Essay on Debt from Outside the Mainstream


http://www.counter-currents.com/2012/02/thoughts-on-debt-repudiation/

Note: I’ll begin by saying that this is an essay by someone outside and even hostile to our own tradition. Of course, linking to it here doesn’t constitute any endorsement of what may be its underlying claims, or what its author may have said elsewhere. However, the essay does make a number of interesting points that I’d like to see discussed, even if I may not have the necessary ability myself to discuss them.

I like this point:

“Debt may no longer lead to slavery or prison. But debt still corrodes freedom in subtler ways. Those who are self-employed have more liberty of thought and action than employees, who are pressured to conform to the opinions and tastes of their employers. For the same reasons, property owners are freer than renters. And debt and foreclosure are the major factors in turning the self-employed into employees and property owners into renters. Thus if we wish to reestablish a society with a large middle class of self-employed farmers and businessmen, we need to revisit the idea of debt repudiation.”

One answer is that people shouldn’t get into debt, and should take the consequences if they do run up more debt than they can handle. This is true, but may not be wholly true in current circumstances. We live in a culture where the most visible forms of success have come about from the clever management of debt. Both political and economic wings of the ruling class encourage debt. Other forms of credit that depended on interpersonal relationships – loans between friends and loved ones, credit unions, building societies, etc – have been taxed or regulated out of existence, or absorbed into the official banking system. People should think for themselves, but mostly don’t. They take their lead from those above them. We live in a world where not getting into debt has come to be seen as a sign of eccentricity.

Therefore, when levels of personal and mortgage debt – especially to fictitious entities – reach the point where they become leading contributory factors in the growth of economic and social inequality, it is worth considering whether and how to cancel the debt.

Whatever the case with individual debt, I do think it would be a good idea to repudiate the national debt. Most of it was run up by people who were only notionally acting on our behalf. It’s now so big that it never will be paid off in any honest way. We seem to have a choice between inflating it away and open repudiation. The only question remaining is to whom is most of this debt really owed? I don’t think any of it is owed to me. Is any owed to you? Is it owed to people who owe money to us? Since it won’t be paid back, does this really matter? Why not repudiate and start again?

I turn to the matter of “interest bearing money.” I know this gets a combination of sneers and glazed eyes from mainstream economists. And I’ve never had any time for Major Douglas and the other monetary heretics. But there is a relevant issue here. At the moment, governments don’t just print money to cover their deficits and live with the blame for what this does to prices. What they do is borrow at interest from banks that create the money out of nothing. The resulting upward pressure on prices may then be disguised for years by sucking much of the new money into asset bubbles, or can be blamed on causes far beyond normal understanding.

The best alternative would be a fully-convertible gold standard, with no fiduciary issue. Since that is not currently on offer, to what extent do the other alternatives mentioned above serve the public interest? I suggest that one advantage to the present banking system is that it limits the inflation. When politicians can simply print and print and print, that’s what they will do. When they have to sell bonds, they will have to go though the motions of running a responsible monetary policy. On the other hand, the present system has led to the emergence of a an artificial moneyed interest that enriches the ruling class and makes government even more corrupt that it would otherwise be.

It also has a degrading effect on political and economic debate. As said above, anyone can understand the effect a billion more £5 notes has on the price of fish fingers. It takes a lot of learning and hard thought to understand how a change of interest rate policy can have no effect for years and years on the Retail Prices Index, but does funny things to the price of houses and bonds – and then can suddenly send measured inflation to double figures in a couple of months.

You may have noticed that I’m not writing with my usual certainty. Can anyone enlighten me, therefore? SIG

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7 responses to “Essay on Debt from Outside the Mainstream

  1. I don’t think anyone writes on this subject with complete certainty, as even mainstream economists are out of their depth when it comes to things like QE. You can see in their writings that they’re not sure.

    I would support debt repudiation. Not default, but permanent repudiation. But clearly that does affect the bondholders, who include many financial institutions and pension funds. It would have great financial ramifications, but no one really knows the full extent. I presume it would lead to the bankruptcy of the banks, and then the emergence of new banks – an instant deleveraging that might be negative for the economy in the short term, but would quickly lead to more rapid growth (much like Argentina’s default).

    The government is clearly backing vested interests rather than the long-term economy. But the ramifications should not be underestimated. They would include the cashpoints of all major banks stopping working as all the banks were bust, and pension funds seeing a large % of their assets wiped away. It is always a good idea to back vested interests, up to a point, as everyone else has piggybacked on the vested interests. But then we don’t deleverage and don’t get back to strong growth.

    It could lead to an instant depression. There would be no access to bond market funding thereafter, and the government would have to just spend only the money on hand – however little. Which is why running a “primary budget surplus” is important – this is a budget surplus before interest payments. If you would be in surplus if you had no debts to service, then you have a primary surplus. Nations with a primary deficit are in difficulty, as even if they repudiate their debts, their revenue is insufficient to finance their income.

    Comment on the above by blogmaster:-

    I like that idea.

    It would “stick it to” the bastards who have encouraged banks in the 1990s under the foul fascist pig Clinton (the banks there and here were not primarily at fault – they merely tried to hedge off the politically-conceived-debt which the ClintoNazis had stuck them with, with threats) to turn away from the paths of rectitude, thus both getting us into this mess and getting the banks’ own faces dangerously and mortally-egged at the same time. A fail, a “choosing poorly”, if you like. If the US banks had stood up to the effing bastard and given him and his “party” some carefully-crafted advice about the simultaneous combination of far foreign travel with the act of procreation, we would perhaps not be having this conversation now.

    We need banks to function and be profitable, to be able to engender the sort of civilisation in which humans would like to live: it is pointless, and fully-Nazi, to pretend otherwise. When I am Principal-Secretary-of-State-for-War in the People’s English revolutionary-Liberalist-Party’s first administration, all sovereign debt contracted before the 2010 election and indented for under “New Labour” will be repudiated. I give notice that this total will include any Gilts taken out to reservice such debt as described, if they were taken out after that election.

  2. I like that idea.

    It would “stick it to” the bastards who have encouraged banks in the 1990s under the foul fascist pig Clinton (the banks there and here were not primarily at fault – they merely tried to hedge off the politically-conceived-debt which the ClintoNazis had stuck them with, with threats) to turn away from the paths of rectitude, thus both getting us into this mess and getting the banks’ own faces dangerously and mortally-egged at the same time. A fail, a “choosing poorly”, if you like. If the US banks had stood up to the effing bastard and given him and his “party” some carefully-crafted advice about the simultaneous combination of far foreign travel with the act of procreation, we would perhaps not be having this conversation now.

    We need banks to function and be profitable, to be able to engender the sort of civilisation in which humans would like to live: it is pointless, and fully-Nazi, to pretend otherwise. When I am Principal-Secretary-of-State-for-War in the People’s English revolutionary-Liberalist-Party’s first administration, all sovereign debt contracted before the 2010 election and indented for under “New Labour” will be repudiated. I give notice that this total will include any Gilts taken out to reservice such debt as described, if they were taken out after that election.

  3. As a general point, I think the key thing here in the essay is the question of, “why public debt”? A lot of people from different political persuasions are starting to ask this question. In a society where a government can print money, why do they ever borrow it?

    I asked this once over at Samizdata, where a lot of sensible people discuss economics. Nobody could provide a clear answer. The best offered was that it demonstrates fiscal responsiblity; “we won’t print too much, only as much as we can borrow”. But this is clearly a nonsense. A government could show similar responsibility by transparently stating how much it has printed this year, and last year. The other answer is that it keeps the government’s credit rating in good order with the banks; but this is a nonsense too; if you never borrow, you don’t need a credit rating, let alone a good one. The simple fact is this; if the government can print bonds, it can print bills.

    There seems to be really no common agreement- or consensus mental model- of how the money system works. Everyone seems to have a different idea. Nobody can agree even what the money supply (in MV=PQ) actually is. Some people think fractional reserve is the problem. My own model is that the system as a whole- frac banks, government borrowing and, crucially, the central bank that binds them- is a perpetual motion machine that takes debt-based M3 (or Mx, take your pick) and converts it via government borrowing into bonds into new base currency (M0) which then generates more M3, and so on. All 3 parts of the system are needed for this to work. Take out one, and the perpetual motion element- and thus the banks’ ability to consume ever more of the money economy- is broken. Under the current system we are paying interest on interest on interest on interest on…

    I don’t believe in a gold standard. The benefit of it is that it supposedly forces fiscal responsibility. But what actually happens is the State falls of the standard and then, to get back onto it, has to enforce a ruinous monetary contraction or, as in 1971, just abandon it. If the government can be disciplined to stay on the Standard, it can be disciplined to print money moderately. The reality is that if the choice is between losing to the Hun, or coming off the Gold Standard, not just the government but the populace too will prefer the second option. So there is no use to it.

    If the State, fighting the Hun, inflates a fiat, there will be inflation, which is harmful. At least though there will not then be a required deflation which is just as harmful. Better to end the inflationary period and stick with the new inflated prices- “1 cup of coffee, 1 thousand pounds please”, than more misery reversing them.

    So the problem anyway is the government debt, which need not exist. Governments borrow rather than print due to (a) historical precedent and (b) membership of that financial class who benefit from the current arrangements; most of the elite are directly or indirectly beneficiaries (“this is my husband Tony, he’s something in The City”). The historical precedent is that in the days of gold coin, the only way for anyone to get more money- including governments- was to borrow it. That is no longer true. But they continue as if it still were true.

    The simplest thing would be to just convert all the current government bonds to money- which would then all be M0 base money, combined with some form of debt holiday for the masses, and probably breaking up the banks themselves to break the oligarchies. The central bank would then be reduced to an office that runs the printing press, without any “lender of last resort” function. Then, leave the system to run and see what the market does with it. IMHO.

    Whatever is done, it will only be done when there is general realisation that the system itself is the problem; there are not problems in,/i> the system but of the system. Whether the elites will dare to question it though, even as everything crumbles around them, is debatable. So it comes to whether the populations will en masse demand a change, as the interest on interest on interest system brings them ever more ruin.

    We’ll have to wait and see.

  4. The Faux Libertarians love the idea of all debts being waived, but it’s not a coherent policy (to put it mildly).

    The government has two ways of paying people – by giving them land or by giving them bonds/bank notes (which are somebody else’s debts). So if you come along and say to all those who were paid in bonds/notes that they can get stuffed, and those who were lucky to choose to be paid in land can keep it outright, that’s a very assymetric and primitive way of doing it, especially as a lot of people who think they own land bought it by borrowing money, so that is even more outright theft, to borrow money and then refuse to pay it back.

    By all means, write off all government debts, wipe off all mortgage debts and wipe out all savings assets, but can we chuck the land back in the pot as well and start again?

  5. Well Mark, land reform is another element; but you just need to abolish land controls and that is fixed. The government doesn’t pay people in land as such, it awards special benefits via Planning regulations, but it does that to numerous other groups as well, so obviously you need a broad libertarian package.

    However of the two elements of Home-Ownerism, smashing the bank cartel pulls out one of the two pillars. Without debt-money generation, there won’t be the massive piles of debt to lend to new mugs on the “housing ladder” so the HOist cartel is half fucked then anyway. Combined with the abolition of Attleean land nationalisation, the problem is basically solved. But this thread was about detb, not land reform, so I can’t speak for anyone else of course but that was what I concentrated on.

  6. The government cannot just print money without causing Zimbabwean inflation. At the moment, the government is creating money electronically with which to buy government bonds, which is an indirect way of printing money, although as the banks are currently refusing to lend much money, it is not having the hyperinflationary effect expected. The success of this policy depends on eventually withdrawing the money created by the government: ie, as the national finances get on their feet, the government can sell on the bonds that it has bought to private bond investors and thus gradually eliminate the QE money. But it is by no means certain that this can happen so easily. Once banks start to lend more freely, the resullt, with so much QE money sloshing around the system, could easily be higher inflation, and Liam Halligan on the Telegraph has repeatedly warned of this. Ian B – the answer is totally simple – and I don’t know why the people you asked couldn’t answer it – it is inflationary to print money.

  7. David, the government commits the crime of inflation constantly. It even has an official target for it of 2%. You only get Zimbabwean inflation if you run the printing presses too fast; we currently run them indirectly at about 2%/annum. That is why you can no longer buy a loaf of bread for a penny or a motor car for £50 or whatever it was back in the day.

    That’s why the question couldn’t be answered; mild inflation is the official policy of modern governments. Zimbabwe simply did too much of it.

    Thats why Milton Friedman proposed a standard rate of money printing at 3% or so. Because it would create the money they want to create anyway, but without producing simultaneous debt; the channelling of money from the poor to the rich via inflation and the banking system is a major problem. If you print bills rather than bonds, you still get the inflation. But not the interest.

    If the government ever withdraw all the money it has created, the national debt would disappear, but so would all the money. They never, ever, withdraw it. The best they ever do is “balance the budget” which means not printing any more, for a year.