From the financial debt to a new slavery

Written with Dr Alexander Mirtchev

Debt, n.: An ingenious substitute for the chain and whip of the slavedriver.” — Ambrose Bierce, The Devil’s Dictionary

In the year 1204, the doughty knights of the Fourth Crusade entered Constantinople by stealth and thoroughly looted what was then the wealthiest city in the world. Their plunder allowed them to pay their debts to the Venetians, who had financed the endeavor, as well as to line their own pockets. The knights took huge quantities of gold, silver and precious stones with them when they returned to Western Europe.

For the first time since the collapse of the western half of the Roman Empire in the fifth century, considerable bullion began to circulate in the “barbarian” west. This newfound wealth led to the development of merchant banking, starting in Italy and continuing over the centuries with important developments in modern state finance that persevere to this day, including sovereign defaults.

In the same period, facing increasingly acute financial problems, King John of England’s efforts to dig out his government from a massive hole of debt (in modern terms, approaching sovereign default) by imposing onerous fiscal demands on his vassals, contributed to a rebellion that led to the signing of the Magna Carta in 1215.

Among other innovations, its provisions transformed the social contract that underpinned British society and provided important precursors to the emergence of the Western world as we know it.

Eight centuries later, governments worldwide are sinking in an ocean of debt — extensive, and in some cases untenable, liabilities and strained balance sheets. The countries that are most visibly plagued by a combination of excessive indebtedness and low-growth prospects appear to be the developed democracies of the West and Japan.

U.S. debt held by the public today stands at over $9.6 trillion (not including debt held by foreign central banks), and total debt is approaching 90% of GDP. In much of Europe, the circumstances are even worse — Greek long-term bonds are trading at a nearly 10% premium over the benchmark German bunds, with Portugal not far behind.

Even Spain, where public debt is considered relatively sustainable, is saddled with a banking system that, according to the credit agency Moody’s, would require more than €40 billion to restructure its liabilities. In Japan, meanwhile, debt amounts to almost twice GDP and is likely to get much worse as a result of the recent earthquake, tsunami and nuclear crisis.

Similar debt issues are haunting a number of emerging markets, from Argentina, perpetrator in 2002 of the largest sovereign default in history, to Dubai.

The perils of this debt maelstrom are framed by structural distortions and systemic imbalances — from protecting the “too big to fail” institutions to pension and investment commitments. These problems are exacerbated by the lack of structural solutions — not just the structure of the debt itself, but also the divergence of fiscal strategies in a global financial system that has evolved beyond the means of states to manage it.

Overwhelmingly, the debt burden of a number of stakeholders is predicated on the existence of large-scale and long-term commitments that are at the core of the overall social contract prevalent in the Western world and beyond.

In U.S. parlance, the most prominent parties to this aspect of the social contract are the government, Main Street and Wall Street (as a symbol of the global financial sector). The commitments embodied in these social contracts — in American terms, consider Social Security, Medicare and Medicaid — reflect economic and financial arrangements that are increasingly becoming unsustainable.

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