Posts Tagged ‘Debt’
Mad as hell

mad as hell

Michael Hudson puts it well:

We’re at a turning point in history. If we don’t solve the problem of economic polarization, which is caused mainly by debt, we’re going to go into another dark age. We’re going to have neo-feudalism. We’re going to have neo-serfdom, except that you’re not going to be tied to the land like serfs were. You can live wherever you want, but wherever you are, you’re going to have to pay about 40% of your income just for housing. And you’re going to have to pay for water, and you’re going to have to pay for the other needs. This is the new kind of serfdom. You have to re-frame what the economy is about in a way that people can understand.”

Good Christians may ask what would Jesus do? For them “Forgive us our debts, as we also have forgiven our debtors” may ring a bell. Michael makes a good case that the debts referred to are financial debts. Read the linked post for more information in this. Michael also outlines how the forgiveness of all private individual debts, as opposed to debts between businesses, was a regular practice in ancient civilization. He even makes what was, to me, a new case for what caused the fall of the Roman empire:

The choice was: either you’re going to have economic renewal and restore people’s ability to support themselves; or you’re going to have feudalism.

That basically is how the Roman historians described Rome as falling. The debtors were enslaved, not only the debtors but just about everybody was enslaved, put in barracks on the land. Finally, you needed to have a population, so you let people marry and you gave them land rights – and you had slavery develop into serfdom. Well we’re going into a similar situation today, where I think we’re going into a kind of neo-feudalism. The strain of today’s society is as much a debt strain as it was back then.

It’s very funny: If you go into Congress – I was the economic advisor to Dennis Kucinich – you go into Congress and there’s a big mural with Moses in the center and Hammurabi on his right. Well, you know what Moses did? He gave the law. Leviticus, right in the center of Mosaic law, canceled the debt. What did Hammurabi do? Debt cancellation as well. You’re not going to see Congress canceling the debts like that”

The potential for mass debt servitude and serfdom is real enough. Hardly a day goes by without an article somewhere on housing affordability. Productivity improvements and of the entry of women into the workforce has done more for house prices than living standards. Retirement ages are being pushed out. Government services are becoming increasingly expensive or hard to get. New roads are increasingly toll roads. Formerly free university educations are increasingly being paid for amid increasing student debt. Formerly universal entitlements are becoming restricted and means tested. Yet taxes go up.

Economic activity and government revenue is increasingly being drained to service debt. Debt which grows at an ever expanding rate. How many more nations have to follow in the footsteps of Greece and Cyprus before we take a different path? How many more lives and businesses have to be blighted. How many people will never fulfill their potential, crushed by debt?

There is a flowing of new political parties. Western voters are crying “no more, this cannot continue”. Unless the new Parties address the fundamental debt cause, they will quickly go the way of the current establishment. People are voting for change. They are crying out for it. Blind Freddie can see it is overdue. Give it to them.

 

 
Economic Depression

David Stockman explains why an economic collapse is all but inevitable:

You can’t live beyond your means because it’s pleasant. It’s not sustainable. Clearly the level of debt that we have is not sustainable. We have a whole generation – the Baby Boom – that’s about ready to retire, and they have no retirement savings. We have a federal government that is bankrupt, literally. Its [debt is] $16 trillion and growing by a trillion a year. Something’s going to give. We can’t pay for all these entitlements. There won’t be the revenue generation in the economy to do it.

So as a result of that, we are deluding ourselves if we think we can just continue to spend.

 

Austerity isn’t an elective course. Austerity is something that happens to you when you’re broke. And yes, it is painful and spending will go down and unemployment will go up and incomes will be impaired, but that is a consequence of the excess debt creation that we’ve had for the last thirty years. So austerity is what happens when you break the rules.

And somehow we have this debate going on. They’re making a mistake. They chose the wrong strategy. Do you think Greece chose the wrong strategy with austerity? No. No one would lend them money. That’s why they ended up in the place they were. Do you think that Spain today is teetering on the brink because they said, “Oh, wouldn’t it be a good idea to have austerity?” No, they had a gun to their head. They were forced to do this because the markets would not continue to lend, and even now their interest rate is again rising. The markets are losing confidence, and unless the ECB prints some more money and bails them out some more, they are going to have austerity. So the austerity upon us is the backside of the debt supercycle we had for the past thirty years. It’s not discretionary.

 

The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an “interest rate.” That isn’t a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. And you can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That’s essentially what we have today.

 

I would stay out of any security markets. These are unsafe markets at any speed. It’s all tied together. As I was saying when the great margin call comes and they start selling the Treasury bond, they’ll take everything else with it. Real estate is priced off Treasuries. Mortgaged-backed securities are priced off Treasuries. Corporates are priced off Treasuries. Junk bonds are priced off Treasuries. Everything. The stock market will go into a panic. We don’t know when the timing will come – we’ve never been in a world where there is $15 trillion worth of central-bank balance sheets, like we have today. The only thing I think you can conclude is preservation is the only thing you are about as an investor. Forget about yield. Forget about return. Just keep yourself liquid and preserve your capital, because you can’t predict the day when, as I say, the great margin call in the sky comes down.

 

When the financial markets reprice drastically, it’s going to have a shocking effect on economic activity. It’s going to paralyze things. It’s going to finally cause consumption to come down. It’s going to cause government spending to be retracted.

You know, the Keynesians are right. Borrowing does add to GDP accounts. But it doesn’t add to wealth. It doesn’t add to real productivity, but it does add to GDP as it’s calculated and published – because GDP accounts were designed by Keynesians who don’t believe in a balance sheet. So they said, “If the public sector and the household sector are borrowing, let’s say, $10 trillion next year, run it though GDP, you’ll get a big bump to GDP.” But sooner or later your balance sheet will collapse. They forgot about that one. So my point is that we’ve gone through a thirty-year expansion of the balance sheet, an artificial growth in GDP; now we’re going to have to be retracting the collective balance sheets. That means that GDP will not grow. It may even contract, and no one’s prepared for that.

Hat tip John Dinkum Wagner. Watch the video here

John also highlighted a reader comment:

Every major country in the world, except China, is unable to pay its bills without going deeper into debt. All while interest rates are at dead nuts lows. Low interest rates should only be earned on the safest of plays, but loaning to a broke country is clearly not a safe play. Once broke, a default can occur at any time, or it can be delayed until hyperinflation. That’s it. And once the whirlwind effect of inflation pushing up interest rates starts, the existence of the major currencies of the world, except the Chinese Yuan, will be measured in months.

Image courtesy of itulip

 
Good-Bye to All That

In good times inefficient systems can survive. Buffet’s comment that “only when the tide goes out do you discover who’s been swimming naked”  applies to “countries” as well as companies. While the debt tide may not have actually turned, it is in the process of turning.

The law of diminishing returns applies to debt as much as it does to other things that can increase GDP. Diminishing returns to debt have well and truly set in across the Western world. If it is not already, its impact on GDP will soon be negative. The instant markets recognized this the new paradigm will be born.  A new normal will then begin its reign.

Time is running out for the Western welfare state. We will soon see who is swimming naked. Our apparent fair and progressive system is about to be revealed as but one more path to perdition.  A slower less direct path than some, but the destination no less certain. Assorted schools of economics will be consigned to the dustbin of history as their vacuous ideology is revealed for what it is. Alas they will rise again in perverted form, when we have forgotten our past and times again appear to suit them.

At this unraveling of the Keynesian concept it seems apt to cite a Keynesian:

“To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.”

John Kenneth Galbraith, The Great Crash of 1929

It is also apt that Galbraith was wrong in this as in so much else. Embezzlement is not alone among the various forms of larceny in having a time parameter. The Western welfare state also has a time parameter. It is simply the public mirror of private sector embezzlement. As with so many government failures when compared to their private sector equivalent, its effect will be worse. It is likely to be maintained for longer, be more pervasive and have far worse consequences. Our welfare state may have made us feel wealthier than we were for years or decades, but it can not change reality.

The reality is that embezzlement lies at the heart of our welfare state. Welfare recipients are paid with taxes from workers on the promise that those workers will be similarly treated in their time of need. With fewer workers and ever more welfare recipients there is only one way it can end, absent prodigious productivity increases. Alas crony capitalism is not associated with rapid rises in productivity. Neither is socialism or traditional and tribal socioeconomic structures.

We need capitalist incentives to maintain any semblance of our expected way of life. Advocate for it now. All it takes for evil to triumph is for the good to remain silent.