In a world of inter-dependent sovereign economies, should Americans be thinking of themselves as global economic citizens? If so, what must they understand about economic World History? In the world history section of Understanding Fiscal Responsibility, students consider how longstanding imbalances in national wealth, and histories of economic exploitation, shape the current balance of power and influence. Students learn the questions they need to ask if they are to engage as effective global citizens when they explore past inter-dependent relationships between debtor and lender nations and the current European debt crisis and ask, “Is it different this time?”
This section contains the following lessons:
Should developing nations accept loans from the International Monetary Fund (IMF)?
The IMF is a great success if it is judged by the achievement of one of its main…purposes, …”to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income….”
-Eduard Brau and Ian McDonald (2009)
When the IMF arrives in a country, they are interest in only one thing. How do we make sure the banks and financial institutions are paid?
-Joseph Stiglitz (Hari, 2011)
Although it is an international organization, the IMF is strongly identified with the United States. The United States has the single largest voting share, and the headquarters of the IMF are located in Washington, D.C. With its near-ubiquitous presence around the world, the IMF is one of the most visible, most powerful, and most highly criticized forces in international economic development. The debates surrounding the work of this controversial organization almost always stress the IMF’s connection with the United States.
Does foreign debt create a dangerous imbalance of power between creditor and debtor nations?
By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together. We are in the same boat. Our economies are so intertwined, the Chinese know that to start exporting again to their biggest market, namely the United States, the United States has to take some very drastic measures with this stimulus package, which means we have to incur more debt.
-Hillary Clinton, U.S. Secretary of State (Associated Press, 2009)
China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets….Mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad.
-Xinhua News Agency, the official press agency of China (Associated Press, 2011)
For most governments, accruing foreign debt is as normal an act as enforcing laws and collecting taxes. In the event that a government is unwilling to raise taxes or enact deep spending cuts, its only other option is to borrow capital to pay for its expenses. As a result, nations regularly borrow money from both internal and external sources. For example, as of May 2011, the Chinese government held 26% of the United States’ foreign debt, totaling 8% of the United States’ total public debt (U.S. Department of Treasury, 2011). Although accruing debt in general is often viewed negatively, the concept of being indebted to foreign entities remains particularly contentious.
Was the hyperinflation of the Weimar Republic a consequence of circumstances that were very specific to Germany in the years following the Versailles Treaty, or is it relevant to how we think about our own monetary policies?
THE NIGHTMARE GERMAN INFLATION: One day everything was fine. The next day hell was
—M.J. Kosares, founder and owner of USAGOLD-Centennial Precious Metals, a precious
metals firm that sells gold and advises on the gold market (USA Gold, 1999)
Too Late to Buy Gold and Silver? Not By a Longshot. . . . know that some of the “best” German economists lulled their citizens into believing deflation was coming just years before hyperinflation destroyed every single German citizen’s livelihood and wealth that didn’t have the foresight to ignore these jokers and store most of their wealth in gold.
—J.S. Kim, a private “Wealth Consultation Adviser” and Managing Director of SmartKnowledgeU, a for-profit consulting firm (Kim, 2012)
Read the sales pitches of any number of companies selling gold coins and bullion, and one is bound to
find references to the hyperinflation experienced by Germans during the Weimar Republic. For example,
the website of USA Gold, a company that sells gold coins and bullion, warns of the “nightmare German
inflation,” contending that those Germans who “survived” the hyperinflation of the early 1920s did so by
buying gold early in the process. They caution potential costumers that soon enough, Americans could be
carrying their practically worthless paper dollars in wheelbarrows to buy groceries, much like Germans did
in the early 1920s. But how relevant is the case of hyperinflation in the Weimar Republic to Americans in
the 21st century?
Although the Weimar Republic offers a range of possible historical lessons, including most broadly the fragility of new democracies, this lesson examines the Weimar Republic through the narrower lens of hyperinflation. The story of the Weimar Republic is potentially instructive on the dire consequences of funding large amounts of deficits and debt by printing money and thus devaluing a currency. Further, Germany in the early 1920s has effectively become synonymous with hyperinflation. These reasons notwithstanding, this lesson challenges students to question the relevance of that German experience to the United States today.
The case of Greece: When is one country’s problem everyone’s problem?
. . . Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically. People can’t live with it—and can’t live without it. The American predicament is little different.
—Robert J. Samuelson, Economics Columnist, Washington Post (Samuelson, 2011)
I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late.
But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow
them down the path to ruin.
. . .So the next time you hear someone claiming that if we don’t slash spending we’ll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we’ll turn into Europe. In fact, we’re well on our way.
—Paul Krugman, 2008 Nobel Prize Winner in Economics (Krugman, 2011)
In October 2009, Greece’s newly elected government asked for help in paying a huge national debt, hidden by the nation’s previous governments, that was enabled by easy credit and used to finance a more substantial social safety net. The news shocked global markets, causing interest rates to rise for Greece and several other European nations. The increased interest rates, during a time of global recession, meant that Greece and these other European nations would find paying down their debts all but impossible. In turn, the prospect of one or more European countries defaulting on their loans threatened the international banking networks that had lent them money with the prospect of not getting their money back. Markets braced for a global financial panic. Hoping to contain the crisis, the European Union (EU) intervened by offering Greece, Ireland, Portugal, and Spain bailout packages in exchange for austerity measures. The packages, which were intended to ensure liquidity and financial stability, were complex and varied from country to country. They consisted of a combination of direct cash assistance to governments to help them plug fiscal holes and pay down debt, debt forgiveness, debt restructuring, and capitalizing banks. In other words, in exchange for financial help, Greece (and the other affected European nations) would have to cut their own government spending. Since then, many economists have concluded that drastic cuts in government spending have actually hindered weak European economies from growing out of their debts because they increased unemployment and slowed their economies, pushing them deeper into recession. Greece, Portugal, and Ireland have slid further into recession, and rising interest rates now even threaten the economies of Italy and Spain, nations previously seen as too big to fail.
Are Iceland and Greece on completely different tracks towards economic recovery because one is disciplined and hardworking and the other is not?
The economic crisis that began in the United States in 2008 and the subsequent recession have been global phenomena, affecting countries around the world. The crisis has not discriminated on the basis of political or economic system. Capitalist democracies like the United States and Japan have been affected, as have social democracies like Iceland, Greece, and the Netherlands. Democracies in Europe and North America and authoritarian regimes, like China, Saudi Arabia, and Venezuela, have all felt the impact of the financial meltdown and the recession that followed in its wake. Their differing histories, governance, institutions, and economic strength did not insulate any of these nations from the global crisis. Although all countries felt the effects of the crisis, some have weathered the crisis better than others, seeming to bounce back more quickly. Some analysts have focused on two of Europe’s social democracies, Iceland and Greece, as they seek to explain the crisis, creating a narrative in which Iceland provides a model for how to respond to the crisis and Greece provides a cautionary tale of what not to do. But is this characterization fair or accurate?
Do their differing responses and outcomes make Iceland a role model and Greece a “bad boy”? This lesson challenges students to be skeptical readers of simplistic characterizations; they will learn to make hypotheses about the more complex reasons that countries might be on different economic trajectories. Experience with Lesson 4.4, “Europe’s Debt Crisis,” would be helpful to students working on this lesson, but it is not a prerequisite.