Western economies have become addicted to debt. In Europe, not a day goes by where the press doesn’t mention sovereign debt, bank debt, or credit.
Indeed, the first thing we must comprehend is that debt and credit are two sides of the same coin. They go together like a horse and carriage. One person acquires debt, the other gives credit. So it is to a great extent paradoxical that while europeans, not so much the dillusional americans, worry greatly about the amount of debt in their economies, they still point to a lack of CREDIT as the problem.
Though it may seem counterintuitive, this is exactly the problem. The great amount of BAD DEBT that is in the system, and has not been cleared out because of the non-existent recapitalization of banks, is what is limiting the flow of NEW CREDIT.
What I mean by this, is that, a few years back, many banks should have gone under. The crisis of 08 revealed many bad investments. Yes, some banks made mistakes and were in the red. What should have happened as a result should have been a proper bankruptcy. Those banks unable to pay what they owe sell all their assets and pay for their liabilities. The shareholders, willl obviously lose everything, all ownership of the company. Some investors, those qith riskier investments( junior creditors), might take a loss. They may get 50 cents on the dollar, so they would get half their money back. Not to worry, the rest is given to them in shares. This is what we call a debt-equity swap. It’s quite simle really; if the bank can’t pay you fully, you become an owner of it. Contrary to popular belief, it is very unlikely, if this process is done lawfully, that regular depositors will lose any of their savings.
This is what should have happened. It’s what would happen in a properly Capitalist economy. But today’s economy is not Capitalist. Instead, failing banks were propped up by governments and given unlimited liquidity by their Central Banks. I repeat. Neither of these actions would occur in a Capitalist world.
And this is the point I wanted to make today. It’s easy for people to view excess debt as a Capitalist problem. As an inevitable result of the actions of greedy individuals. But this is in no way the case. The credit markets are firmly controlled by a few big banks with the help of government. It is these two entities, government and banks, who LOVE debt. Indeed, it’s like they cannot get enough of it.
Together they form the perfect alliance. The banks will fund governments, government debt will prove a great source of income for banks. Governments will benefit from having more money, and therefore spend more. It can seem inocuous. Why not let the banks fund governments? Doesn’t governmetn work for us? Well yes and no, that’s a completely seperate issue, but the point is, that at the end of the day, it is the taxpayer, the ordinary joe, who will have to pay for the government debt, and the interest that goes to the banks.
Without even realizing it, we are becoming enslaved to banks. This is a clear abuse of power by the State, who does this without our express consent. But even if we did all vote in favour, it would still be inmoral. Why? Because debt is a cost on future generations, and those people don’t get a vote. The incentives for people in the present to indebt themselves at the expense of the future gnerations is clearly a strong one. Moreso, is the incentive of appointed governments to indebt themselves, having an even shorter “life-span”, perhaps 4-8 years in office. Kicking the can down the road always seems like a good option…until you run our of road.
But equally bad, is what the vested interests of banks and governments do to credit and debt in general, and how these distortions of the market affect the rest of the economy.
In a nutshell, price intervention in the credit market has the same negative effects as in any other. In the credit market, price intervention comes in the form of “interest rate setting”.
Few economists today would dare call the actions of central banks price setting, but that is indeed what it is.
What we can expect, therefore, is that when interest rates are set artificially low, there will be an overabundance of credit. As a result of credit being artificially cheap, money will go into investments which, were the market rate prevailing, would not be justified. This will be revealed in future through price inflation.
The Central Bank, may increase the amount of available credit, but it cannot increase the resources available. In the end, more credit chasing the same resources will mean a bid up in their prices.
In conclusion, since we abandoned gold and banks started engaging in these corrupt activities, we have been condemned to sustain debt growth beyond what is posible. Indeed, gold is the only extinguisher of debt. All dollars in circulation now, are made of debt, backed by treasuries, so in reality, ALL MONEY IS DEBT. For the past few years, we have maintained an illusion of prosperity due to the exponencial growth of debt. Now, it has become evident that debt based growth is unsustainable and unhealthy for the economy.
Remember: the problem of excessive debt is not a problem of Capitalism, but of Stateism