In the Name of Debt

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A front-page photo in Tuesday’s Financial Times shows lightning striking near the Parthenon. Zeus must be reading the paper.

Greece is supposed to cut its public spending by an amount equal to 10% of its GDP. Even so, its public debt is expected to rise to nearly 150% of GDP by 2016 – or three times the level of Argentina when it defaulted in 2001.

It should be obvious that the Greeks owe too much. But so does almost everyone. Every kind of debt is so heroic it poses an affront to nature and a challenge to the gods. Much of it is unpayable. Private debt. Public debt. Short term. Long term. US. England. Europe. All kinds of debt in all kinds of places. In America’s private sector, for example, debt exploded 6 times faster than GDP since 1950. And today, the whole world staggers under debt, with more than $3.50 of debt for every dollar of GDP.

Today’s global economic problem is breathtakingly obvious: too much debt. The solution is obvious too; debt that cannot be repaid must be destroyed – by defaults, foreclosures, bankruptcies, write-downs, and restructurings.

Nouriel Roubini, writing in The Financial Times this week, is on the right track. Greece cannot bear the weight of all its debt, he says. Since it will default sooner or later, better to restructure the debt now…reducing it to a level the Greeks can actually pay. Fair enough. Creditors would take their losses in an orderly way.

When the debtor cannot pay, the creditor should take the loss. But practically the entire burden of modern economics over the last 3 years has been a scammy effort to shift the losses to someone else.

To bring the readers fully into the picture, the great debt build-up began with Reagan in the White House and Thatcher at #10. Reagan added to deficits. Thatcher cut them. On the west side of the Atlantic, economists called on Reagan to stop spending. On the east side, 346 economists implored Maggie Thatcher to spend more.

Reagan’s young budget director, David Stockman, resigned in protest when the Republicans wouldn’t bring deficits under control. Meanwhile, Maggie Thatcher was told that her austerity policies would “deepen the depression, erode the industrial base and threaten social stability.” She should do a U-turn immediately, said the august economists. “This lady’s not for turning,” she replied.

It didn’t seem to matter what anyone thought or did. Markets do what they want. Back then, interest rates were coming down. The US 10-year Treasury yield fell from 15% in 1980 down to under 3% today. In that tender, delightful world, debt was no problem for anyone. Even if you wanted to default, the banks wouldn’t let you. They offered to refinance your debt at a lower rate. Both Britain and America grew; their debts grew too.

Private sector debt peaked out in 2007. Households and corporations have been de-leveraging ever since. But as the private sector taketh away, the public sector giveth more debt. And again, markets are doing what they want. Interest rates are already at the lowest levels in a generation. This time, economies cannot cut rates and grow their way out of debt. Instead, someone will have to pay. Who?

The world’s economists have no better idea what is happening in the 21st century than they had in the 20th. They neither saw the crisis coming, nor knew what to do when it arrived. Their panicky ‘rescue’ attempts wasted $10 trillion. They claimed they had put the world on the road to ‘recovery’ and claimed victory over the credit cycle. They might just as well have claimed to have conquered sin or exterminated cockroaches.

Neither governments nor their economic advisors can make bad debt disappear. They know that as well as we do. All their sweating and grunting has another purpose – to decide who gets stuck holding the bag.

Taxpayers, for example. That is the general drift of the Germano-Anglo- Canadian proposal. ‘Austerity,’ as they call it, means higher taxes, fewer services, and bailouts of the financial sector. The big banks won’t pay for their mistakes. The public will. Martin Wolf and Paul Krugman are wrong about many things, but they’re probably right about the side effects of this bitter medicine; it will probably deepen and prolong the slump. It will cause a ‘third depression,’ says Krugman.

On the other hand, Krugman, Wolf and the other neo-Keynesians have a bad proposal of their own.

“…governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending,” writes Krugman.

If too little spending were the real problem, it would invite the most agreeable fix since sex therapy. Every government would lend a hand. Alas, the real problem is the opposite. It is the consequence of too much spending – debt. More government spending means more debt.

Who will pay it?

Taxpayers? Consumers? Savers? Investors? Lenders? The young? The old? Nobody knows for sure. But everybody is surely going to find out.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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21 Comments on "In the Name of Debt"

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Richo
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Well, lucky I have paid off all my debts then.
Or should I borrow up to my eyeballs and ride on the coatails of all the other borrowers(voters) who are going to seek government help to save them from living beyond their means.

watcher7
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“Some of the people I know lost millions [in the crash of 1929]. I was luckier. All I lost was two hundred and forty thousand dollars. I would have lost more, but that was all the money I had” – Groucho Marx. Harpo lost $250,000; J.P. Morgan, Jr. lost between $20 and $60 million and the Rockerfeller family lost four fifths of its fortune (Harold Evans, The American Century, p.231). Michael Pento, in the article below, addresses the financial/economic aspect of the crisis that the world is soon to go through, but the technological (cp. Michael A. Bernstein, The Great… Read more »
Biker
Guest
“Messer’s Obama, Bernanke and Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second; if at all.” If they actually realise(d) it, would they do anything different? As you say:: “…the government never believes it’s ever a good time to pay off the debt incurred.” Political survival is always placed well ahead of tough, concerted action. For those always watching the windsock, public perception will always determine action, or lack of it. Let the turbulance happen during the next guy’s watch. There’s little doubt that the excreta… Read more »
David Bode
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Watcher7 – I Remember when we were kids, the cure for sunburn was to take a hot shower. Talk about an old wives tale! Watcher7 – everything you say is true but I think you maybe haven’t delved deep enough. Debt in our society/economy cascades upwards in a ponzi like triangle. Those at the top of the triangle stand to lose much more (in purely material terms)that those at the bottom on so called “main street”. So the powers that be have socialised the debt losses of those at the top while cutting main street adrift. All the de-leveraging going… Read more »
Lachlan
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Great piece watcher7! BP I’d rather be here too than anywhere else although I do see our economy has important ties with the global economy eg carry trade effects on AUD. But who here will stop maiming the breeding herd with debt. Maybe when the “Best Party” (if thats what I think you mean) gets in we may see at least some efforts made. Its going to be a difficult test. It may be that nations who can stay up with or ahead of the austerity pack (as insufficient as the measures may be) may get a cushioned ride as… Read more »
Tony Hansen
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Something must be terribly wrong if Krugman is right. :)

Biker
Guest

I was astonished when no one challenged my mention of The Best Party, Lachlan!~ :)

http://www.abc.net.au/news/stories/2010/05/31/2913394.htm

Biker
Guest
David: “…the crap is about to fly – I reckon 2012 with a pretty sickening slide gathering pace in 2011. I don’t think places like Sydney or Melbourne will be healthy to be in either.” My view, not universally shared here, is that we’ll enjoy comparative immunity; but that the largest centres will be worst hit. Like nuclear hits on major cities, I think the further you are from these zones, the less you’ll feel the pain. If there is pain, it won’t be limited to property. There will be few safe havens. I guess the question that the general… Read more »
watcher7
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HRN: Do you think a return to the gold standard would constrain government abuse? Jim Rogers: Well, it never has. The Romans had precious metals as their currency and do you know the term “debase”? The Roman politicians had the brilliant idea that if a coin was 100% pure precious metal, they could slip a little base metal in and, over a couple of hundred years, they went from 100% pure precious metal to almost 0%. That’s where the term “debase” comes from. So, we’ve tried it. (Ron Hera, Interview: Jim Rogers on Currencies and Inflation, 321gold.com, June 4, 2010).… Read more »
Lachlan
Guest

Oh I see…
Well I was trying to be a little more cheery in my last post BP.
At least they’re cutting back on the drug use at work…maybe a good first step ;)

Biker
Guest
Cheer up, Lachlan. It may all just fly past us, leaving us unscathed…!!~ You’ll recall that both our contenders for the crown tell us they can rid us of the deficit within three years. :) Our grandchildren will enjoy a surplus!~ I read an interesting Letter to the Editor a couple of weeks back, when the Mining Super Tax debate was raging and prime ministers were dropping off perches and it all looked pretty shaky. The writer, from Southern River WA, made a point which resonated, particularly after reading OMG’s post on derivatives here. I’ll quote it verbatim: “However there… Read more »
Lachlan
Guest
BP I dont really know the truth of those matters. I can only say what I think would be the case. As an individual trader I cant see how I could effect the direction of a market because I’m too small and from my own observations private traders lose money into the market on net. On the other hand if one had practically unlimited capital with no risk (printing press, public takes risk) then you would have the grunt to manipulate markets away from their natural course and to the detriment of producers. Traders dont just take money out they… Read more »
Lachlan
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So naked short selling would cause a problem I think.

Ned S
Guest
Tricky one isn’t it? Things seemed to work reasonably well when we had: a) ‘Producers’ producing stuff in the real world b) ‘Capitalists’ ponying up capital for the producers to risk c) Traditional style banks as go betweens for a) and b) d) Pollies and public servants who figured that they added something to it all and that a), b) and c) should all be compelled to feed them, and e) The charity cases that figure even though they add nothing to anything they are entitled to a feed regardless But then we got these other sorts of banks that… Read more »
Biker
Guest
That’s a simplification, but it’s pretty much spot-on, Ned. Once the thin line between ethics and profits frayed… and the easy-bucks-brigade summed this up as reduced risk (to them) the US and Europe were open wide. You only have to look at the tens of thousands of _immense_ bonuses paid to these crims, to bleed their countrymen dry, to lose all respect for US financial systems. I’m not sure many of them ever believed it _would_ collapse. The thing fed on itself for a long time, unchecked. At the point at which these slimers starting selling their neatly-wrapped excrement to… Read more »
Ned S
Guest
Throw in the fact that the world never has come up with a reserve currency that actually works, and that a few more billion people became participants in the capitalist system over the last few decades (with most of them not actually needing USD 40k pa to make ends meet), Mr Greenspan figuring that cheap credit and bubbles equated to growth (with the system being stuffed now if the cheap credit should disappear), a few changes on the horizon re global demographics over the next few decades, and the fact that the developed nation’s major innovations over the last decade… Read more »
Biker
Guest
“…the developed nation’s major innovations over the last decade probably haven’t added all that much in terms of particular productivity or value…” And where the West _has_ innovated, the work has gone offshore, to minimise costs. Your point about the major increase in ‘capitalist consumers’ is also worth considering, Ned. Once it all started to unravel, we could also analyse where we got it _right_ and where we _screwed up_. Looking at stimulus projects across Canada, we heard of a one rort almost as questionable to us as any back home! To boost tourism, this initiative encouraged owners of very… Read more »
Ned S
Guest
“where the West _has_ innovated, the work has gone offshore, to minimise costs” – I really can’t see any way around that one Biker. (Although Dan Denning does occasionally mention the possibility of de-globalisation.) The indications just seem to be that if people have maybe been used to earning USD 500 pa (or less) and they suddenly get the opportunity to earn USD 4k pa and join the new rich who own a scooter and a mobile phone, they are going to see their lives as pretty good – Despite any lessons their western contemporaries may wish to pass on… Read more »
89peterg
Guest
“I’m not sure many of them ever believed it _would_ collapse” not many, but its the few (elites) who, with my tin foil hat on, I worry about….have they also gone too far? is their own game theory (if it collapses, how to gain) faulty? are there benevolent mystical forces at work? I dont know, but it is not impossible that some agencies have their hands on all the relevant strings (media, culture, trading, government…and our brainwashed and dependent minds). time might tell. I’d imagine that most Ozzies would be horrified to live on $200 a week (like myself). but… Read more »
Kontact
Guest

The only workable suggestion for a stable currency that I have read about is that suggested by Lietaer in his book : “The Future of Money”.
He proposes a world trade currency backed by a weighted group of commodities such as : Gold, Silver, Oil, Wheat, Corn,Copper etc. This has one great advantage in that no government could fraudulently produce them as they can with fiat paper and governments would be forced to keep enough on hand to back their debts.

Ned S
Guest

Keynes had a similar idea: http://en.wikipedia.org/wiki/Bancor

Issues with using a national currency as an international reserve currency are discussed here: http://en.wikipedia.org/wiki/Triffin_dilemma

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