Past debts, future instalments
Over
the past thirty years, ever since Maggie and Ronnie began privatising
their republics, the developed nations have sunk into debt by
spending increasing amounts of their future incomes. And the two
trends are intimately linked. To favour private capital under the
cover of an entrepreneurial ideology, a new paradigm was instituted
of reducing wages and taxes. However, labour and government are the
mass consumers of society, and all productive investments end up,
sooner or later, as consumer supply. Instead of paying wages and
taxes, capital was encouraged to increase production. And, when
supply increased, consumers were encouraged to supplement their
insufficient means by borrowing.
Investing
incomes instead of consuming them tends to overproduction and crisis.
This fatality can be avoided by exporting consumption and importing
investments, and/or by granting unlimited consumer credit. The
industrial nations had developed their economies by using the first
procedure, but the growing production of the last decades was, to a
large extent, built in new developing nations and this has inverted
the exchange. The developed nations found themselves exporting
investments and importing consumption, which is when debts began to
expand. Individuals borrowed to compensate wage freezes, governments
borrowed to compensate falling tax revenues and nations borrowed to
compensate commercial deficits. For a while all went well,
billionaires thrived and multiplied, millions of people passed from
extreme to simple poverty, but borrowing is cyclical and, since
short, medium and long pay-back dates have begun to coincide, a
growing number of borrowers are on the edge of insolvency. Stepping
back means drastic reductions in consumption with all their knock-on
effects. Stepping forward is a jump into the unknown.
The
cancellation of debts has a long history, going back at least to
Solon in 6th century BC Athens. But such drastic measures
have more often been replaced by monetary creation, rising wages and
inflation. In the past, debt and its reduction were the concern of a
nation with its particular monetary system. That financial autonomy
disappeared when debts were outsourced as a means of restoring
commercial balances. The first to do it was the US under the Nixon
administration, shortly after revoking the Bretton Woods gold
standard, and when oil imports were suddenly costing much more
following the 1973 oil embargo by OPEC. It was agreed that the trade
deficit on Arabian oil would be paid with Treasury bonds. It was an
offer the Gulf protectorates could not refuse. This successful
formula was later extended to include all commercial deficits, with
Japan, Germany and China. The UK, a nation of bankers, turned to
selling complex financial products, and may have invented the
mortgage backed “security”. Inside the euro zone trade balances
were maintained with Treasury paper from the start, Germany being the
major creditor. As for Japan, a nation of savers, it has had a
commercial surplus for the past fifty years, and holds all its
national debts and a fair slice of American ones as well.
The
industrial nations old and new (G7 + BRICS) have criss-crossed their
debts and intertwined their production and trade to a high level of
interdependence. But the US, primus inter pares in wealth and
power, believes it can decide unilaterally the value of its currency.
The trouble is that the US dollar is America’s currency and, at the
same time, it is the global measure of value. Governments in Tokyo
can do what they want with the yen, as it only affects Japan. Whereas
the planetary impact of Federal Reserve decisions is similar to that
of the European Central Bank on euro zone members. US dollars are not
a shared currency, as they are rarely legal tender outside of the US,
and yet exchanges everywhere are labelled in and paid with them, and
all the world’s moneys are constantly compared to them. The Cold
War was a confrontation for world dominion, and the dollar was a
powerful tool for holding America’s imperial dominos. The events of
1991 and 2001 changed all that into a global coalition of governments
against subversion. Instead of subverting each other, East and West
are now confronting subversive elements in their midst. Yesterday’s
enemies have formed an alliance to face a common menace. They no
longer oppose each other and their Cold War weapons are obsolete. And
the dollar is no exception.
The
leader of the Western world cannot become world leader. America’s
role in the 20th century cannot be globalised in the 21st.
The world’s demography will not allow it. And so it is with the
dollar’s dominion. And yet the global market cannot function
properly without a universal standard of value. It needs to display
prices that have a common scale of measure, as do volumes, weights,
distances, etc. The dollar could fill this function when the US was
producing half the planet’s manufactured wealth (1945), or a
quarter (1980), but as the fraction gets smaller (a fifth in 2012)
there must come a time when an alternative instrument is necessary, a
real world currency that is not subjected to the particular policies
of any one nation. Unfortunately, the multinational coordination
needed for such a system is inconceivable in these times of intense
economic competition and multiple military interventions.
Nations
around the globe are recklessly spending their future revenues. This
path to insolvency was taken by Argentina, Greece and others with
fatal consequences. But they are small countries, and their
tribulations are not considered reproducible in the major economies,
least of all in the US. The trouble with ballooning debts is that
they take over the economy. More and more income is being lent
instead of being invested in production, and is paying interest
instead of consumption. Instead of producing and consuming, an
increasing amount of the nation’s wealth is dedicated to lending
and usury. A trend that is obviously auto-destructive, though it is
difficult to predict at what point the process will fail, not so much
when the bonded masses rebel as when the wealth produced can no
longer fuel it, when there is no more to increase lending and the
paying of interest. That stage cannot be far off. It may in fact
already be in place, and is being held off temporarily by
quantitative easing. The dollar, the euro and the yen are probably
already living on borrowed time, under the perfusion of monetary
creations by their federal and central banks. Stopping those flows
would be fatal. Maintaining them can only prolong the agony.
A
small fraction of humanity receives most of the wealth produced.
Being unable to spend it, it is lent out to the rest of society, to
corporations, states and consumers. But, as corporations came to
depend less on borrowing for their investments (less taxes, lower
wages, more profits and cheaper more productive technology), the
lenders relied increasingly on governments and households to fill the
gap and circulate their excess wealth (1). Except that corporate
debts are investments and they return their value, whereas government
and household debts are consumed and their value must be produced
again (2). The huge transfer of income, from labour and state to
property, created an imbalance of supply and demand that was restored
by debt. But, since the debt peak of 2008, that imbalance has become
increasingly obvious and detrimental. As household borrowing and
welfare began to fall back, consumer demand slumped and is still
drifting in the doldrums with neither power nor direction. And, as
long as the drain of wealth continues, there is no reason why that
should change. It seems that the debt solution to domestic and
international inequality has run its course, “and
it's
a hard rain's a-gonna fall ”.
1.
Alan Nasser, in accordance with Keynes, sees the emergence of cheaper
more productive technology as a historic trend.
2.
A tentative analysis of this in a previous post.
posted by le Lézard at 1:52 AM
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