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Debt

August 21, 2011

A debt that will not be repaid is a theft. A system based on debt only works if the creditors believe they will get their money back. Creditors will only believe they will get their money back if the promises made by the debtors are creditable.

To take an analogy: if I say I will pick your kid up from school tomorrow, you will probably believe me if we know one-another and our friends go to the same school; but if I say I will pick your kid up from  school for the rest of their school life, you will think I am nuts and will not take me up on my offer: it has no credibility. Who now believes the US can pay back – what is it now – 43 trillion dollars?

There are an increasing number of people who do not believe some governments – Greece, Spain, Ireland, even the US – will ever now be able to pay their debts as they stand. The money they have been loaned has been loaned on the never-never. You basically have, writ large, an exactly scaled up version of personal consumption debt, of people who maxed out on their credit cards in order to buy all those things and who will never have the money to pay back the loans they took out. This is what has led one UK commentator to say that the entire US financial system, headed up by the Fed, is just one giant Ponzi scheme. The US government has gotten more and more into debt to try to give its people what they want and has promised that somehow it will use this money (by job creation, infrastructure development, whatever) to generate money to pay back those debts. But more and more people are believing this is not going to happen.

One could argue that, of course, it is not the repaying of the debt itself, but the furnishing of the interest on the debt that is important. This may be true, but it essentially becomes just a ‘second order’ problem. At some point, the interest on the debt becomes so large that it cannot be repaid either – let alone the capital amount.

So what happens instead? Well, a bunch of stuff can happen, but let’s consider just two things. 1, you get different sorts of agencies ‘buying up’ debt at less than its stated value but at just enough of a margin to allow the agency to think it worth chasing things up to get what they can by way of repayments; 2, you get write-offs where those who are owed money just wave it goodbye.

Three things about this ( and, no, I don’t really understand the whole situation, but nobody else seems to either, which is why commentators like me can make a contribution): 1. How do people (i.e. bankers in this case) enrich themselves so much by giving out loans which are never paid back?; 2. If everyone is in debt to everyone else (which seems to be the case in at least some examples, China excepted), why don’t we just cancel all the mutual debt and start from scratch? 3. The fact that our democratically elected governments have passed all that debt onto their people and taken it away from the private sector that created it must be the biggest political-economic gamble in a long, long time. As Nassim Taleb has said: the surprising thing is not the riots in Greece; the surprising thing is that there are no riots on the streets of London or New York. Or, should I say, he did say that, before the London riots… (though actually, I think the reasons for the London riots are not so straightforwardly political or economic).

No, the real risk if that if living conditions deteriorate markedly in the richer Western countries, then we could have serious social unrest – and that will be fuelled by the realisation finally getting through to masses of people that those who had no, or very little, part in creating the debt bubble are now having to pay for the consequences, while those that fuelled it remain largely untouched.

Things don’t look to good: if living standards decline dramatically because governments default on their debts, are not able to borrow money further and economies slip into recession, they will have ended up, not only ‘thieving’ from those to whom they owed the money they borrowed, but thieving from most of their own people to ensure the safety and well-being of the richer members of that same society, particularly those closely associated with the financial sector. It smells bad, doesn’t it?

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From → Economics

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