The World Shifts

By Mark Crutchley

Next week may mark a momentous event in the history of the global financial system with consequences far beyond national boundaries. If the Republicans in the US Congress and President Obama cannot agree on a package to reduce the US budget deficit, then a bill to increase the US debt ceiling may not be passed and the United States could be in technical default on its debts. We have been here before, but there has never before been such a strong possibility of default as the extreme right of the Republican Party pushes its anti-government agenda. The US is in this mess because President Bush took the balanced budget he was bequeathed by Bill Clinton and turned it into a massive annual deficit by cutting taxes for the richer Americans and funding a massive surge in military spending. Now his party want this to be paid for by cutting government spending programmes which will impact on the relatively poorer segments of society rather than by raising taxes on the wealthy.

The importance of this decision cannot be underestimated, because once the conventional thinking has been shown to be wrong, there is no telling what might happen. Let the genie out of the bottle so to speak, and all bets are off. We have seen this most recently in the case of the News International empire. For decades politicians and the media have courted Murdoch for the power his newspapers wield. Post the phone hacking scandal though things will never be the same again and many of those same politicians are queuing up to be seen to be taking a tough line with him. Meanwhile Channel 4 carried not one, but two documentaries this week, outlining the malicious influence of the media under his control. Already the bid to take over Sky, which had seemed a foregone conclusion, is dead in the water. Who is to say that the company might not ultimately have to divest its UK newspapers if the management are deemed not to be fitting people to own such a large portion of our press.

But to return to the financial world, if the US defaults, even on the most temporary of bases, then why shouldn’t other nations do so. Developing countries in particular are weighed down by heavy debts, often run up pursuing inappropriate grandiose projects foisted on them by the countries doing the lending; or the result of earlier dictators siphoning vast sums of money into their own accounts rather than using it for the benefit of the country. Why shouldn’t they just renounce their debts and use the interest payments saved to increase their health and education spending.

The same goes for individuals in this country. Lured by cheap credit and the ready availability of credit cards many have built up debts which they now struggle to pay the interest on, let alone have any hope of repaying the capital. If they have little in the way of assets, then it would be far better for those people to declare themselves bankrupt and start again. What is the penalty? Not being able to get a mortgage, credit card or any other form of debt for a few years. They wouldn’t be able to anyway from a position of deep debt. Of course it isn’t a course of action which people should enter into lightly, they should consult an organisation like the Citizens Advice Bureau and research the implications online at a site such as bankruptcy.org.uk. But often it’s only convention which stops people from following this course of action – one in which the only real losers are the banks and loan companies. Shame.

The Americans will ultimately have to reach a compromise solution and avoid a full-scale default. But just the idea that it could happen has shaken confidence and perhaps changed things forever. If they can consider the unthinkable, then perhaps others – countries and individuals – should think about it too. They, maybe you, might realise that there is an alternative to struggling under insupportable debts.