The zombie economy and digital arm-breakers
pluralistic.net
pluralistic.net
Quite besides the abstract economic concerns which can be ameliorated by moving around numbers in ledgers, the true cost of a zombie economy is the tragedy of billions of human lives wasted away because of the (engineered) difficulty in integrating with society in a smooth manner. Makes one wonder whether there are good reasons why several cultures/religions forbade usury.
It appears he may be advocating just erasing debt - meaning if I owe the bank $300k on my mortgage, I don't owe it any more and the bank has a $300k hole in its balance sheet.
That would be absolutely insane, and would destroy our modern system of finance as we know it. That means interest rates will go absolutely through the roof, because lenders would bear the risk of complete default if the government randomly forgives loans again (are we even going to allow loans any more in that scenario?). It also means that everyone who is in debt will receive a massive windfall, while those who have lived frugally will be punished. Most banks would instantly be out of business.
So I guess he means that the government will "forgive" debt by repaying it for you? That's like half a step better, but would result in disastrous inflation. Even if we're just talking about consumer debt (we're not, since he also mentions bonds), that amount is around $14T, not far below the total money supply (~19T). So either the government is going to more or less double the money supply by printing currency, or it's going to add nearly 50% to the national debt.
If it doubles the money supply, then everyone will be hit with massive inflation, meaning the money you have right now will be worth about half as much.
If it ratchets up the national debt, then we'll all be repaying it eventually in the form of taxes and lost government services.
All because he doesn't want people to have to pay for for the Tesla or Samsung smartphone that they bought (his examples)?
Because given extremely high inequality, 100% of the total money supply might very well represent 1000 times the money supply which is actually in the hands of average citizens. Most of the current fiat is concentrated in very few hands and it's not being spent on consumables - That's the only reason why we don't already have massive hyperinflation in consumables.
Boohoo. We should stop thinking of finance as an end in and of itself, and more for the purposes of achieving other goals, whether individual or social. In that case, it's both acceptable, and probably in some cases desirable, to lose money in the venture.
If the private banking industry is vapourized, the state can step in, and gains an incredible new leverage to achieve policy goals.
It would be the turbocharged version of things like green pledges. Rather than saying "we convinced some big banks to not back new coal projects, so you'll have to pay a few percent more interest/deal with second tier lenders to build the plant" it's simply "there's only one lender, and they said no to coal effective 2021, so you'd better start a bake sale to raise $400 million." or "The state will give you a 1% rate loan to build your new job factory in a downtrodden rust-belt city, or a 15% loan to build it in San Jose."
Even inflation, I think we maybe need to think about it less as an abstract badness indicator. As they say, "money can be exchanged for goods and services", so let's figure out how to ensure access to goods and services even in economic turmoil, rather than worry about the numbers on the notes.
On the short term, if you're not Zimbabwe or Venezuela, inflation is noise. If I'm saving for a few months to buy a RTX3080 or the down payment on a car, even if it's 20% per year inflation, that's not going to be a huge damper on my plans, so long as wages trend with it. There's plenty of things we buy with that degree of price volatilty already. Subsidized staple goods can help further damp the social consequences.
On the medium term, inflation is basically a hedge strategy for everyone who took out non-jubileed debt. In some ways, this could kickstart some consumer demand to exploit it. Every year, your fixed-rate mortgage or car payment gets cheaper, again, so long as we index wages. I suspect we already see this-- how many people don't move because they don't want to leave their 15-year-old $120k mortgage on a house now worth $400k?
On the longest terms, we have things like home deposits, college funds, and retirement plans. A state intervention could provide risk-mitigation strategies-- for example, broad deployment of inflation-indexed investment programs for consumers. Something like the old "Series I" savings bonds, but with bigger subsidies and better marketing. Or development of "guaranteed benefit" prepaid programs. Sign up now, pay for 15 years, and you're guaranteed a condo in Boca Raton when you turn 60/tuition at Harvard for your kid when he turns 18, no matter what they would cost on the open market at that time.
#1 we are doing gargantuan "stimulus" transfers of money. This money will serve 1 thing only: The US will become a net exporter (and to some degree, it always was) of inflation. All the world economies that can get away doing so will do so. Since all debt that matters is denominated in USD, then that debt is effectively being repaid thru the loss of purchasing power of every single dollar holder.
At some point it may be true that debtholders may experience a debt "shock". This brings me to repayment #2
IF any issuer of debt, like a bank, gets in trouble, like in 2008 or March 2020, they are bailed out. Sometimes directly (TARP) sometimes indirectly (CARES).
So due to the bailout, a huge amount of debt is transferred to the federal balance sheet. Its true that did not liquidate the private debt - govt debt still needs to be repaid. But that can happen via #1, or via taxation. So the circle is closed and the debt is repaid. Note that taxation can involve individuals not yet born, too.
So while I agree that this is zombie (bad) debt, i don't agree that it won't be repaid. Its just that the time horizon for repayment is so long, and hard to observe, that it may lead to the conclusion that the debt is not being repaid.
The only real purposes of taxation are to force people to keep using the fiat currency as a means of payment (maintain currency monopoly) and also to maintain scarcity of the currency as this helps to keep inflation under control (at least for consumables). But it doesn't actually prevent inflation in absolute terms because the government usually ends up spending more than it collects in taxes anyway (take loans from the Fed by creating new bonds); they mostly care about having inflation lower or proportional to other countries, not about preventing inflation.
The only way to pay off the debt would be to change the mechanism via which money enters the economy so that it is no longer tied to a debt as it does so. But then the question would be who should receive all that new debt-free money? Probably it will be big corrupt megacorporations via insanely large government contracts.
Yes, all money is created in the form of debt, which implies that it has to be paid back with interest. There is no way for everyone to pay off all outstanding debt.
However, you are forgetting that not all debt is paid off. Some of it defaults, which destroys money.
But it's not the money which is being destroyed by defaults, it's only the debt component which is wiped clean. The credit component of the loan was already spent into the economy by the now-insolvent borrower and cannot be recovered by creditors so it's still circulating and adding to inflation.
It really sucks. What a horrible society we live in.
The current system monetizes bankruptcies. Bankruptcy is the only mechanism which allows debts to be wiped clean without simultaneously adding more debts.
This is untrue. There is also repayment, which is the way the system is designed to work. There is also voluntary/negotiated forgiveness by lenders.
More than that, how is bankruptcy a bad thing in this context? Isn't bankruptcy exactly what should happen when repayment becomes impossible?
Our system of bankruptcy organizes the process of default, and was actually the solution to the older problem of things like debtor's prisons.
This is incorrect. Repayment helps to clear the debt only from the perspective of the individual who has the debt but this is only possible because someone from the next generation took on even more debt to purchase the debtor's assets (took out a loan to buy the house, for example). So the aggregate debt never goes away, it's just transferred to the next generation and it keeps growing along with asset prices.
Asset holders see their capital increase continuously while non-asset holders keep getting squeezed until they are basically reduced to slavery.
Bankruptcy, however, clears the aggregate debt because the central banks end up taking the loss.
Changing who's holding the hot potato is not the same as repayment of debt. In both of your examples, it's the government who's assuming the debt from corporate debtholders who have (presumably) milked it for return already in the way the article describes. But, as you point out:
> ...govt debt still needs to be repaid. But that can happen via #1 ["The US will become a net exporter (and to some degree, it always was) of inflation."], or via taxation.
Taxation is a no-go - even if the political will could be mustered in the US to increase taxes, who are you as the government going to tax? The companies who were so indebted you had to bail them out, or the private individuals who've already been put through the wringer by the companies?
So we have to export the debt in some way - but it stays debt, and it has to be paid.
> Its just that the time horizon for repayment is so long, and hard to observe, that it may lead to the conclusion that the debt is not being repaid.
I suspect that if it takes long enough then it doesn't really matter whether the debt is "repaid" in some technical sense because the negative outcomes associated with default will have already taken place.
This is incorrect, for two reasons.
Firstly, because there are two ways that new money is created (which is what causes inflation).
Those ways are fractional reserve banks issuing loans, and the printing presses at the Fed.
In normal situations, the printing presses aren't running, and most new money is created through the fractional reserve banking system. In a recession, like the one we are in, fractional reserve banks stop lending, and thereby creating money - and the printing presses at the Fed fulfil that function, instead.
We didn't go from 'no money being printed' to 'a lot of money being printed'. We went from 'a lot of money being printed by banks' to 'a lot of money being printed by the Fed.' The difference between those two things is not very large.
Secondly, stimulus money isn't magical printed money that was just parachuted onto the economy, with no strings attached. It's money that the government borrowed - and will have to be paid back by taxpayers - like any other loan.
Actually, most major economies borrow in either their own currency or in Euros (if they are in Europe).
It's 'as a service' with indefinite use (at the manufacturer's discretion) after a fixed amount of payment. They just have to monetize you differently after you've paid your share.
Forgiving debt would not only have a hyperinflationary effect on the currency since everyone will suddenly have massive surplus income but it's down right unethical. What about people who did not take on any debt? Will the government give them free money? How can we make it fair to people don't have any debt. Also, not everyone who has debt has the same amount of debt... Forgiving debts is akin to the banks giving free money only to people who have debts. It's ridiculous, why not give every person in the US 1 million dollars each? This should allow the vast majority of people to pay off their debts. That is still unfair though because massive hyperinflation won't give people the time to even spend their money so they would still be severely disadvantaged relative to debt holders who own assets.
But anyway, debt forgiveness would completely destroy the fiat monetary system. Nobody will accept Dollars or Euros or any currency backed by a reserve bank which forgives debt because the amount of currency that would flood the system is unfathomable.
The price of cryptocurrencies would double every hour, that kind of crazy.
I can highly recommend David Graeber's book 'Debt: the first five thousand years' on this topic. He proposes modern 'Debt Jubilees' similar to these: https://en.wikipedia.org/wiki/Jubilee_(biblical)
There's nothing to say that such a jubilee couldn't have means-testing or other 'fair' aspects incorporated into the design, it doesn't have to be blanket forgiveness. In Graeber's examples of ancient jubilees 'business' debts were, iirc, usually extempt.
I agree it would be very disruptive to the existing order.
Does this mean I should go to the bank right now and take out 1 million in loans to buy crypto then wait for my debt to disappear? Why would the bank approve such loan?
Some people couldn't even afford to get a loan. Forgiving debts will make house prices even more out of reach. These people would be absolutely evicerated since everyone else will basically get free money. These honest, cautious people will be the new lower class of society. It's criminal. Think of all the lawsuits... The court system won't even be able to handle it. There will be complete break down of all laws. I doubt private property laws will survive. You can be sure mafias of disgruntled individuals will form and take all your assets anyway.
Maybe if the debt jubilee comes with complete forfeiture of all assets, then it makes a little bit more sense. But this will still be terrible for inequality at the very top.
If we want to change the rules, the fairest thing that can be done is seize everyone's assets which are above a certain threshold net worth and redistribute them evenly to all citizens. Then we can talk about cancelling the debt. Otherwise I think we should just let things run their course.
If you don't like your situation, why don't you pay a visit to the billionaires and politicians who put you in that position? Sort it out with them. Don't try to steal from decent people via monetary manipulation who are also victims.
If you have a business idea that requires money, then you certainly should do so. The bank would approve such a loan because it might work. Of course, you'll have to convince them. In practice, they'll take proxies for conviction: you'll have to prove you believe (and that you will follow through) by putting up your own money next to theirs.
> Some people couldn't even afford to get a loan.
Well the deeper reason is that "the rich" are the ones responsible for most of those assets being worth something in the first place. So they get something back from the people they provide it for. They don't immediately need something, so they're ok to take the promise of something back in the future. Add some basic economics and you have debt.
So I wouldn't worry about assets being worth much or not: they won't be, as organizations making these assets will voluntarily stop, and the value of those assets will drop like a stone. In crude terms: why would Apple maintain an app store for society if there's a debt jubilee ? They won't. Because they won't get paid for it, and motivation will have to come from elsewhere. And a gun, the historical answer, only goes so far.
The big problem is that we are getting more and more into is the situation that a significant portion of society is worthless to society. Solve that, and debt problem will go away. Don't solve it and no economic system, no matter how simple or complex, is going to save you (assuming it keeps growing it has to break). Debt is fundamentally a way to make private enterprise pay for nonproductive people in a growing economy. Great. Take that away, and someone else will have to work (not pay, obviously) for them.
Current tax rates implies that we're close to the situation that everyone with a job will have to provide for between 3 and 4 others (US closer to 3, EU closer to 4, Asia, surprisingly, even higher), without receiving anything in return. That's what debt, indirectly, does. Fancy switching back to the direct approach?