In the City
Raiders of the lost money
Tony Rudd
The problem with debts that are very large is that they become unreal; they ascend into the world of telephone numbers. This seems to be what happened last week at the annual meeting of the Inter- national Monetary Fund in Toronto. The Mexicans, who are on the verge of the largest debt default known to man, might have been expected to behave with a certain degree of humility. Not a bit of it; they knew they were the masters of the situation and that, owing as much as they do, the rest of the world can't afford to let them go.
It is interesting to examine why this should be so. Obviously if the world ex- pected the Mexicans to repay next month or even next year, it would indeed be stupid to let them go into default just as it is short- sighted in the commercial world for a bank to put a receiver into a company which is about to turn the corner. But it seems very doubtful whether the Mexicans are just about to turn the corner. Far from it; they look, on the contrary, as though they are going to remain incapable of repaying what they have borrowed within measurable time. This means that, to use the jargon, banks who have lent money will have to `roll over' the debts, meaning that they will not press for repayment when it is due and instead will allow further, in the end unlimited, time and will not press for the past interest, let alone the present interest, to be paid either. In the end this will doubtless lead to a debt settlement as a result of which the Mexicans will pay x in the peso, probably adding up to a tiny pro- portion of what they should have paid.
This means that the countries which lent the money will have lost it. What is the point therefore, as we all know that this is going to happen, in not admitting that the money is lost now? The answer appears to be that to do so would blow such a large hole in the international — and indeed the US domestic — banking system that con- fidence would be shaken. The same argu- ment, incidentally, applies to quite a seg- ment of South American debt owed by countries like the Argentine and to the Polish debt and quite a chunk of Eastern European debts generally. In fact, the capacity of the Third World to pay back the money it has borrowed as a whole is much the same as Mexico's: it can't pay. But nobody wants to make the appropriate ad- justments in the ledgers.
If the whole thing could be stopped there, and it was just a matter of 'window- dressing' that the bankers don't want to push these countries into default, it might not be so serious. But in economic rather than banking terms the matter doesn't stop there. The fact is that the money lent to Mexico has been lost, and lost in a way which has swindled the societies from which the resources came in the first place. For this is not just a matter of international bank- ing; real resources are involved here. If we follow the chain of events round, what has happened is that interest rates in America (and to some extent this is what has happen- ed in the UK) were driven up deliberately by the authorities in their attempts to hold down inflation and to counter too lax a fiscal policy. Rates went up so high as a result that fewer and fewer consumers could afford to borrow. This broke down the usual nexus in the American domestic market, whereby the older well-off genera- tion saves and lends its money, which gets borrowed by the younger generation who are going into debt to raise their families and build up their households. As interest rates went up, the saving went on, but the borrowing was choked off.
Yet the money had to be lent somewhere. Industry could hardly afford to borrow it. The government was of course a borrower, but much of the savings went into the bank- ing system and was on-lent to the very large category of borrowers who didn't mind the high interest rates — namely those who had no intention of paying the money back or who could always print more money to do so if needs be. These borrowers were the sovereign borrowers like Mexico, the whole of Argentina and so forth. This amazing and ill-sorted pack of illiberal economists helped themselves to the bonanza that flow- ed their way. The great banks like Citibank, Chase and the rest were the channel through which it all happened. Those whose job it is to monitor these kinds of
movement applaud it. This was the interna- tional banking system at its best, moving a surplus from one place into a deficit M another. The numbers cancelled out perfectly. It was a miracle of the electronic number transfer system which we have to- day instead of the bookkeeping of yester- day. The fact that the US worked itself into a recession, and Mexico into an inflation, was neither here nor there. Now we are at the embarrassing point of not wanting to put a reverse entry through the electronic numbering machine. Let's leave it where it is, say the bankers. But the middle classes whose savings these numbers represent have parted with real money these were savings in the true sense, representing consumption forgone. And the would-be consumers have lost too, because they haven't bought the consumer durables, cars and houses, which they do in fact ward because the wretched Mexicans beat them to it. It wouldn't matter so much if the money invested in Mexico had alreadY fructified but it hasn't. The same is true with the money that has been pumped into Poland. There is going to be very little to show for it.
One suggestion that has been made is that if things get too bad, we can always print some more money to fill the hole. Well, it depends what kind of money. It is certainlY no use printing any more pesos. Printing more dollars is in a sense exactly what the, Federal Reserve Bank is in the business 01 doing now; it was the Fed's change from a tight credit policy to an easier one, brought about by their fears concerning the in- stability of some of the banks, that has led to the great boom in bonds in Wall Street. Similarly, it has brought interest rates, tumbling down. By taking the pressure of t they hope to have averted a collapse and will probably have succeeded in doing s°' But the trouble with printing more moneY is that it doesn't put any real wealth back into the system. That's gone. And it will never come back.
From this somewhat dismal story we cart see several things. Monetary policy worked perversely during a period of high interest rates; it sucked savings out of developed economies, and, through 'sovereign' lend- ing, it put it into the underdeveloped coin' tries where much of it has now been lost. S° much for that part of the monetarist excl.," cise. The economic impact was to add severely to the downward pressure of the recession as real wealth was wiped out. The final problem of how to square the books is still unsolved. Had the lending been direct, with middle-class Americans buying Mex- ican bonds, they would be able to see that they had lost their money. As it has bee°, indirect (and no government can afford to see its banks go up in smoke), the governments themselves will have to squat ,e the books, which they will do by the simple time-honoured method of using the Pri°- ting presses. Next time we listen to a, monetarist prescription, we ought to read the fine writing a little more closely just to check on the ingredients.
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