[hackerlight]

> as it turns out by just spending the money that people deposited in the banks. And it's all gone now.

Is it that or was it a run on the bank (catalyzed by a currency collapse) which wasn't sustainable because of fractional reserve banking?

[usr001]

The run on the banks was an effect, not the cause.

So in the 1990s, after the country came out of a 2-decade civil war, the government adopted a policy of fixing the currency against the U.S. dollar. So regardless of the economic happenings, the conversion rate from LBP to USD was fixed.

But the economy was not really producing enough. It was mainly focused on tourism, which kept taking hits due to political instability. Too much imports, very little exports, but the currency was kept fixed.

This imbalance was sustained by the government borrowing from the central bank and the banks. They kept lending the government, even though it was clear that the money wasn't coming back.

Some of the money was being spent to support imports and big projects. But most of it was being siphoned away by corrupt politicians; which was pretty much all politicians.

After about 25 years, most of the money ran out. The depositors' money.

So what did the banks do? They started offering higher interest rates to attract foreign deposits. We're talking 10% or 15% interest rates. And they used those new deposits to support the continuing needs to lend the government. Incurring more debt to pay the previous debt.

That was essentially a Ponzi scheme, and the final tailspin began. Crash.

[imtringued]

This is a classic tale of imbalanced trade resulting in a debt trap, the moment debts become unpayable, the government has no choice but to borrow money for interest payment, which mean interest starts fueling inflation and since more inflation means higher interest rates, the government will have to borrow more and more, leading to hyperinflation. If the government cut interest payments to zero, it would actually stop the hyper inflation assuming that the government pursues austerity and tight monetary policy afterwards. Any negative effects of austerity can then be countered by lowering the interest rate below zero.

What people don't seem to understand though is that it is easy for a developed country to refuse to import products from a developing country, which in turn makes this a structural problem in the global economy rather than a failing of any particular politician.