(OPE-L) "Imminent First World Debt Crisis"

From: glevy@PRATT.EDU
Date: Tue Sep 09 2003 - 09:02:23 EDT

> http://www.neweconomics.org/gen/


A new annual report on the global economy published by nef
today, Monday
September 1st, predicts that a giant credit bubble, created
globalisation's decades of 'easy money', has now reached
a "tipping
point" - a point that has historically triggered financial

Ground-breaking new analysis in the report - titled Real
World Economic
Outlook - shows that Japan's financial crisis was triggered
in 1990 when
the total stock of financial assets began to outstrip GDP by
nine times.

Two of the world's richest countries, the US and UK have
followed Japan's
example, inflating the credit bubble and the accumulation of
assets through de-regulation and reckless lending and
borrowing. This
bubble has been fuelled further by the decisions of Central
Bank governors
and their boards to lower interest rates to historically low

Jubilee research at nef, the team that spearheaded global
awareness of a
third world debt crisis, are releasing provocative new
research into the
first world's huge debts. This shows that credit and other
paper 'promises
to pay' now exceed  levels of real income (GDP) by ten times.

Recent stock market falls, drastic though they have been,
have barely
dented the credit superstructure. When this credit bubble
bursts, the
report concludes, it will be middle class consumers in both
the US and UK
that will bear the brunt of the financial crash.

Ann Pettifor, editor of the annual report, the Real World
Outlook, said:

"Gullible consumers, acting as heroically as Atlas once did,
are holding
up the US and UK economies by dutifully borrowing and
spending. But
take-home pay is falling in the UK, and unemployment is up
in the US, so
consumers will soon buckle under the strain of single-
handedly propping up
these economies. As we live in a deflationary era, the
burden of debt will
be much more painful than it was say, during the aftermath
of the Lawson

"When tipping point is reached, consumers buckle and the
credit bubble
bursts, it is the middle-class debtors who will bear the
full brunt of a
debt-deflationary financial crisis. Sadly, they will suffer
much more pain
than a minority who have resisted the siren calls of lenders
and instead
watched as their assets have been inflated by the actions of
bankers - enriching the already rich."

The report notes that the decades since 1970s have been
characterized by a
near-total abrogation by central bankers and politicians of
any control
over the growth of credit.  As a result the total stock of
assets has mushroomed. At the same time, these central
bankers and
politicians have clamped down on wages and consumer price

Ms Pettifor added: "Central bankers and finance ministers
have engineered
the Anglo-American economies so that we now have a
combination of consumer
price deflation and asset price inflation . The rich can't
believe their
luck. This is their dream economy as  labour and commodity
costs fall, but
property, stocks and bond assets rise. But for farmers,
retailers and employees, these economies are turning into a

Romilly Greenhill, senior economist at nef added: "While
Japan has managed
to keep interest rates very low through a financial crisis -
the same will
not be possible here and in the US. The British and American
are building up substantial foreign and domestic debts - and
in order to
continue attracting finance to fund these debts, will have
to raise
interest rates. There are already signs in the US bond
markets of this
happening.. .A rise in interest rates would, in our view,
tip the credit
bubble over the edge and cause it to burst."

The report warns that in a deflationary environment the real
value of
debts rise, and against a backdrop of rising unemployment in
the US and
falling real wages in the UK, will fast become unpayable for
many.  While
house prices remain artificially high both in the US and UK,
there are
ominous signs that these assets too could fall in value.
Falling asset
prices combined with spiralling debts would impact most
severely on middle
class borrowers in the UK where total household debt is now
120 per cent
of disposable income

When the "tipping point" comes, likely to be triggered by
higher interest
rates in the UK and US  -  then it will be those same
obliging middle
income borrowers and spenders that will be made to bear the
burden of the
ensuing debt crisis.

"Debtors tend to forget that assets do not pay off debts.
Debts are paid
off out of take-home pay, and in the UK take-home pay is
falling in real
terms", said Ms Pettifor.

Steve Diamond
School of Law
Santa Clara University

Office:  408-554-4813
--- End forwarded message ---

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