Sunday, May 26, 2019
Escaping The Black Hole Of Debt
written 19 May 2019
published 26 May 2019
When a debt is created, it is treated as a real asset until it is paid off, without regard to fiscal integrity underlying its creation. A loan to pay for an expensive vacation is treated the same as a loan funding a hostile corporate buyout or loan to build a productive business. Once in the economic pool, debt is immortal and homogeneous.
Money is a place holder for value, with no actual use of its own. When money was tied to actual assets, like a bushel of wheat or an ounce of gold, the expansion of money was somewhat limited, and reflected value in the economy. For the last fifty years, money has been created out of thin air, decoupled from the tangible world. The value of this fiat money is defined by the creating agency. As long as everyone has confidence in the creating agency, the economy functions and the debt endures. The crash of 2008 showed there are limits to this confidence game.
The American government has a national debt greater than $20 trillion, about equal to the annual gross domestic product of the US economy. There is an additional $120 trillion in unfunded liability, in the form of Social Security, Medicare, and government pensions, which are contractual future obligations currently without the funds to support them. The problem is even greater when the costs of deferred infrastructure maintenance and environmental restoration are added.
The tradition economic solution is to grow the economy. Even if it was possible on this finite planet, our economic model funds expansion by increasing debt, which grows faster than the actual economy. Every economic sector is struggling to service their current debt load. Pensions are underfunded, student debt debilitates an entire generation, retail sales are down, store closings are increasing, wages have been stagnant for fifty years, and income inequity is increasing, so supporting more debt isn't possible. The classic alternatives at this point are hyperinflation, or total economic collapse.
Beginning 4000 years ago, debts have been forgiven as regular debt jubilees or in times of financial crisis. Today no banker wants to admit the debt they carry as asset is really junk, so writing off debt is avoided. At the peak of the 2008 crash, when it was obvious that banks had worthless balance sheets, they still resisted Federal bailouts which required them to write off their bad loans. In Europe, the banks dealing with Greece extracted ruinous pension cuts and privatization of public assets before they would consider writing off uncollectable debts. The fiction of debt value is hard to transcend, because it brings into question the judgement of the person or institution that loaned the money in the first place.
Modern Monetary Theory (MMT) is an emerging economic model which suggests that fiat money can be used to advantage. During the 2008 crash, the central banks created $20 trillion in "funny money" to buy up bad debts from the banking industry. This eventually ended the panic and avoided a collapse of the western economies. MMT suggests using the same kind of "funny money" to eliminate debts for the larger population.
Specifically, the government could issue vouchers to provide debt relief for mortgages, student loans, and credit cards, as well as funding a Universal Basic Income (UBI). For instance, the Treasury could send a voucher to each person with a mortgage, to be mailed to their mortgage lender, cutting the principle balance by 50%, tax free. The same kind of voucher could be sent to everyone with a student loan or a credit card, cutting their balance by 50%, all paid by the Treasury. This same source would fund a UBI for everyone with a Social Security number, dealing with the twin employment challenges of outsourcing and automation.
This might seem like foolish inflationary pie in the sky, but the current model is headed to hyperinflation or collapse, with increasing economic inequity, creating endless war and environmental devastation, without little benefit to the larger population. The MMT investment model would do for the 90% what the bank bailout did for the corporations and the 1%, giving a real boost to the real economy, unlike the Trump tax cut.