Opinionista Mario Ambrosini 27 September 2011

Debt-free money is only way out of financial crisis

Sooner or later a chain of sovereign defaults will finally force people to realise that the present system cannot work and that the time has come to reconsider the role of the state in modern society.

For the past two years in articles and parliamentary addresses, I predicted the present global financial crisis, pointing out how unprepared our government would be and the futility of Pravin Gordhan’s optimistic rhetoric.  This is not due to my clairvoyance, but to the historical understanding of what has been happening in the past 20 years in global terms.

Common sense, now exiled out of political discourse, can simplify the abstruse concepts used by governments and economists alike.  The official figures of the United States make a point which is applicable to many Western countries and to South Africa, even though we, alas, produce no such credible and transparent figures.

The US national debt is circa $14.6 trillion plus $115 trillion in unfunded government liabilities, which are additional debt. Its total public spending is circa $7 trillion, which is $3.4 trillion greater than its government’s tax revenues. The annual cost of financing this debt is about $3.7 trillion.  The country as a whole produces about $15 trillion a year, but has a total public and private debt of $55 trillion a year, plus the $115 trillion in unfunded government liabilities.  This is against total national assets of $76 trillion.  This state of indebtedness has been chronic and is set to grow annually, as the present economic outlook predicts the reduction of tax revenues and an economic recession. 

If this were the balance sheet and position of any company, the company should file for bankruptcy, no bank would lend it any additional money and S&P would place it at the bottom of its credit risk rating.  Obviously the US cannot repay its debt even if it expropriates all of what each citizen owns.  Yet S&P only downgraded the US creditworthiness to a still prestigious AA+, and the bottom fell off the markets.  Whom are we fooling?

In South Africa we are reaching a national debt of R15 trillion with an annual deficit of about R155 billion.  Gordhan has refused to answer my questions on the amount of the local government debt and there are no credible figures in respect of unfunded public liabilities.  Yet, I have no reasons to believe that the South African situation is any better than the US’s. 

My parliamentary questions on how we intend to repay our debt have gone unanswered and the best Gordhan has been able to promise is that sometime in the future he will contain the growth of the debt to 5% a year.  Obviously, absent dramatic cuts in spending, the approaching global recession makes this limit unrealistic.

Hence now Gordhan resorts again to the empty rhetoric of optimism, stating he is in touch with all global leaders who are considering the situation seriously.  He adds that the fundamentals are strong, which anyone capable of counting can refute. Yes, the markets are sound but the state is rotten.  

Were I an Italian politician, I would call for Italy to default on its sovereign obligations.  This sham cannot go on forever.  The entire notion of credit rating has been reduced merely to the sovereign’s capability of raising more debt to pay the interest on its ever increasing debt, not on its ability to ever repay it.  The European Central Bank buying more in this debt is tantamount to counterfeiting money on a colossal and unprecedented scale, as the ECB will create out of thin air the money used to finance the new issuance of T-bills from Italy and Portugal, possibly with the intention of neither placing such T-bills with its client banks nor ever calling on their payment.

The sooner all the state financial house of cards collapses, the less painful it will be for the citizens, and the sooner will we be able to begin rebuilding out of the inevitable catastrophe.

We are faced with a global conflict of a nature before unknown and because of it not easily recognised. Through the tools of finance and state indebtedness, the Soviet Union was made to collapse in a decade, without a shot being fired.  Thereafter, the West fell prey to the same dynamics which are destroying its manufacturing capacity and wealth on a scale comparable only to the devastation of WWII.  Wealth, industries and soon financial centres are moving to the East, in what could be the death of the Occident, which, alas, Germany alone cannot prevent.

We must avoid that the inevitable catastrophe is used to justify the erection of the same system on an even larger basis, viz. a global private central bank issuing a global fiat currency, whether based on drawing rights or a pool of existing currencies.  If this happens, the same catastrophe will reproduce itself within a hundred years, but in much larger scale.

These catastrophes are not accidents and do not hurt everybody: they suck equity out of both the middle class and the industrialists, to hand it to international money trusts, which always benefit from such financial disasters.   In the final analysis, these catastrophes are created not by the markets but by the state’s interfering with the markets and getting away with acting in a manner in which no non-state entity could do.

The only way out of this and future catastrophes is to use their devastating impact to reform the debt-based production of privately owned money [banknotes] which is at the centre of the present monetary system.  We need to reform the monetary system to re-introduce debt-free money, viz. government money issued by the treasuries. 

The establishment of a European treasury with such powers would be an immense step forward on the path to federal integration of Europe.

In South Africa, I made this proposal in elaborate detail in a letter I wrote to both Gordhan and Minister Patel two years ago, showing how South Africa is one of the few countries which can break ranks and replace fiat money with sound money, but I received no reply.  I discussed the matter with officials of the Reserve Bank and academics, receiving the usual measure of scepticism met by anything out of the consuetudinary.  I placed this correspondence on www.ifp.co.za for those who care to analyse it.

This reform is espoused by US presidential candidate Ron Paul and two Nobel Laureates in economics, but is rarely discussed because of the immense vested interests set against it. The situation is dramatic enough to consider it fully.

Alternatively, there is but one painful road, which is that of cutting spending dramatically and way below our decreasing revenues. 

Sooner or later a chain of sovereign defaults will finally force people to realise that the present system cannot work and that the time has come to reconsider the role of the state in modern society.  Who does the state really serve?  Financially, not you and me, as I will show in a follow-up article. DM


"A long habit of not thinking a thing wrong gives it a superficial appearance of being right and raises at first a formidable outcry in defence of custom. But the tumult soon subsides. Time makes more converts than reason." ~ Thomas Paine