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The International Credit Cartel

The First World, led by the Group of Seven (G7), has funded Third World development over the last fifty years through a variety of commercial, multilateral, and bilateral loans. In the ideal, these development loans were to provide the wherewithal for the lesser developed countries (LCDs) to build infrastructure, social programs, schools, health services, a viable economy and, eventually, a place in the global market. What we have today is a gross perversion of that ideal.

Presently tiers upon tiers of interest payments on these development loans swarm like locust around the globe, eating at the heart and soul of struggling new economies. Nearly every Third World country labors under debt. For most, it is vast crippling debt. Generations of loans and restructuring programs enslave whole populations to poverty, strip social programs of funds, and place needless rush on the harvest of natural resources. Development has occurred, but piece meal, and causing, in more instances than not, as much devastation as progress. Something has gone wrong. Horribly wrong.

Architectual Voodoo, John Kirchner
The World Bank

Over time, with inflation and interest rate fluctuation, relative values of dollars loose sense, so the numbers have only limited relevance; but the compounding nature of the problem is revealed by a few bulk figures. In 1974, for instance, the world's LDC debt totaled 135 billion dollars. By 1980, it had grown to $567 billion. In the next twelve years, the indebted LDCs paid $1.6 trillion to their creditors. In that same period, however, the total LDC debt rose from $567 billion to $1.4 trillion. The combined Latin American and Caribbean region paid out $739 billion in debt servicing, more than its entire debt in total. And still their debt continued to grow.

How can this be? It's disturbingly simple. All that is ever paid on these LDC loans is the interest and the service charges. The principal sits like a hungry beast behind the treasury doors gobbling up every dollar of export revenue and slurping down funds targeted for needed social services. Real economic growth stagnates, and the emerging Third World markets flounder in the global economy like lifeboats around the Titanic. Today the LDC's debt tops the $2.3 trillion mark and continues to grow like a virus. Not only is this a horrible insult against the poorest people in the world, but at the same time, it lends to the accelerated harvest and waste of the planet's natural resources. There may be no better example of how our current economic system embodies the antithesis of what is called for in managing the planet.

In the eyes of commerce, the development of the Third World is primarily the expansion of markets. The growth-based economy seeking new frontiers. Capitalization through loans and credit is the universally accepted method of Third World development. It has been going on in increasing dollar amounts since World War II. Records show, however, that once a loan is re-serviced and economic conditionalities are imposed, things get very tough on the debtor country. Only a select few developing nations have been able to escape the initial pit fall of loan reconstruction and then its economic quicksand. The sad truth is that development is an economic tightrope in the free market arena, especially when you are entering the G7 monetary system from the outside.

The G7 fractional reserve monetary system is a system of "credit money." It allows credit to be extended in great excess of banked reserves. For example, a bank needs but three percent of the amount it loans to grant the loan. That is, three thousand dollars in reserves is all that is needed to grant a one hundred thousand dollar loan, meaning the creation of ninety-seven thousand dollars out of thin air. This "credit money" or "synthetic money" is created whenever a loan is made. It appears only as a deficit on a ledger and disappears as it is paid back. Credit amounts to a bond of trust between the financial institution and the borrower on a quantity of synthetic money, secured by a fee and maintained by the payment of interest. This method of fractional reserve banking is how money is created in the United States, whether through a bank loan, a mortgage, or a credit card expenditure.

Under this system, large sums of money are essentially created out of nothng and often, because of government guarantees, are extended far beyond the reasonable means of the recipient of the loan. We saw this in the Savings and Loans scandals of the 1980s, and we are seeing this again in the recent crash of sub-prime mortgages. This kind of problem multiplies as the loan size gets larger, for instance, in the case of borrowing nations. Over the last fifty years, credit has been extended and extended again to the Philippines, Indonesia, Malaysia, Mexico, really all of South America and the sub-Saharan African nations. In a pattern that began when the U.S. established the Development Loan Fund in 1957 and John Foster Dulles announced that all further U.S. foreign aid would be as a loan not a grant1, over and over again, developing countries have fallen victim to the international credit cartel's ponzi-like system. Old loans threatening to default are invariably propped up by new loans that are saved yet again by another new loan. Because the principle is often ninety-seven percent "synthetic," there is no real limit on how much credit money can be created to sustain timely loan payments. After many generations of loan restructuring, which is frightfully common, something of the principle in the original loan is lost to abstraction, only the steady demand of interest remains real. The bank cares little of the principle anyway. All but some small percentage was created out of pixels on a computer screen. It's the loan fee and interest payment that make the wheel turn.

A little history is revealing. Click to read entire article as PDF.

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