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May 06, 2005

Happy Day After Debt Repudiation Day!

Yesterday was Cinco de Mayo. Or, as los gringos call it, May 5th.

Most people have no idea what Cinco de Mayo is about, except for the cheap beer part. And arguably the cheap beer part is most important. But the rest of it is also interesting, and (unfortunately) relevant.

Cinco de Mayo celebrates the victory of Mexican troops over an invading French army at the Battle of Puebla on May 5, 1862. While militarily it wasn't that important, it was a big watershed in Mexican national consciousness. Nothing brings people together like fighting others.

Anyway, here's the important part: France was invading Mexico essentially because Mexico owed France money.

Through history, countries have built up unsustainable debts to others all the time. In this case, Mexico had borrowed lots of money from Europe while establishing its independence and then fighting the US invasion in the 1840s.

In these situations, it's best for everyone--both debtors and creditors--to work out some kind of default. But the creditors usually don't see it that way. They want their sweet, sweet money.

In this case, France wanted its money so much it invaded Mexico. After the loss at Puebla they sent more troops and installed Archduke Maximilian of Austria to run things so they'd get paid back.

This was admirably honest. International relations are often like organized crime on a gigantic scale, but people pretend otherwise. Here there was no pretense: the loanshark's enforcers beat the crap out an entire country.

By contrast, creditors today have things like the IMF, which is essentially a creditors' cartel. The IMF is in charge of squeezing countries until they pay back their debts. This often involves lots of people dying... but in quiet ways, without armies involved.

The reason this is relevant to Americans today is now WE'RE in deeper and deeper hock to others. Will China invade us to get their money back? Probably not. We're more powerful than Mexico in 1862. What's more likely is we'll go through the same kind of "structural adjustment" we've imposed on others via the IMF. This means slower economic growth, cutbacks in Social Security and Medicare, and all the other things that benefit normal people.

Now, you might assume this will have to be forced on us, because all Americans would oppose it. BUT YOU WOULD BE WRONG--just as you'd be wrong if you were a regular Mexican and believed no Mexicans would support Archduke Maximilian.

The truth is most of the richer people in America will push for it to happen, because it's good for them. True, it will make America poorer and weaker as a whole--but it will make them more relatively powerful within America. And that's what the elites of most countries care about, just as Saddam Hussein cared about himself rather than the well being of Iraq.

For a glimpse of our future, I recommend the book Savages about Ecuador, a country with its own foreign debt problems. Ecuador as a whole would be better off defaulting on its debt, but that doesn't matter:

My family and I rented an apartment in the new section of Quito... Beyond the office towers, up along the valley walls, were lavish new condominiums and golf courses and tennis clubs. A good French dinner ran about fifteen dollars, a full-time, live-in house servant about twenty-five dollars a month.

I called them servants; one of my neighbors, Alex, called them slaves...

For someone like Alex--that is, for anyone, American or Ecuadorian, who works in the white-collar end of the petroleum business... Ecuador's ever-increasing poverty was a windfall. The price of slaves kept dropping. "The debt?" Alex said. "I love the debt."

Posted at May 6, 2005 03:33 PM | TrackBack

well done. I learned and laughed and cried.

Posted by: Peter at May 6, 2005 10:33 PM

The Chinese are masters of bloodless murder, I should know because I am one. They never fight if they can afford it, even if they are (and they have been in the past) more powerful than neighboring countries, but they prefer to tax and exhaust their opponents into submission...

Posted by: En Ming Hee at May 6, 2005 11:33 PM

I disagree with your premise, Jonathan. We're in debt, but we certaintly aren't going to get IMF loans to pay it back. So we're not going to be forced to undergo the formal structural adjustment that the IMF requires. And the IMF requires this because it believes, stupidly, ideologically, that this is the correct formula for economic health. This, despite the fact that no one has ever followed their formula to get anywhere but deeper in debt. Since US legislators are not beholden to IMF demands and are not as ideologically cracked as the people running the IMF, structural adjustment here seems less likely - since the imperative here is simple economic health. Sure, there's the regular, run-of-the-mill "free market" crap that strips away social safety nets. But that happens anyway, all the time, when the working class is weak and the rich control the government. I don't think debt has anything to do with it.

Posted by: saurabh at May 7, 2005 10:27 AM


Glad you liked it. It's rare to be able to tie together beer drinking and structural adjustment.

En Ming Hee,

Why do you think this is? As you know, it seems to be encoded in America's DNA to expand until we've covered the globe and, if possible, the solar system.


Sorry, I wasn't clear. We won't be forced into some sort of structural adjustment because of having IMF loans. But then, no country actually is directly forced. The way it works is two-fold: first, the IMF has lots of sway over the terms small countries can get on international financial markets... meaning that the small countries are not just worried about IMF loans themselves being yanked, but the effect that will have on other loans. Second, the people who run the governments of small countries are generally the people who actually benefit from structural adjustments. It's good for them, horrible for most.

The point I was trying to make is that we will likely go through something AKIN to a structural adjustment, rather than a formal one. The IMF can't force us; in fact, they've previously made cluck-clucking sounds about us, and we tell them to fuck off. However, international financial markets CAN force something like that on us—particularly since many American elites want to see it happen, and will enthusiastically collaborate in the implementation. The imperative for them is not simple economic health—it's gaining more power for themselves relative to other Americans. They will claim to be forced to do something they want to do anyway.

Posted by: Jonathan Schwarz at May 7, 2005 02:16 PM

I'm essentially illiterate economically, but it seems to me that this is quite related to what Paul Krugman has called the neocon's "starve the beast" strategy (a la grover Norquist) and that eventually the rich USians will just "be" the government by default, de facto (if this isn't already more or less the case).

Posted by: Jon Husband at May 8, 2005 02:50 AM

The starve the beast peeps are so full of it! Big Gubmint is far too useful a tool for the powerful to ever give up. It's not about wealth, as Jonathan has said. It's about power. The best way to achieve that is to keep education out of reach to all but the children of the wealthiest and those most willing to serve wealth bondage. The crushing debt load for the majority keeps people dependent and scared.

Posted by: Harry at May 8, 2005 10:07 AM

I agree that the general trend in the U.S. will be in a direction that LOOKS rather like structural adjustment. But I'm not sure how international debt is the engine driving that trend, rather than the (sorry to be gauche) capitalist ruling class.

Posted by: saurabh at May 8, 2005 10:23 AM