The Heart of the Matter
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The world seems stuck in the mire, like the wonderfully metaphorical Burning Man disaster, but there is a way out. In fact, short of unimaginable conflict, it is the only way out. In the face of burgeoning debt, geopolitical tensions, and political polarization at all levels—global, local, and personal—the path forward is forgiveness. We can get there quickly, tortuously, slowly, or not at all. It will require controlling both our emotions and our instinct for punishment. We will need to compromise. We have to be willing to take losses today instead of tomorrow when they will far more costly.
In order to create the stability we all crave it might be necessary to give some who might not “deserve” it a fresh start. But that will be better than waiting for failure. For example:
Financial debts that cannot be reasonably repaid by distressed countries and individuals should be proactively renegotiated or forgiven rather than be allowed to go into default. At his press conference in Hanoi today, President Biden mentioned the possibility of forgiving debt in exchange for climate change concessions, as one option.
To promote effective international relations, historical grievances should not be fanned by one country against the other, especially now that we are more interconnected than ever before. By prolonging old disputes we create new risks, particularly in Asia, but elsewhere around the world as well. A positive example: the current relationship between the US and Vietnam. A negative example: the recent vitriolic dispute between China and Japan over Fukushima.
As we enter election season, political warfare should not be allowed to find a permanent home in our legal system. Everyone I have spoken to is well and truly exhausted by media coverage of both President Trump and the Biden family at a time when we face so many challenges post-Covid. The prospect of another year of this seems unbearable, and unwise. I haven’t heard any discussions yet of a joint pardon, probably because both sides would be unhappy. However, that might mean that it is exactly the right path to take.
Moving on is the heart of the matter, but I am not sure we have the necessary leadership anywhere in the world to pull off reconciliation. I’m concerned that what is inevitable will only be possible in the wake of conflict and suffering. I’ll discuss some problems and solutions that forgiveness would make possible.
Economic Forgiveness
The Problem: Emerging Market Debt
Despite the efforts of the IMF and World Bank, traditional debt restructuring is not working, partially due to China’s covenants on its loans to developing countries. For more on what is called the Common Framework, read here.
Interest payments on dollar-denominated loans are rapidly becoming the largest budget item for some developing countries:
The number of nations at risk of default is growing. At a certain point this is not merely unsustainable, it is dangerous. Keep in mind that Pakistan, in full economic free-fall, is also a nuclear power, and spends more than half of government revenues on interest payments. How can any country sustain this? Sooner or later, defaults will accelerate and build upon each other, as regional effects multiply. (For an excellent interactive map of default risk by country, see the Council on Foreign Relations’ Sovereign Risk Tracker.)
Tightening Monetary Policy and Slower Growth
Until inflation blew up interest rates, $18 trillion worth of government bonds worldwide paid negative interest, seen by investors at the time as a good tradeoff in exchange for a secure risk-free asset. Now governments have to offer higher rates for new debt, which will no doubt dampen growth in the Global South. Latin America in particular is lagging other regions. A new report by the Group of 30 outlines this challenge in our own hemisphere, which has contributed to the crisis at our borders.
China, formerly an engine of global growth, is slowing as well. Over the next two years, developed economies are forecast to grow only approximately 1.5%. In a world interlinked by both trade and finance, a cascade of defaults in emerging markets could reach a tipping point that affects developed economies too. The disease is incubating— we are merely waiting for contagion unless hard choices are made soon.
The Solution: A Debt Jubilee
Almost five hundred years ago, England and the Dutch Republic pioneered the use of government bonds, as a means to pay for the war and other projects. Since that innovation which financed the modern world, governments have regularly defaulted during times of war and revolution, often as a last resort since this subsequently severely limits their access to debt markets.
Given the overall benefits of sovereign debt, forgiveness might be the most realistic approach in some instances. There is an ancient economic model for this. Debt jubilees were first mentioned in the Bible, and were meant to happen every 49 (7X7) years, an Old Testament version of the Great Reset. We might be overdue for one now. According to Fitch:
A record five Fitch-rated sovereigns are in default: Belarus, Lebanon, Ghana, Sri Lanka and Zambia. There have been 14 separate default events since 2020, across nine different sovereigns (Argentina, Ecuador, Suriname and Ukraine as well as those currently in default) compared with 19 defaults across 13 different countries between 2000 and 2019. Further defaults are likely.
Add slowing growth and declining demographics to this mix, and you have a shrinking repayment base. How much better to forgive a debt than try to force repayments that are impossible to meet, creating hardships for ordinary citizens in those countries?
What would the direct cost of forgiveness be for these distressed economies?
All in, about $210 billion of emerging-market bonds denominated in dollars, euros and yen are trading with yields of more than 10 percentage points above that of similar-maturity Treasuries — levels that typically suggest investors reckon default is a real possibility. That accounts for 15% of the $1.4 trillion of outstanding sovereign external bonds, according to data compiled by Bloomberg.
Perhaps I have become inured to big numbers, but $210B does not seem like a lot of money to contain this problem globally. It is only about half of Singapore’s GDP, and one-third of Chicago’s. Compared to the issues posed by the world’s two largest economies, this level of forgiveness seems very achievable.
Political Forgiveness in a Polarized Landscape
Politics Rules in China and the US
The US and China are embroiled in political conflict. In the US it is highly visible, in Congress and in court cases involving key political figures, and in a divergence of values clearly apparent in US media. In China, we can only see the shadows of what is going on at Beidaihe or Zhongnanhai, but it is evident that struggle sessions are ensuing over China’s surprisingly poor economic performance. I will write more about what is going on in Beijing in my next Hale China Report, but both economies directly affect world growth. The US in particular has an outsize role.
US Debt is a Political Football
Debt increases have not been confined to the developing world where they will be much more complicated to solve. US government spending sped up during the pandemic, then fell last year. The Washington Post says however that the US budget deficit is projected to double from 2022 to 2023:
A budget showdown in Congress will probably create at least one government shutdown this year. Tax receipts collected in April were also down 35% in 2023. Somehow, control has been lost and this has been duly noted by rating agencies. Here is another look at US government spending that is creeping back up past the levels of the Global Financial Crisis.
It is obvious that not just for the US but for the rest of the world, it is vital that US Congressional leaders begin to work together as colleagues instead of enemies. I wonder, quietly, whether the advanced age of Congressional leaders is a contributing factor to their lack of flexibility.
2024 US Elections
Legal battles are muddying the landscape of the upcoming US elections. The polarization is acute. Polls for President Biden and former President Trump are dead even. With the overlay of the continued legal battles of both Donald Trump and Hunter Biden, whether or not either could be given a fair trial in any jurisdiction in the United States is an open question. By using the courts for political purposes, including the first ever leak of a Supreme Court decision, we are weakening the very institutions we claim we are protecting.
There is a precedent for stepping down from this potentially endless conflict. 49 years ago this week, forgiveness was the solution chosen by President Gerald Ford. He faced a difficult political choice, and he made it, when he pardoned Richard Nixon, ending our “long national nightmare.” In the tumult after Watergate, that was the right thing to do.
Before you dismiss out of hand my suggestion to do the same for both Trump and the Biden family in order to end our current national zeitgeist, I encourage you to first listen to Gerry Ford’s thoughtful announcement (recording here). Perhaps it is time for another 49-year jubilee, this time celebrating political forgiveness, allowing us to get on with the considerable business at hand.
Theirs is an American tragedy in which we have all played a part. It can go on and on or someone must write “the end” to it. I have concluded that only I can do that. And if I can, I must. (President Gerald Ford, September 8th, 1974)
It created a furor at the time, but later Ted Kennedy said this when he and Caroline Kennedy presented President Ford the Profiles in Courage award:
At a time of national turmoil, America was fortunate that it was Gerald Ford who took the helm of the storm-tossed ship of state. Unlike many of us at the time, President Ford recognized that the nation had to move forward, and could not do so if there was a continuing effort to prosecute former President Nixon. So President Ford made a courageous decision, one that historians now say cost him his office, and he pardoned Richard Nixon.
I was one of those who spoke out against his action then. But time has a way of clarifying past events, and now we see that President Ford was right. His courage and dedication to our country made it possible for us to begin the process of healing and put the tragedy of Watergate behind us. He eminently deserves this award, and we are proud of his achievement.
It is impossible to quantify either the practical or spiritual value of this decision. If we can find the same degree of political courage, we can also find ways to move forward.
Recommendations for the Path Forward
Strengthen global programs that emphasize debt forgiveness for poor countries, and bring China into that process which will benefit them as well in the long run.
Improve the US budgeting process by eliminating the debt ceiling, which does not exist in any other country and intensifies political divisions.
Blaming monetary policy for everything that goes wrong and expecting the Fed to fix it has reached its natural limit. Target fiscal spending instead. Democrats and Republicans need to reach across the aisle and compromise, recognizing the role they play in the global economy.
Pardon both the Trump and Biden extended families and create new legislation to lessen the risk of future possible misuses of power. As a country we need to focus on other clear and present dangers.
Economic Realism vs Politicization
There are other risks to the post-pandemic recovery which I will discuss in my next EconVue+. They include new global taxation legislation, the US student debt restart next month, increased credit card debt, and auto loan defaults. All point to a need for wise policy choices that could include some degree of forgiveness or compromise.
I do not advocate universal, turn-the-other cheek forgiveness for all transgressions. I am not making these suggestions based on ethical considerations or judgments, although those should be considered as well. Instead forgiveness is the logical, lowest-cost solution to our current reality after a cataclysmic once-in-a-hundred-year event.
In terms of international relations we are still living in the shadow of World War II. Similarly, we are only beginning to understand the effects of the greatest shock in global economics in our lifetimes, and need to be more aware of these influences on our decisionmaking. Political and economic policies fueled by retribution will only prolong the path to recovery, while forgiveness will speed up the process. In other words, forgiveness is the cure for the rigidity and hyper-politicization which prevents realistic economic solutions to critical problems.