2. Everybody Knows

Everybody Knows
Bob Komives

::

In 1990 and 1991, when the United States of America lead other countries in a war to evict the forces of Iraq from Kuwait, many advocates of balanced national budgets knew it was time to abandon that principle in order to wage war. I heard nobody ask, "If debt for war is good, can debt for peace and public welfare be bad?"

A war rages in the Middle East
—costly by measures more important than money.
We so readily
suspend our fantasy of a balanced budget
so that we may fight a harsh war,
only to again impose our fantasy,
with harsh futility,
during brief interludes of peace.

Oh, the insidious fantasy!
Never apologize for expenditures
if they do not exceed taxes.
That is, if government recalls from us
at least as much money as it spends,
it can boast:
" We ruined the country
and much of the rest of the biosphere,
but we never ran an unbalanced budget."
Let us remember
that war is the age-old medicine
to counter peacetime fantasies.
For failing to make good investments in peace
we are as likely as ever
to
fall
into
internal and external
conflict
that will lead us again to war.

from: A War Rages

Things are not as they should be. The cold-war dichotomy between communism and capitalism has blurred. It should now be easier to study the complementary relationships between socialism and marketplace, and between peace and investment. Yet, in the years since the war in Kuwait such discussions seem less frequent, or, at least, less noticed.

Also in 1991, leaders in the United States of America were in a panic over their failing banks. Those who had long advocated smaller, decentralized government were sure it was time for larger, more centralized banks. They now have them. I see irony in this past and problems in this future.

One panic replaces another. In 1996 everybody knew that the big problem in the USA was budget balancing --provided we increase military expenditures and decrease both our taxes on the wealthy and our assistance to the poor. In early 1998 the problem seemed to be what to do with a projected budget surplus if we do not wage war with Iraq. Yesterday and today everybody knows that, when convenient, national taxes must balance expenses.

Once upon a time, everybody knew
the earth is flat.
Common sense confirmed it.
Common politicians ratified it.
The best scientists of the day spoke doubts.
Since everybody knew,
nobody listened.

from: Everybody Knew

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 2. Everybody Knows ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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40. Baby and Student, Investment and Balance

Baby and Student, Investment and Balance
Bob Komives
::

If we measure economic relationships among nations by subtracting imports of trade goods and services from their complementary exports, we produce a figure that says something about trade surplus or deficit. It is a humble figure that has a secure place in the basement of accounting houses. Unfortunately, we often invite this figure to stride out of its basement nook, mount a dark horse, and ride off self-importantly into media and politics. If we fix our attention on this figure as it parades by with its precedents and successors in impressive curves and columns, we miss most of what is important about exchange of wealth.

Much wealth flows across time and international boundaries in ways that do not fit trade figures. If we climb above the parade and broaden our view, we can see that nations form just one layer among complex layers of overlapping, wealth-exchanging communities. We can see that the trade routes connecting nations are but a few conduits in the biosphere's complex network of wealth exchange.

We will see imbalance when we focus on isolated conduits. For trade to happen, local, temporal, item-specific imbalances must exist. There must be vacancies in a housing market; there must be imbalance in trade; there must be imbalance for there to be investment.

Notice, as baby and student come by.
Baby imports wealth
far in excess of export.
Student does more of same.
Do you see an obscure trade deficit
or an obvious good investment?

||

Imports have always exceeded exports in our biosphere. Otherwise, biosphere could not have grown and prospered. Biosphere, our prototype for economic development, does export byproducts to the inanimate universe, but never as requisite to an import. A community with trade imbalance may be investing well in children, education, quality of life, and survival. A business can be responsible while borrowing to invest in its future. So too, a community invests responsibly in its future using trade imbalance to borrow necessary resources from neighboring communities which voluntarily foster their own profitable, responsible imbalance.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 40. Baby and Student, Investment and Balance ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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47. Three Siblings: Loan, Stock and Money

Three Siblings: Loan, Stock and Money
Bob Komives
::

Every time I use my credit card to buy something I issue a piece of real or symbolic paper --paper which embodies a loan secured only by my promise to pay. A bank gladly accepts my new paper. Its accountant calls my paper promise, an asset. With that new asset my lender bank can invest more than it could lend yesterday. Every time a business buys something using its line of credit it issues a piece of real or symbolic paper --paper that embodies a loan secured only by the business's promise to pay. The lender bank gladly accepts the new paper as a new asset. Today's new asset makes the bank worth more to buyer or investor than it was worth yesterday. The paper loan --floated on nothing but a promise-- is an unsecured loan. This unsecured loan is a sibling of money.

Money has another sibling --a fraternal twin adopted by corporations. Common stock floated by corporations is the fraternal twin of money floated by national governments. Both are worthless paper with an initial value in the marketplace based only on speculation that proceeds from sale of the paper will be invested wisely.

Many corporate leaders and investors, and perhaps you, believe a national government should run like a business --claiming that a government is unbusinesslike if it spends more money than it collects. This dogma makes it difficult to see the family resemblance between stock, loans and money. Please prepare to suspend your belief for several paragraphs. If you hold this dogma the most I can ask is that you consider what you are about to read to be science fiction. Try to enjoy reading of a different world. Later, over a cup of your favorite drink, please ponder the possibility that this different world is our real world.

When good-old General Motors and I had good credit ratings we were allowed (often encouraged) to not balance our budgets --to paper the world with more credit than we can pay for immediately. Lender and investor wanted to hold our paper because they believed they would be well repaid for holding it.

Good-old General Motors issued paper called stock. Each new issue reorganized the investing public so that some of us gullible people played our assigned role and gave General Motors our money in exchange for the stock. If Jane had not been so induced she might have put a California hot tub on her back porch. Part of her wealth would have flowed to a small hot-tub company in California. Instead, it flowed to a giant in Michigan. Mary got laid off in California and moved to Michigan where her cousin, Sid, had just been hired for a new General Motors' project.

When good-old General Motors invested Jane's money poorly, it experienced inflation: Sid got laid off; Mary failed to find a job; Cadillac prices went up, or profits went down; the value of General Motors' common stock went down.

Jane and other stockholders took a risk for potential reward. Her risk and potential reward parallel those of a holder of national currency. If government invests well money holders will be well repaid.

Suppose good-old General Motors had required that anyone who wants to buy one share of its stock must pay for it with one share of Ford Motor Company stock. This may seem strange because General Motors normally asks for payment in money. However, if we suppose a time when one share of GM stock was equal to one share of Ford stock the stock-for-stock policy would be reasonable. It is as reasonable as holders of USA dollars exchanging their money for Canadian dollars of equal value. If General Motors had been trying to take over Ford it would have been quite reasonable to give Ford Stockholders new shares in General Motors in exchange for old shares in Ford. The newly issued General Motors stock would have been balanced by new corporate wealth --the assets of Ford. This is an understandable transaction with real balance.

Now, suppose good-old General Motors had been asked by its investors to achieve balance in the way advocates of balanced budgets say national governments should achieve balance. That is, General Motors had to receive one of its own shares before issuing a new one? Here is balance; nothing does balance nothing. Do you not agree that it is ridiculous balance? It would have been ridiculous to require that General Motors take in one share of its common stock for every new share that it issued. Such a requirement would invalidate accepted practice in corporate finance. It is equally ridiculous to ask the national government to take in one dollar for every one it issues.

A corporate stock issue should be balanced by an increase in corporate wealth coming from responsible investment of the proceeds from the stock issue. A national money issue should balance itself in the same way --through good investment. The public and private investment enabled by the expenditure of new money must create wealth to match the increase in money supply.

To review:

Sibling one, Unsecured Loan
We borrowers must invest the wealth of our lenders in productive ways that by choice or impossibility those lenders will not invest directly. We trade unsecured, paper promissory notes for a loan of investment resources. If we do not invest those resources well, we will fail to pay off loans, our credit rating will fall, our loans will lose value (inflation), and our lenders may rise in revolt to take over our remaining assets.

Sibling two, Common Stock
Corporate directors must invest the wealth of their stockholders in productive ways that would be difficult or impossible for individual stockholders to invest. The corporation trades paper stock for investment resources. If it does not invest those resources well its stock will lose value (inflation), and its stockholders may rise in revolt to install new directors for the corporation.

Sibling three, Money
Government must invest the wealth of its citizens in productive ways that by choice or impossibility will not to be private investment. National government trades paper money for investment resources. If it does not invest those resources well its money will lose value (inflation) and its money holders may rise in revolt to take control of the nation and its government.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 47. Three Siblings: Loan, Stock And Money ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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48. Efficacy Limits

Efficacy Limits
Bob Komives
::

There are limits to sensible, productive paper investment. They are efficacy limits. If some investment works but more investment does not work, then more is too much. At some point resources and society cannot respond efficiently to the competing demands. At that point some investments fail. They are good ideas that prove ineffective because they are poorly timed. Efficacy limits are not dollar limits. Money is sibling to unsecured loans and common stock. Like good borrowers and good corporate stock issuers, our national government will produce better budgets when it seeks to make good investments that are well timed. National government need not concern itself with the amount of money that it has on hand nor the amount expected to come in. It should rather consider what effect investment and non-investment will have on the wealth of the country and the international community of which it is a dependent.

The insidious implication of the balanced budget fantasy is that a national government would seem to never have to apologize for its expenditures if they do not exceed the amount of currency returning to its treasury:

"We ruined the country
and much of the rest of the biosphere,
but we never ran an unbalanced budget."

from: A War Rages

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 48. Efficacy Limits ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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50 :: Investment Debate is Better Debate.

Investment Debate Is Better Debate.
Bob Komives
::

Neither a national government nor its agent banks can spend wealth that the nation does not have. Citizens expect reasonable balance between new money invested and new wealth produced. They expect monetary balance. It comes from prudent national investment, just as corporate stock balance comes from prudent corporate investment, and ecological balance comes from nature's tendency to invest prudently in itself. These are dynamic balances. Credits can more than balance debits as biosphere, species, nation, and family take dominion over a greater expanse of the inanimate universe.

We should hope to do better
than balance our budget.
We should hope to do better
than debate how best to limit spending.
We can save inferior debate
for the day the sun turns off
and the biosphere dies.

||

A nation that understands the economics of money and communal investment will debate whether proposed investments contribute to the long-term health of society and its economy. Liberals might point to the profitability of social programs. Conservatives might argue strongly for hardware. In U.S. America some debaters will point to the boom in computers and related paraphernalia as wealth that followed investment in the space program; others to the black and brown faces in media and business as economic return from investments in civil rights and social programs; others to the Works Progress Administration under the New Deal as argument for a nation putting its labor force to work when the marketplace fails to do so; others to examples of peace work bringing higher return than war work; and many to the peace and productivity of those people who choose to invest their efforts to enhance the natural environment that they rent from future generations. These will be a difficult debates. For a change, however, they will be meaningful.
Productive investment debate happens within a successful nation that has prudent government knowingly financed by paper money. Growth in this nation's supply of paper money balances itself through growth in national wealth --a collective wealth that incorporates local, international, and biospheric wealth.

Investment debate is better debate.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 50. Investment Debate is Better Debate ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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51. Against Foreign Loans

Plum Local IV ::: Part IV
National Finance: Debt and Taxes

== chapters 51 - 78 ==

=== look to right column for direct links to chapters ===

51. Against Foreign Loans
Bob Komives
::

Poor countries continue to go into debt to other countries and international banks. They must repay their debt using one of the world's hard currencies --their own, considered too soft. Too often, some lucky citizens in the debtor nations manage to hoard hard currency that comes in through loans, while their governments hoard only the debt. Such problems hobble government and exacerbate the dichotomy between rich and poor in debtor nations, but damage is not restricted to debtors. The world suffers waste. Immense resources, including human effort and intellectual talent, pour into the system that supports international debt. Assume for a moment I can convince you that the system is invalid. Imagine the benefits we would reap if we divert this waste of resources into productive endeavor --endeavor that improves investment within nations and the trading of resources among nations.

As 1987's September turned to October. The members of the International Monetary Fund and World Bank met in Washington D.C. confronted by continuing crises in world finances. They started their meetings with little hope that they would devise a solution to the international debt problem. Their pessimism proved justified. By Christmas, banks in U.S. America had begun to write off large parts of their international loan portfolios as bad debt. If international debt gets less popular attention today than in 1987, perhaps the novelty is gone. International debt is an old problem that still stymies financial leaders.

Certainly some international debt comes from ill-conceived loans on bad projects, but other debt piles up from projects that were good-but-slow-to-prove-it. Money leant to enhance ecological, educational and social systems, for example, may return manifold profit in increased wealth, but the profit may come too slowly to cover the interest on the loan. Other projects may return profits quickly to society in general but too slowly to the marketplace. The market, not reflecting true benefit and detriment, declares the project a failure. Internal, national investment can accept some inflation as tradeoff for long-term and non-market benefits from good-but-slow projects. Instead of paying off the debt directly, the nation lets its money lose a little value --achieving the same end. An international loan, however, requires prompt payment to avoid geometrically escalating debt. Any country that embarks on good-but-slow projects by borrowing foreign money invites default --unnecessary default.

Much in life is unnecessary but quite acceptable, even enjoyable. International debt is unnecessary, but also harmful. I reach the same conclusion if the lender is a private bank or a multinational institution such as the World Bank or the Interamerican Development Bank. I reach the same conclusion even for projects that promise to be good-and-fast. I am against foreign loans.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 51. Against Foreign Loans ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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52. The Unnecessary Burden of Foreign Debt

The Unnecessary Burden of Foreign Debt
Bob Komives
::

In Guatemala
they have a way to carry heavy loads
—primitive, simple, and efficient—
one or two loops of rope engage the load,
carry it to the forehead
where loop closes with strip of leather or cloth.

Body tilts,
bends forward to balance load:
perhaps a bulging sack
holding a quintal of maiz,
or small table
topped by seeming household of furniture,
or wooden frame
with pottery stacked five feet high by four feet wide.

From the bus windows
I watch men carry such loads
down,
up
steep mountain roads,
distant from past town and last house.

I see small loads
watching boys learn the art
under burdens cut to their size.
I enjoy their smiles spurts of speed.
Paces and decades ahead
I see burdens too-large,
postures too-bent,
leathery foreheads too-creased
under burdens saddled to a man.

In Guatemala,
they have a way to weed corn
—primitive, simple, and efficient—
with machete and stick.
The stick is narrowest where it fits the hand.
A subordinate branch makes a hook at the other end.
Though well-chosen and well-fashioned,
the stick may be left by the field to be recovered tomorrow
or replaced,
fashioned anew from branch of a living fence.
The stick gathers and supports grass and weeds
as the machete cuts them at the ground.
Machete strokes begin high from vertical.
Agile wrist and low body
take them quickly down to horizontal.
This smooth, rhythmic movement
fits and fills both the confines of tall corn
and the muscles of a short body.

I see an old man every day
on the road to El Rosario.
His machete and a boy are constant companions.
I know not where they live.
Seldom do I know in which of the fields they work.
I see them on the road between.

They come early
racing a day's work
against sun's rise to oppressive heat.
Yet, they come later than most.
They may start with others,
but in kilometers of walking
they fall behind.
The old man does not move fast.
The boy is in no hurry—
his walk seems youthful,
but two paces behind the old man.

I cannot know
if it is the years of work with the machete
or the carrying of heavy loads
that has bent that back and humped those shoulders.
But, as the man walks by me now,
his eyes focus on the ground
two paces in front of his feet.
Back is tilted;
head is bent
—as if to carry a load of corn.
I choose to believe he can no longer carry such loads.
The machete in one hand hangs as burden enough.

One, hot mid-day as suffered a long walk
I saw them at work in a field.
Old man and boy
propping unwanted growth with theirs sticks,
severing it from its roots with their machetes.
I wanted to believe that the boy does more than his share,

On their walk home
they look no different than when they came.
Neither requires conversation.

The first time I passed,
the sound of a gringo-ish “a dios!”
caused the old man to startle;
he turned his head to reply.
Now, salutations to me
are as those to other familiar voices
—uttered quietly in the rhythm of the resigned pace.
On occasion, I pass by, say nothing.
Neither old man nor boy give apparent notice.

Am I silent from sympathy or reverent from respect?
Have I passed a humble man who has worked too hard, too long?
Am I watching a great man who has long carried great loads?
I look for cues in the eyes of the boy
and choose to see reflections of a hero two paces ahead.

Every day on their walk to work in El Rosario.
—until yesterday.

Heavy Loads, 08

Good governments finance what they hope will be good projects and services --whatever the source of funds. Good projects and services are successful. They benefit society in excess of the resources that go into them. Even developing countries have experts with sophisticated training to evaluate the likelihood of success. Lenders who make loans to developing countries presumably have people with similar training to make the same evaluation. Experts do not know for certain whether a project will succeed or fail, but success is their goal.

International debt is a burden to the developing countries that carry it. I argue that it is unnecessary; the international lending structure need not exist. To illustrate and simplify my argument, I will name Guatemala as a representative developing country and the United States of America as a representative foreign lender.
Guatemala is a small country with a fairly large international debt. It is a wonderful and troubled country. In 1998 we hope that recent peace will hold. In March of 1986 I held high hopes for a new democratically elected government under president Venicio Cerezo which had launched an Economic and Social Reorganization Plan. Within 18 months, however, Cerezo's government acknowledged that the plan had failed. A key factor in the failure seems to have been under spending. Of the amount that it had budgeted for public investment, the Guatemalan government spent only about one third. The limited spending failed to stimulate the economy. Faced with ever decreasing living standards and continuing civil war, the government abandoned its first plan and began a new effort on August 1, 1987, The National Reorganization Plan. The new plan was less ambitious and at least as unsuccessful. The first Guatemalan plan had borrowed some ideas from the New Deal and U.S. America's recovery from the Great Depression. Public projects would help get things moving. However, national coffers went dry. International loans did not make up the difference.
When we hear of the suffering that afflicts many developing nations that have large foreign debt, we should pause to consider that in accumulating this debt their governments probably tried to follow norms of international finance.

Guatemala followed today's norms for responsible finance when it refused to undertake beneficial projects for which there was no money. The public projects that Guatemala proposed but did not undertake were designed by dedicated and well educated planners. It is reasonable to suppose that some of the projects could have stimulated the economy and reduced poverty. Cerezo's government refused to undertake projects for which it had no money. Under conventional wisdom, in failing to act the Guatemalan government acted responsibly. Did it act correctly? If they were good projects, no. Should international lenders have filled the gap and financed these good projects with loans? No. An international loan is never more economically feasible than is internal financing, and international debt is never less burdensome than internal debt.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 52. The Unnecessary Burden of Foreign Debt ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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53. Buy Good Projects.

Buy Good Projects.
Bob Komives
::

A good project is a good investment;
a bad project is a bad investment--
whether building life,
species,
family,
association,
or nation.

A good investment pays
yet bears no debt.
What would the biosphere owe
(and to whom?)
for the inter-galactic loans
that financed its development?
Did the Gulf of Mexico
ever repay its debt to the Mississippi River?
Who could tell Mahatma Gandhi
that he had repaid all investments in his life?

Good Projects Are Good Investments

A good project, a good program, raises the value of the nation. It can lead to deflation even if paid for with newly printed money. A bad project or program causes inflation even when paid for with money in hand. If the government of the United States of America happens to have a million excess dollars, to waste them on a failure would damage the economy and the value of the dollar. Even if the Guatemalan government happens to have four million excess quetzales, wasting them on a failure would damage both the value of the quetzal and the Guatemalan economy. A money-in-hand project puts no new money into circulation, it does use and alter resources and produce inflation as the old amount of money chases after reduced resources.

If failure is to be paid for with an international loan it will cause even more inflation. In order to pay off the loan the borrowing nation has to export resources equal in value to those invested in the project plus an additional amount to cover interest. The net reduction or alteration of resources is greater than if the same failure were paid for with money-in-hand; the value of national currency falls more.

Now, consider a good project. The Guatemalan government has plans for a four million quetzal project. All analyses indicate the social, moral, and environmental results will range from acceptable to beneficial. Analyses also show that the project should increase the wealth of the nation well beyond the four million quetzal investment. Unfortunately, the treasury does not have four million quetzales on hand.

This project should proceed. It will be deflationary even if Guatemala prints new money to pay for it. If analyses are close to correct, this good project raises the value of the nation beyond the current market value of the new money to be spent on it. That is deflation. If Guatemala were to borrow foreign money to pay for the project, the result might also be deflationary. However, the interest payments added to the project cost will lower net national worth below that achieved through the issuance of new money for the same project.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 53. Buy Good Projects. ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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54. Money Works Better Than Debt.

Money Works Better Than Debt.
Bob Komives
::

Let's look at two graphs of possible outcomes from three hypothetical projects: A, B, and C. Project A is a resounding success. B is marginally successful. Project C is a failure. The graphs show the net national benefit or net national loss from each project. Where there is a net benefit, the wealth of the nation increases and the net-benefit line on the graph ends above the centerline. That is a successful project. Almost all projects will start out creating a net loss because resources are spent before benefits return. The project that never creates a net benefit is a failure.



Graph 1 assumes the three projects are paid for internally. Graph 2 assumes an international loan finances the same projects.



The two projects that bring net benefit without the loan (Graph 1) bring fewer benefits when financed by an international lender. Project B changes from a marginally successful project to a failure --producing a net loss. C is a failure in Graph 1 but worse in Graph 2. Why?

If U.S. America decides to lend U.S. dollars for a Guatemalan project, then Guatemala will have to pay back the principal plus interest (Graph 2). Guatemala will draw upon the project's benefits to pay back the principal --the one-time cost in resources of the project. Any benefits left over, less the amount needed to pay interest, are the project's net benefit or net loss. The interest is the price charged by the USA to Guatemala for the privilege of borrowing. The added charge reduces Guatemala's net benefit.

When, instead of seeking an international loan, Guatemala finances such projects internally (Graph 1), the entire excess of benefit over cost accrues to Guatemala. No extra national wealth is lost or exported.
Under internal financing, good projects are economically successful. Under external borrowing some very good projects are economically successful, but extra wealth must be exported to pay interest on the loan. They are less successful, less profitable, than projects financed internally. Projects that could be marginally beneficial when financed internally will likely become failures when financed with an international loan. For projects destined to fail, an international loan can turn mere failure into disaster.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 54. Money Works Better Than Debt.
::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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55. Foreign Debt: Don't Let False Analogy Fool You.

Foreign Debt: Don't Let False Analogy Fool You.
Bob Komives
::

I did not enjoy the story,
One opines;
it is much too artificial.

So it is,
Two reminds;
but such is the real world.

I suppose it is,
One resigns;
I suppose it is.

A Dialogue

I think most of us consider borrowing money to be serious business; we do not do it if we have in hand the money or resources to undertake our project; we borrow when we need money for good projects. A developing country would seemingly pay for its projects itself if it has the money to do so, borrow if it does not. As any individual, does not a country borrow because it needs the money? If it cannot collect the money at home it needs foreign money, right? No, wrong.

Clearly, the Guatemalan government borrows from foreign lenders because it believes it needs the foreign money, just as I believe I need a bank's money when I ask for a loan. But herein lies the great mistake --the false analogy behind loans to national governments. It is falsely assumed that the principles of private borrowing can be applied to borrowing by governments of sovereign nations that caretake their own currencies. This error built the international debt crisis.

When I borrow from a bank --in an unsecured loan-- paper passes in two directions. I hand the bank a signed paper that is my loan agreement. In return, I get paper money. I try to prosper. By prospering I can pay off the loan, maintain a good credit rating, and borrow more if needed. By managing well my financial affairs, I also manage the value of the paper that I issued to the bank, my loan agreement.

I control the value to the bank of my loan by the skill with which I manage my financial affairs, however the bank has almost no control over the value of the money that it gives to me. While the bank tries to prosper and manage well its financial affairs, it does not manage the value of the paper dollars that it passes out in loans. The effect on the value of money that comes from the actions of one bank is insignificant. Money fluctuates in value due to forces that neither bank nor borrower can manage. Our roles are not symmetrical. While we borrowers manage the value of the paper we issue, moneylenders cannot.

An international, intergovernmental loan is different: both borrower and lender manage the value of the paper they issue. When Guatemala borrows one million dollars from the USA its representative signs a piece of paper called a loan agreement and, in return, receives other paper called dollars. Each paper dollar gives Guatemala a claim to some resources in U.S. America. Although dollars may be used for transactions outside of the USA, their fundamental value lies in a guarantee by the government of the United States of America that this money can buy a million dollars worth of goods and services in the USA. The amount that each dollar can buy is not guaranteed; the right to participate in the USA marketplace is. During the period in which Guatemala uses the borrowed dollars, the government of the United States of America protects the value of the dollars as best it can. It manages the total number of dollars in circulation as well as the general flow of the USA economy. It tries to maintain a healthy dollar.

The loan agreement signed by Guatemala gives the USA claim to some of the resources of Guatemala. The fundamental value of the loan agreement lies in a guarantee by the government of Guatemala that it will forgo use of somewhat more than one million dollars worth of its future resources to repay the loan plus interest. The government of Guatemala protects the value of the loan agreement as best it can. It controls the number of loans that the country has outstanding as well as the general flow of the Guatemalan economy. It tries to maintain a healthy loan agreement.

This international loan is symmetrical. Paper dollars buy a paper loan. A paper loan buys paper dollars. U.S. America hands Guatemala paper dollars signed by its treasurer and continues to manage the dollar's value. Guatemala hands U.S. America a paper loan agreement signed by a comparable government official and continues to manage the loan's value. In economic terms, the roles of the USA as lender and Guatemala as the borrower are essentially the same.

Timing is one incidental difference, but not as significant as it might seem. Presumably the outflow of dollars would be an immediate drain on the USA, whereas the drain on Guatemalan resources gets delayed until project benefits flow. The timing of benefits should accordingly be just the opposite --early in Guatemala, delayed in the USA. However, both economies are likely to make short and long-term adjustments that dampen the effects of timing. Dollars that leave as a foreign loan do not necessarily come home quickly to the USA to be cashed in. Some will circulate for years internationally before returning to extract goods and services from the national economy. The loan agreement itself is a long-term national asset that will tend to uphold the short-term value of the dollar. A rapid drain on the economy of the USA is unlikely. In Guatemala, a loan agreement may affect domestic resource allocation long before the payments are due. Guatemala should gain in the short-term as it takes in money from the lender. However, the short-term drain felt by Guatemalans may be as great or greater than that experienced by citizens of the USA. Anticipating the debt payments, their government will tend to favor investments in export production, thereby altering local consumption. The citizenry of Guatemala may experience this extraction of customary goods and services from their economy almost immediately.

Don't let a false analogy fool you. Borrowing by national governments is not like borrowing by you and me.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 55. Foreign Debt: Don't Let False Analogy Fool You. ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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56. Poor Countries Do Not Need Rich Money.

Poor Countries Do Not Need Rich Money.
Bob Komives
::

One said: The Guatemalan government does not seem to have extra quetzales.
Can it lend them to itself
or, for that matter, to anybody else?

said Two: Yes, the government in the United States of
America does not seem to have extra dollars.
(Its accounting sheets seem to show negatives
where extra dollars are supposed to be.)
Yet it lends new dollars to other nations
and invests them in its own.
It also uses them to wage war.

One said: I know such irresponsible practice is long since condemned.
Have not those United States long since prospered?

said Two: Yes. Meanwhile poor countries long since work
to avoid such irresponsible practice,
and those poor countries long since remain poor.

One said: So, if the United States of America
lends and profits,
invests and profits
with money that they are supposed not to have,
might Guatemala try to do the same?

said Two: Yes, and it should.

||

If you can accept that the system for lending to sovereign nations is invalid there is yet another practical question: do not poor countries need dollars or some other strong currency to participate in the international marketplace? Politics, tradition, and organizations such as the World Bank and the International Monetary Fund can prevent countries from using their currency easily in the world marketplace, but there is no economic justification. The beauty of marketplace is that it adjusts prices to allow trading in products of different value. Imagine a farmers' market in which tomatoes from many farmers --varying in quality and kind-- cannot be traded except by using as currency the prized tomatoes of a few powerful farmers. This is unnecessary and unacceptable.

Guatemala, Brazil, Mexico, the USA and any other country can finance good projects with their own currencies. Within the country, venders of goods and services must accept the national currency without question. Such is the history of money. For off-the-shelf international purchases, project managers can buy what they need using local money converted to the foreign seller's preferred money at the current exchange rate. For international orders and long-term contracts, project managers and sellers can agree to a price tied to some standard such as dollars, marks, francs, yen, or a composite index. They can still make payments in national currency in an amount adjusted according to that standard.

Wealthy as well as developing nations will experience setbacks that create prejudice against their currency in world markets. A crisis in Guatemala may cause most of the rest of the world to stop for awhile accepting the quetzal. Guatemala might flood the market with quetzales by making too many international purchases in too little time. The value of the quetzal could drop dramatically. However, trade will resume. The marketplace can establish an efficient exchange rate. If the USA or an international organization wishes to help, it could offer in-kind aid or political support. It should never lend money. A loan will reinforce prejudice against the borrower's currency. Why should we accept a troubled country's money when we know the country has just received more familiar currency from a rich country?

I saw them working in a field one day.
He was swinging his machete.
I only looked for a moment,
probably because I didn't really want to believe it's possible.
He swung his machete all that day and many days since--
his friend working beside him.
I would like to think
that the boy does a little more than his share,
but it's probably just the opposite.

They walk home looking no different than when they came.
The boy does not require conversation of his old companion.

The first time I passed,
the sound of a gringo-ish "a dios!"
caused him to turn his head to reply.
Now, salutations to me
are the same as to the other familiar voices on the road
--uttered quietly in the rhythm of the resigned pace.
On occasion, I have passed without saying anything
--an irrational form of sympathy.
But he passed giving no notice to me,
maybe a little relieved that his attention was not diverted
--his attention on the road just two paces away.
However, why should I walk by him in sympathy
when his companion walks with him in respect.
It takes a great man
to have worked that hard for that long.
Maybe, in reality,
he still can carry a good-sized load on his back.
And the boy too is looking just two paces ahead
--at that man he wants to emulate.

After all, you see him every day
on the road to work in El Rosario.
At least he was there yesterday.

Passing

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 56. Poor Countries Do Not Nee Rich Money ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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57. Weak Argument For Reverse Foreign Debt

Weak Argument For Reverse Foreign Debt
Bob Komives
::

Despite some superficial differences, loans between national governments are reversible. I have tried to argue myself out of this conclusion, but I cannot. I find it difficulty to distinguish borrower from the lender in international loans to national governments -- that is in economic terms. Though common wisdom and common prejudice see them as very different, borrower is lender; lender is borrower. If you have trouble seeing the similarity, try to imagine a loan in the reverse direction.

I have a weak argument for reverse loans to support a troubled country. In a reverse loan, the helping country accepts a loan from the troubled one in the troubled country's currency. The loans have no true economic justification. However, they might have financial justification and could make a great topic to help you survive a dull cocktail party.

A reverse loan could grease international financial machinery for a troubled nation. The reverse-loan agreement gives the troubled lender an immediate asset with which to guarantee international purchases. Also, troubled currency that flows out as loan must come home to be cashed in.

If international lending were reversed, richer borrowing nations would have to buy goods and services from the poorer lending nation using the lender's troubled currency. Since rich nations tend to influence trends and styles, their purchases from a poor nation might foster international interest in the poor nation's goods and services. At least, international markets would have to grow accustomed to dealing in the troubled country's currency.

How would a reverse loan be set up? Instead of U.S. America lending Guatemala one million dollars, Guatemala could lend U.S. America an equal value in quetzales. In return for the loan, the USA will sign an agreement with Guatemala in which it promises that after it spends the quetzales it will forego domestic use of enough USA resources to round up the quetzales it will need to pay back the loan plus interest.

Once it receives borrowed quetzales, the USA can spend them to buy the same coffee, sesame seed, beef, and ornamental plants that Guatemala would have had to export to pay off a loan had it borrowed from the USA. Alternately, the USA could exchange the quetzales for Japanese radios so that Japan could buy the sesame seed.

So, Guatemala can finance the same project as lender that it could as borrower. The quetzales that it lends out are not lost. They will return directly or indirectly to Guatemala as the USA spends them. The loan agreement is an asset. It can serve as collateral to finance purchases or to issue new quetzales pending repayment by the USA of those that were lent out.

My strong argument is that a loan from Guatemala to the USA is fundamentally the same as a loan from the USA to Guatemala. Therefore, each is useless in economic terms. If Guatemala could just as well lend quetzales as borrow dollars it might as well lend the quetzales to itself.

My weak argument is that if international markets are sticky due to bad habits and irrational prejudice a reverse loan in quetzales from Guatemala to the USA might inject the needed grease. With well greased wheels, a caravan of reverse loans will parade brilliantly compared to the overheated squeak-buckets going in the traditional direction.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 57.Weak Argument For Reverse Foreign Debt ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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