Here’s the status quo:
These figures are staggering; the advanced nations typically have between three and ten times as much total debt as they have economic activity. In the United Kingdom — the worst example — if one year’s economic activity was devoted entirely to paying down debt (impossible — people need to eat and drink and pay rent, and of course the United Kingdom continues to add debt) it would take ten years for the debt to be wiped clean.
But the real question is why? Why are both debtors and creditors willing to build a status quo of massive unprecedented debt?
From the side of the creditors, I think the answer is the misconception that debt is wealth. Debt can be used as collateral, or can be securitised and traded on exchanges (which itself can become a form of shadow intermediation, allowing for a form banking outside the accepted regulatory norms). To keep the value of debt high, and thus keep the debt illusion rolling along (treasury yields keep falling) central banks have been willing to swap out bad debt for good money. But debt is not wealth; it is just a promise, and in today’s world carries huge counter-party risk. Until you convert your debt-based promissory assets into real-world tangible assets they are not wealth.
From the side of the debtors, I think the answer is that debt is easy. Why work for your consumption when instead you can take out a home equity loan or get a credit card? Why buy the one car that you can afford when instead you can buy two with debt?
But there is another side in this world: the side of the central planners. Since the time of Keynes and Fisher there has been an economic revolution:
Deflation has effectively been abolished by central banking. And so we get to where we are today: the huge and historically unprecedented outgrowth of debt. Deleveraging necessitates economic contraction, which produces the old Keynesian-Fisherian bugbear of debt-deflation, which the central planners abhor. So they print. Where once deflation often made debts unrepayable, and resulted in mass defaults, liquidation and structural transformation, today — thanks to money printing — debtors get their easy lunch of cheap debt, and creditors get their pound of flesh, albeit devalued by the inflation of the monetary base. It has been a superficially good compromise for both creditors and debtors. Everyone has got some of what they want. But is it sustainable?
The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Bad companies, business models and practices that might otherwise not have survived under previous economic systems today live thanks to bailouts and money-printing. This moral hazard has grown legs and evolved into a kind of systemic hazard. Unhealthy levels of leverage and interconnection that once might have necessitated failure (e.g. Martingale trading strategies) flourish today under this new regime and its role as counter-party-of-last-resort. With every rogue-trader, every derivatives or shadow banking blowup, every Corzine, every Adoboli, every Iksil, comes more confirmation that the entire financial system is being zombified as foolish and dangerous practices are saved and sanctified by bailouts.
With every zombie blowup comes the necessity of more money-printing, and with more money-printing to save broken industries seems to come more moral hazard and zombification. Is that sustainable?
Already, central bankers are having to be clever with their money printing, colluding with financiers and sovereign governments to hide newly-printed money in excess reserves and FX reserves, and colluding with government statisticians to hide inflation beneath a forest of statistical manipulation. It is no surprise that by the BLS’ previous inflation-measuring methodology inflation is running at a much higher rate than the new:
Worse, in the modern financial world, we see an unprecedented level of interconnection. The impending Euro-implosion will have ramifications to everyone with exposure to it, and everyone with exposure to those with exposure to it. Not only will the inflation-averse Europeans have to print up a huge quantity of new money to bail out their financial system (the European financial system is roughly three times the size of the American one bailed out in 2008), but should they fail to do so central banks around the globe will have to print huge quantities of money to bail out systemically-important financial institutions with exposure to falling masonry. This is shaping up to be a true test of their prowess in hiding monetary inflation, and a true test of the “wisdom” behind endless-monetary-growth fiat economics.
Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects.
Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — I think they will soon be smashed again.
azizonomics 
@ Aziz “The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on.”
Based on your graph, it is not going to look pretty!
I think there will be massive pain, which will require a global coordinated response to either nationalise industries or direct major businesses to merge and form global monopolies (Komatsu/Caterpillar, GE/Siemens, Ford/Daimeler etc) which will then gear up production to provide output at a lower price for the public with lower disposable income.
At the end of the day, provided people have access to food, clothing shelter and goods, they won’t riot even if they don’t have jobs.
It is about keeping people from rioting or voting out Governments which is key for the survival of the system. Jacobianism has seen its ultimate end game become front and centre stage. The NWO will present a plan to “save” the system, and the people will accept.
If everybody defaults on their debt due to a lobal collapse, lack of jobs, the Courts will be so backlogged, there is no way Creditors could collect. It looks like the increase production caused by cheap credit will ultimately be a distribution of goods and services by the Government, with the private sector being a facilitator.
Debt is in fact wealth, when Debt is not repaid, but you still have the real goods.
Buddy you’re talking from the perspective of the debtor (who may still get squeezed by deflation and rate spikes — or debtor’s prison if we are to get Victorian). The delusion that debt can be wealth comes from the perspective of the creditor.
Good post! Glad to see you’re better and back to writing again.
I’ve seen that graph of total debt before, and I always wonder: Why is non-financial debt included? If e.g. Ericsson has borrowed money for product development, what has that got to do with Sweden as a nation? I can see why the financial sector is included, even if it is (nominally) in the private sector, since if that debt becomes too heavy for the banks to bear, it’s likely to spill over onto the national shoulders. But non-financial private corporations?
Have you ever read The Debtors and the Savers? One of FOFOA’s finest and most crucial essays, in my view, and certainly relevant to your post.
You need to represent non-financial debt to represent the burden of the nation. Yes, non-government debt is held unequally. But government debt is paid unequally, because taxes are paid unequally.
And yeah, FOFOA and I agree on far more than I first realised.
So I read that fofoa article you linked to and the main thing I got from it was that the world is divided into two camps: debtors and savers, and the debtors are causing crises because the have an illegitimate claim on the savers wealth and contrive to get that wealth through taxation and govt programs?
Is that correct?
If so I dont think I can agree from a historical standpoint. If debtors are the cause of all the ills of modern society, why is there such a disparity of wealth and why aren’t there more savers?
If you were to go back to the medieval times and apply the same concept, debtors v. savers, you would realize that there was a targeted and concerted effort to keep certain types of people tied to land and out of possession of anything of real value. So, for instance, you had a class of people who inherited land from their family because their family was either lucky enough to be related to monarchy or the family was able to become a knight, survive for a wealth and attain a small amount of wealth and later buy land or become a some kind of lord somehow.
But the point is you always had a class of people that started out by legitimately or illegitimate attaining wealth – though arguably the reason a family may have been the ruling one was due to their combat or intellectual prowess – and with that wealth they kept entire groupings of people from saving.
So I guess my question is why be so hard on the debtors given that if going into debt was the only way of achieving some semblance of a decent life?
Jon: No, that’s not quite how I understand it. The difference between savers and debtors is more in how they view money; the “hard-money” and “soft-money” camps, if you will. The softies believe in borrowing money for consumption, gradually diluting the value of it, and worrying about the consequences later. The hardies believe in living within your means, storing away your surplus in a non-diluting medium, and only buying something when you can afford it. There are plenty of the richest men in the world today who clearly belong in the debtor camp.
And I don’t think FOFOA is saying that everything is the debtors’ fault, either. He’s just observing that this – and not capitalists vs labourers, as Marx viewed it – is the fundamental source of most struggles throughout history, and that realising this will help you understand how history played out and how the future will be shaped. If you read other FOFOA stuff, you’ll find that he is advocating – or rather, identifying as the inevitable next step in society’s evolution – a new form of monetary system, “Freegold”, where the means of exchange (“paper money”) is separated from the store of value (gold). This will enable both savers and debtors to do their stuff the way they like it, but without ending up in conflict with each other.
FOFOA’s writing is quite complex and challenging. You basically have to plough through everything he’s written from start to finish to even have a chance of fully understanding his standpoint. I’m nowhere near that stage myself! But just from reading any individual essay of his, you get a sense that this is a guy who knows his stuff, who has a unique perspective and has thought things through on a deeper level than most, and that it’s probably worth investing some time to learn more of what he’s saying.
If you do, though, I wouldn’t bother getting involved in the discussions at his blog. The tone there is rather insular and hostile to newcomers and sceptics, and FOFOA himself doesn’t participate much. There are certainly insights to be gained from what the more senior and knowledgeable commenters are saying, but in my view it’s not worth the effort to sift out the nuggets from all the dross. Better to just read FOFOA’s posts!
So I got that part about the money savers and the money borrowers but my question is when you live in a society that actively restricts how much you can attain and thus save, leaving you the only option of going into debt to finance a decent style. Saving is pragmatic and good but if you have nothing to save and no means to acquire it, then what?
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Debt has been driving the economy. But it is a fake wealth that will only feel like wealth for as long as people accept debt as payment. As soon as they find out its all a sham, the house of cards collapses.
Debt has been driving the economy. Driving it into a hole of dependency on foreign energy and deindustrialisation. GDP is just a number, it just measures monetary circulation.
I am preparing a public interest litigation against the Union Government (India) for violation of right to life under Article 21, under which we are not supposed to be deprived of our life and liberty except by due process of law. Examination of the law suggests that our constitution makers were just not aware of the extent to which the traders / bankers / debtors / Victorian nuclear families and generally everyone benefiting from political economy and Bank of England arrangements after Isaac Newton, never had to follow any due process of law. In other words, the capitalists who designed the modern nation state and money system which all democracies follow turned life and land into marketable commodities with central banks playing a vital role. The liberal state was asked not to interfere with a persons’s liberty which was equated with the liberty to benefit from central bank arrangements to trade; humans were defined as labour, the earth’s atmospheric and the species’ evolutionary processes and balances were defined as ‘land’ – another commodity. Combating climate change poses the same challenge as combating social inequality: it is a struggle against capital and the commoditisation of life into labour and land and money. These things are practically incomprehensible to the majority in OECD countries who do not witness the collateral damage caused by their system. But we poor in developing countries are the collateral damage. Though we will have difficulty fighting the American entities who are depriving us of our life and liberty under the Alien Tort Claims Act, it may be more possible if we have been able to successfully proceed against the Union Government here. They facilitate deprivation of life and liberty because they have not set up processes of law to control the destructive forces from within the country and without. The money system, when it is not embedded in the social and cultural life of a people who are brought up to protect the body and the body of nature and the bodies of animals and plants and their energies, destroys life. This is what is happening in India today through capitalism and the money you talk about. The capitalist forces and the consumer economy of the OECD countries want to be the bankers and consumers to the world in order to destroy us by asking us as in colonial times to produce for a world market.
They don’t listen to letters or protests, they only listen when the angry mob chases them with pitchforks. I heard an “Untouchable” has avery popular leader in Parliament. Is this true?
anandi — I’m sure you know the Malthusians running the British East India Company deliberately let famine ravage India so “the population would not grow out of control”. Millions of people died in the two great 19th century famine.
At least we’re not following those destructive dogmas today.
So by your logic any capitalist that uses child labor which injures or kills the child indicts the entire system of capitalism? British people were racist and wanted to exploit the land in India; malthusians was just one more excuse. Just because people implement bad prescriptions for a problem does not mean the problem never existed.
Having said that, I am not all that well versed in Malthusianism but I can tell this: if you think the amount of people living in the world won’t affect how people live who gets access to what and to what degree then you are batshit, no offense lol!
That vast financial debt in the UK is surelly less scary than it looks.
It’s partly banks debt, but includes debts of big financial companies based in the City.
If it was to fail, it would have no real effect on the UK, apart from possibly lowering property prices in Kensington.
Great post though.
I’m sure we would be happy to give them a haircut-free bailout on it, though. The incompetent Tories believe in “financial stability” just as much as the incompetent New Labourites. Cameron needs to listen to his adviser Taleb much, much, much more, and Osborne much, much, much less.
Somehow my girlfriend has failed to get the message about debt not being real wealth. She keeps running it up and getting real goods in exchange, and foolishly old fashioned me keeps paying it off (quaint concept, I know…)
You forgot to apply for a card in her name.
I’m reminded of forest management.
For decades, forest fires were fought zealously, stopped in their infancy before they could do much damage. But fire is part of the natural cycle of the forest. As a consequence of this policy, decades worth of underbrush, and dry tinder built up, fueling massive unstoppable blazes (such as the Yellowstone fires).
I think it’s as good an analogy as any to describe the current financial climate; an overabundance of debris and stands of dead timber that should have been allowed to burn itself out locally. Now it’s fueling an unstoppable firestorm that will engulf the entire forest, including healthy trees that would have withstood a normal blaze.
Excellent analogy. My mother taught me that one.. She went to the University of common sense.
V10
Read Spitznagel much?
But Debt is Wealth to the money lenders. When the sum they can collect back is larger than the sum they loand out
You mean the interest coming in is greater than the interest coming out. Modern finance boiled down into a nutshell. Sum collected will never be greater than sum lent except when the government bails you out.
Ricecake —
Debt is wealth to a creditor until the debtor defaults. And the only thing standing between mass global defaults is a tidal wave of money printing, something monetary authorities are trying very hard not to do.
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Debt is sexy from a fractional reserve lenders point of view. Money that can be created through fractional reserve and lent out is making more money than money that has not been created from nothing. Idle money loses its value due to inflation so it needs to be loaned out to earn interest. The borrowers are short of cash because they are not paid in line with inflation and consumerism needs easy money. Humans collectively need to get back to basics, real wealth is tangible and provided by the earth, it is not bits of paper printed at will with digits printed on them, and it is not electronic pulses that flash down a copper wire with no real earth produced commodities to back it. Gold the barbarous relic indeed!
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It’s an odd concept – I am considered wealthy (compared to the rest of the world) because I have a medium sized home in Canada, and all the trimmings that go with it (TV, food on the table, a video game console, etc) however when I look at it differently, It appears that the poor in other countries are richer than I am – I have $125,000 of debt attached to my home and all the other stuff I own. When you consider that an asset is not cash until it’s sold, I am basically in the hole for $125,000 whereas the beggar in Chennai india has no assets, but no debt. Given the choice of being at break even (the beggar) or in debt but with assets, I pick the later.
Now, I know you might say that a mortgage back security is not the same kind of asset as a house – one is useful and the other isnt – but thats not technically true – the home is useful as it allows me to sleep in it, whereas the mortgages backed security is useful as it brings in a steady stream of income. Yes the mrotgage backed security’s income might dry up, but then again my home might be destroyed by a tornado and I wouldn’t be able to sleep it in any longer – risks one has to take.
So, in a strict financial sense, a beggar is better off than me – but in a real sense, I am better off than him – thanks to debt. Yes, house prices can go down, mortgage back securities can decline in price until they become junk, but I’d rather take the risk and get the home, and most investors would rather take the risk and get the return on the financial asset. They each serve their purposes.
Keep in mind that I am not referring to criminal greed by the top financiers of the world, or the lack of the rule of law that is prevalent today – I’d get rid of those in a heartbeat. Let me put it in another way: Say everyone in the UK was responsible for their part of the national debt. Now, go up to the beggar and ask him if he would be willing to take on his share of the UK’s debt is that meant that he could have the associated lifestyle that comes with living there. I’m pretty sure he’d jump on that opportunity.
So there is SOME wealth associated to debt. that is, if you measure wealth in a real sense and not a financial sense.
my 2 cents.
Excellent points. If someome went into debt, spent that debt on a meaningful experience with loved ones, and those loved ones passed away, would that debt be considered “non wealth”.
I went into debt in my youth, I travelled the USA for 3 months. I eventually paid it back. The interest costs are meaningless now. I can’t get my life back.
Debt is the consumption now for the lack of consumption in the future. If life is more valuable to you in your youth, then spend now and pay back later.
They don’t have debtor prisons now, so why worry.
Deides, you are talking from the perspective of a debtor, not a creditor. From the perspective of a creditor (i.e. someone who owns debt) debt is not wealth. For the debtor, it is possible to take the money and have an easy lunch, but debtors should not be surprised to at some point lose that easy lunch via a rate spike or grinding debt-deflation.
Well, how do you really define the line between creditor and debtor? If I decide to purchase a US treasury note and receive the pittiful interest it gives, that is a choice I can make. The US treasury is an asset that I hold, that gives interest.
If I am a bank that decides to purchase a loan note that provides interest, that is a choice the bank can make. Banks hold loan notes as assets, that’s how they make (some) of their money.
I don’t really see a distinction between lendor and borrower. both sides of the trade give something in order to receive an asset – be it a loan note or a home or a US treasury or cash. Both have the potential to loose from the trade, and both sides carry a risk (not being able to pay the interest, the loan note defaulting, etc).
Really isn’t much difference between the two, and i still think my above points hold.
If ever anyone apologises to me for not paying me yet I always tell them I am happier when people owe me money than when I owe money. A creditor is someone who creates credit. This is something everyone does when they do some work they will be paid for tomorrow.
Aziz. I like your posts. Nations, people, regions, are caught in the contradictions caused by their own personal, group, national, reginal histories, and groups and nations only have so much wiggling room at any given point in history. The states of Bihar and Uttar Pradesh with a population the size of the USA have budgets this year which are a mere fraction of that of the USA. But India does not believe in too much debt, but nonetheless it does believe in debt. This is the problem of course, a colonial inheritance. I am not of the view that communism is the abolition of money. I have a simple view of money. May I post the link where I have written my view point? Getting to that point is as tough, and par tof the same struggle, as getting to the point of “GHG emissions in every country below the sequestration capacity of their forests”. And of course money and concentrations of GHGs in the atmoaphere are closely linked. So. To sum up: the excess of debt is because OECD wish to perpetuate capitalism which is synonymous with imperialism. But in the context of climate change the edifice has come tumbling down. Now, when all is blatantly exposed as toxic to the continuaiton of life on earth as we know it, there is nothing India needs from the USA. Absolutely nothing. Dollars as our reserve currency are toxic to our life, as we have experienced in the last 20 years. Never has the Yankee go home viewpoint been as strong as it is today in India. May I post that link now? I think the point is a bit too long for a comment. But it is just one point more or less. Or a vision, to be precise. http://anandisharan.wordpress.com/the-role-of-money-in-communism-in-the-here-and-now/