Debts No Honest Economy Can Pay
But I got debts that no honest man can pay
So I drew what I had from the central trust
And I bought us two tickets on that coast city bus
Well now, everything dies, baby, thats a fact
But maybe everything that dies someday comes back"
From Atlantic City, by Bruce Springsteen
Over the last few years, I've thrown out the odd comment here and there about how many economic charts seemed to put us right about where we were prior to the Great Depression (or worse). Some of those charts measure income inequality, but mostly they are debt related.
The last few decades, much like the 1920's, have seen a massive run-up in debt levels across society. Now, as anyone who has borrowed money knows, the amount of money you can borrow and still make ends meet depends on interest rates: the lower the interest rate, the more debt you can handle.
So, since the early 80's we've been able to carry this increasing debt load thanks to ever lower interest rates (which have now reached 0 in the U.S.) After 9/11 when a recession looked likely, central banks lowered interest rates down to 1 or 2% for a couple of years, which was enough to prevent a serious recession from occurring, and also started us on our latest run of piling up even higher and higher debt levels.
So we now have (or had a year or two ago) a massive mountain of debt which could only be supported with very low interest rates and with an ever expanding credit bubble providing higher asset prices to prevent losses. At some point, the economy simply couldn't take on any more debt and things began to unravel. The U.S. housing market was one of the first shoes to drop and it's a pretty big shoe. But once the bubble bursts, it's hard to prevent it from collapsing entirely.
As I said, central banks managed last time by reducing rates almost to zero, prompting further inflation of the debt bubble via (in part) the creation of a global housing bubble. But this time, I'm not sure anything will prevent the debts from being wiped out in a self-reinforcing collapse.
So, from my standpoint, the problem the economy faces is a crippling debt load and the solution is anything that will reduce this debt load back to manageable levels in an orderly fashion.
With that in mind, I have to admit I find headlines like the following puzzling:
Carney Urges Banks to Lend More
I appreciate that we don't want the economy to implode as the debt bubble unwinds, but shouldn't we be trying to just manage the debt reduction process, not actively trying to create more debt? Maybe I'm missing something. It almost seems as if central banks think they can restart the economy based on further expansion of our debt levels, but surely they must have realized by now that, even if that was possible (which seems unlikely), it would only lead to an even bigger mess the next time the economy collapses under the weight of too much debt?
There's basically three ways to get rid of debt:
1) The most orderly way is for people to pay it back.
2) People can default on their debt. Bad for creditors (people who are owed money), good for debtors (the people who owe the money
3) The value of the debt owing can be reduced. This could be done by renegotiating terms, by government order, or, more usually, by inflation. Inflation reduces the value of money, allowing borrowers to repay their loan using dollars that aren't as valuable. Imagine you owe $200,000 on your mortgage, if we have 10% inflation and you get a 10% raise every year, it gets a lot easier to repay that mortgage as the years go by.
Faced with deflation (which has the opposite effect of inflation and will make our crippling debt levels extra crippling) it seems as though central banks are trying to print enough money to cause inflation instead. While dangerous (inflation can turn into hyperinflation which can wreck an economy) it seems the most likely escape from our debt prison at this point, so it's a reasonable approach. But what I can't figure out is that they seem to be trying to cause inflation by giving banks money and having the banks lend that money to people. But given that that is how we got into this mess in the first place, it seems an unlikely method to get us out.
Anyways, I don't know much about macroeconomics and this is all over my head, but it seems to me like the government should be focusing on reducing debt, not expanding it.
It brings to mind the stories we read back in school about Solon, the legendary ancient Greek leader who helped bring about the flourishing of ancient Greek society.
Here's a fairly standard account of the successful reforms Solon made:
"First coming to prominence (c. 600 B.C.) for his patriotic exhortations when Athens was fighting a war against Megara for possession of Salamis [see Map section Dab], Solon was elected eponymous archon (the magistrate whose name the year is known by) in 594/3 B.C. and perhaps, again, about 20 years later. Solon faced the daunting task of improving the condition of:
* debt-ridden farmers
* laborers forced into bondage over debt, and
* the middle classes who were excluded from government,
while not alienating the increasingly wealthy landowners and aristocracy. Because of his reforming compromises and other legislation, posterity refers to him as Solon the lawgiver.
In the 8th century B.C., rich farmers began exporting their goods: olive oil and wine. Such cash crops required an expensive initial investment. The poorer farmer was more limited in choice of crop, but he still could have continued to eke out a living, if only he had either rotated his crops or let his fields lie fallow.
When land was mortgaged, hektemoroi (stone markers) were placed on the land to show the amount of debt. During the 7th century, these markers proliferated. The poorer, wheat farmers lost their land. Laborers were free men who paid out one sixth of all they produced. In the years of poor harvests, this wasn't enough to survive. To feed themselves and their families, laborers put up their bodies as collateral to borrow from their employers. Exorbitant interest plus living on less than five sixths of what was produced made it impossible to repay loans. Free men were being sold into slavery. At the point at which a tyrant or revolt seemed likely, the Athenians appointed Solon to mediate.
Solon, a lyric poet and the first Athenian literary figure whose name we know, came from an aristocratic family which traced its ancestry back 10 generations to Hercules, according to Plutarch. Aristocratic beginnings did not prevent him from fearing that someone of his class would try to become tyrant. In his reform measures, he pleased neither the revolutionaries who wanted the land redistributed nor the landowners who wanted to keep all their property intact. Instead, he instituted the seisachtheia by which he canceled all pledges where a man's freedom had been given as guarantee, freed all debtors from bondage, made it illegal to enslave debtors, and put a limit on the amount of land an individual could own.
Plutarch records Solon's own words about his actions:
"The mortgage-stones that covered her, by me Removed, -- the land that was a slave is free;
that some who had been seized for their debts he had brought back from other countries, where
-- so far their lot to roam, They had forgot the language of their home;
and some he had set at liberty, --
Who here in shameful servitude were held."