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Debt Default: A Ticket to the Third World

6 February 2010 9 Comments

The year was 1986, and I had a management position in the International Banking Division at a major regional bank. The Division had grown rapidly over the previous ten years, and had become a major source of revenue for the bank. International banking, which was previously dominated by the big East Coast and West Coast banks, was available at that time to all the smaller, regional banks who were willing to participate in the risk. The essence of the business was the lending of huge amounts (often in the billions) of U.S. dollars to large commercial enterprises operating in “developing” countries (i.e. the third world). Although the loans allowed the foreign enterprises to expand rapidly, it was also good business for many of the large U.S. companies that were looking to the third world as a lucrative market for expanding their own sales. The governments of the third world countries were, of course, over-joyed at the prospect of billions of U.S. dollars flowing across the border, and were more than willing to guarantee the payment of principal and interest on loans made to indigenous companies. It seemed like a “win-win” situation; the profits were huge, the loans were guaranteed by the foreign governments, and the U.S. domestic market had a whole new customer base. Over the course of a decade, hundreds of billions of U.S. dollar loans ended up on the balance sheets of small and large banks across the U.S.

By the end of 1986, the major international lenders in the U.S. began to suspect they were becoming victims of what amounted to a Ponzi scheme. New money being lent to foreign companies was being used to pay interest on the previous debt, and the total amount of money owed to the banks had become far greater than the borrowers could ever repay. Over the course of the next two years, the foreign governments who had guaranteed the debt were called upon to assume the debt and make good on the payments. Although the outstanding debts were almost all assumed by the foreign governments, there was a lack of political willingness to actually repay. The countries defaulted and the U.S. banks were left holding the bag. The implications for the “third world” was a lack of adequate capital necessary for
long term development.

Twenty-five years have passed since the third world, “international banking” crisis of the ’80s; however, a new crisis is beginning to appear on the horizon: a crisis that could make the one of the ’80 seem like small potatoes. The United States of America, along with many European countries have now become the biggest debtors in the world, and have amassed many trillions in debt owed primarily to China and the Middle Eastern countries. The interest payments alone on this debt have brought five European countries to the brink of default. Further, it is estimated that interest payments by the U.S. to foreign countries could equal close to a trillion dollars a year by 2020. This is a frightening scenario, and there is little doubt that a default on debt payments by the U.S. would bring about disastrous repercussions. It is critically important that Congress and the Obama Administration immediately develop a long term plan to reduce the country’s reliance on debt funding before the United States of America is considered uncreditworthy. The results of inaction may be America receiving the dubious distinction of becoming a member of the Third World.

—Rich

9 Comments »

Mama ASID - BadGalsRadio.com said:

aaahh Vampire Debt; our old nemesis. you sure are diggin in the crates to come up with that one Rich. but I loooooooooooves it. maybe you can cc this over to lil timmy c/o: whitehouse.gov; he needs to read and remember.. oh wait, he’s a lil young for that isn’t he… (side eye)

did you know that when I heard that hall and oats tune “Private Eyes” I always thought they were saying “Pirate Eyes, they’re watching you watching your every move..” yeah I did.. and I’m sure you are now connecting the dots between my comments and the blog. Yepppp.
pretty soon they are gonna be scraping the last dollar out of us and hoping we don’t know how much they are behind in collections to OUR Plundered Federal Coffers.

Pirate Eyes, I’m Watchin YOU !!!

# 6 February 2010 at 8:34 pm

VH said:

Sorry to say but the Obama Administration is setting the table with a lot of goodies that will keep them coming back for more and more for decades to come: Federal programs are notorious for being hard to roll back, even the one’s that most people agree are wasteful (recent example is the ethanol subsidy). You are right to insinuate that a debt crisis can happen here as it is happening right now in the once vaunted E.U. Moody’s Investors Service caused a market shake up this past week when it politely warned that massive U.S. debt may put pressure on our triple A rated bonds. Moody’s is probably overstating things but it makes one wonder.

We need spending restraint and the sort of economic growth that keeps up with population growth—-neither of which we are going to get with new massive entitlements, pork, and tax increases. Barring all that, we can pray that the political class in Washington suddenly come to understand that “there is no such thing as a free lunch.” I’m not holding my breath.

# 7 February 2010 at 3:11 am

Windroot said:

I was privy to State Department cable traffic in the mid-1970′s. Even then their were concerns about over-extension of U.S. bank lending to foreign countries.

Like you, I am keeping an eye on the sovereign debt issue, particularly in Japan and Greece. It’s like every other problem we face today, whether it is climate change or debt or reform. We know what we should do but the cure is so painful that governments would rather put up with the disease.

# 7 February 2010 at 6:53 pm

Harrison said:

The time for this post was before Obama took office. He’s not serious about debt reduction and, I fear, neither are the Republicans.

# 8 February 2010 at 10:47 pm

admin (author) said:

Harrison,
I also fear that no politicians have the guts to tackle the “national debt” problem. The same thing applies to Social Security and Medicare.

# 9 February 2010 at 2:06 pm

admin (author) said:

Windroot,
If nothing is done to deal with the national debt problem, then nature will ultimately have its way. The great fire of inflation will eventually take away all of our wealth!

# 9 February 2010 at 2:08 pm

Tina T said:

I am appalled at the amount of debt that we’ve accumulated and the way the interest we owe is racking up. We have over 1/2 trillion dollars in state debt just here in California, a figure that would once have been viewed as out of control spending if the entire national debt were at that figure. Everyone keeps going on about how we’re going to pay for this, and I just keep feeling like the emphasis is way more on how to pay for the debt rather than reduce spending.

# 9 February 2010 at 3:26 pm

admin (author) said:

Tina,
Politicians know that reducing spending or increasing taxes is political suicide. It’s a lot easier to borrow the money and let the next generation worry about it. In a sense, we Americans are committing economic suicide by consciously and deliberately consuming more than we can afford. It may feel good for the time being, but when the bubble bursts there will be no where to run.

# 9 February 2010 at 5:53 pm

Harrison said:

Tina, Kalifornia is run by Democrats. You need look no further for your reason.

# 10 February 2010 at 1:49 am