By Mubarak Sooltangos

The world is holding its breath. Have we found the panacea that will defeat COVID-19? If we think that vaccination will harness Covid-19 to manageable levels or even eradicate it, enough damage has already been done to national and world economies to rock the world’s finances. We are probably at the start of an immense financial crisis, the magnitude of which the world has never seen.

The reason for this, setting aside the pandemic, is a phenomenon, rather an evil called “debt-based economy”. Everybody in this world is living on debt, from households to companies and countries. Families cannot envisage buying anything, from household appliances to furniture and cars on a cash basis, with savings made over time. Companies live on the minimum possible shareholders’ funds and their worth is constantly being measured by their debt: equity ratio rather than their profit generating potential. Countries have tied the hands of their citizens and their children for decades to come by borrowing intensively for investment in public infrastructure often not needed. Let us not talk of borrowing to buy weapons, from huge credit providers where dirty money reigns supreme.

All this denatured scenario has one name: easy credit obtained from third parties via banks and debenture issues because the ultimate lenders earn interest on their loans. If not, nobody would have lent money and holders of capital would have invested their money in equity-based development projects, and we would have protected the world from the doom scenario we are in. Borrowing on interest is essentially a speculative move, with the hope of earning sufficient profits in a future full of uncertainty to service interest bearing loans, whose demands are very much certain and already set in concrete in advance.

If most countries and corporates cannot survive financially a four-month lock down, cash flow wise, this gives an idea of the magnitude of the debts which they carry on their shoulders to be to this point crippled. We are all witnessing live the vulnerability of debt-based economy.

The magnitude of the debt economy in figures

  • Economists all over the world talk about the necessity of containing national debt because its repayment is tantamount to a tax on future generations. The International Monetary Fund and the World Bank have fixed a reasonable maximum indebtedness of 65% of GDP in their financial reform programmes for distressed countries. At the same time, total world’s debt stands at USD 253 trillion against a world GDP of USD 79 trillion, and the debt is as high as 320% of GDP. Finally, every country seems to be outside IMF and World Bank’s recommendations.
  • The most indebted country in the world is America, with an explicit debt of USD 24 trillion, i.e., 115% of its GDP. Explicit debt means all debts accounted for in national accounts. To this, must be added its implicit debt (unaccounted for), namely financial promises, pensions yet to be disbursed and obligations for medical insurance to be paid at a future date, which makes a total of USD 103 trillion. Implicit and explicit debt together make a staggering USD 127 trillion, i.e. 570% of its GDP. As a comparison, America’s explicit debt after World War Two was 120% of its GDP.
  • As compared to America, China’s debt is 57% of its GDP and Russia, a surprising 18 %. This makes us think twice before we swallow the oft repeated rhetoric that America is the most powerful country in the world. It depends on what benchmarks we are using. GDP in dollars and being the biggest economy in the world are not a measure of power because it depends on what this GDP and wealth creation is built.
  • National debt per capita is USD 60,000 in America, USD 1,400 in China and USD 3,700 in Russia. Russia has the ninth lowest debt per capita in the world.
  • Total explicit debt in America is USD 24 trillion, China USD 5 trillion and Russia USD 468 billion.
  • GDP in America is USD 22 trillion, China USD 11,3 trillion and Russia USD 1.1 trillion.
  • Expressed as a percentage of world GDP, America’s GDP is 27% and China 14.3%.

Some facts about the US Dollar

  • America controls 18% of world trade but the proportion of the total world’s trade flux conducted in US dollars is 57% (Euro 30% and GBP 5.5%). The amount of non-trade flux, in the form of speculative, hot money is unrecorded, but may represent 25% of all US dollar movements. This makes the US dollar by far, at over 80%, the most traded currency in the world.
  • 80% of the world’s energy transactions, mainly oil, is traded in US dollars, while America exports only 2% of the world’s oil requirements.
  • Total foreign currency reserves of all countries in the world amount to the equivalent of USD 12 trillion, and 61 % of these reserves are in US dollars, i.e. USD 7.3 trillion. Hence, America has a further debt of USD 7.3 trillion on its Treasury owed to other countries, and not expressed in its national accounts. 20% of the world’s Central Bank reserves are in Euros, on a decreasing trend since 2010 and 2.2% in Renminbi. Assuredly, the wisest financial/monetary decision made by an American President is that of Richard Nixon, namely stopping the convertibility of the US Dollar into gold in 1971, otherwise the equivalent of USD 7.3 trillion of America’s gold would, as of today, be the property of foreign countries, if ever it does possess this amount of gold.
  • Under the present circumstances, there is nothing that America can do, by buying or selling its own currency, to influence the exchange rate of the dollar if it so wishes. The majority chunk of US dollar exchanges is done by other countries. If the Federal Reserve decides to use the other monetary policy tool, namely the interest rate, to raise the value of the dollar, it would be the first loser. Being given that the national debt of America stands at USD 24 trillion, if the Fed hiked up its interest rate by one percentage point, this would cost the American treasury USD 240 billion of additional interest payment per year.

Who are in the forefront to defend the US dollar?

Finally, the defence of the dollar lies in the hands of foreign central banks, and not the American Federal Reserve. Any fall in the US dollar would pull downwards the value of the world’s reserves, kept in dollars. This is an enigma for all economists to solve. The most powerful country in the world and the first economy in size is the biggest debtor in the world, and it has no handle on its own currency. Its economic fundamentals have no monetary significance, and it cannot have a monetary policy of its own. It relies on the quantum of transactions conducted in the world by other countries in dollars to keep its currency high, because the lower this quantum is, the lower will be the dollar in value.

The root cause of our indebtedness is the financing of new electoral promises.

Additionally, and cynically, other countries as well want the US dollar to be high, because their national reserves are in dollars. The dollar is perpetually kept high in China because its central bank always buys the excess of its balance of trade generated by its exporting companies in dollars at a premium, so as to keep demand for the dollar high. This suits China admirably because in releasing more renminbi’s via this dollar purchase on its domestic market than is necessary, it keeps its own currency plethoric and low to favour its exports. The danger that this excess liquidity fuels inflation is kept at bay by quantitative anti-inflation measures. If tomorrow another commercial and financial giant decides to embark on a financial war with America, it has to find other means than destroying the US dollar, because it has become the backbone of the world’s foreign trade and the lion’s share of all reserves of all central banks in the world.

What is the nature of America’s debt?

The reason for all this American indebtedness is that its debt is in its own currency and there is no urgency to repay them via a conversion in other currencies. The bulk of the Treasury bonds issued by America to finance its budget deficit each year is bought by foreign central banks, and since these bonds are in dollars, it is as if America will never repay them back, and will keep on issuing new Treasury bonds to repay old ones as they come to maturity. The only thing that can spell doom for America is if its creditors convert their dollars in other currencies. But if America cannot by itself keep its dollar strong, because it cannot have a monetary policy of its own, it deals violently with all countries which try to make a move to conduct their trade in other currencies and to get rid of the hegemony of the dollar. Ghaddafi has paid with his life his “impropriety” of trying to establish his “Gold Dinar”, backed by Libyan gold reserves, as a new monetary standard to finance trade within the African continent. We can bet that any country trying to convert its dollar reserves into other currencies will meet the same fate as Libya.

Why is America constantly at war?

This is the law of the financially weakest but militarily the strongest, made possible by easy money being available because of the interest factor, a deadly evil at its core. Besides this, America has to be perpetually at war to satisfy its demands of all sorts on other countries, and these demands are so outrageous that they cannot be discussed around a negotiation table. As an example, cheap Middle East oil prices would place American industries at a disadvantage with regard to China, Japan, India, South Korea and Malaysia, who buy their oil from the Middle East when America has its own oil, but with a higher extraction cost. There can no doubt be ways to sit down with Middle East oil producers to negotiate a reduction in their output which will drive their price higher. But this will involve inviting Iran to the negotiation table, and Iran would impose its own conditions which America does not want to hear of. So, the preferred American scenario is to keep the Middle East perpetually at war to drive its oil prices up because of the uncertainty of war. This gives oxygen to American oil producers and manufacturing industries with a cheaper oil extracted on their own soil.

Where does Mauritius stand?

Mauritius does not currently have a foreign currency availability problem because its central bank has a comfortable cushion of foreign reserves of Rs 300 billion. However, these reserves are likely to deplete month by month because of the country’s chronic balance of trade deficit, which will not be bailed out, as is usually the case, at least in the foreseeable future by a surplus of invisible trade (mainly tourism). Mauritius is also not in a position, right now, to measure the magnitude of its eventual loss in foreign currency earnings of its financial sector resulting in its inclusion in the European black list.

The solace we have, in the face of decreased exports of goods, and probably also reduced financial sector earnings, is that with the depreciation of the rupee of around 10%, our imports of consumption items will also decrease, but to an extent that we cannot presently measure with any degree of accuracy. Our other lifebuoy could be an increase in incoming foreign currency for investment in real estate if these assets depreciate to an extent that will make them attractive for foreign buyers.

Heavy investment in infrastructural projects of dubious usefulness is a largely unjustified financial burden.

The national budget financing situation

Mauritius’ real problem is the financing of its national budget, and in this context, we already had, even before Covid-19, a very stretched situation because of our national indebtedness which had reached the limit of reasonableness. The alarming point is that if money has to be injected in the economy to prevent business failures and destruction of jobs, the budget deficit will have to increase substantially, especially in a phase where reduced activity in all sectors will result in a substantial loss of tax revenue. A reality which has for long remained unnoticed is that for years, our budget deficit of around 3% of GDP (Rs 16 billion) has not gone into measures to boost economic activity, but into financing a chronic debt servicing burden of about Rs 13 billion yearly.

So, whatever economists may say about budget deficits being a financial tool to boost activity, this is absolutely not the case for Mauritius because we also have been living chronically on debt at national level. I am not in the same line of thought as the IMF and their assumption that above 65% of GDP, a country exceeds the upper safety limit, because many other developed countries are still thriving with a debt of 120% of their GDP. However, we must all admit that, contrary to well managed economies, our national debt has no useful and productive corollary. If we give some thought to the reason why we are so heavily indebted, the implacable reality is that the root cause of our indebtedness is the financing of new electoral promises made at each election campaign, which, like old age pension, free bus fares and others become permanent items of expenditure. Heavy investment in infrastructural projects of dubious usefulness, for whatever reason, is also a largely unjustified financial burden. Enough to say that we are living under crippling debts conditions as well.

Matters can become worse if we have to borrow in foreign currency in a durable balance of payment deficit situation to keep our reserves at a level which is necessary to keep our country’s credit rating still attractive for foreign lenders. The other aspect that nobody comments on is the fact that our published foreign reserves figures are expressed in Mauritian rupees, and our rupee has suffered a 10% depreciation in one year, albeit for justified reasons. But this also forms part of management of public opinion.

Mubarak Sooltangos
Mubarak Sooltangos ([email protected]), a consultant, is the author of Business Inside Out (2018).