Overview of the Prediction

This site carries a prediction of and provides evidence for a wave of defaults that is outside the control of financial and monetary authorities. It might be thought of as a "disorderly" rather than an "orderly" workout of overindebtedness. According to the IMF and mainstream macroeconomics, there is no "debt problem," only a commitment problem. According to this view crises occurred in the late 'nineties because the political authorities in emerging economies lacked the political will or commitment to institute much needed economic reforms. Reflecting this "Northern" rather than a "Southern" perspective, the respected NGO, ICG (International Crisis Group), argues in a recent 13mar01 report, that "the problem" underlying Indonesia's continuing crisis is "the government's inability or unwillingness to implement fully a policy agenda that it has already agreed with its external creditors." Authorities have admitted to a problem of overindebtedness among HIPCs (Heavily Indebted Poor Countries). But the 41 countries identified as HIPC by the WB (World Bank) have (before any debt cancellations) an *average* level of external debt of just over $5bil, and this debt is almost exclusively debt to governments and multilateral banks (such as the IMF and WB). When HIPCs have gone into arrears this has not destabilized world capital markets. Whether or not more HIPC debt is forgiven by the G8, this does not matter so much for the stability of the world monetary system. The HIPCs are not only important for issues of human suffering, however. I argue that the inability of HIPCs to pay their external debt is the canary in the mine -- they are informing us of what's coming from countries with major indebtedness to private creditors.

The prediction of an uncontrolled wave of defaults comes from the vulnerability of the system. That vulnerability comes from US household debt (over $6trillion) as well as the external debt of countries like Argentina, Indonesia, Russia, and Turkey as well as the volume of non-performing in the banking systems of Japan and Korea as well as the high debt/equity ratios of firms in these two economies. It also comes from G7 corporate overleveraging, especially in the telecommunications sector.

A driving force that is yet not expended in the world economy is the telecommunications revolution. The revolution will not be over, in my opinion, until wireless two-way interactive video is within the grasp of the world's "middle class." By the time that happens many brick and mortar firms will have been eliminated by this technological upheaval. But my prediction of a wave of defaults is not so much about the enterprises that are swept away by the profound changes in technology, but rather by the vulnerability of those economic agents who, like overzealous energy investors in the late 'seventies, continue to accept increasingly levels of risk in their efforts to participate in quick riches from this revolution. The willingness to assume unsustainable levels of indebtedness began when the rules of prudent borrowing were discarded during the inflationary monetary policies of the 'seventies and it has continued unabated into this new millennium.

If and when such a wave of defaults occurs, it will be trivially obvious to anyone who looks back in time that the wave of defaults started before the new millennium. The 1999-2000 debt-relief/write-downs have been under the control of the IMF, Paris Club and London Club. What is being predicted here is that the defaults will cease to be orderly -- they will be sufficiently large to circumvent the control of monetary and financial authorities and become a "crisis," larger than the Mexican ('94-95), Asian ('97) and Russian/LTC ('98) crises which will be eventually seen as precursors to the final event which a weakened IMF will no longer be able to control via "bailouts."

The reasons for regarding the world system as vulnerable to a wave of defaults are both historical and contemporary. From a historical perspective, I argue that "the West" has been in a Kondratieff downwave since the Monetarist/Volckerian revolution in monetary policy in 1979. The third world and emerging economies have joined their richer neighbors in this period of tight policy as a result of contracting debt in hard currencies and submitting to IMF stabilization programs. The treatment of this period as developing unsustainable real debt burdens comes from my studies (with others) of the late nineteenth century and the Great Depression and from a monetary interpretation of the Kondratieff wave. All US price waves but the current K-wave are found in this long term price graph from my co-authored Great Depression paper.

The reason for entitling this site "Waves of Default" comes from the historical similarity between the post-1980 disinflation and post-war deflations in the 19th and early 20th century. I interpret the recessions/depressions at the end of all Kondratieff downwaves as debt crises caused by commodity price paths coming in lower than debtors anticipated causing a higher than expected real debt burden. I have, therefore, a monetary rather than a real theory of the longwaves-down named after Kondratieff.

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