Ann Pettifor: The Coming First World Debt Crisis

I heard Pettifor interviewed yesterday on NPR's Marketplace. You can listen and read the full transcript here. An excerpt:

Pettifor: It is, of course, OK to borrow, but it's not OK to have a global financial system in which there are grave imbalances, where one country will have a big deficit, like the United States and Britain, and other countries, like China will have an enormous surplus. When these get out of synch, they're likely to just implode.

Ryssdal: What was the mechanism, how did it come to be that the United States and the UK and other Western economies had such great debts?

Pettifor: What happened between 1945 and 1971, we lived within a framework called the Bretton Woods framework, which had been constructed by Roosevelt, President Roosevelt, and John Maynard Keynes and others after the war as a way of preventing the crisis of the 1920s and the '30s. It ensured that when a country built up a deficit, it was then required to, if you like, structurally adjust its economy, cut back and restore itself to balance. And this happened until the 1970s when the United States began to get itself into deficit, very largely because of the Viet Nam War and began to run out of gold, because Bretton Woods, of course, was anchored in gold. And President DeGaulle of France, for example, was demanding to be paid for his exports in gold.

And so what happened was the economists came to President Nixon and said, "We have a problem here." And President Nixon said, "Well, why bother to give gold. Why not just offer them dollars and greenbacks." And they said, "Well, if you did that it would break up the Bretton Woods system." There had been some strains in the system, then too. And he said, "Well, let's do that." With the abandonment of gold, the IMF was charged with finding an alternative to gold. And eventually, they came up with the idea of using U.S. Treasury bills. Now, a Treasury bill is an IOU And, today, poor countries, rich countries all over the world keep these IOU's in the vaults of their central banks. But what that also meant was the United States was then able to just issue these IOU's almost without limit and live off that money, that borrowed money.

Ryssdal: And did that give rise, then, to the debt crisis that we're in now?

Pettifor: What it did was it meant that the United States did not have to structurally adjust its economy and restore it to balance. It was acting, if you like, as the world's banker. And then at the same time internally and domestically as an economy, the United States was building up individual household and corporate debt. So it was a sort of double-whammy, really.

Pettifor published a book two years ago entitled The Coming First World Debt Crisis. Spot on.