Debt and World Money

The origins of the contemporary debt crisis are usually traced to the imprudence both of creditors and borrowers in the years of the petro-dollars recycling feast. The debt ‘bubble’ burst through an ‘external shock’: the 1979–80 shift in the monetary policy stance of the international monetary regime’s hegemonic power. As a result interest (floating) rates bearing on most of the stock of debt shot up; world output and trade declined sharply; prices of primary commodities which account for most of the exports of indebted developing countries suffered a steep and prolonged downfall. The bankers stopped lending — with a lag — and the debtors were forced to adjust severely through demand policies which sank their economies into deep recessions, great monetary, fiscal and price upheavals, and huge capital flights.