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Whenever Third World debt cancellation is discussed, it is automatically
assumed that somebody, somewhere has to suffer a loss. Either banks must
cover the losses, taxes must be raised or Western governments must foot
the bill.

In fact, Third World debts could be cancelled with little or no cost to
anyone. Indeed, cancellation would be not only the simplest process
imaginable, but to the general advantage of the world economy. All that
is involved is a bit of creative accountancy - something at which the
West has shown itself highly adept when this has suited its political
purpose.

To appreciate this, it is essential to recall that the dominant form of
money in the modern economy, bank credit, is entirely numerical. It is
an abstract entity with no physical existence whatsoever, created in
parallel with debt. Debt cancellation is therefore largely a matter of
numerical accountancy. This is emphasised by the fact that only one
factor prevents the immediate cancellation of all Third World debts -
the accountancy rules of commercial banks.

Third World debt bonds form part of the assets of commercial banks, and
all banks are obliged to maintain parity between their assets and
liabilities (deposits).

If commercial banks cancel or write off Third World debt bonds, their
total assets fall. Under the rules of banking, the banks are then
obliged to restore their level of assets to the point where they equal
their liabilities, usually by transferring an equivalent sum from their
reserves. In other words, when debts are cancelled, normally banks
suffer the loss.

There are two options for overcoming this accountancy blockage. They
involve acknowledging that debt-cancellation is both desirable and
possible, and adapting bank accountancy accordingly.

The first option is to remove the obligation on banks to maintain parity
between assets and liabilities, or, to be more precise, to allow banks
to hold reduced levels of assets equivalent to the Third World debt
bonds they cancel. Thus, if a commercial bank held $10 billion worth of
developing country debt bonds, after cancellation it would be permitted
in perpetuity to have a $10 billion dollar deficit in its assets. This
is a simple matter of record-keeping.

The second option, and in accountancy terms probably the more
satisfactory (although it amounts to the same policy), is to cancel the
debt bonds, yet permit banks to retain them for purposes of accountancy.
The debts would be cancelled so far as the developing nations were
concerned, but still valid for the purposes of a bank$B!G(Bs accounts. The
bonds would then be held as permanent, non-negotiable assets, at face
value [pages 135-136] $B!D(B The cancellation of international debts, or
their conversion to national debts [see pages 140-143], is the sine qua
non if Third World nations are to discover a path away from poverty and
decline and towards more socially and culturally benign futures. The
acknowledged need is for Third World countries to develop their
agricultural and industrial infrastructure for their own domestic
consumption and direct less effort towards export-led growth. To the
extent that international debts remain, the export imperative remains.

The Third World cannot be said to be in material debt to the
industrialised nations. The developing nations are in financial debt to
international banks. But whilst not actually in material debt to the
industrialised nations, because these bank debts are denominated in
dollars, they are forced to behave as if they were in debt to the West,
seeking a perpetual export surplus [page 145].

Also see article here for how Third World debt is created:
http://www.prosperityuk.com/articles_and_reviews/articles/moneymake.php

_____

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Essential Further Reading:

Prosperity: Freedom from Debt Slavery - is a four-page quarterly journal
which campaigns for publicly-created debt-free money, edited and
published by Alistair McConnachie. A four-issue subscription is
available for GBP 10 payable to Prosperity at 268 Bath Street, Glasgow,
Scotland, UK, G2 4JR
Tel: 0141 332 2214; Fax: 0141 353 6900
admcc at admcc.freeserve.co.uk  http://www.ProsperityUK.com
Or you can follow this link to our subscribe page:
http://www.prosperityuk.com/get_involved/subscribe/index.php

The Grip of Death: A study of modern money, debt slavery and destructive
economics by Michael Rowbotham [Jon Carpenter Publishing, 1998] and
Goodbye America! Globalisation, debt and the dollar empire by Michael
Rowbotham [Jon Carpenter Publishing, 2000] both available from the
address above.

http://www.prosperityuk.com/articles_and_reviews/articles/cantwd.php


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