the U.S. Treasury quickly complied with a massive infusion of funds, followed by additional sums from the major industrial nations. The U.S. government has intervened twice since; once in providing a fiscal life preserver in oil prepayments, agricultural credits and short-term loans to Mexico, and again with a hastily arranged short-term loan to Brazil. The United States also passed the Monetary Control Act of 1980, permitting the Federal Reserve System to assume part of the international debt and issue Federal Reserve notes as collateral. However, as the Fed already has its hands full monetizing the U.S. debt, it would be disastrous t6 see a flood of U.S. currency being released to cover the major debts of Latin America, Asia and Eastern Europe. The IMF, to its credit, has quietly demanded the debt-ridden countries to install acceptable austerity measures to shore up flagging economies. But there is a definite limit to IMF measures. What measure would ever be effective for a Third World economy whose social and financial life resembles a raging typhoon? Austerity measures mean cutbacks in such social programs as welfare and food subsidies-removal of these in a starving nation means riots and political turmoil. Few economists hold any hope for orderly servicing of the national debt in Yugoslavia, Rumania and Poland. The warning flags are out and riding high. "Failure to manage and diffuse these strains," warns Mr. Volcker, "could deal a serious blow to the recovery of the United States and the world economy." Realistically, despite public efforts to paper over barely concealed panic, the situation looks bleak. Meeting in Paris, senior economists and government officials from the Group of 30 (the 30 largest industrialized nations) issued a statement asserting that the debt situation isn't likely to collapse in the near future. But they readily admit that it will take several years for Third World economies to heal following the ravaging by high interest rates and severe worldwide recession. Other economists regularly qualify their forecasts, asserting that the situation remains critical and unstable. A series of independent wrong decisions could topple the entire picture. Security from what economists call the "irresponsible doomsday scenario" can only come from major industrialized nations working closely together. Martin S. Feldstein, President Reagan's chief economist, summed it up: "It is surely true, as Benjamin Franklin said in quite a different context, that 'We must all hang together, or we shall all hang separately.'" But most privately admit that the potential for a major, awesomely destructive fiscal holocaust remains alarmingly high.
The Unexpected Outcome
Other economists and political leaders, not content merely to wait out the crisis, now call for more radical solutions. Writing in Foreign Affairs, Albert Bressand (deputy director of the Institut Francais des Relations Internationales (IFRI) declared, "... national policymakers have obviously lost control over their much cherished spheres of economic autonomy." Dr. Bressand asserts that the West must now recognize the de facto existence of a global economy. Will the world ultimately be forced to embrace a global economy? Yes! Two separate world economies are coming-one to follow the other! The source of this foreknowledge is available in a book widely available in dozens of languages, but rarely, if ever, consulted in economic matters. We call it the Holy Bible. The terrible irony is that this overlooked book explains the underlying laws of economics-the means to avoid fiscal disaster-but economists have not realized it. This book explains the cause of inflation (Hag. 1:6), the biblical rules governing interest rates (Ex. 22:25), the only fully effective way to adjust for long-term economic growth (Lev. 25) and a truly equitable welfare and social security system (Deut. 26:12-15). Yet, it is virtually ignored-and that accounts for the reason the nations face so much economic turmoil today. You see, these laws explained in the Bible are just that-laws. But they differ from the laws that humanity legislates. God's laws cannot be defied without incurring a visible setback. If they are defied, the adverse effects accumulate. Perhaps you have heard that the Bible forbids actions based on greed. Can you imagine what the fiscal outlook would be like today if that single precept was widely followed?! "These are principles that no one could follow in today's business world," some may snort. But continued defiance will only bring disaster on all, including the greedy! Humanity must realize that time is quickly expiring-the room for maneuvering has all but disappeared! Perhaps you did not realize that there are only two basic ways of life. Science and economics know little, if anything, about these two ways of life. Humanity has but two choices: to embrace a way of life summarized as a way of giving, of out-flowing love; or a way of "get," of competitively taking with no concern for others. The latter way of life in operation in every nation today virtually guarantees eventual destruction! Sadly, it appears humanity remains bent on choosing the latter way, which will lead to the startling, prophesied rise of a new consortium of nations in Europe and the rise of a new worldwide economy in an attempt to get around the consequence of today's greed and selfishness in the marketplace (Rev. 18:11-18; Ezek. 27:1-36). This world economic system will inevitably fall (Rev. 18:11), to be replaced by an efficient, prosperous, internationally linked economy, personally directed by the divine Personage who originally revealed all economic law: Jesus Christ, the son of God.
Look to This!
Mythologic fantasy? Hardly. The economic laws revealed by Jesus under the guidance of God the Father are the only answer, even in this competitive world. They work! God himself declares, "'Prove Me now in this,' says the Lord of hosts, 'if I will not open for you the windows of heaven and pour out for you such blessing that there will not be room enough to receive it'" (Mal. 3:10, RAV). These are not lightly made statements-they are authoritative promises that God fulfills to those who seek to obey him. God is not against people making profits, as long as they're honest profits. God wants you to "prosper in all things" (III John 2). We announce a way that benefits both yourself and your neighbor. If you truly seek understanding, both of the background to the contemporary fiscal crisis and why mankind fails to lift this world from devastating war, poverty and other ills; we have two free booklets to offer you. If you're interested, and you should be, write for your free copies of Never Before Understood- Why Humanity Cannot Solve Its Evils and Managing Your Personal Finances. These eye-opening booklets carry no further obligation-they are presented free in the public interest. God's ways are simple, yet profound. May God help the people in this world to understand and apply them!
Can a Country Go "Bankrupt"?
Economists specializing in the international debt threat assume generally that, national bankruptcy is not possible under present conditions. Bankruptcy per se is a legal concept. It would require a court of law to arbitrate and to define the boundaries and responsibilities of any unilateral national bankruptcy proceeding. No such international court of bankruptcy now exists, nor is there an internationally accepted body of laws that would govern such proceedings. Yet national declaration of either bankruptcy or default would radically affect the defaulting country, instantly cutting itself off from additional monetary and physical aid. One economist equates a national declaration of default with an act of war. Today, while about $200 thousand million of the aggregate international debt is considered in de facto default, central banking systems as the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and the U.S. Federal Reserve System are working feverishly in cooperation with lending institutions, debt-ridden countries and other governments to renegotiate this debt and reschedule payments. The problem with any major rescheduling program is that future economic shocks and recessions cannot be fully foreseen and could topple any arrangement.
Why Are the Banks Upset?
Since the first financial shocks of the late 1970s, private banks and lending institutions have been endeavoring to decrease their risks and involvement in the international debt situation. These institutions have managed to erect safeguards and obtain bail-out measures for most of their remaining outstanding loans. Yet, more than one seventh of the international debt remains unsecured and guaranteed by little more than the good faith of the debt-ridden countries. This is what causes banking executives to reach for the sedatives at night. Of the nine largest American banks, about 113 percent of stockholders' equity is tied up in loans to Mexico, Argentina and Brazil. Were a significant portion of this amount declared in default, the banks would likely require heavy government assistance to remain open. All three countries have asked for new rescheduling of payments. Bankers readily admit that there is little likelihood that the international debt will ever be fully repaid, pointing to the unlikely event that the domestic United States debt also will ever be fully repaid. Some loans will be paid in full, while others will be renewed and extended. The banks hope developing countries will reach the point where they can service their debts by making interest payments on time.