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Is the Whole World Going Bankrupt
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Transcript of Is the Whole World Going Bankrupt
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Is the Whole World
goIng Bankrupt?
Gvnmnt Dbt: What
It Is and Hw It Fnctins
Rosa LuxembuRg Foundation
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2
In the 1990s, it was globalization. Now government debt
is considered the central problem of the world economy. The
reason: for the rst time since the Second World War, it is not
the so-called developing countries that are experiencing a debt
crisis, but rather established industrial countries. In Europe,
a few governments have become insolvent and have to be -
nanced by other states. In the United States, government debt
has grown to levels that are otherwise only reached during wars.
That is whyBild, Germanys biggest tabloid, asked: Is the Whole
World Going Bankrupt? (July 13, 2011), while the headline of the
newsweeklyDer Spiegel(32/2011) asked: Is the World Going
Bust?
In the public discourse, two things seem to be clear: rst,
government debt is bad. And second, there is too much of it.
Saving is therefore the order of the day. States want to be-
come trimmer, public property is being privatized, and nati-
onal wage levels are to be lowered in order to raise the level
of competitiveness of the nation as a location for business.
Government debt thus engenders the same political measures
as the specter of globalization a decade ago.
Now all governments of the industrial countries have resolved
to save more drastically. This affects the poor primarily in the
form of social cuts in all countries. Why is that the case? Where
does all this debt come from? Why do all states incur debt even
though it is generally considered to be something bad? And whynot just cancel these debts, if the whole world is suffering under
them? These are some of the questions that this brochure seeks
to answer. It does not attempt to assert that government debt is
actually not a problem. Rather, it attempts to demonstrate the
purposes that government debt serves, and when it becomes a
problem and for whom. Because ultimately, questions of debt
are questions of distribution: some have to pay, while othersbenet.
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Table of Contents
1 TheThriftyHousewifeasaRoleModel:YouCant
SpendMoreThanYouEarn 2
2 OurGrandchildrenWillHavetoPayBackOurDebts 3
3 WeveAllLivedBeyondOurMeans 5
4 PoliticiansWasteMoneyAfterAll,ItIsntTheirs! 9
5 WeHavetoSave! 12
6 WereBankrupt! 15
7 TheFinancialMarketsTamethePoliticalSphere 18
8 WeShouldJustCanceltheDebts! 22
9 WeNeedStricterRegulations 24
10 Conclusion:SoIsGovernmentDebtGoodorBad? 26
11 Glossary 30
Inthisbrochure,thetermshighlightedincolorareexplainedin the
glossary(seepages3134).
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1
THe THrIFTy HoueWIFe role MoDel:
you CT peD More TH you er
Ataconventionofherparty,theGermanChristianDemo-crats(CDU),inDecemberof2008inStuttgart,ChancellorAngelaMerkelinvokedtheimageofthethriftySwabianasarolemodelforstateeconomicactivity:WeshouldhavejustaskedaSwabianhousewifehereinStuttgart,inBaden-Wrt-temberg.Shewouldhaverelatedapieceofwisdomwhichisasbriefasitiscorrect:Inthelongrun,youcantlivebeyondyourmeans.Itseemssosimpleandtrue.
What Truth is There to That?
Thecomparisonbetweengovernmentandhouseholdbudgetsisbelovedbypoliticianswhentheiraimistoexplainthestatesdistresstothepopulation.Butthecomparisonwiththehousewifeismisleading.Agovernmentbudgetfunctionsac-
cordingtodifferentrulesthanthatofahouseholdbudget.Ifaprivatehouseholdtakesoutaconsumerloan,topurchaseanewwallunitforexample,thenitisanactofanticipatorysav-ing:thehouseholddoesntrstsaveupthemoneyinordertopurchasethefurniture,butrathertakesonaloan,buysthewallunit,andthenrepaystheloantothebankincludinginterest.Theloanthusmakesthehouseholdpoorer(sinceit
paysthepurchasepriceofthewallunit,plusinteresttothebank).Thestate,ontheotherhand,takesoutaloanandusesthemoneytobuildroads,schools,andtelecommunicationnetworks.Itthusimprovestheconditionsofdoingbusinessinthecountryforcompaniesandattemptstoattractinvest-mentandmakeitprotable.Forthestate,incurringdebtisameansofstimulatingeconomicgrowth.Forexample,the
stateprovidessubsidiesforyounggrowthindustries,andusesmilitaryexpendituresasameansofsecuringtheglobalbusinessofdomesticcompanies.Furthermore,debt-nancedexpenditurescanstrengthensocialdemand,sothatacrisiscanbemorequicklyovercome.Thecentralindexforthestateisthereforenottheabsolutelevelofdebtindollarsoreuros,butrathertheso-calleddebt-to-GDPratio.Thisdivides
thetotalgovernmentdebtbyeconomicperformance(Gross
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3
DomesticProductorGDP).ThisratiomeasureswhethergrowingdebtisaccompaniedbyanincreaseinGDPthuswhetherdebtsfunctionasaleverformoreeconomicgrowth.1Aslongasthatfunctions,governmentdebtisnobigproblemandthestateachievesitsgoal:thegrowthofnationalwealth.Incidentally,abusinessalsocannotbecomparedtoaprivatehousehold:itborrowsinordertobuildacarfactory,forexample.Itinvests,socreditiscapitalforabusiness:externalnance.Thefactoryaccordingtotheplanyieldsaprot.Fromthisprot,thebusinessrepaystheprincipleandinterestonthedebt.Ifthingsgoaccordingtoplan,thebusinessisnotpoorerasaresultofthedebt,butricher.
Soofcourse,agovernmentcanspendmorethanitearnsinthelongterm,sinceitcanincreaseitsincomewiththeexpenditures.Ahousewifecannotdothat.Incontrasttoaprivatehousehold,acountrycanevenbecomericherbytak-ingondebt.Italldependsuponwhatthegovernmentusesthecreditfor.
2
our GrDCHIlDre WIll He To py
BCk our DeBT
TheGermanweeklynewspaperWelt am Sonntag(June26,2011)explainedtoSigmarGabriel,chairoftheSocialDemo-craticPartyofGermany(SPD):Werelivingattheexpenseofourgrandchildrenandgreatgrandchildren,sincetheyhavetopayforallofthat.Ineverytalkshowdebate,theremarkalwayscomesupatleastoncethatwecannotincurdebtattheexpenseofourchildrenandgrandchildren.Thatisare-
quirementofthefundamentalprincipleofintergenerationaljustice.Thedramaticpictureisclear:debtsincurredtodayhavetobepaidbackinafewyearsordecades.Ifnewdebtsaretakenoneveryyear,thenthepileofdebtbecomeslarger.
1 TheGrossDomesticProductisnotthepropertyofthestate,butitrepresentsthewealththestate
canpotentiallydrawuponbymeansoftaxes.
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Themoredebtsaccumulate,accordingtothisargument,thelessmoneythereisforotherexpenditures,forexampleforeducation,roadconstruction,andsocialprograms.
What Truth is There to That?
Thispictureisalsowrong.Firstofall,assetssuchasroadsorschoolsthatarenancedbycreditarealsoavailableforusebyfuturegenerations.Secondofall,withgovernmentdebt,noredistributionbetweengenerationsoccurs,butratherredistributionwithinageneration:generally,frombelowtoabove.Howdoesthatwork?Ourgrandchildrendonotjustinheritthedebt,butalsotheclaimsuponthedebt,sotheyalsoinheritwealth.Onecanpicturethisusingtheexampleofafamily:whenthemotherlends100eurostothefather,andbothdie,thechildrendonotjustinheritthe100eurodebtofthefather,butalsothemothersclaim.Sowhoinheritsthedebtandwhoinheritstheclaim?Whohaslentmoneyatinteresttothestate?Andaboveallelse:whopaysthisinterestandwheredoesthemoneycomefrom?
Forexample,intheyear2008,Germangovernmentdebtaloneyielded69billioneurosininterest.Thedebtinstru-mentsareheldoverwhelminglybybanks,institutionalinvestors,andthewealthy.Theylendtheirsparemoneytothestatebypurchasinggovernmentbonds,andcollectin-terestinreturn.Theinterestpaidbythestatecomesfromtax
revenues.InGermany,asaresultofthetaxreformsofthelasttenyears,roughlytwo-thirdsoftaxesarepaidbywageworkers.Thatmeansthatthereisnoredistributionbetweengenerationsoccurring(thesumofclaimsandobligationsbalancesout).Rather,wearedealingherewithatransferofwealthfromthosewhosetaxpaymentsnancetherepay-mentofinterestandprinciple,tothosewhopocketbillions
ofeuroseveryyearasownersofgovernmentbonds.2
2 However,governmentdebtisnotthecauseoftheinterestcollectedbyownersofwealth,butrathertheirwealthitself.Interestincomearisessolelyfromthefactthatsomehouseholdsareinapositiontoaccumulatesavings.Sothereisnoproblemofjusticearisingfromgovernmentdebtthatdidntalreadyexistwithregardtopreexistingdisparitiesofincomeandwealth(NorbertReuter,
Inter-generationalJusticeinEconomicPolicy,PROKLA121/2000,p.547556).
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Bytheway,governmentdebtisnotpaidback;rather,itisserviced.Thatmeansthatthestatespileofdebtisusuallynotpaidofforsettledsothatastateatsomepointagainbecomesdebt-free.Ifadebtbecomesdue,meaningthatthesumoriginallyborrowedascredithastobepaidback,thisoccursintheformofaroll over:topaybackolddebts,newcreditistakenon.Thedebtdueisreplacedbynewdebtinaquasi-permanentprocessthatishardlyeverexplicitlymentioned.Forexample,since1965theFederalRepublicofGermanyhasneverentirelypaidoffitsdebt,butalwaysrolleditoverinstead.Onlynewcreditwhichexceedstheamountrolledovercountsasnewdebt.Thatmeansthatifnonewdebtistakenon,thepileofdebtremainsthesameasbefore.Futuregenerationswillproceedinthesamemanner.Debtswillnotbesettled,butinsteadserviced.Aslongaseconomicperformancegrows,thatisnotaproblem.Itisnotourgrandchildrenwhohavetorepaydebtsinthefuturethatweincurtoday.Rather,thewageworkersoftodaypayforthenancialinvestorsoftomorrow.Thisdistinction
betweenwinnersandlosersofgovernmentdebtisobscuredbythenationalwe.
3
Wee ll lIeD BeyoD our Me3
TheGermanchancellorclaimsthattheGermanshaveincurredtoomanydebts.Bythatshemeansnotprivatebusinessesorprivatehouseholds,butratherthestate.Shenonethelesssuggeststhatthisappliestoeveryone.In1950,thegovernmentdebtoftheFederalRepublicofGermanywasstillat9.5billioneuros.In1990,itwas538billioneuros.
Between2007and2010,debtgrewdrasticallyasaresultoftheeconomiccrisisbyalmost30percent,from1,550to2,000billioneuros.IntheUnitedStates,governmentdebthasrisenbyafourthto16trilliondollarssincethebeginningofthecrisis,andinJapanbyalmostafth,to1120trillionyen.
3 AngelaMerkel(PotsdamerNeuesteNachrichten,May15,2010).
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2.500
2.000
1.500
1.000
500
0
1950 1960 1970 1980 1990 2000 2010
Allofthatissupposedtobeourdebt.Afterall,weareallthestate.4Thisisusuallyexpressedasthepercapitashare
ofdebt.InGermany,thisrosebetween1950and2010from190to24,500euros.IntheUnitedStates,itisabout40,000eurosatthemoment(seepoint10).Inotherwords,wearelivingbeyondourmeans.
What Truth is There to That?
Concerningtherstpoint,itistruethatgovernment
debthasrisendrastically.Butwhatdoesthatmean,ourdebts?Inmostcountries,thenanceministrydrawsupabudget.Itpredictsstaterevenuesandexpen-ditures.Whenexpendituresexceedrevenues,thedifference isnancedbytakingonnewdebt,meaningthatthegov-ernmentborrowsmoney.Thebudgetandthenewdebtarethenusuallyapprovedbytheparliament.Thepopulationat
largedoesnotshareinthisdecision-makingprocess.Itcanfollowthebudgetdebatesinthemediaandformitsownopinion.Itcanbesatisedordissatisedwiththestates
4 AccordingtotheGermangovernmentonitswebpageregierenkapieren.DiejungeSeitederBundesregierung(UnderstandingGovernment.TheYouthWebpageoftheFederalGovernment)underthesectionWokommtdasGeldherundwogehteshin(Wheredoesmoneycomefrom
andwhereisitgoing).
Germany:GrowingGovernmentDebt
Grossgovernmentdebtinbillionsoeuros
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nancialconduct.Butithasnoinuenceuponthelevelofnewdebt.
Thestatesdebtisnotthedebtofitspopulation.Ultimately,thegovernmentdebtpercapitaincreasesregardlessofhowthriftytheindividualworkerorunemployedpersonlives.Asaprivateperson,onecannotrepaythedebt,evenifonewantedto.Andwhen,forexample,somebodygoestoabankinGermanyandwantstotakeoutaloan,nobankwillrejecttheloanapplicationwiththewords:butyoualreadyhave24,500eurosindebtthroughthestate!
Governmentdebtmaynotbethedebtofthepopulation.Butultimately,thepopulationisliableforgovernmentdebt.If
debtsaretobepaiddown,thepopulationhastopayhigher
GovernmentDebtandPrivateWealth
Inbillionsoeurosortheyear2010inGermany
Governmentdebttotalwealth
10.000
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
1.000
0
Gvnmnt
Dbt
Financialassets
Tta a
dmstic assts
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taxes,waitlongerforitsretirementpensions,workmore,earnless,orgetbywithlessstatebenets.Thus,thestatemakesitsdebtourdebt.
Concerningthesecondpoint:fromthepointofviewofsocietyasawhole,itcannotbesaidthattheindustrializedcountriesarelivingbeyondtheirmeansthatistosay,spendingmorethantheyaretakingin.Atleast,thatisthecaseifoneconsid-erssocietyasawhole.Thestatesdebtisincreasing,buteveryloanthatsomebodytakesouthasacorrespondingdebtclaim.Everydebtorhasacreditor.IfMs.Alends100eurostoMr.B,thenitisnotthecasethatbothhavelivedbeyondtheirmeans.Rather,Mr.BhasadebtandMs.Ahasaclaim,anancialassetfromwhichsheearnsinterest.Bothbalanceeachotherout(seepoint2).IftheGermangovernmentborrowsamillioneurosfromtheDeutscheBank,thenwehavenotlivedbe-yondourmeans.Rather,thegovernmenthasincurredadebtandthebankhasadebtclaimfromwhichitpocketsinterest.
Ifonetakestheweseriously,andcalculatesallthedebtandnancialassetsofeachmemberofthepopulation,then
oneisforcedtoconcludewithregardtomostindustrializedcountries:wehavenotlivedbeyondourmeans.Weare
nothighlyindebted,butratherrich.LetstaketheexampleofGermany:thegovernmentdebtamountstoabout2,000billion
euros.Privatenetwealth5ontheotherhandwasmorethan
9,000billioneuros,eveninthecrisisyearof2009.6Thatcanalsobecalculatedpercapita:foragovernmentdebtof24,500
europercapita,thereisanetprivatewealthofmorethan
90,000euros.7Sowearewealthy,8atleastonaverage.Inreality,however,governmentdebtisbornebyeveryone,since
itispublic.Wealth,ontheotherhand(andnancialclaims
5 Inthecaseofprivatenetwealth,debtisalreadysubtractedfromthetotal. 6 SeetheDIWWochen-bericht50/2010.Ifonecalculatesonlyprivatenetwealthinastrictersenseso,subtractinginsur-anceassets,aswellaslifeinsurancepoliciesorretirementpensions,andhouseholdwealthsuchasautomobilesorpersonalbelongingsthenonestillarrivesatasumover7,370billioneuros. 7 SeeBaselInstituteofCommonsandEconomics(http://commons.ch/).Thecorrespondingvaluesforgovernmentdebt/privatewealthperresident/householdineurosfortheyear2010,roundedoff,are:Greece(24,000/56,900),Ireland(23,500/74,700),Italy(29,300/120,300),USA(32,800/49,700).However,thenumbersfortheUSAareonlymarginallycomparabletothoseofEurope. 8 Bytheway,ifoneconsidersGermanysnancialpositionwithregardtoothercountries,Germanyhasa
netsubtractingforforeigndebthasapositivebalanceofmorethan1,000billioneuros.
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upongovernmentdebt,forexamplegovernmentbonds,belongtothiscategory)isinthehandsofafewprivateindividuals.In
2007,60percentofthetotalwealthbelongedtotherichesttenpercentoftheGermanpopulation.Ninetypercentofthewealth
belongedtotherichest30percentofthepopulation.9Inother
countries,wealthdistributionisconsiderablymoreunequal.
4
polITICI WTe Moey FTer ll,
IT IT THeIr!
Politiciansaresuspectedofextravagance.Staterevenuesareconstantlyinsufcientfornancingtheirdesiredexpendi-tures.10Theconsequenceishighgovernmentbudgetdecits.Thisisfrequentlyexplainedintermsofthesupposedmyo-piaofpoliticians,11theirquestforgreatness,ortheirdesiretobeguiletheelectoratewithfavors.Thebillarrivesbut
onlyafterthegenerouspoliticianshavelongsinceretired.Forthatreason,theGermanneo-liberalthinktankStiftungMarkwirtschaft(MarketEconomyFoundation)demandsdaringtohavemoredemocracywithoutgifts:letshavesuccessfulpoliticswithoutstrikingSantaClausposes.12
What Truth is There to That?
Little.Sure,thereissometimeswaste,andeveryyearvarioustaxpayersassociationsandgovernmentinspectionagenciesaddupthenumbersandcomplain.Butifpoliticiansreallyexclusivelyactedextremelyshortsightedly,itwouldbeawon-deriftheydidnotincurevenmoredebtthantheyalreadydo.Ifpoliticiansactuallyboughtvotes,thentherewouldnotbeanydebtindictatorships,oratleastlessthanindemocracies
(whichisnotthecase).Politiciansdonotjustspendmoneywithouthesitation.Whentheyincurdebts,theydonotignore
9 DIWWochenbericht50/2010. 10 Whydoesthegovernmentincurdebt?Thenanceministerbreaksoutinasweateveryyearwhenfacedwiththenumberofexpenditures.Revenues,althoughtheyaresohigh,arenotenoughtocoverthecosts.Weareliving,asusedtobesaidsonely,beyondourmeans(www.regierenkapieren.de). 11 Governmentshavetonallystartthinkingbeyondthenextelection(Spiegel32/2011). 12 Marktwirtschaft:EhrbareStaaten?ArgumentezuMarktwirtschaft
undPolitik,Dezember2011.
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thewellbeingoftheeconomy;rather,thewellbeingoftheeconomyistheirgoal(seepoint1).However,particularlyinthelastfewyears,thathasnotworked.Debthasgrownmuchfasterthaneconomicperformance.Thisisdemonstratedbythedebt-to-GDPratioinallindustrializedcountries.
Thatwaslesstheresultofahighlevelofexpendituresonthepartofthestate.Onthecontrary:stateexpendituresinGermanyevendeclinedinrealterms(adjustedforination)between1998andthebeginningofthecrisisin2008.Thereweretwootherreasonsfortheriseinthedebt-to-GDPratio:rst,therewerehugetaxcutsinGermanysince1998.The
taxratesforthewealthydeclined,asdidthetaxesoncapitalgainsandtaxesonbusinesses.In2010,theGermanstatewouldhavetakenin51billioneurosmoreinrevenues,iftheoldtaxlawsof1998hadstillbeenineffect.13Thesecond
1. 2. 3. 4. 5. 6. 7.5
0
-5
-10
-15
-20
-25
-30
-35
1. Germany 2. Japan 3. USA 4. UK 5. Spain 6. Greece 7. Irleand
2007 2009 2010
Crisis:LessRevenue,MoreExpenditures
BudgetdefcitsasapercentageoGDP
13 SeethepressreleaseofSeptember8,2011,StaatsausgabentrotzKrisenabwehrrealkaum
gestiegen,bytheHans-Bckler-Stiftung.
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reasonwastheeconomiccrisis.Wheneconomicperformancetankedattheendof2008,businessesnolongerinvestedsomuchandhouseholdsnolongerconsumedsomuch.Thestatejumpedintointerveneinallcountries.Ittookoncredit,rescuedbanks,andsubstitutedstatedemandformissingprivatedemandinordertoamelioratetheeffectsofthecrisis.14Thiswasalsosuccessful.Withouttheseinterven-
tions,economicperformancewouldhavecollapsedevenmoredramatically.Nonetheless:thedebtratioincreased.However,thiswasnotasignofwastefulnessonthepartofthestate,butratherofthefactthatthestatewasusingpublicmoneytokeepthebusinessofprivateenterpriseshalfwayfunctional.Theresult:theprotsofGermanaswellasAmericanbusinessesonceagainreachedrecordlevelsin
2011.GovernmentsinGermanyaswellasinotherEuropeancountrieshaveimposedausterityprogramsinwhichlabor
Debt-to-GDPRatio
GrosspublicdebtasapercentageoGDP
14 ThisisevenmorethecaseforcountrieslikeIrelandorSpain.There,thedebtratiohaddeclinedconstantlyuntiltheoutbreakofthecrisis.Butthenthegovernmentshadtorescuethebanks.Asaconsequence,thedebtratioinIrelandandSpainbetween2007and2012increasedfrom28percentto113percentand42percentto80percentofGDP,respectively.Thisshowshowabsurd
theaccusationofwastefulnessis.
2005 2006 2007 2008 2009 2010 2011
68.6 68.1 65.2 66.7 74.4 83.0 81.2
66.7 64.0 64.2 68.2 79.2 82.3 85.8
105.4 106.1 103.1 105.7 116.0 118.6 120.1
43.1 39.6 36.2 40.2 53.9 61.2 68.5
67.9 66.6 67.2 76.1 89.7 98.6 102.9
42.5 43.4 44.4 54.8 69.6 79.6 85.7
186.4 186.0 183.0 191.8 210.2 215.3 229.6
Gman
Fanc
Ita
ain
u
Gat
Bitain
Jaan
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andsocialbenetsaremostimpactedbycuts.15IntheUnitedStates,suchastepisexpectedfor2013.
5
We He To e!
Inlightofincreasinggovernmentdebt,politiciansandeconomistsdemandthatgovernmentssavemore.Conserva-tiveeconomistssaythatthestatehastodecreaseitsexpen-ditures.Leftisteconomistssaythatthestatehastoincreaseitsrevenues.Bothpathscanbeusedtodecreasethelevelofindebtedness.
What Truth is There to That?
Savingisnotthateasyforastate.Astatecansimplycutitsexpenditures,butthenitnolongerplaystheroleofconsumer.Thestatebuyslessschools,roads,tanks,etc.Oritcanlayoff
employees,whothenbecomeunemployedandbuyless.Oritcutspensions,whichdecreasesthepurchasingpowerofretir-ees.Inallofthesecases,thetotalconsumerdemandofsocietydecreases.Thesituationissimilarwhenthestateraisestaxes,forexamplethevalue-addedtax.Thatmakescommoditiesmoreexpensive,andthebuyingpowerofconsumersdeclines.
AdrasticexampleofthisistheausterityprogramsofGreecesincetheyear2010:thegovernmentcutpensions,salaries,laidoffthousandsofpublicemployees,raisedtaxes,andatthesametimecutitsexpenditures.Theconsequence:consumerspendingcollapsedandwithit,economicperfor-manceasawhole.Withthat,thetaxrevenuesofthestatealsodeclined.Furthermore,thestatehadtospendmore
moneyontheunemployed.TheendeffectwasthatAthensdidnotreduceitsdebt;onthecontrary,itincreased.Radicalausteritycanalsoruinaneconomy.
15 Soingeneralonecansaythatinnormaltimes,governmentdebtserveseconomicgrowth.Intimesofcrisis,itservestopreventanevenmoredrasticdeclineineconomicperformance.Warsareaspecialcase.Here,thestatenolongertakesintoconsiderationtherelationshipofGDPtogovern-
mentdebt,butratherregardsitsexpendituresasabsolutelynecessary.
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Thatiswhyinmostcasessavingdoesnotmeanthatthestateonlyspendsasmuchasittakesin,orthatitspendsevenlessthanittakesin,andsavesthedifferenceforarainyday.Thisoccursonlyintimesofcrisisorunderpres-sure,asisthecasewithGreece.Butusually,statesavingsisnotaquestionofspendingalotoralittle,butratheraquestionofwhatshouldmoneybespenton?Whenagov-ernmentsaves,itrearrangesitsexpendituresandrevenues.Bymeansofausterityprograms,theconditionsofdoingbusinessforcompaniesissupposedtobeimproved,inordertoincreaseeconomicgrowth.Theaimisnottoreducethelevelofdebt,butratherareductioninthedebt-to-GDPratiotheratioofdebttoGDPbyincreasingGDP.
Correspondingly,austerityprogramsusuallylooklikethis:taxesonbusinesses,wealth,orcapitalarenotraised.Instead,thegovernmentcutssocialexpendituresandwages(prima-rilyinthepublicsector),andraisestaxesinthesphereofconsumption(thesalestaxorvalue-addedtax).Additionally,
thestateattemptstodecreasewagelevelsbymeansoflegalregulationsinordertocreatebetterconditionsofinvestmentforbusinesses,sothateconomicperformancegrowsandthedebt-to-GDPratiodeclines.16
InEurope,theseprogramsexistundersuchnamesasEuropeanSemester,Euro-PlusPact,andEurope2020.
TheirmodelistheGermanAgenda2010oftheformerSPD-Greengovernment,theexplicitgoalofwhichwastoliberalizethelabormarket,increasepressureontheunemployedandthusputdownwardpressureonunitlaborcosts.Withsuchprograms,Europeissupposedtobecomethemostcompeti-tiveregionoftheworld.Withtheso-calledscalpactanddebtbrake,theEuropeanstatesarealsosettingstrictlimits
toexpenditures.Allofthisservesonepurpose:winningbackthecondenceofthenancialmarkets;inother
16 AnexamplefromGermany:In2002,federalnanceministerHansEichel(SPD)raisedwarn-ingsaboutatickingtimebombofgovernmentdebt(ARD-MagazinPanorama,episodeofApril18,2002).Between2003and2005,drasticlabor-marketreformswereimplementedandregula-tionsoftemporaryworkwereloosened.ThiscontributedtothefactthataveragewagesinGermany
stagnatedfortenyears.
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words,makingEuropeattractiveasasphereofinvestmentorincomepropertyfornancecapital,sothatgovernmentscanonceagainborrowmoneyatlowratesofinterest.Withasceticismandanimpoverishmentofthepopulation,theEu-ropeanstatescompeteamongandwitheachotheragainsttherestoftheworldforcredit,foraccesstoglobalmoneycapital.Thismoneycapitalinturnistobeusedtoimprovetheconditionsofthesecountriesaslocationsfordoingbusiness.Thegeneralaimisso-calleddebtsustainability,theabilityofacountrytoserviceitsdebtspermanentlyandsecurely. 17
Theconsequenceofallthisisthatwageworkerspayforthecrisis.Thetaskofbusinessesandthenancialmarketsontheotherhandistoearnalotofmoneyandthusstimulateeconomicgrowth.Soitisnotthecasethatweallhavetosave.Savingisaprogramofredistribution.
Suchausterityprogramshavetobepoliticallyimplemented.Debtcanbeusefulinmakingthepopulationpreparedto
tightentheirbelts.Politiciansareveryawareofthis.TheGermaneconomistPeterBongerwrites:Ifonewantstorestricttheroleofthestate,itsnancialresourceshavetobetakenaway.[]Asarststep,comprehensivetaxbreaksarecarriedout.[]Thisleadstoanincreaseofnewindebted-nessinthecaseofanunchangedlevelofexpenditure.Ifatthesametimeonenurturesagreatfearofgovernmentdebt
inthepopulation,atonceahighlevelofpoliticalpressuretocutexpendituresiscreated.18
Itshouldbenoted:ifthestatesweretoatsomepointstopincurringdebt,thenancialmarketswouldhaveahugeproblem.Withalltheirriskyspeculationinderivatives,commoditiesmarkets,andstocks,nancialinvestorsknow
ofonesafeharbor:governmentbonds,thestablevalueofwhichtheycanrelyupon.Theindustrializednationsalonehaveissuedbondsamountingto33,000billionUSdollars,whicheffectivelyconstitutethefoundationofworldnan-
17 See,Kaufman,Stephan,2011,Sellyourislands,youbankruptGreeks(http://www.rosalux.de/
publication/37664/sell-your-islands-you-bankrupt-greeks.html). 18 WSI-Mitteilungen7/2008,p.351.
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cialmarkets.Modernnancialsystemsarereliantupongovernmentbonds.19Thiswasdemonstrated,forexample,inAugustof2011:thedebtcrisisandfearsofarecessionledtoacollapseofstockmarkets.InvestorsedforsecurityinthegovernmentbondsofGermanyortheUnitedStates,forexample.Thepricesforthesegovernmentbondsreachedrecordhighs,whereastheirinterestratesfell.Andthat,inspiteofacrisisofgovernmentdebt!Thatshowsthatwithoutgovernmentbondsthuswithoutgovernmentdebtthewholenancialsystemwouldfalter.
6
Were BkrupT!
AccordingtoapollbytheGermannewsweeklySterninMayof2012,governmentdebt,with62percent,ledthelistofworriesofGermans.Isthewholeworldgoingbankrupt?
askedthetabloidBildinJulyof2011,inlightofthegrowingamountofdebtinEuropeandtheUnitedStates.Andsincethebeginningofthe2010,expertsareconstantlyassertingthatGreeceisbankrupt.InJulyof2011,JohnBoehner,RepublicanspeakeroftheUSHouseofRepresentatives,said,listen,werebroke.
What Truth is There to That? Onethingisclear:thewholeworldcannotbebankrupt
becausethesumofglobaldebtisjustashighasthesumofglobalclaimsondebt,orbettersaid,ofwealth(seepoint3).Thesituationisdifferentforsomeindividualstates.Twoquestionsarise.First:whenisastatebankrupt?Andsecond:whatdoesthatevenmean?
Bankruptisadifcultconceptwhenappliedtostates.Inthecaseofabusiness,itislesscomplicated:thermcanno
19 Governmentbondsplayanoutstandingroleasameansofsecurity,avehicleforpreservingsavingsforretirementandasaninstrumentforsecuringliquidityandequitymanagement[]thecallraisedinsomequartersfordebtreliefforgovernmentswouldnotonlyconsiderablyaffectsmall
investors[]butthenancialsystemasawhole(DIWWochenbericht44/2011,p.9).
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longerpayitsbillsorinterestonloans,andthusreceivesnomorecreditfrombanks.Insolvencyproceedingsfollow.Iftheliquidatorcomestotheconclusionthatnothingcanbesaved,thebusinessisliquidated.Whatevercanbeissoldoff,andcreditorsareservicedfromtheproceedsofthesesalesasbestaspossible.Thenthecompanynolongerexists.
Butwhenisastatebankrupt?Thiscannotbeestablishedonthebasisofthelevelofdebt,andalsonotonthebasisofthedebt-to-GDPratio.In2010,Greecesdebtlevelwas140percentofGDP,anditwasregardedasbankrupt.Spain,withalevelof60percentofGDP,wasregardedasbeingindanger.Japan,ontheotherhand,withadebtlevelof200percentofGDP,wasconsideredrelativelysolid.
2012 (according to IMF predictions)2007
200
150
100
50
0
1. Spain 2. Germany 3. Great Britain 4. Belgium 5. USA 6. Ireland
7. Italy 8. Greece 9. Japan
1. 2. 3. 4. 5. 6. 7. 8. 9.
HigherDebtLevelsinAllCountries
Publicdebtasapercentageoeconomicperormance
Theinterestburdenratiotheamounteachstatehastopay
eachyearforinterestisnotaclearindicatorofinsolvency.AsGreecewentintocrisisattheendof2009,ithadtopayinterestatthelevelofvepercentofitsGDP.Thatisalot,relativelyspeaking.Butintheyear1996,itsinterestburdenratiowasdoublethat.
Furthermore,whatdistinguishesgovernmentsfromprivate
householdsorbusinessesisthattheycanindependently
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determinetheirexpendituresandrevenues.Iftheyaremiss-ingmoney,theycansimplyraisetaxesor,forexample,lowerexpendituresfortheunemployed(thatalsohasitslimits,ofcourse.Seepoint5).Or,agovernmentcanattempttoborrowmoremoneyontheinternationalnancialmarkets.Ifthatdoesnotwork,itcansimplyforcedomesticnancialenter-prisestolenditmoney.20Inanemergency,astatecanalsoborrowfromitself:thegovernmentissuesabond,andthecentralbankofthecountrypurchasesthebond.Inthiscase,thecentralbankprintsmoneyandlendsittothegovernment.Mostcentralbanksoftheworlddothistoagreaterorlesserextent.Intheyears2010/2011,theUSFederalReserveboughtUSgovernmentbondstothetuneof900billionUSdollars.21Asaresultoftheeurocrisis,eventheEuropeanCentralBank(ECB)temporarilyresortedtothisactuallyforbiddenmeasure.InordertolowertheinterestburdenforprimarilySouthernEuropeancountries,theECBboughtgovernmentbondsintheamountofmorethan200billioneurosthroughthemiddleof2012,andannouncedfurtherpurchases.Soa
governmenthasmanywaysofsecuringitssolvency. 22Soonecouldsay,asovereigndefaultisapproaching:
whenagovernmenthasahighlevelofdebt; whenithastocontinuetakingonnewdebtsinorderto
nanceitsexpendituresandserviceitsolddebts; whenitonlyobtainsthisnewcreditathighratesofinterest,
sothatthedebt-to-GDPratioofthecountryincreasesmorerapidlyandanincreasingamountofstateexpendi-turesareusedtoservicedebt.
Sowhetherornotstatesareinsolventisthusdependentupontheassessmentoflendersandthenancialmarkets.Theyarethejudges;theydetermineinterestratesforcredit
(seepoint5).Ifthenancialmarketslosecondenceinthe
20 Thistacticisknownasnancialrepression(http://en.wikipedia.org/wiki/Financial_repression).21 TheFeddidnotbuythesebondsdirectlyfromthegovernment,butratherfrominvestorswhohadalreadypurchasedthem.Buttheeffectwasultimatelythesame.22 Thisisthecaseforlargeindustrialcountries.Developingcountriesthatincurdebtinforeigncurrencieshavelessroomtomaneuver.SoifadevelopingcountryhasdebtdenominatedinUSdollarsandhastoserviceit,it
cannotsimplyprintdollars.
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solvencyofacountry,interestratesrise,whichcanleadtoadebtcrisis,likeinGreecefrom2010untilnow.
Butasopposedtoabusiness,astatecannotjustdisappearfromthefaceoftheearthinthecaseofabankruptcy. 23Bankruptcythusmeansthatagovernmentnegotiatesaneas-ingofthedebtburdenwithitscreditors:debtsareextended,cancelled,orinterestratesarelowered.Ifcreditorsmostlybanksagreetothis,thedebtleveldeclines,andthecountryisonceagainsolvent.Germanyalsoprotedfromsuchdebtreliefinthepast:in1953,halfofitspre-warforeigndebtwaswaived.Thebankruptcyofastateisthusapoliticaldecision:thegovernmentofanoverlyindebtedcountrydeterminesthatitsdebtistoohighanditwillnolongercarryit.24Andforeigngovernmentsrefusetosupportthecountryintheformofcheapcredit.So,countrieslikeGermanyandtheUnitedStatesarefarfromgoingbankrupt.
7
THe FICIl MrkeT TMe THe
polITICl pHere
Market-liberalintellectualsinparticulararehappythatnancialmarketsexist.Afterall,thesemarketslendmoney
tostatesandpermanentlycheckwhetherastatesolidlymanagesitsbudget,andthuswhetheritearnsthetrustofthemarkets.Themoresolidastatesnancesarejudgedtobe,thelowertherateofinterestthemarketsdemandforlendingitmoney.Ifastatetakesonalotofdebt,interestratesrise;servicingitsdebtsbecomesincreasinglydifcultandnewcreditmoreexpensive.ThiswasthecaseinGreece,
Ireland,andPortugalintheyears2010/2011,wheninterestratesincreasedsomuchthatthesecountriescouldnolonger
23 Exceptionsprovetherule:whenNewfoundlandwasover-indebtedinthe1930s,theparliamentandgovernmentdissolvedthemselvesandtheindependentstateofNewfoundlandbecameaprov-inceofCanada. 24 Astatecanalsorefusetoserviceitsdebts.Forexample,aftertheUnitedStatesoccupiedCubaaftertheSpanish-AmericanWarin1898,itrefusedtorecognizethedebtsoftheSpanishpredecessorgovernment.SincetheUnitedStateswereverypowerful,Spainwaspowerless
toimposedebtpayments.Sodebtisalegalrelationship:mightmakesright.
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payfornewloansandthereforefacedbankruptcy.Thiswastheinterestratetruncheon,gushedtheGermandailyFrankfurter Allgemeine Zeitung.Thisistheonlylanguagepoliticiansunderstand;onlythisforcesthemtoreact(August16,2011),whichmeansreducingdebt.AndJensWeidman,presidentoftheGermanBundesbank,seesrisinginterestratesasanimpetustoforcepoliticianstodotheirhomeworkandtowinbackthecondenceofthenancialmarketsbymeansofreforms(Reuters,April18,2012).
What Truth is There to That?
Inthenancialmarketsbanks,investmentfunds,insur-ancecompanies,etc.themoneyoftheworldiscollected:themoneyoftherichandthatofthecommonpeople,whoforexamplesaveforretirementthroughtheirlifeinsurancepoliciesorprivatepensions.Onbehalfoftheirclients,orbytheirownaccord,nancialinstitutionsinvestthismoney.Inshort:theywanttoincreasetheamountofthismoney.Toachievethistheybuy,amongotherthings,government
bonds,debtcerticatesfromstates,fromwhichnancialinstitutionscollectinterest.Governmentbondsarebelovedbyinvestors,sincetheyareregardedasasafebet.Afterall,thestateisareliabledebtor,sinceitincontrasttobusi-nessesorprivatehouseholdscansimplycollectmoneybydecreefromitspopulation.
Financialinstitutionsbuygovernmentbondsandcanalsoselltheminstantly;namely,onthestockexchange.Theyareallowedtodothis.Governmentbondsarepermanentlytraded.Theyhaveapricethatchangesconstantly.Sogovern-mentbondsareobjectsofspeculation.Investorsinspectthestatesrevenues,itsexpenditures,itsdebts,itseconomicgrowth,itspolicies,itswagelevels,etc.Thustheycheckto
seewhetherastateconstitutesaworthwhileinvestment.25Tothatextent,onecouldsaythatnancialmarketscontrolpolitics,whichmovedJoschkaFischer,theformerforeign
25 Theratingagencieshelptheminthisendeavor.Ratingagenciesconstantlyjudgethecredit-wor-thinessofstates.Variousfactorsplayaroleinthis.Forexample,theratingagencyStandard&PoorsloweredthecreditratingforVenezuelainAugust2011,amongotherreasonsbecausePresidentHugo
Chavezsillnessfromcancermadethepoliciesofthegovernmentunpredictable.
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ministerofGermany,tostatethatonecannotpursueany
policiesinoppositiontothenancialmarkets(BadischeZeitung,September3,2009).
However,nancialmarketsarenotasingle,uniedagentthatevaluatesthesolvencyofstates.Rather,nancialmarketsarethesumtotalofallinvestors,whoallwantthehighestpossiblereturnontheirinvestment.Thatiswhyherdbehaviorand
speculationdominatethenancialmarkets. 26In2009,forex-ample,therewasdoubtatthebeginning,justdoubt!con-
20
18
16
14
12
10
8
6
4
2
0
retunsinpecent
Gc Gman
WhenInvestorsLoseCondence
Returnson10-yeargovernmentbonds
Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May July09 09 10 10 10 10 10 10 11 11 11 11
26 Herespeculationmeansthatbuyingandsellingonthenancialmarketsisbaseduponexpectationsofthefuturevalueofnancialassets.Soasecurityisboughtbecauseanincreaseinitspriceisexpected.Ifmanyagentsonthenancialmarketsactinthisway,thenthegrowingdemandforsuchsecuritiesleadstoanincreaseinitsmarketpricethemarketpricerisesbecausearisein
pricewasexpected.
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cerningGreecessolvency.Asaresult,someinvestorsgotridoftheirGreekbondsbecausetheywereafraidtheywouldlosevalue.ThisfearoflossesbyitselfpusheddownthepricesofGreekbonds.ThatwasthesignalformoreinvestorstogetridoftheirGreekbonds,whichcausedthevalueofthesebondstodeclineevenfurtheraclassicexampleofherdinstinct.
Thislossofvalueofgovernmentbondsinturnhasaneffect
uponthestatesnances.How?Hereisaverysimpliedexample:thestatepaysaxedrateofinterestonthebond,letssayvepercentonabondofoveronemillioneuros.Sotheinvestorlendsthestateamillion,andpockets50,000eurosininteresteveryyear(vepercentofamillioneuros).Ifthepriceofthebondfallsby20percentonthenancialmarkets,aninvestorcanonlysellitfor800,000euros.Therateofreturnonthebondhasthusrisen,sincethestatecontinuestopay50,000eurosininterest.Thenewrateofreturnis6.25percent(50,000eurosonaprincipleof800,000).Ifthegovernmentwantstooatanewbond,the
interestrateisbaseduponthereturnontheoldbond.Sothestatenowhastopromiseinvestorsnotvepercent,butrather6.25percent(seetheGlossaryforfurtherinforma-tion).WhenGreekbondscollapsedatthebeginningof2010,therateofreturnshotintothestratosphere,andnewloansbecameveryexpensiveforAthens. 27
ThisinturnwasinterpretedonthemarketsasasignthatGreecemighthaveproblemsrepayingitsdebts.Theconse-quence:thevalueofbondsdeclinedfurther,returnsin-creased.Thisisaviciouscircleinwhichnancialmarketsdonotneutrallyevaluatethecredit-worthinessofstates;rather,thisevaluationdamagestheircredit-worthiness.Investors,expectingGreecetohavenancialproblems,droppedthe
bonds,thusprecipitatingthecrisis.Atthesametime,othercountrieswereinfected:inordertoavoidexpectedlosses,investorsthrewPortugueseandIrishbondsontothemar-ketwiththesameconsequences.Tothatextent,itistruethat,withregardtotheirfunding,statesdependuponthe
27 Forthereasonsbehindthecollapse,seeKaufman,Stephan,2011,Sellyourislands,youbank-
ruptGreeks(http://www.rosalux.de/publication/37664/sell-your-islands-you-bankrupt-greeks.html).
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judgmentofthenancialmarkets.However,itisnottruethatthemarketstamethestateslikesomewildanimalasifwildstatesstoodoppositerationalinvestors.28Firstofall,nancialmarketsarenotrational.Herdinstinctsandself-fulllingpropheciesdominatethiscircus.Secondofall,eveninnormaltimes,investorsevaluatethestatesoftheworldaccordingtoaverysimplestandard:thehighestpos-sibleandmostsecurereturns.Theytreatpeople,workplaces,countriesandentirecontinentslikemachinesforperma-nentlyaugmentingtheirmonetarywealth,andsubmitthemalltothisstandard.Thatisrationalaccordingtothelogicofmaximizingprot,butwhatisreasonableaboutthat?
8
We HoulD JuT CCel THe DeBT!
Ifdebtissuchaproblemfortheeconomiesofsomany
states,fortheworldeconomy,andforhundredsofmillionsofpeople,thenthisraisesthequestion:whynotjustcancelallthesedebts?Thentheproblemwouldbesolved!
What Truth is There to That?
Firstofall,debtswhichputsomuchpressureonthestatesarewealthtosomebodyelse.Forcreditors(banks,invest-
mentfunds,insurancecompanies),governmentbondsarecapitalmoneycapital,asumofmoneythatyieldsareturn.Ifthestatesweretoberelievedbycancellationoftheirdebts,thenthiswealthwouldbedevalued.29Abankcouldquicklygobankruptinsuchasituation.
Secondly,thereistheriskofadominoeffect,aswasthe
casewithGreecein2011.TheEuropeanUniondecidedtoreleaseGreecefromsomeofitsdebtorextendthematurityofitsdebt.Thatmeantlossesforcreditors,meaningbanks,
28 ButtheGermannewsweeklyDer Spiegelthinksthisisthecase:Theominousnancialmarketsareneithergoodnorevil.Theysimplyactrationally(Spiegel32/2011). 29 Incidentally,thisalsohappenswhenonlytheinterestonbondsisloweredforthesakeofdebtrelief,sincethevalueofa
bondismeasuredbytheamountofitsreturn.Ifthatdeclines,sodoesthevalueofthebonditself.
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andinvestmentfunds.NowmanyofthesecreditorsfearedthatPortugalorIrelandwouldalsobereleasedfromsomeoftheirdebt.Asaconsequence,theysoldtheirPortugueseand
Irishbonds,whichmadethesituationinthosecountriesevenmoreacute(seepoint7).Acrisisofthenancialmar-ketscanalsoariseinthismanner.Thirdly,ifastaterefusestoserviceitsdebtsorcancelsitsdebts,itcanbesurethatlenderswillnoticethis.Itscredit-worthinesswouldbeshot,atleastforawhile.Andeverystateknows:soonitwillneednewloans.Butacancellationofdebtsfrightensinvestors
andthusendangersthenancingofthestatesprograms.
Inexceptionalcases,creditorsagreetoacancellationofdebts,whichmeansareductionintheirclaims.ThiswasthecasewithGreecein2011. 30Thecreditorsassumethatastate
TheRiskoftheBanks
900
800
700
600
500
400
300
200
100
0
Caims f ean bans in biins f sagainst ctain cntis (as f 2010)
1. 2. 3. 4. 5. 6.
1. Greece 2. Portugal 3. Ireland 4. Spain 5. Italy 6. France
30 See,Kaufman,Stephan,2011,Sellyourislands,youbankruptGreeks(http://www.rosalux.de/
publication/37664/sell-your-islands-you-bankrupt-greeks.html).
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24
issohighlyindebtedthatitcannolongerserviceitsentireaccumulateddebt.Thecancellationofapartofthedebtissupposedtoputthestateinapositiontoreliablyservicetherestofthedebt.Debtcancellationdoesnotservesimplytorelievethedebtor.Rather,thisreliefisintendedtorescuetheremainingclaimsofcreditors.Debtcancellationthereforefunctionsonlywiththeagreementandforthebenetofcreditors.Itisthereforecorrespondinglyseldomandsmallinamount.
9
We eeD TrICTer reGulTIo
In2009,Germanyincorporatedaso-calleddebtbrakeintoitsnationalconstitution.Itissupposedtolimitgovernmentdebtandbindinglyregulatethereductionofdebtfrom2011on.Newdebtcannotexceed0.35percentofGDP.German
states,regionalgovernmententities,cannottakeonanynewloansatall.Thereareexceptionsfornaturaldisastersoraneconomicrecession.AttheinitiativeofAngelaMerkelandFrancesformerPresidentNicolasSarkozy,asimilardebt-brakewasadoptedforotherEuropeancountrieswithintheframeworkoftheEuropeanFiscalCompact.Germanywasabletoachievethatonlythosecountrieswouldreceive
nancialassistanceundertheEuropeanStabilityMechanismwhichhad,amongotherthings,implementedthedebtlimitationsforeseenbythecompactintotheirownrespectivenationallaws.Theideabehindthisisthatifpoliticianswontbudgetthriftily,theyhavetobeforcedtobylaw.
What Truth is There to That?
Itisstriking:therealreadyexistvariousregulationsthatlimitstateexpenditures,forexample,theStabilityandGrowthPactoftheEuropeanUnion.TheStabilityandGrowthPactestablishesthataeurocountrycanonlyhaveamaximumamountofnewdebtofthreepercentofGDPandamaxi-mumdebt-to-GDPratioof60percent.However,manycountrieshadalreadyviolatedthisruleinthepastparticu-
larlyGermany.31
Sotherealreadywereplentyofregulations
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andinstrumentsthatweresupposedtolimitagovernmentsexpenditures.Whyaresuchregulationsunabletoguaranteeadeclineingovernmentdebt?Andwhywillnewregulationsorprohibitionsdolittletochangethat?Thereasonissimple:thestabilityofstatenancesisnotsomethingthatcanbeenactedbydecree.Economicdynamicsdonotproceedaccordingtodirectives,andcrisesdontmakeappointmentswithministriesofnance.Sure,regulationscansimplylimitstateexpenditures(orraiserevenues).However,undercertainconditionsthisisharmful,forexamplewhenthebusinesscycletakesanosedive.Then,thestatehastotakeoncreditandspendmoneyinordertopreventthesituationfromgettingworse.Ifitdoesnot,inordernottoviolatesuchregulationsondebt,thecrisiscandeepen.Thisinturnleadstoafurtherdeclineineconomicperformance,andthedebtsituationmeasuredintermsofdebt-to-GDPratioisexacerbated,preciselybecausethestateadheredsostrictlytotherules.32
ThatiswhyattheEuropeanlevel,ifthereisenoughpoliti-calpressure,therulesareregularlymodied:France,forexample,wasabletoensurein1997thatthestabilitypactdemandedbyGermanywouldonlyberealizedasaStabil-ityandGrowthPact.AgrowthcomponentwasalsotackedontotheFiscalCompactof2012underpressurefromothercountries.Atthesametime,itsalmostcertainthatthe
regulationsinvolvedwillalsobeviolated.Somaybearegula-tionlimitingdebtdoesnotmaketoomuchsense.However,sucharegulationmakesiteasyforgovernmentstoimple-mentspendingcutsortaxincreases.Itcansimplyrefertotheregulationandthusjustifyitspolicies:thelawrequiresthisstep;thegovernmentshandsaretied.ThesituationissimilarwiththeEuro-PlusPactadoptedbytheEuropean
Union,whichobligatesmemberstatestobecomemorecompetitiveandlowertheirdebtlevels.TheEUregardsunit
31 AsopposedtocountriessuchasItalyorSpain,whicharetodayregardedascrisiscoun-tries. 32 ThatiswhymanyeconomistsexpectthatGermanywillatsomepointabolishitsdebt-brakeorsoftenit.Forexample,DennisSnower,headoftheeconomicresearchinstituteIfW:ItiscompletelyuncleartomewhyacountrylikeGermanyissubmittingitselftoaharddebt-
brake,andevenwantstoexportthismodel(BerlinerZeitung,August26,2011).
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laborcostsasanimportantindicatorofcompetitiveness.ThePacthasprovisionsforaninspectionofwagedevelop-mentsinallmemberstates.Thegoalismoderatewageagreements(particularlyinthepublicsector),taxreliefforthelaborfactor,andlabormarketreformsthatmakelaborexible,thatistosay,cheap.ThroughtheEuro-PlusPact,thesewagedecreasesnolongerseemlikepoliticaldecisions(subjecttocriticism),butrathersimplylikeaconsequenceofthelegalsituation(withnoalternative).Stricterregulationsarethereforeaformofauthoritarianstabilization:alterna-tivesaresimplyexcluded.
10
CoCluIo: o I GoerMeT DeBT
GooD or BD?
Ifonelistenstopoliticians,debtappearstobesomething
bad;theirmainargumentisthatthestatehastouseanincreasinglylargeportionofitsrevenuestopayinterest.Forthatreason,thelevelofdebtshouldbereduced.Everyftheuroisusedtopayoffinterest[]onlywhennonewcreditistakenoncanthealreadyaccumulateddebtbeslowlypaidoff,thusreducinginterestpayments.Thestatewouldthusbeabletodomoresensibleandusefulthings[]Whata
niceidea.33
Ontheonehand,debtisregardedassomethingbad.Atthesametime,thestateconstantlytakesonnewdebt.Thisapparentcontradictionisresolvedwhenoneregardsgovern-mentdebtforwhatitis,aninstrumentwithwhichthegov-ernmentattemptstoreachacertaingoal:economicgrowth.
Withborrowedmoney,thestatenancesitsexpenditures.Aboveall,itattemptstoimprovelocalconditionsfordoingbusinessandtostimulateeconomicgrowth.Concerningtheappropriatevolumeofgovernmentdebt,howmuchdebtisallowed,onecannotsaymorethan:nottoomuch.
33 Accordingtotheself-portrayaloftheGermanfederalgovernment(seewww.regierenkapieren.de).
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Thistoomuchissubjectinpracticetoasinglemeasure:economicgrowth.Governmentdebtissupposedtoservegrowth,andshouldnotharmit.Thequestionofwhethergovernmentdebtisgoodorbadthereforeamountstothequestion:howgoodorbadiscapitalisteconomicgrowth?
35.000
30.000
25.000
20.000
15.000
10.000
5.000
0
GDp er resident Government debt er resident
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
DebtandEconomicPerformance
GovernmentdebtperresidentandGDPperresidentineuros
(FederalRepublicoGermany,fguresuntil1990notcountingthe
GermanDemocraticRepublic)
Thatgovernmentdebtcanincreaseeconomicgrowthisnotsubjecttodebate,butratherafact.Itdoesnotmatterwhetherthedebtispassivelyaccepted(inthecaseofalossoftaxrevenue)orintentionallytakenonasapartofactiveeco-nomicpolicy.However,itisalsoafactthatitisaproblem
whenhigherdebtsarenotaccompaniedbyhighereconomicperformanceandhigherrevenuesforthestate,andagreaterportionofthestatesbudgetisthereforeallocatedforservic-ingdebt.
Sogovernmentdebtislikethedebtofbusinessesasort
ofpre-nancedgrowth.Bymeansofstateborrowing,govern-
mentsandtheirlendersthenancialmarketsspeculate
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thatdebtwillgenerategreatereconomicperformanceandmorerevenuesforthestate.Withitsdebt,thegovernmentmakesitspopulationliableforthesuccessorfailureofthiswager.Thisliabilityisillustratedbythestatisticalgureofgovernmentdebtpercapita.
Itismistakentoaskwhethergovernmentdebtisaproblemforusorforacountry,sincepeopleareaffectedinverydifferentwaysbythisdebt,accordingtotheirpositionandfunctioninsocietyandintheeconomy.Forcreditors,gov-ernmentdebtismoneycapital,wealththatcanbeincreased.Theyprotfromthedebtburdenintheformofinterestpayments.
Whethertheirwagersucceedsistheresponsibilityofothers.Thatisparticularlyclearwhenastatehasproblemswithservicingitsdebtandwantstosave.Thissaving,logi-cally,alwaysimpactsthesamegroupofpeople:recipientsofgovernmententitlements,workers,andconsumers.Onthe
otherhand,driversofgrowth,i.e.businessesandnancialinstitutions,aresupported.Theyaresupposedtoinvestandmakeloans,theyaresupposedtoearnmoneyfromthis,theyaresupposedtocreatejobsandthusincreaseeconomicperformance.Thatincreasesinthesalestaxanddecreasesinwagesandpensionsleadtoadeclineinthepurchasingpowerofthemasses,thusreducingsocialdemand,thus
impairinggrowth,isacontradictioninthisprogram(seetheexampleofGreeceinpoint6).Allthismakesitclearwhobearsthebruntofsavingwheneverthereistalkabouthowwehavetosave.34
Itshouldalsobenoted:thereisconstantcomplainingabouthowthestatespendstoomuch,buttherevenuesideis
seldomcriticized.Yettherearetwodevelopmentsworthyofcriticism.Firstofall:itisclearthatthestatecouldtaxnancecapitalinsteadofborrowingfromitandpayinginterest.Yetitdoesnotdothis,oronlytoasmallextent.In
34 HowcanitbethatthereishagglingovereveryadditionaleuroforrecipientsofHartzIV[collo-quialtermforlong-termunemploymentbenetsinGermanytranslatorsnote],butthefailureof
afewbankersisenoughtoopenthestatescoffers?(SddeutscheZeitung,September30,2008).
-
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29
Relievingth
eBurdenonProfts
andWealth(Germ
any)
Sharesintaxrevenues
,Source:FederalBoardofver.di,EconomicP
olicyDivision
40pecent
30pecent
20pecent
10pecent
*)Cpateincme
tax+businesstax+assessedincmetax
Capitalgainstax+
inteestincmetax+
taxnassets
uce:atinale
cnmicaccunts,Fedealtatisticalofce,authscalculatins
taxnptsan
dassets
incmetax
value-addedand
cnsumptintax
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
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30
Germany,sincethegreatnancialreformof1969,creditisaregularinstrumentfornancingstatetasks.Secondofall,itisremarkablewhothestatetakesmoneyfrominordertopayitsdebtswhopays(theintereston)debt.Here,developmentsareunmistakable:since1977,thetaxburdeninGermanyandnotonlythereisincreasinglybornebywageworkers(whoalsopaysalesandconsumertaxesforthemostpart).Theburdenoncapitalgainsandwealth,ontheotherhand,hasbeendeclining.Thetrendhasbeenthatthetaxratehasdeclined,whilewealthhasgrown.Soitisclear:taxpolicyisessentiallyapolicyofredistribution.Thistrendhasbeenexacerbatedbythecrisis:politicians,inordertoconsolidatestatenances,haveincreasinglyfavoredtaxingconsumption;thevalue-addedtaxhasbeenconsiderablyincreasedinalleurocrisiscountries.
Wageworkers,ontheotherhand,whobearabouttwo-thirdsoftheentiretaxburden,paynotonlyforthegreatestshareofgovernmentdebt.Theyarealsosupposedtocurbtheirwage
demandsandatthesametimehavebeenexpectedtoaccepttheconsequencesofcutstostatesocialservicesforyears.
Sothequestionofdebtisaquestionofredistributionandnotleastaquestionofpower,astheGermansociologistsJensBeckertandWolfgangStreeckhaveformulatedit:AstheincreasesinGDPduringthelastthirtyyearshaveben-
etedprimarilytheupperlayersofthepopulation,thedebtcrisisraisesthequestionofwhetherandwithwhatmeansthewell-to-dowillattempttodefendtheirposition,evenatthepriceofamassivesocialandpoliticalcrisis(FrankfurterAllgemeineZeitung,August20,2011).
11
Glory
Bondmarketsandstockexchangesarewherenancialinstrumentssuchasstocks(sharesintheownershipofacompany,whichpaydividends),governmentbonds,or
derivativesaretraded.Largeexchangescanbefoundin
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NewYork,Chicago,London,Tokyo,orFrankfurtamMain.Bondandstockmarketsareessentiallysynonymouswithnancialmarkets(seebelow).Here,buyersandsellersofsecuritiesmeeteachother.Thesumofmoneyforwhichabondorstockistradedisitsprice(orcourseinthecaseofastock).Investorsusuallybuysecuritiesbecausetheythinktheycansellthematahigherpriceinthefutureandthusmakeaprot;theysellthemwhentheyexpectalossinvalue.Soexpectationsaredecisivehereandusuallybecomeself-fullling.Hereisoneexample:traderAbuyssecurityBbecausehethinksthatitsvaluewillrise.IfalotoftradersalsoexpectthatsecurityBscoursewillgoup,theybuyit,too.ThehighdemandforsecurityBcausesitscoursetogoupthemerelyexpectedincreaseinitsvaluebecomesareality.Thereverseisalsothecase:iftradersexpectthatasecurityspricewillfall,theysellitandmaketheexpectedlossafact.Butitisnotjustexpectationsthatbecomerealityonstockandbondmarkets;thesituationisevenstranger.AtraderwillonlysellsecurityBifheexpectsthatalltheother
tradersexpectitscoursetogoup,becauseonlythenwillthecourseactuallygoup.Sotheexpectationsofinvestorsareconstantlyorientedtotheexpectationsofotherinvestors.Themarketsactinacircularmanner.Forthatreason,theeconomistJohnMaynardKeynescomparedsecuritiestrad-ingwithabeautycontestinwhichjudgesdonotvoteforthecandidatetheyndthemostbeautiful,butratherfortheone
thattheythinkalltheotherjudgesndmostbeautiful.
TheDebt-to-GDPratioindicateshowhighthetotalindebted-nessofacountryisinrelationtoitseconomicperformance.Germanystotaldebtisabout2,000billioneuros,anditsGDPisabout2,400euros.SoitsDebt-to-GDPratioisabout83percent(2,000:2,400).Thebudgetdecitexpresses
thenewdebtinayearinrelationtoGDP.InGermany,thefederalgovernment,states,andmunicipalitiesinthersthalfof2011hadrevenuesofover555.1billioneurosandexpendituresofover570.7billioneuros.Sothenewdebtwas15.6billion.Economicperformance(GDP)was1.274billioneuros.Thebudgetdecitwastherefore1.2percentofGDP.Onespeaksofabalancedbudgetwhenrevenuesand
expendituresareequal.
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Financialmarketsarethosemarketsonwhichnancialproductsaretraded.Thetermrstemergedinthe1970sandusuallyencompassescapitalmarkets(forsecuritieslikestocksandbonds),themoneymarket(forshort-termtrans-actionsbetweenbanksandthecentralbank),andtheforeignexchangemarketforcurrencies.Themarketinderivativesisalsousuallycountedamongthenancialmarkets.Deriva-tivesaresecuritiesderivedfromotherassetsderivedinthesensethatwithderivatives,onecanspeculateontheriseorfallinvalueofothersecuritiessuchasstocks,bonds,in-terestrates,orcommodities.Actorsonthenancialmarketsareprimarilybanks,investmentfunds,pensionfunds,(life-)insurancecompanies,andwealthyindividualinvestors.Incommonparlance,thenancialmarketisusuallysynony-mouswithitsactors,forexample:nancialmarketsarelosingcondenceinGreece.
Agovernmentbondisasecuritywithaxedrateofinterestandthemostimportantforminwhichstatesborrowmoney
onthenancialmarkets.BondsoftheFederalRepublicofGermanyareissuedbytheGermanFinanceAgency.TheAgencybelongstothefederalgovernmentandimplementsdebtmanagement.Abondhasafacevalue.Itisissuedatthisvalue,andthisisthevaluethatitsxedrateofinterestisbasedupon.Forexample,toraisecreditofamillioneuros,theFinanceAgencyissuestenbondswithfacevaluesof
100,000euroseach.SinceGermanyisregardedasasafedebtor,itdoesnothavetopaysomuchinterestatthemoment,around2.2percent(inthefollowingexample,forthesakeofsimplication,letssay2percent).Thedurationofabondisusually10to30years.Duringthisperiodoftime,ownersofbondsreceiveannualinterestpayments,twopercenton100,000euros,meaning2,000euros.Afterthe
endofthebondsduration,thefacevalueofthebondisre-paidtorepaybonds,thestateusuallytakesonfreshcredit(arollover).Bondsarealsotradedduringtheirduration,meaningboughtandsoldonexchanges,butnotnecessarilyattheirfacevalue.Hereisasimpliedexample:ifthecredit-worthinessofGermanydropsandithastopayahigherrateofinterestforfreshcredit,thentheoldbondswillonly
beboughtiftheyyieldanequallyhighreturn.Otherwise,
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investorswouldbestupidtobuythelessprotablebonds.Whatdoesthatmean?If,inthecaseofanewlyissuedbondof100,000,theinterestraterisesfromtwopercenttofourpercent,theownerofthebondreceives4,000eurosannu-ally.Thatisdoubletheolderbond,despitetheequalfacevalue.Sotheolderbondcannolongerbesoldfor100,000euros,sincenobodywouldbuyit.Ifthecurrentmarketinter-estrateisfourpercent,tradersaskhowmuchabondwouldbeworthifityieldedareturnof2000annuallyataninterestrateoffourpercent.Thosearetheconditionsinthecaseoftheolderbond.Theresult:abondwithavalueof50,000euroswouldyieldthisreturnatarateoffourpercent.Thatmeansthateventhoughtheoldbondhasafacevalueof100,000euros,itcanonlybesoldfor50,000.Thatmeansitsprotabilitywouldbeequaltothatofthenewbond.Thismechanismisalsoineffectwheninvestorsexpectahigherinterestrateandarethereforenotwillingtopaythefullfacevalueofabond.ThathappenswhennewspapersrunheadlineslikeYieldsonGreekBondsSoar.Conversely,the
declineofabondscourseisregardedasanindicationthatinterestrateshavetoincrease;thecreditornolongerexhibitsgoodcredit-worthiness.Intherealbondtrade,otherfactorsaretakenintoconsiderationthedurationofabond,forexample.
Thegovernmentbudgetisthebudgetbymeansofwhich
thepublichandnanciallyorganizesitsexpenditures.Itencompassesrevenuesandexpenditures,butisnotabal-ance,notaprotandlossstatementinthebusinesssense.Rather,thestatedetermineswhichservicesmustandshouldbenanced.Increatingabudgetplan,asortofbalancedueisdeterminedthatneedstobenanced.Thisisplacedoppositerevenues.Ifexpendituresarehigherthanrevenues,
thestatehastonancethemwithcredit.Itcreatesabudgetdecit.Thisbudgetdecitcorrespondstonewdebt.
GrossDomesticProduct(GDP)isthesumofgoodsandservicesthatareproducedwithinacountryinayear.GDPisregardedasthemostimportantindicatorofeconomicperformanceandgrowth.
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Theinterestburdenratioexpressestheshareofinterestpaymentsinrelationtototalstateexpendituresorinrelationtoeconomicperformance.In2010,theinterestpaymentsoftheGermanstateamountedtoabout2.7percentofGDP(debtpaymentsof65billioneurosdividedbyGDPintheamountof2.400billioneuros).Theinterestburdenratiomostcloselyexpresseswhatiseagerlyreferredtoasthelimitationonthestatesroomformaneuver.Itspeciesthesumthatagovernmenthastopaycreditors,thesumthatthereforeisnotavailableforfundingotherexpenditures.Theinterest-to-taxratioontheotherindicateshowhightheshareoftaxrevenuesisthatgoestointerestpayments.
Theacquisitionofcapitalgoods,suchasmachinesorbuild-ings,withtheaimofofferinggoodsorservicesisreferredtoasinvestment.Themoneyexpendedforthis,however,onlycountsascapitaliftheaimofincreasingtheoriginalsumofmoneyinvestedisactuallyachieved.Thestatedoesnotinvestwiththegoalofmakingprot.Itsinvestmentsare
intendedtomakecertainuse-valuesavailable(schools,roads,etc.).However,stateinvestmentsaresupposedtoimprovetheconditionsofvalorizationforcapital.
Therateofreturnexpressestheprotinpercentageofanancialinvestmentandisusuallyannual.Forexample:ifaninvestorbuysasecurityfor100euros,whichheearnsve
euroson,thereturnisvepercent.Therateofinterestisthemostwell-knownreturnindicator.Theinterestrateisthepricethataborrowerpaysforborrowingmoney.
Ratingagenciesareprivatebusinesses.Theyregularlyevaluatethecredit-worthinessofstates,municipalities,andbusinesses.Theyissuegradesforthiscredit-worthiness:rat-
ings.Financialinvestorsorientthemselvestotheseratings:agoodgrademeanshighercredit-worthinessandthusmoresecurityfortheinvestor.Businessesandstateswithgoodratingsthereforepaylowerratesofinterestthandebtorswithbadratings.Iftheratingdeclines,theinterest-raterises.Sothejudgmentsofthethreebiggestratingagencies,Standard&Poors,Moodys,andFitch,areimmenselyimportantto
governments.
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puBlICTIo I eGlIH
ell your IlD, you BkrupT Greek
20 popular fallacies concerning the debt crisis
(also in greek and finnish language)
Its that time again! Greece needs more loans and the governments
in Europe are arguing about whether its really necessary and who
should foot the bill. There is widespread opinion in Germany that
Greece itself is to blame for the problems it now nds itself in.It rst of all cheated its way into the Eurozone, then the govern-
ment spent too much and the governed worked too little, many
believe. Latently nationalistic patters of interpretation of this kind
have been nourished by German politicians and the media, who
have no end of proposals for how to solve the crisis. For examp-
le, the Greeks should save more, work more and sell their public
property and if all of these measures do not help, then Greecewill just have to leave the Eurozone or declare itself bankrupt. The
stupid thing is, neither are the causes of the crisis that have been
named actually correct, nor will the proposed ways out of the crisis
achieve their goal.
Download:www.rosalux.de/publication/37664
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puBlICTIo I eGlIH
BeuTIFul Gree WorlD
on the myths of a green economy
luxemburg argumente no. 3 by Ulrich Brand
In the UNs Rio+20 conference in Rio de Janeiro in June 2012, the
green economy was about to become a new central concept of
global policy. The conference took place on the 20th anniversary of
the 1992 United Nations Conference on Environment and Develop-ment, where the magic formula sustainable development was
coined. In 2012 the green economy was on everyones lips. For
20 years now people have been rhapsodising over the greening of
capitalism. At the same time it is clear that somehow sustainable
development is not faring so well. CO2 emissions are increasing.
Biological diversity is contracting. Famine, impoverishment and
social inequality are increasing in many countries. The much fetedconciliation of ecology and economy is proving hard to cons-
truct. The green economy is not what many want to see it as: a
magical formula which will offer solutions on a silver tray for many
problems.
Download:www.rosalux.de/publication/38457
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Imprint
luxemburgargumenteno.1
revised4thedition
Berlin,December2012
ISSN2193-5831
Authors
StephanKaumannandIngoSttzle
Photos
cover:guano/Flickr
back:A.E.I.O.U.
Translation
AlexanderLocascio
Publishedby
Dr.AntonellaMuzzupappa,Dr.SabineNussRosa-Luxemburg-Stitung
Franz-Mehring-Platz1,10243Berlin
Contact
Dr.SabineNuss,Tel.+493044310-448,[email protected]
Dr.AntonellaMuzzupappa,Tel.+493044310-421,
Copy-editing
TEXT-ARBEIT,Berlin
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