TWIN EXPLOSION: The current debt system has reached it’s expiration date. At the end of the millennium, a perfect convergence took place between the forces responsible for today’s looming storm: Indebtedness, the rise of neoliberalism, the collapse of communism, the information revolution, globalization and the liberation of the banking beast (Part I)

Surplus countries of the Euro-zone do not seem willing to either limit their excessive surpluses (by increasing the wages of their employees, so that domestic demand will increase), or to transfer «resources» to the members running a deficit, nor are they willing to «mutualize» public debt, or allow the transformation of the ECB into an actual central bank of the Euro-zone (Euro-bonds, direct purchasing of bonds from member states etc.).


As a result, the vicious cycle of banks «rescuing» states and, later on, states rescuing banks will perpetuate – thereby ultimately increasing the debts of both. It is therefore reasonable to assume, that the particular «un-natural» process has an expiration date.


In this context, it is justifiable to believe that, unless radical changes come into effect, sooner or later an unprecedented twin explosion will occur – an explosion of states and banks simultaneously, the size of which will be increasingly devastating the more it is being artificially postponed. The ones blamed are not going to be the economic elite – which essentially governs from the backstage.

While hoping to be proven wrong, concerning the above «predictions», it seems appropriate to go through some details again:




’’In the Nordic countries, Germany, the Netherlands and France, a different economic «mixture» was preferred after the mid 20th century. Its vision could perhaps be summed up in the idea that capitalism is the only system available that can work – but only with the strong presence of the government’’ (R.Heilbroner, 1919-2005, American economist and historian of economic thought).


Is capitalism in reality, one wonders, despite its promises to generate wealth for all, eventually making the rich richer and the poor even poorer? Can growth be achieved without the creation of inequalities – that is the widening of income differences between the upper and the lower «social layers», whether they are individuals or entire nations? Stated even simpler, can rich people get richer, without the poor becoming poorer – without the one side «growing» at the expense of the other?


Furthermore, does the vast majority really need a «smaller state» (reduced government interference), as many liberal economists believe it would be to the benefit of society, putting all their faith in the skills/uprightness of the private sector or would it rather benefit from a more qualitative, less costly or corrupt, and more transparent state, regardless of its size (especially when political power, is the only protection against financial power)?


And are economic crises, the frequency of which have increased dangerously, the necessary «companion» of the capitalistic process, as well as the «creative destruction» (Schumpeter, 1883-1950, Austrian American economist and political scientist), or is there a way to avoid this, by appropriately regulating the free market system? How much longer will humanity be able to withstand the markets «depressive» behavior, meaning the continuous rises and falls, the «oscillations» which expand more and more, from the lowest end (recessional debt downsizing) to the maximum end (development indebtedness)?


Finally, is it objective to believe, that the «invisible hand of the market» (as Adam Smith named it), if released, creates wealth in the real economy (Main Street), and brings destruction to the financial markets (Wall Street)?


It is obvious, that an honest answer to all these questions is not an easy task, as long of course one remains a supporter of the free market theory – both of the non-centrally directed, as well as that of the non-monopolistic. Especially when realizing that the circulation system of the economy, or otherwise money, is generated through credit – thus from the creation of debts, with all the problems this entails.


However, it is vital for these questions to be answered, even if the answers cannot be properly documented or the questions completely covered. Especially since it is by now clear that we are experiencing an unprecedented massive global economic war – with the ones «feeding» it being the financial markets, which seek their authoritarian establishment in global governance, with the complete privatization of power.




Before the financial crash and the Great Depression of 1930, the levels of national income in the U.S. were, without any doubt, impressive in overall volume. But by taking a careful look, one would determine that the country benefited very unevenly from the distribution of this generated wealth. The approximately 24,000 families at the top of the social pyramid reaped three times more income compared with 6,000,000 families characterized as being part of the Pyramids base – while the average income of wealthy families at the top was 630 times larger than the income of families at the base (source: R. Heilbroner).


Unfortunately, this was not the only problem at the time. Forgotten on the sidelines of the excitement created by the belief that Capitalism was to generate unlimited prosperity («Everyone should become rich», were the words the President of the democratic party back then articulated), were two million unemployed citizens, while hiding behind their classical, marble facade, banks went bankrupt at a rate of two per day – for six whole years before the financial crash.


The average American back then, used his prosperity in a self-destructive manner. He had taken on too many loans, was also dangerously exposed to the market «sirens», buying products with installments and had sealed his fate by entering the stock market – engaging in stock purchases made not with his own money, but with bank loans. The tragic developments may have been inevitable, but even so not predictable, since rarely a day went by, without some personality of the days, assuring the nation for its prosperous condition – among them prominent economists, academics, businessmen and politicians.


Between 1930 and 1970, i.e. after the Great Depression (which unfortunately led to the second world war), income inequalities in «western» economies narrowed considerably – in complete contrast to the latest decades (after 1970). In 1928, the U.S. richest enjoyed 5% of the country’s total income – forty years later, in 1970, their wages did not exceed 1% of it (today, they have increased again, as a result of the «reverse» policy adopted in recent decades).


During the same period, the power of labor unions was increasing steadily, granting them the ability to continuously negotiate higher wages for workers – who in this way participated in the additional revenue generated both by the growth rate and an increase in productivity. This «conditions» where of course largely the result of government «provisions», which actively participated in both the redistribution of income and unemployment reductions – mostly through public investments (Keynes) and tax law reforms.


Governments generously increased spending on social services, funded to a great extent from income generated by the rich. In Great Britain, the highest tax rate was close to 83% – a rate more than double of that today, and much too excessive to hold. The state was making large investments in social care and education, while also funding college education.


In the contrary, as far as the financial markets are concerned, the situation was completely dampened – with minimal to nonexistent profit opportunities. The international flow of capital was strictly controlled, the financial «products» limited, while bank executives (the equivalent of today’s Golden Boys), were rarely earning more than their peers in other business sectors. At the same time, neither citizens, nor governments were seeking to engage in borrowing – since spending was not in excess of income.


Unfortunately, at some point logic was lost completely, driving the system to its limits. Tax rates increased excessively, while unions were demanding ever higher wages, which ultimately triggered an inflationary spiral circle – at the same time, continuously ongoing strikes undermined business operations, leading the economy to a dead-end.


On the other hand, with social benefits exceeding reasonable limits, unemployment benefits sometimes even surpassed salaries, reducing work incentives. In the end, the international currency system collapsed, leading to the «hatch» of the Chicago school – with the Nobel laureate economist Robert Lucas (born 1937, American, University of Chicago) demanding for the complete change of the system.


’’The redistribution of income, strict rules on markets and high tax rates, mean death to the free economy’’, as Robert Lucas documented his thesis, continuing: ’’Whoever is forced to be taxed on a large portion of his income, as well as whoever can rely on assistance from the state, has little incentive to work, invest or finance his college studies… Inequality is the basic prerequisite for growth and wealth generation while, by a dynamically growing economy, even the poor benefit… The tide lifts all boats’’ (note: the translation was based on Greek text, therefore minor variations to the exact words of Robert Lucas might be found).




Both R. Reagan and M. Thatcher based their policies on these theories, in an effort to «reduce the state» and to neutralize the unions. When they finally succeeded, privatizing enterprises and selling public property (British public property nowadays consists only of a bridge on the Thames, since governments have sold everything, but even so the country’s total debt exceeds 500% of its GDP), inequality soared – because the market never seeks for equality on its own.


So as it turns out, the markets dis-proportionally reward the rich, helping them, among others, to charge high interest on their capital. They also reward those with special skills, inherited or acquired, as well as those who have been fortunate enough to work in growing sectors. Essentially therefore, they are «punishing» all the others, which are characterized by limited skills, poor ancestors or who have been unfortunate enough to train in a profession for which there is no demand at the time.


Specifically, the period after the abolition of the gold standard (starting in 1971), was undoubtedly extremely profitable for the capital owners – for all of those who were considered to be rich or capable. Both their income and «portfolios» were constantly growing – as proven by the fact that, if in the 70’s an American had a total net worth equal to 75 Million Dollars, he belonged to the 400 richest people in the country, while today more that 1 Billion Dollars of net worth are required to fit that position.


In contrast, the same period was of rather neutral importance to employees, since the annual income of an average American worker was $ 45,879, remaining almost stagnant until today ($ 45,113, with data being «deflated»). In Germany, even during the period of high growth between 2004 and 2008, when corporate profits jumped dramatically, the average wages of workers significantly narrowed, instead of increasing (a situation that contributed to the improvement of the country’s competitiveness, to the detriment of its citizens and its European partners).


In Greece, wages were little changed after 2000, despite the country’s relatively high growth rate – which explains the sharp downturn that followed the arrival of the IMF. In Great Britain, special fees (Bonus) for executives in the financial industry surpassed all previous records, while the wages of all the other workers remained at previous year levels.


Of course in developing economies poverty reduced in absolute terms, but social differences increased dramatically – and once again the big loser’s here are workers, while the «winners» are those who had bet their income on capital «commissions». In China, 10 years ago, 50% of GDP was spent on wages and salaries – recently it was reduced to 40%. In India, mainly high income groups benefited from the economic reforms of the 90’s – while in Brazil, after the invasion of the IMF, the rich live in fortified areas and sheltered apartments, to protect themselves from the many poor. According to a recent study conducted by the IMF, ’’Inequalities have increased in all countries, except perhaps in the poorest nations of the planet’’.


The common «political» feature of this period was undoubtedly, as was mentioned in the beginning, the predominance of the neoliberal doctrine of the Chicago school, in the reforms that were carried out by R. Reagan in the U.S. and M. Thatcher in Britain.


Concluding, the «limiting» of the state and the privatization of all public enterprises, as well as the sale of state assets, predominated – with documented (historical) results being, the state and household indebtedness, keeping wages steady, the neutralization of unions, increases in corporate profitability, the emergence of monopolies (multinationals), continuous «attacks» by the IMF, as well as the omnipotence of the idle, speculative capital – meaning all kinds of financial «markets» by that.


Athens, 29.03.2013

Date of original: 08.12.2012

Translation of original: Dennis Viliardos


    Vassilis Viliardos is an Economist and an Author of several books on the Greek economic crisis. He has earned his Economics degree in ASOEE (Greek University of Economics) and in Hamburg, Germany.  He lives in Athens, Greece.

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