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Where Shall Capitalism Lead

In the last three decades of capitalism focus has shifted from the physical economy towards a financial expansion that is fiduciary in nature, with minimal links with physical asset-creation. The bubble is burgeoning with an expansion of derivatives, options, and claims – a plethora of commodity and credit derivatives. We are not dealing so much with the physical development of the real economy. We are no longer dealing in assets, not even claims on assets, which are there in the form of stocks and bonds. Instead we are dealing more and more in fictional claims on claims on assets. We are in the grips of a virtual economy – capable of producing millionaires and billionaires but not capable of feeding the millions that are hungry or providing jobs for the millions that are jobless.

Let us have an idea about the real shape of such an economy. World trade i.e. all international trade in commodities and services is only one fiftieth (1:50) of trade in foreign exchange. The ratio between the foreign exchange required for actual world trade and trade in foreign exchange derivatives is 1:50. Every day US$1.3 trillion worth of foreign exchange derivatives exchange hands in international foreign exchange markets, which is 50 times more than the real physical daily trade of the world. Take another indicator: while the total Gross National Product of all the countries of the world taken together is between US$30-32 trillion dollars, annual turnover of derivatives is now more than US$500 trillion. Ignoring the fact that one is a ‘flow’ and the other ‘stock’, there has to be an inherent relationship between the physical economy based on assets and the monetary economy whose real function is to facilitate the production and exchange of physical goods and services, to ensure well being of all human beings. This central focus has now been shattered. Who are the gainers in the game? Who are the major players? Few financial institutions and a handful of billionaires are making money out of it. They are not making money by increasing the flow of goods and services, and consequently making life better and prosperous for all human beings. They are making money by creating only more money, virtual money. Interest is playing a key role in this process. While the real arena and financial house of the bubble economy is the USA and the developed countries of the West; the whole world economy from individuals to private firms, from national economies to the global economy, are being sucked into this fiduciary whirlpool.


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Coming to the other side of this global power game, it is again submitted that while loans and debts have always been there in history, both loans to meet personal or distress situations and loans to facilitate trade and increase in production, but for the first time in human history, from national to the global economy, everything is becoming dependant on debts and financial institutions that control and manage debts. Banks and financial institutions are the global players who are creating credit, reaping its fruits, and holding others hostage in this new form of global slavery. Debt is the most potent instrument of control and interference in this modern economy. Debt slavery is the most modern version of slavery. Statistics about US may give an idea of how this system is working.

The national debt of the USA, the richest country of the world, was only $1 billion in 1901, the first year of the twentieth century. In the last year of the 20th Century the public debt is over 4 trillion dollars. If one includes international debt  (and the irony is that America is the most indebted country of the world even internationally), which is about 1.4 trillion dollars, this superpower, now the only superpower holds on its back a mountain of debt amounting to 5½ trillion dollars and that too only in the public sector. If private loans are also included, particularly house mortgages, it adds another 4-5 trillion dollars to the debt burden of the richest country in the world. But this is not America’s predicament only; most of the countries of the world are in similar plight. Third World countries are the victims of a strategy of economic development based on foreign-debt. After forty years of experimenting with this debt-based strategy of economic development, there is hardly any economic development visible in their lands. It is only the mountains of debt that are breaking their backs.

When India and Pakistan attained freedom, they had outstanding balances with the colonial rulers. Huge amounts were loaned out to the British Government during the war. We were in credit and they were in the red. What is the position now? Pakistan’s total external indebtedness is around 38 billion dollars. The irony is that in 1971 when Pakistan was cut into half, and had to take on the entire debt burden liability, its total debt was only 3 billion dollars. During the last 30 years the country has paid back some 30 billion dollars. But after paying back 30 billion dollars on an original loan of 3 billion dollars plus some other loans, the country still indebted to the tune of 38 billion dollars. Brazil, one of the very fast developing countries of Latin America, has paid back around 70 billion dollars in the last 29 years and they are still indebted to the tune of 200 billion dollars. The total Third World debt is now over 2 trillion dollars. Every year, Third World countries are paying back about 220 billion dollars by way of interest and amortization and yet this debt is increasing. They are forced to borrow only to pay back earlier loans, with the result that in the case of some countries, their debt servicing now exceeds their total export earnings. There is now a net transfer of resources from the poor to the rich countries of the world. Africa has been made poorer in the last 30 years. According to some recent studies, for every net $1 that is received in the form of new loans and aid by the Third World countries, they are paying back $11. If this is not debt slavery, what then it should be called?

 

Source: Contemporary Economic Challenges and Islam, Khurshid Ahmed. Republished with permission.