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The Young Are Going to Get Screwed by Debt: Part Two

Thomas Jefferson was familiar with debt. He carried a substantial burden of it throughout his adult life.

At the time, there were no bankruptcy protection laws. If you did not pay your debts, your creditors hounded you…could take everything from you…and get you sent to jail.

Jefferson had such a reputation that his creditors were perhaps awed by it…or sympathetic. They did not push him too hard. Otherwise, he might have been ruined. Or even put in prison for non-payment of debt.

There he might have joined his fellow Declaration of Independence signatory James Wilson.

Wilson was put in prison for non-payment while serving as Associate Justice of the US Supreme Court.

There too, in the Walnut Street Debtors’ Prison, in Washington, DC, he might have encountered his old friend Robert Morris, also a signatory of the Declaration of Independence.

Morris was once one of the richest men in the colonies and was described as ‘the most powerful man in America’. From 1781 to 1784, he acted as the new nation’s secretary of the Treasury – as its ‘Superintendent of Finance’. But he was bankrupted in the Panic of 1796 and sent to debtors’ prison.

The Great Debt Danger
 

Another illustrious veteran of debtors’ prison was Henry ‘Light-Horse Harry’ Lee, father of Robert E. Lee. He was a hero of the Revolutionary War, but nevertheless busted and sent to prison in 1808. He used his time there to write his Memoirs of the War.

Throughout history, excessive debt has been a great danger – with serious consequences for the unwary. There were heavy penalties for not satisfying your debts. In Ancient Greece, for example, the debtor could be taken into ‘debt bondage’. He was made a slave.

So many people became enslaved in this way that Athenian statesman Solon enacted a law in about 600 B.C. that banned the practice. Called the seisachtheia, it allowed the debt slaves to return to their farms as free men. But the debt was not erased. The debtor was still at risk of becoming his creditor’s slave if he failed to respect the new credit terms.

The penalty for failure to pay debts in Europe during the Middle Ages was prison. Conditions were appalling, as you might imagine. Typically, the debtor’s family had to continue providing food and clothing. If the prisoner had no family support he would starve.

In prison, of course, he had little means to repay the debt, which commonly brought the story to a miserable conclusion.

Going broke was also an abominable disgrace. It was a blemish on a family escutcheon, telling the world that a member of the family – often the head of it – had let down his friends and associates.

Read the novels of Thackeray and James; you will find young women of good society who can’t get married – ever – because their fathers defaulted on their financial obligations. Non-payment of debt sullied the family – for generations. To avoid this stain, uncles, cousins and other would come together to discharge the debtor’s obligation.

The penalties of excessive debt also figured heavily in commercial relations – especially in the banking industry. Until the creation of the Federal Reserve System in 1913…and the later Depression Era reforms that allowed banks to operate behind a corporate shield… bank owners were personally responsible for their bank’s losses.

There was no federal deposit insurance and no private banking cartel that could come up with funny money when it was needed. Money was real – expressed as a unit of gold. Losing it meant real losses. Failed banks went into receivership. The receiver would tally up the losses and send a bill to the owners. Each paid his share of the losses…or he would be judged insolvent too.

As you can imagine, bankers were a lot more prudent back then. So were borrowers. Both shared a keen interest in not overdoing it. Because both were directly exposed to penalties if anything went wrong! There was a direct connection between the debtor and his suffering – whether or not he operated behind the big brass door of a bank or the flimsy wooden door of a tenement apartment.

Today’s Debt Slaves

Times have changed…

The system today allows some people to make reckless bets and extravagant promises, while putting the penalties for failure onto someone else. Sooner or later their speculations go bad. Sooner or later they spend more than they can afford. Sooner or later they make wasteful and disastrous investments.

Who cares? Someone else pays the penalty…sooner or later!

Bankruptcy protection laws now permit debtors to continue to live normal lives, as their accounts are brought back into balance by court order. The modern debtor is usually allowed to keep the family home…provided it is not too extravagant…and enough of his earnings to allow him to carry on. Otherwise, his assets are seized and distributed among his creditors.

But public debt is another matter. Never before in history have we seen anything like it. A young man in the 19th century might inherit his father’s debts (along with his assets); he now inherits debts incurred by people completely unrelated to him.

An old man in Arizona gets free pills from the government in 2010; a young man in Maine will still be paying for them in 2030. A middle-aged banker pays himself a $10 million bonus in 2011 thanks to EZ money from the Fed; a plumber just starting out in 2025 wonders why his own money is worth so little. Washington goes $7 trillion further into debt in 2012; some hapless college grad 10 years from now finds he can’t get a job.

Calculated by Professor Lawrence Kotlikoff of Boston University, your grandson’s share of the total US government debt burden is about $700,000. This is not a fiction. It is real. And as the baby boomer generation retires and grows old, this obligation will come due and payable.

It would cost your grandson about $20,000 a year, over a 40-year career, to discharge it. And that assumes that the government immediately stops adding to it. This young man will probably pay about 40% of his income just to keep the feds current on spending. On earnings of $50,000 a year, he would pay another 40% for the benefits his parents and grandparents consumed many years before.

We have yet to meet the young man or woman who would stand for this. None would. No government would dare impose it. And the markets would get the heebie-jeebies and collapse long before it came to pass.

The feds will delay serious budgetary reforms as long as possible. They will raise taxes here and there. They will postpone spending cuts. The can will be kicked – and booted – so many times that it will be battered and bumped into an unrecognizable shape when it finally comes to rest against a brick wall. That will be the brick wall against which the feds will have their backs when all hell breaks loose.

Prices will begin to rise. Investors, fearing inflation, will sell US Treasury debt. The feds will have only two choices: raise interest rates to stifle inflation (thereby protecting the dollar and the bond market) or print money to cover deficits (thereby protecting their jobs and benefit consumers). The first choice will mean recession, maybe depression, and possibly riots and looting. The second will mean hyperinflation.

This wall is out there. Where exactly this wall is, no one knows. I have been surprised by the example of Japan. The country has been racing toward its own brick wall for more than a decade. Shinzo Abe has promised to speed up! But so far investors and savers still consent to transferring more and more of their money to the government in return for IOUs (Japanese government bonds) that can’t possibly be paid off. They too must collapse… sooner or later.

A Lot of Debt Ruin
 

The US has ‘a lot of ruin in it’ too, to borrow an expression from Keynes. How much? I don’t know. But it is certainly doing its best to find out. And it will be a costly lesson.

Succeeding generations (probably the next) will bear the costs of the debt.

This will likely come in the form of a disastrous period of financial whammies…crashes…bear markets…and hyperinflation. They will also bear the cost of living and working in a debt-saturated zombie economy (one that is essentially moribund but that appears alive).

From a distance – or from the figures provided by the US government – you might think the US economy is ‘recovering’ from a serious ailment. But if you hold a mirror up to its nose, you will not see much fog. Hold its wrist. The pulse will be hard to detect.

The false impression is primarily the result of faulty reporting. Real employment and inflation measures are distorted by changes to the system put in place at the Bureau of Labor Statistics.

According to John Williams of ShadowStats.com, properly measured, the numbers would show the US economy now in its seventh year of recession…with a 20% real unemployment rate. That is to say we are living through a depression, and young people are bearing most of the pain.

The young will also bear the brunt of the feds’ clumsy efforts to repair the system. Government is always reactionary – favouring existing capital interests over those of the (non-voting) future. But never before in a ‘free market’ economy have governments so vigorously defended the past at the future’s expense.

In the US, Washington’s deficits and bailouts protect current jobs at the expense of future jobs. Its QE programs protect today’s bondholders at the expense of those of tomorrow. Its Social Security and Medicare programs protect present beneficiaries. Those who will come into the program 20 years from now can go fish.

In short, the young are today’s debt slaves. But unlike the debt bondage of ancient Athens, today’s young people never even got their hands on the money. Our job as parents is to help our children and grandchildren unscrew themselves by giving them a source of real capital and showing them how to use it.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

Ben Bernanke’s Pseudo Logic
8-03-13 – Dan Denning

China: The Biggest Bubble Ever?
7-03-13 – Bill Bonner

The Disaster of Central Planners and Other Simpletons
6-03-13 – Bill Bonner

What the Shale Gas Revolution Could do to LNG Prices
5-03-13 – Dan Denning

Politicians Are Clowning Around With Your Wealth
4-03-13 – Dan Denning

9 Comments

  1. SG says:

    Amen Brother

  2. Technofreak says:

    Sort of makes sense that people will try something like the OPPT in an attempt to up-end the banking system…

  3. slewie the pi-rat says:

    i hear they’re hiring at McDonald’s.

    bye!

  4. jon livesey says:

    This entire post is based on a fallacy. Yes, we are going to pass the obligation to pay sovereign debt to the next generation, but we are also going to give them the debt! You can’t take it with you.

    Today, one set of taxpayers pay taxes to pay interest on Government debt, and the interest goes, mostly, to financial institutions who then pay out pensions, insurance claims, endowments and the like. So one set of taxpayers pay interest to another, overlapping set of taxpayers.

    And that is what will still be happening in fifty years. Your children will pay taxes that become interest on national debt which then translate into pension, insurance payments and so on. Once again one set of taxpayers will ultimately be paying interest to another overlapping set of taxpayers.

    All national debt is, is investors buying a tiny slice of future tax revenue which they use to meet obligations to their stakeholders. In other words, the money goes round and round. It does not disappear from the economy. It just circulates.

    Oh, and all that twaddle about Jefferson just shows that Bonner doesn’t understand the ‘household fallacy’, which is taught in High School Economics. Jefferson was borrowing from outside his household, so of course he could go broke. A country that borrows in its own sovereign currency can never go broke.

  5. David says:

    “A country that borrows in its own sovereign currency can never go broke.”

    Zimbabwe???

  6. pravin says:

    jon livesey -that keynesian krugmanesque nonsense has been destroyed by bob murphy and nick rowe long ago. debt taken today means foregone consumption tomorow or more tax payments tomorow.

    A FUTURE taxpayer will surely have to reduce his consumption to pay future taxes.obviously today’s enjoyers of the benefit of the doubt get a free lunch.

    http://www.fee.org/the_freeman/detail/debt-cant-burden-future-generations#axzz2Nb9cJv23

  7. Bud Wood says:

    It’s probably correct that in terms of numbers, a nation can’t go broke. On the other hand, in terms of purchasing power, a million multiplied by zero is still zero.

  8. Sparrows345 says:

    The way over used and trite “your kids and grand kids will pay” has been around since the 70′s now.

    Truth: This is the here and now, and we are “all paying for it” right here, right now.

  9. neville says:

    Our job as parents is to help our children and grandchildren unscrew themselves by giving them a source of real capital and showing them how to use it…….better still would be to give them a fishing rod and teach them how to fish instead of giving them a basket full of fish.
    The good times are for sure over.Please listen to Bill bonner and the other voices of reason.

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