In case you missed it, the American banking system has been
giving out massive amounts of loans to foreign companies. This has good, and
bad, consequences. Because the American banking system had a limitless amount
of cash and credit (so it appeared), it was willing to loan out these quick and
easy loans to businesses in China and India, amongst other emerging economies.
But now, with the American dollar going up, the exchange
rates have become sharply assymetrical. Any emerging economy business trying to
pay its loans is going to find that the amount they need to pay has sharply
increased in local currency. With the Federal Reserve raising interest rates,
these companies may find it difficult, or impossible, to pay the loans back.
There’s always Chapter 11, leading to a massive wave of defaults across the
world. Apparently around a trillion dollars may be at stake here.
The Federal Reserve cannot keep interest rates artificially
low for ever. Then there’s also their massive 85 billion per month dollar
printing program which has been steadily pumping dollars into the economy. At
some point, all of these billions catch up and come to be known as “inflation.”
But American economic head honchos were apparently supremely confident that the
economy was so strong it could withstand an unlimited amount of money,
especially for defense, being printed each year since 9/11.
Will the American economy be able to absorb the last 10
years of massive overprinting of dollars? Will the defaults in the emerging
economies act like dominoes, bringing down the American financial system? Its
hard to say for sure, but what is clear is that countries that have taken these
easy loans from America
are going to reconsider where they get their credit from, in the future. In
fact, indebting people is nothing new in America-most people have massive
amounts of credit card debts, and they also buy everything else, from college
education to house to car to their monthly food items, on credit. For America, this
is a normal way of operating. But for many other parts of the world, where debt
is not considered an asset and a sign of normalcy, the sudden spike in interest
rates and the resulting defaults could spell serious consequences.
In general, banking operates on trust, and the notion of
stability. People plan their projections of future growth, and payment, based
on a notion of stability of currency and exchange rates. When the rates start
to fluctuate this wildly, businesses become more risk-averse, and the dollar
becomes an unreliable currency. Of course, for the risk-takers who don’t have
any other form of credit, the dollar will still remain a currency to bank on,
since its more easily available to them in the form of credit than say, the
Swiss franc. But in the long run, the losses incurred from the dollar’s easy
credit (And easy indebtedness) may be harmful to emerging economies.
I’m also interested to know how many emerging economy
countries are tied by debt to the World Bank, and what these loans are for.
Also, how do they get repaid? And how is the dollar’s wild ascent going to
affect these economies?
I was working as a consultant at the World Bank between
2008-2010. My job was to take part in the countrywide assistance strategy, and
to note down the suggestions given by various groups of stakeholders in
Pokhara, Nepalgunj and Biratnagar. In one of these sessions, teachers gave the
feedback that the World Bank, in collaboration with the Nepal Government, had
frozen the hiring of permanent teachers, but started a new program that
allocated “block grants” to school—these grants were given in small chunks to
schools to do what they wanted. Most schools built a spanking new concrete
structure. In exchange, the World Bank put on hold the permanent hiring of
teachers—that was the conditionality for the block grants (from what I could
understand, the agreement was that the school could do whatever it wanted with
the grants—including pay its teachers, which of course none of the schools
actually did.) This left the government schools, in effect, with shiny new
concrete buildings but poorly paid temporary “teachers” who may just have
passed their SLCs. In other words, they took what was once a very efficient and
well-functioning system from which many highly educated individuals graduated
to go forth in the world and hold international positions, to a system which
boasted “infrastructure” but whose commitment to teachers and teaching had been
allowed to be greatly undermined. With the Maoist affiliated students
threatening teachers, a teacher admitted to me that he hadn’t failed a single
student for a few years, even if they were not sufficiently up to
standard—meaning a lot of these Maoist gangsta boys then reached SLC but didn’t
actually have the academic chops to pass the final examination.
My purpose in sharing this story is to show that loans that
operate on this level of conditionalities can be dangerous. Who thought it
would be a “neat” idea to stop hiring lazy permanent teachers? Perhaps there
was some wild new radical theory of social change (no doubt started by
anthropologists) which posited than handing $4000 to schools would
automatically make them hire good teachers, or teachers more suitable to their
ethnic and /or caste group. In fact, the program seems to have backfired, since
the permanent teachers, many of whom are actually selfless and dedicated
individuals who happen to spend a lifetime teaching in extraordinarily
difficult circumstances for very little pay (and often facing mortal danger, as
during the civil conflict when they were targeted by both sides), are now no
longer present in these schools, leaving the schools in remote areas even more
vulnerable than before.
These loans, therefore, can lead down the slippery path
where governments, businesses and individuals end up taking actions that are
bad for the collective good. The ironic part of this whole story is that the
very student who fails from this educational system then has to go to Qatar and
work in slave-like conditions to amass enough wealth, some of which will be
extracted from the government as tax in order to service World Bank loans—the
same loans that made him a less educated and less skilled man. I cite an
example of a loan from the Word Bank, an “international” institution that just
happens to be headquartered in Washington
DC, but it could just as well
apply to private businesses as well.
It would be a strange world in which only America’s
monster currency swallows all others, in some PacMan like movement through the
banking system. Clearly some intervention of international proportions would
need to occur, especially if these fluctuations of interest and exchange rates
also effect the debts of the Third World
countries, via the World Bank, amongst other international banks that have been
loaning money to poor countries for infrastructure, governance, et cetera.
How will the loans repayment work out? Lets hope the
American lenders will think about a way out for themselves, as well as for
their borrowers. There could be solutions, including allowing the businesses to
repay the loans at the interest rates, and the dollar exchange rates, at which
they initially made the contracts. Of course, this would bring on a big loss to
American banks, but this might be better than not getting anything back in
return.
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