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Debt Machine

A look into the global economic system, focusing on the role of debt and Europe’s debt crisis spiraling out of control.

Filmmaker: Laure Delesalle

Debt drives financial markets, creates profit and generates an endless cycle of production and consumption.

Many aspects of modern life revolve around credit. Our homes, cars, schools and government expenditures are financed by borrowing. Debt has become the engine of growth, the lifeblood of the economy. It is a machine that creates more and more debt, day after day.

This debt machine has grown to epic proportions, and now seems to have spiralled out of control. Public debt, the debt held by governments, is soaring.

The Eurozone is having a much harder time than other economies emerging from the crisis of spiraling debt. Why? How can the debt be repaid? And how can we ever get out of the spiral?

This documentary takes viewers on a fascinating journey through the rugged landscape of economics and finance. Fast-paced and dynamic, it recounts the history of sovereign debt from the late Middle Ages to the present day and offers unexpected exit routes to safeguard the Eurozone from future crises.

Caught in the debt spiral

“Government debt is not in itself a problem”, explains Karine Berger, MP, Commission of Finances, French National Assembly. “Every country has debt. And since we have economic growth with the creation of new wealth every year, debt is ok. That’s the assumption. The problem is when your debt gets out of control, when it gets so big that you no longer control the process and its growth year after year.”

It's a debt machine, yes. When you're on it, it's very hard to get out of it.

by Lee Buchheit, international lawyer, New York City

When debt reaches a certain level, a government gets caught in a spiral. It has to borrow more money in order to repay its debt and the accrued interest.

Most Eurozone countries are now in that situation and government debt has soared into the trillions of dollars in some countries. They borrow heavily on the financial markets and from large private banks.

“Banks love to make loans to sovereigns, because behind the sovereign are millions of taxpayers and … those taxpayers never go away. There’s a new one born every single day and they’re going to pay taxes for the next 150 years unless the country collapses. So why wouldn’t you lend to them because you know you’re going to get your money back? You know there’s no bankruptcy law, you know that you can always make profit – it’s safe lending,” explains Ann Pettifor, political economy specialist, PRIME economics, London.

A country’s debt is measured as a percentage of Gross Domestic Product (GDP). In the Maastricht Treaty of 1992, experts decided that in order to keep debt from getting out of control, countries should not allow it to exceed 60 percent of their GDP.

But that critical threshold has been largely exceeded by most European countries. And when debt exceeds a certain level, tax revenues end up going to pay interest on the debt, instead of funding government expenses for hospitals, schools, roadworks etc.

“It’s a catastrophic situation because you no longer have the ability to do what you want with your own budget”, says Berger.

The history of debt

Debt has always existed. It dates back to the origins of civilisation and even predates the invention of money.

“The very earliest Mesopotamia inscriptions that we have are actually debts and credits calculating who owes what to whom within temples and other large bureaucratic systems,” says anthropologist David Graeber of the London School of Economics. “So what you have actually are credit systems. And in Mesopotamia they didn’t have cash.”

Private debt has always existed, but government debt first emerged in Italy in the major trading cities during the late Middle Ages.

Florence, Genoa, and Venice were constantly at war, and monarchs financed those wars by borrowing from prominent families who founded Italy’s first banks. The first government bonds were traded, paying interest.
The bankers were often ruined by the rulers who’d jail creditors to avoid paying back their loans. At the time, governments had power over creditors. Only much later that balance of power was reversed.

‘Dictatorship of the creditors’

After World War II, the US injected $13bn to help Europe’s industrialised countries rebuild their economies, which resulted in exceptional economic growth for the next 30 years. Government debt in Europe was at record lows thanks to growth and inflation.

However, by the 1970s, US President Richard Nixon’s abandonment of the gold standard and the first oil crisis drastically changed the world economy and put the brakes on growth. As a result, production costs and prices rose while inflation skyrocketed.

High inflation has a major drawback: it impoverishes savers and investors, since their money depreciates. For governments, inflation became the new enemy, to be defeated at all cost.

Life under capitalism is very, very violent. Even if we're not killing each other in the streets. But we create constant suffering for people.

by Bernard Maris , economist & writer

“Economics should be seen as a struggle, but it’s behind choices about inflation, strong currency.”

“We could call it the dictatorship of the creditors. Borrowers don’t lay down the law like during ‘the Glorious 30’ when entrepreneurs and consumers made the law. Now the creditors do it, and it’s a totally different economy. Creditors need a perpetually indebted economy and a very strong currency. They want absolutely no inflation, which devalues their capital, and, above all, more debt, so we keep paying it back,” says Maris.

Starting in the 1980s, the industrialised countries began to borrow heavily on the international market, after which their public debt never stopped increasing.

Governments were lowering taxes, privatising public assets, deregulating banks and expanding stock markets. By deregulating and liberalising, those governments became dependent on financial markets, which by then were an inescapable part of the economic system.

“The crisis began one after the other, first at the periphery and then in the core,” says Ann Pettifor, political economy specialist, PRIME economics, London.

The “debt machine” was taking shape. Nearly everyone went into debt – governments, businesses, and individuals. The economic system had turned into a machine for creating debt. And the banks got rich on the interest paid by borrowers, as credit became the primary fuel for growth.

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“Money is like the air we breathe, it allows us to live. [It] should be a public good … Money, which had become a public good, meaning that the government handled money creation, has again become a private commodity. Now it’s created by banks, by very large autonomous powers … Producers used to control the economy, and now the bankers do,” says Maris.

The 1929 Wall Street Crash in the US prompted the British economist John Maynard Keynes to warn politicians: The credit machine needs to be controlled to benefit all of society, not just speculators.

In 1999, the birth of the euro and the European Central Bank created a strong currency in the next decade, prompting growth while reducing public debt. Confident financial markets lent generously to governments, where even the weakest economies of Spain, Greece, Italy and Portugal benefited from low-interest rate loans. That low-cost financial windfall was an economic boost.

US subprime mortgage crisis

Meanwhile, in the US the housing bubble was expanding and in 2007, the subprime mortgage crisis struck, causing thousands to lose their homes because they were unable to make their mortgage payments. Many banks were in danger. On September 15, 2008, Lehman Brothers, one of the largest US investment banks, collapsed.

After the fall of Lehman Brothers, European banks with close links to American banks also risked bankruptcy. Governments only just managed to save them, in order to avoid the collapse of the whole system.

“It’s a vicious circle,” explains Thierry Philipponnat, director and co-founder of Finance Watch NGO, Brussels. “Government support allows banks to get bigger. They develop activities that make them more fragile. Since they’re fragile, they need more support.”

In Spain and in Ireland, after the advent of the euro and thanks to loans from German, French, and British private banks, developers invested heavily in real estate.

“We paved the whole Spanish coast, we built airports everywhere. More housing was built in Ireland than they’ll ever need,” says Philippe Lamberts, member of the European Parliament, Belgium.

“The Irish and Spanish governments at the time couldn’t help but see that it was a bubble. That bubble burst, resulting in colossal losses for the banks and real estate companies that had invested. So governments had no choice or rather made the choice – to rescue their financial sectors … what they did was transfer irrecoverable private debt on to government books, turning it into public debt.”

The 2008 financial crisis threatened to completely disrupt the global financial system. Governments made the choice to bail out big banks and to rescue troubled economies. This led to a spectacular increase in public debt in Europe and contributed to the debt machine spiralling out of control.

Greece: Bankruptcy, austerity and Eurosceptics

The first country to declare bankruptcy was Greece, in November 2009. The newly elected Prime Minister Georges Papandreou revealed the real figures that had been hidden by the previous governments. Greek public debt had reached 129 percent of GDP, well above the 60 percent threshold set by the Maastricht Treaty. He asked for help from Europe.

But the European heads of state struggled to reach an agreement. As Europe hesitated and markets speculated on the Greek debt, confidence collapsed. Only after six long months of crisis they finally decided, despite resistance from Germany, to lend Greece enough to pay its creditors. “At the time, if we had been a united European block, and said: “Greece is in the eurozone. We’ll absorb it, don’t mess with us,” we would have settled it, with no European crisis. But that political unity wasn’t there,” says Berger.

READ MORE: Eurozone fails to agree fresh Greek bailout

An austerity programme was imposed on Greece and it was placed under stewardship, losing part of its sovereignty. It was placed under surveillance by the “Troika”, consisting of the three delegates of the European Commission, the European Central Bank, and the International Monetary Fund.

Austerity was met with anger, leading to massive protests, riots, and social unrest throughout Greece.

“We felt guilty, and the measures, the programme, felt at the beginning like punishment,” says Neda Kanellopoulou-Malouchou, professor of constitutional law at Panteion University in Athens.

Other over-indebted countries in the Eurozone such as Cyprus, Ireland, Portugal, Italy and Spain would soon be controlled by the Troika and subjected to similar austerity programmes.

The programmes were poorly implemented and poorly explained, so people came to resent Europe, which started to look like an uncompassionate task master. All over the continent, anti-finance and Eurosceptic parties were gaining ground.

Is debt cancellation the solution?

“I think the game’s over. What needs to be done is simple,” explains Maris. “We revise the Maastricht Treaty … so that debt above 60 percent is restructured, or at least collective. For the Portuguese, the Greeks, the French, even the Germans, everything above 60 percent goes into the kitty and all of Europe guarantees it. So the markets finally leave us alone. And people can breathe again.”

Some analysts suggest going further and simply writing off a country’s public debt.

Why banks love public debt

“Debt cancellation can be done to preserve social order but it can also be done to transform it. Most revolutions involve cancellation of debts,” explains anthropologist David Graeber of the London School of Economics.

“Ironically, German prosperity now is based on the cancellation of German debt after World War II. It seems very ironic that the German public is absolutely unwilling to even renegotiate debt of some countries like Greece, calling them debt sinners. When in fact all debts were cancelled after World War II. It was that freedom which actually made the German economic boom possible,” says Graeber.

Today, debt, the economy, and finance are an ever-present global reality. We are all caught in the debt machine. The debt, its grip, and its dictates have insinuated themselves into our work, our relationships and our lives. Only time will tell if we can truly afford this master-servant relationship to debt.