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AI Summary:
Source: “Background: The existence of a Monetary Growth Imperative (MGI) and its implications for economic stability, democracy and environmental sustainability have been put forward by environmental economists for around two decades but recently criticised as invalid. Given the urgency of the climate and ecological crisis alongside spiralling public and private debt, the MGI deserves closer attention. Methods: For this review paper we analysed studies on the MGI, using a selective, iterative approach to the literature review. Results: Our critical review of the research on the MGI revealed several full academic treatments of the argument and even a taxonomy of them, most of which have not been refuted. We articulate one of them in a new way, as well as two more which have not received academic treatment, before considering why it might be thought politically expedient that any MGI should be refuted, or at least seen to be refuted. Conclusion: In any economy where money hoarding and accumulation is not curtailed, and where most of the money in circulation is issued by private banks as debt, with or without interest, there will be a system-wide scarcity of money available to people and organisations to service their debts – unless, that is, there is continual economic growth. To avoid the deleterious implications of a shortfall of money in an economy, policies are used to maintain economic growth, which is therefore a form of imperative on society. This MGI may be accentuated, at a system-wide level, by the practice of full-reserve re-lending of money. Interest is not the main driver of the imperative, but because it increases the transfer of money to those who are wealthy and more likely to hold that money in a stagnant form that is not available for debt servicing by others, interest charges may indeed exacerbate the MGI. We conclude that the debt-money system creates a competition for money between debtors and savers which is resolved through creation of more debt-money, which in turn drives growth and the resulting ecological and climate emergency.”
Source: “This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.”
Source: “In a series of papers based on analogies with statistical physics models, we have proposed that most financial crashes are the climax of so-called log-periodic power law signatures (LPPL) associated with speculative bubbles (Sornette and Johansen, 1998; Johansen and Sornette, 1999; Johansen et al. 1999; Johansen et al. 2000; Sornette and Johansen, 2001a). In addition, a large body of empirical evidence supporting this proposition have been presented (Sornette et al. 1996; Sornette and Johansen, 1998; Johansen et al. 2000; Johansen and Sornette, 2000; Johansen and Sornette, 2001a, Sornette and Johansen, 2001b). Along a complementary line of research, we have established that, while the vast majority of drawdowns occurring on the major financial markets have a distribution which is well-described by a stretched exponential, the largest drawdowns are occurring with a significantly larger rate than predicted by extrapolating the bulk of the distribution and should thus be considered as outliers (Johansen and Sornette, 1998; Sornette and Johansen, 2001; Johansen and Sornette, 2001; Johansen, 2002). Here, these two lines of research are merged in a systematic way to offer a classification of crashes as either events of an endogenous origin preceded by speculative bubbles or as events of exogenous origins associated to external shocks. We first perform an extended analysis of the distribution of drawdowns in the two leading exchange markets (US dollar against the Deutschmark and against the Yen), in the major world stock markets, in the U.S. and Japanese bond market and in the gold market, by introducing the concept of ‘coarse-grained drawdowns,’ which allows for a certain degree of fuzziness in the definition of cumulative losses and improves on the statistics of our previous results. Then, for each identified outlier, we check whether LPPL are present and take the existence of LPPL as the qualifying signature for an endogenous crash: this is because a drawdown outlier is seen as the end of a speculative unsustainable accelerating bubble generated endogenously. In the absence of LPPL, we are able to identify what seems to have been the relevant historical event, i.e. a new piece of information of such magnitude and impact that it is reasonable to attribute the crash to it, following the standard view of the efficient market hypothesis. Such drawdown outliers are classified as having an exogenous origin. Globally over all the markets analyzed, we identify 49 outliers, of which 25 are classified as endogenous, 22 as exogenous and 2 as associated with the Japanese ‘anti-bubble’ starting in Jan. 1990. Restricting to the world market indices, we find 31 outliers, of which 19 are endogenous, 10 are exogenous and 2 are associated with the Japanese anti-bubble. The combination of the two proposed detection techniques, one for drawdown outliers and the second for LPPL, provides a novel and systematic taxonomy of crashes further substantiating the importance of LPPL. We stress that the proposed classification does not rule out the existence of other precursory signals in the absence of LPPL.”
Source: “…it might not be feasible for a steady-state economy to support a stable debt-based, interest-bearing monetary system without strong interventions.“
Source: “Throughout history, rich and poor countries alike have been lending, borrowing, crashing—and recovering—their way through an extraordinary range of financial crises. Each time, the experts have chimed, ‘this time is different’—claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes—from medieval currency debasements to today’s subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much—or how little—we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts—as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.”
Source: “Aggregate fluctuations and volatility arise from the financing decisions of firms, who face a fundamentally uncertain future. To mitigate this, firms use heuristic rules, e.g., following what the majority do, or assuming their current situation continues indefinitely. The adoption and dissemination of these heuristics depend on the architecture of their social and spatial network. If these rules are accepted to guide investment behaviour, speculative leveraging decisions can propagate contagion effects via networks, resulting in cycles driven by optimistic and pessimistic sentiment. As a result, what may be conventionally seen as a ‘rational’ decision at the microeconomic level, may create an emergent maladaptive (e.g., Fisherian debt deflation) outcome if most agents follow suit. Social networks are then formal mechanisms that transmit speculation, and the network topology is a source of endogenous volatility, which is irreducible to the firm itself.”
Source: “...the current economic and financial system is a roll over of credit into infinity with a locked in requirement for economic growth without which the debt burden (the interest) would quickly amount to more than the worth of the entire economy. With this model, it is also easy to explain and predict economic and financial crisis. When the amount of new loans diminishes, older loans can no longer be repaid, and the economy suffers from a contraction and lower or even negative economic growth... If at some point less loans are issued, then the interest on older loans cannot be serviced and the economy suffers... There are no easy solutions to this situation, but a few economists propose some original and workable measures. For instance, Johnna Montgomerie and Steve Keen insist on the necessity of lowering private debt to restore the ability of households to borrow. However, these measures do not question the underlying monetary and financial system’s model based on debt money created by commercial banks. They merely propose a more engaged and pro-active intervention from public authorities in managing how banks create money (for instance, via credit guidance, making sure that credit is issued not only for consumption of existing goods/services, but also for productive purposes), taxation and monetary policy via central banks (revisiting the idea of « helicopter money » or quantitative easing for the people). In other words, relying on a centralized authority like governments or central banks to implement their solution. Unfortunately, looking at the political situation in many countries, their proposals are far from being discussed, let alone adopted. The debt based monetary system has therefore shown its limits. It is ill suited to weather shocks, or only at extreme human costs, and relies on confidence and the willingness of people to take risks, which in difficult times, creates a pro-cyclical tendency (over-borrowing in ‘good’ times, which creates speculation and unrealistic growth targets, under-borrowing in ‘bad’ times, which exacerbates economic downturns and crisis). Given the challenges ahead, especially climate change, one can easily see that the current financial system is not designed to weather the storm, as the current coronavirus episode is showing us now. There will come a time when governments will be powerless to save the financial system, and so before that day comes, it may be wise to consider transitioning to a new monetary and financial system altogether.”
Source: Boom and bust cycles are caused by cycles of debt accumulation and default that underpin the monetary and financial system: “The cycle process captured by the model works as follows: Debt accumulates gradually through booms due to its interest-bearing nature coupled with the downward wage rigidity that sustains the upward slope. Debt is rolled over frequently because the principal debt feeding the economy is insufficient to cover the interest on top, from a system perspective. Throughout the boom, firm profit shares, interest coverage ratios, and credit spreads all fall structurally and bottom out before the turning point to the recession. At the turning point, the system is so stretched (maximally leveraged) that any small demand perturbation or an endogenous interest rate change induces a cascade of firm defaults and associated debt write-offs. The cascade spreads through demand-side feedback, fueled by dropping income and hence declining consumption for the workers that become unemployed. In addition, feedback through rising debt costs due to realized risk-based debt pricing by banks drags yet other firms into default. After the downturn, a new debt accumulation process starts endogenously… The centrality of interest on debt in the model (as its absence lets cycles disappear), makes the model verge on Islamic finance since one of its defining features is the prohibition of interest. To the extent that there are no hidden forms of interest, or they be at least sufficiently slight, Islamic financial systems may be less procyclical. A small but evolving literature appears to show this empirically. The model may offer theoretical support to such empirical findings… The model’s emphasis on the essence of debt squares well with the importance that policy institutions such as the IMF perceive, including regarding the role of macroprudential policies to pre-emptively curb excessive debt build-ups. Examining how macroprudential policy, besides monetary and fiscal policy, influence cyclical economic behavior in a disequilibrium model as the one considered here warrants much more exploration.”
Image source: Distribute / socialize finance or the whole system will collapse: “…transnational corporations [TNCs] form a giant bow-tie structure and… a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic ‘super-entity’… Remarkably, the existence of such a core in the global market was never documented before and thus, so far, no scientific study demonstrates or excludes that this international ‘super-entity’ has ever acted as a bloc. However, some examples suggest that this is not an unlikely scenario… nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic ‘super-entity’ in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries. [The attached figure] shows a small subset of well-known financial players and their links, providing an idea of the level of entanglement of the entire core. This remarkable finding raises at least two questions that are fundamental to the understanding of the functioning of the global economy. Firstly, what are the implication for global financial stability? It is known that financial institutions establish financial contracts, such as lending or credit derivatives, with several other institutions. This allows them to diversify risk, but, at the same time, it also exposes them to contagion. Unfortunately, information on these contracts is usually not disclosed due to strategic reasons. However, in various countries, the existence of such financial ties is correlated with the existence of ownership relations. Thus, in the hypothesis that the structure of the ownership network is a good proxy for that of the financial network, this implies that the global financial network is also very intricate. Recent works have shown that when a financial network is very densely connected it is prone to systemic risk. Indeed, while in good times the network is seemingly robust, in bad times firms go into distress simultaneously. This knife-edge property, was witnessed during the recent financial turmoil.”
Source: $63 Trillion of World Debt in One Visualization
Source: “We are in a debt trap” - Nouriel Roubini on 10 ‘megathreats’ to our world and how to stop them (video)
Source: US Debt clock: Counting up until the Great Reset.
Source: Absolutely stunning animated video of the structure of modern finance, covering the credit theory of money, fractional reserve banking, and shareholder capitalism. Part II of the video will be released later this month: “The everyday economy is there to serve the financial sector… placing social impact above financial returns is virtually impossible within today’s system. For that to happen, politicians will have to act. After all, how the waterworks functions is ultimately a political choice. Ever-growing inequality, an economy that’s out of sync with the planet— it’s all inextricably tied up with our financial system.”
Image source: “Global debt rose by 28 percentage points to 256 percent of GDP, in 2020… Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs. Debt increases are particularly striking in advanced economies, where public debt rose from around 70 percent of GDP, in 2007, to 124 percent of GDP, in 2020. Private debt, on the other hand, rose at a more moderate pace from 164 to 178 percent of GDP, in the same period… In advanced economies, fiscal deficits soared as countries saw revenues collapse due to the recession and put in place sweeping fiscal measures as COVID-19 spread… Monetary policy is now appropriately shifting focus to rising inflation and inflation expectations. While an increase in inflation, and nominal GDP, helps reduce debt ratios in some cases, this is unlikely to sustain a significant decline in debt. As central banks raise interest rates to prevent persistently high inflation, borrowing costs rise. In many emerging markets, policy rates have already increased and further rises are expected. Central banks are also planning to reduce their large purchases of government debt and other assets in advanced economies—but how this reduction is carried out will have implications for the economic recovery and fiscal policy. As interest rates rise, fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities. As history shows, fiscal support will become less effective when interest rates respond—that is, higher spending (or lower taxes) will have less impact on economic activity and employment and could fuel inflation pressures. Debt sustainability concerns are likely to intensify. The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.”
Source: Lyn Alden: The Myth of Frictionless Finance
Source: “With an ever-lower cost of debt, the economy has had a hidden tailwind pushing it long between 1981 to 2020. Now that interest rates are again rising, the danger is that a substantial portion of this debt bubble may collapse. My concern is that the economy may be heading for an incredibly hard landing because of the inter-relationship between interest rates and energy prices, and the important role energy plays in powering the economy… Politicians are concerned about the price of food and fuel being too high for consumers. Lenders are concerned about interest rates being too low to properly compensate for the loss of value of their investments due to inflation. The plan, which is already being implemented in the United States, is to raise interest rates and to significantly reverse Quantitative Easing (QE). Some people call the latter Quantitative Tightening (QT). The concern that I have is that aggressively raising interest rates and reversing QE will lead to commodity prices that are too low for producers… The types of economic growth in the 1960 to 1980 period and the period since 2008 are very different. In the earlier of these periods (especially prior to 1973), it was easy to extract oil, coal and natural gas inexpensively. Inflation-adjusted oil prices of less than $20 per barrel were typical. An ever-increasing supply of this oil seemed to be available. New machines (created with fossil fuels) made workers increasingly efficient. The economy tended to “overheat” if interest rates were not repeatedly raised (Figure 1). While higher interest rates could be expected to slow the economy, this was of little concern because rapid growth seemed to be inevitable. The supply of finished goods and services made by the economy was growing rapidly, even with headwinds from the higher interest rates. On the other hand, in the 2008 to 2020 period, economic growth is largely the result of financial manipulation. The system has been flooded with increasing amounts of debt at ever lower interest rates. By the time of the lockdowns of 2020, would-be workers were being paid for doing nothing. World production of finished goods and services declined in 2020, and it has had difficulty rising since. In the first quarter of 2022, the US economy contracted by -1.4%. If headwinds from higher interest rates and QT are added, the economic system is likely to encounter substantial debt defaults and increasing breakdowns of supply lines… Since 2019, our problem has been that the total energy supply has not been keeping up with the rising population. The cost of extraction of all kinds of oil, coal and natural gas keeps rising due to depletion, but the ability of customers to afford the higher prices of finished goods and services made with those energy products does not rise to match these higher costs… The situation we are facing today is much more severe than in 2008. The debt bubble is much larger. The shortage of energy products has spread beyond oil to coal and natural gas, as well… We cannot assume that reported reserves of anything can really be extracted, even if the reserves have been audited by a reliable auditor. What actually can be extracted depends on prices staying high enough to generate funds for additional investment as required. The amount that can be extracted also depends on the continuation of international supply lines providing goods such as steel pipe. The continued existence of governments that can keep order in the areas where extraction is to take place is important, as well. What we should be most concerned about is a very rapidly shrinking economic system that cannot accommodate very many people. It seems that such a situation might occur if the debt bubble is popped and too many supply lines are broken. There may be a time lag between when interest rates are raised and when the adverse impacts on the economy are seen. This is a reason why central bankers should be very cautious about the increases in interest rates they make as well as QT. The situation may turn out much worse than planned!”
Images source: “Low and middle income countries accumulated debt over the previous decade but interest payments have shot up since central banks hiked interest rates. Debt restructuring is now necessary to limit outflows… With a handful of countries in prolonged debt negotiations and another 61 nearing debt distress, urgency is high. Systemic reform of the international financial architecture has been pursued for decades but with little progress. No real forum exists, for example, for countries that run into debt repayment problems to work out a procedure with creditors. (Efforts to introduce such systems in 2002 and 2015 both failed.) Progress on reform of the global tax system has so far produced an imperfect floor, whose coordination is dominated by wealthy countries. IMF governing quotas remain skewed towards advanced economies, and the flawed system of sovereign credit ratings continues. The World Bank and its peers tend to lend on a project basis and the IMF continues to prescribe austerity measures for countries in urgent need of its liquidity support. Reforms at the World Bank allowing for an increase in its lending have so far yielded an additional annual $5 billion—a miniscule figure compared to its $240 billion of outstanding loans, and smaller still against the $1 trillion of annual finance that is needed each year to meet development and climate goals. Even the most modest of proposals, involving little to no cost to rich countries, have been met with resistance. For example, one ‘announceable’ outcome being floated for the Paris summit is to confirm the rechannelling of $100bn worth of Special Drawing Rights, an IMF-issued reserve currency, which was already promised by wealthy countries to poorer countries. The issuance of condition-free Special Drawing Rights in 2021 were by far the largest source of any aid to developing countries in any year since the pandemic and probably saved hundreds of thousands of lives. Due to Congressional obstruction, the US will not re-channel or issue new SDRs. IMF rules mean that most SDRs are disbursed to the wealthiest economies. Many middle- and low-income countries quickly spent much of what they received to pay down debts and support domestic budgets, and so are in urgent need of funds, but rechannelling must be done in a way that satisfies both IMF rules and legal requirements in each country… there is some ambition for debt relief on a large scale, reminiscent of the publicly-backed HIPC program in the 1990s. As a key pillar of its Bridgetown agenda, Barbados has put forward a proposal for a mechanism to reduce the costs associated with foreign currency risk for investing in developing countries, and thus make borrowing cheaper. A working group convened by the Élysée has canvassed an application of the ‘polluter pays’ principle to compensate for climate damages. The formal agenda includes a global tax on fossil-fuel extraction to support the rising losses associated with climate change in poor countries, which could raise $150 billion, and a shipping-fuel tax that would raise $40–60 billion annually; while debt campaign groups advocate for a 5 percent tax on multimillionaires that could raise $1.7 trillion a year. Though it often goes unmentioned, the US Congress raised revenue for the IRA by similarly taxing rich Americans and polluters… since interest rate hikes in 2021, low- and middle-income countries pay more in interest payments than what they would need to spend annually to achieve their national Paris agreement climate action plans. Financial hardship is on the rise, with half of low income countries in or at high risk of debt distress.”
Image source
Image source: “In the aftermath of the COVID-19 pandemic, much of the global South has been immersed in a debt crisis of a breadth and depth not seen since the early 1980s. The debt distress was apparent before the pandemic and the situation over the last decade is best described as a slow burn, which the pandemic and war in Ukraine ignited in often sudden and dramatic ways. However, what remains a surprising feature of the ongoing situation has been the avoidance so far of a generalized domino effect, unlike previous systemic Southern debt crises. This fact does not diminish the severity of the consequences given that the containment of crisis has been achieved by regular and persistent applications of austerity and adjustment programmes with deleterious impacts on development in poor countries. This article frames the Debate by exploring these aspects of the current Southern debt crisis, focusing on its deeper structural drivers versus the role of more proximate triggers of the crisis; the similarities or differences with past crises of recent decades; and the degree to which anything has in fact changed in orthodox responses to crisis management. A theme that emerges from the more heterodox scholarship profiled by this Debate is that the current crisis and its responses are maintaining the dominant development paradigm of the last 40 years, rather than eliciting a shift away from it. There is a continued adherence to neoliberal ideology in macroeconomic policy making and to the punitive subordination of developing countries in debt distress, through crisis responses, to the Northern and especially US-centred international financial system. Ignoring the very strong similarities to the past, especially the 1982 debt crisis that ushered in this paradigm, risks repeating the lost decades to development that followed.”
Source: “Millions of people received their stimulus payments from the federal government this week, but some are at risk of immediately losing the money if they owe credit card, medical, or private student loan debts. A loophole in the law could mean some of those who are most in need of the emergency aid don't get the money. About a third of Americans -- some 71 million adults -- have debt in collections and could be impacted, according to the National Consumer Law Center.”
Source: "'...the current spending on my generation — I’m 61 — if it continues unabated, will erase any chance my children will have the safety net of social, education and health services they will need. It seems deeply offensive to me that we will be asking these poor children from Harlem to subsidize a generation that is, by and large, more well-off than they are, and then leave them deeply indebted in an America that had eaten the seed corn of the next generation.'”
Images source: Note: This report was published before COVID raised debt even more: “The global debt crisis is gripping more and more countries in the Global South. It is threatening the livelihoods of millions of people. At the same time, many over-indebted countries are suffering massively from the impacts of climate change. Bone crushing debt servicing is hampering urgently needed adaptation measures. 124 out of 154 developing countries and emerging economies examined are critically indebted. The situation is especially critical in Bhutan, Mongolia, Sri Lanka, Djibouti, Cape Verde, Mozambique, Sudan, Argentina, El Salvador, Jamaica, Lebanon and Kirgizstan. In absolute terms, the external debt of all countries reviewed amounts to 7.81 trillion dollars. 19 governments have currently had to suspend, either in full or partly, payments to their foreign creditors. The difference between the low interest rates in the North and the high profits in the South continues to fuel capital export. A high demand for infrastructure in the South, dependence on a small number of commodities for export and weak governance in some countries of the South are amplifying the tendency towards unsustainable indebtedness. Climate change and the disasters it triggers are becoming increasingly severe and often present a special threat to highly indebted countries. Small island nations in the Pacific and the Caribbean as well as the countries in the Sahel Zone are particularly hard hit. An agreement on compensation provided for victims of climate change by its perpetrators has still not been reached. No internationally coordinated mechanism on coping with recent debt crises is in place. This leads to a prolongation of debt crises. People in the countries affected are bearing the costs. China and other ‘non-traditional creditors’: In order to be able to cope with a debt crisis, the creditors have to negotiate with one another and with the debtor. In the current debt crisis, increasing private loan making and the status of China, which has become the most important creditor for many debtor countries, are complicating coordination.”
Source: "So the evidence is overwhelming, not only that changes in private debt have very significant macro-economic effects, but also that the importance of this factor on its own is substantially greater than either the rate of interest, or the level of debt service (the product of the two). This alone is sufficient to reject the Neoclassical belief that the rate of interest is the significant regulating variable in the economy. The level of private debt is more important, and arguably its explosion since the mid-1990s (on top of a rising trend) is the reason that interest rates tended to fall prior to the crisis—so rising private debt could be a reason for the fall in the 'natural real rate of interest.'”
Source: Melanie Gilligan's meditation on global finance: "Crisis in the Credit System is a four-part drama dealing with the credit crisis, scripted and directed by artist Melanie Gilligan. A major investment bank runs a brainstorming and role-playing session for its employees, asking them to come up with strategies for coping with today’s dangerous financial climate. Role-playing their way into increasingly bizarre scenarios, they find themselves drawing disturbing conclusions about the deeper significance of the crisis and its effects beyond the world of finance. Using fiction to communicate what is left out of documentary accounts of the crisis, the short, TV-style episodes reflect the strangeness of life today in which the financial abstractions that govern our lives appear to be collapsing. Crisis in the Credit System, commissioned and produced by Artangel Interaction, is the result of extensive research and conversation with major hedge fund managers, key financial journalists, economists, bankers and debt activists.”
Source: Dr. Jason Hickel, London School of Economics: "...it turns out that microfinance usually ends up making poverty worse. The reasons for this are fairly simple. Most microfinance loans are used to fund consumption – to help people buy the basic necessities they need to survive. In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt... [So] Why is microfinance such a resilient idea? Because it promises an elegant, win-win solution to the problem of poverty. It assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power. In other words, it promises revolution without the messiness of class struggle. And, what is more, it promises that we can help save the poor while making money from it... It’s the neoliberal development strategy par excellence. Forget about colonialism, structural adjustment, austerity, financial crises, land grabs, tax evasion, and climate change. Forget about challenging the concentration of power and wealth. And, above all, forget about collective mobilisation. Bankers shall be our new heroes and debt our salvation.”
Source: Hundreds Of Suicides In India Linked To Microfinance Organizations. Microfinance is out of control. The suicides mentioned in the report are specifically linked to the largest microfinance firm in India, but larger structural issues also exist.
Source: "Grameen had never been an alternative to the World Bank-pushed neoliberal economic model; rather, it was born and brought up as a necessary supplement to it... Microfinance is a now more than $90 billion industry, with over 200 million borrowers. In one estimate, 'a total of US$ 19.583 billion was actually paid by microfinance borrowers' to this industry in 2010. Bringing a huge number of the poor of the world under the net of finance has contributed to a 'transformation of value into globalized value' which renders their labor accessible to global capital... [But] GDP and per capita income have increased without a significant improvement for the people in poverty and deprivation in Bangladesh, and for many there may even have been a further deterioration in their living conditions... the conditions of the rural poor do not differ much between borrowers of microcredit and non-borrowers... In a study on 'a total sample of 1489 families from 15 villages, only 5 to 9 per cent of the borrowers were found to use micro credit for their economic improvement'... In another study, Q.K. Ahmed and others found that 1,189 out of 2,501 respondents could not repay their due installment of microloan on time... Nevertheless, Grameen Bank and other Microfinance Institutions (MFIs) have their own spectacular success stories. But that success is found not in poverty alleviation, but rather in corporate expansion and the establishment of a new form of financial industry.” Related article.
Image source: Principles for Dealing with the Changing World Order by Ray Dalio: The rise and fall of empires follows a cyclical pattern with distinct stages. Currently, the post-WWII world order, dominated by the U.S. and ratified by the Bretton Woods agreement, is in decline. Cheap credit from China and 0% interest rates has fueled years of over-consumption in the Western world. Now, central governments are rapidly printing money and inflating their currencies to prevent financial collapse during a sustained period of economic contraction. Over the next decade or two, rising populism and civil strife will present domestic challenges to the U.S., and conflict with China will become ever more likely.
Image source: Many people have developed models reflecting the fact that economic growth seems to come in waves or cycles. Ray Dalio shows a chart describing his view of the economic cycle in a preview to his upcoming book, The Changing World Order. Figure 1 is Dalio’s chart, with some annotations I have added in blue.
Source: TLDR: The most likely scenario is that over the next ten years, barring an energy productivity miracle (which is not going to happen), the end of peak cheap oil will force central banks to inflate their currencies to fund greater deficit spending, as everything becomes more expensive. Years of hyperinflation would then create a financial collapse and debt jubilee, and the old monetary order based on U.S. debt / treasuries would then reconfigure itself around a new order in which money is directly tied to energy (e.g. Bitcoin).