Posts Tagged ‘Debt’

The biggest human-created economic problem

February 10, 2016

Debt-and-GDP-II-1-15-2016-510x358

debt-chartII-2-8-2016-510x396

These two charts, which I found on a blog called PeakProsperity, show the world’s fundamental human-created economic problem.

The problem is the fact that debt is increasing faster than economic output.

This is not just true in the United States.  It is true of all the world’s advanced industrial countries.

The results of increasing debt are:

  • An upward redistribution of income from wealthy lenders to non-wealthy borrowers.
  • A diversion of capital away from investment in production to produce new wealth.
  • Another recession, worse than the last, because, as Michael Hudson says, debt that can’t be repaid, won’t be.

The United States and other industrial countries have treated the big banks and investment houses as too big to fail and their executives as too important to jail.

But at some point, either in this economic cycle or the next or the one after that, the bank failures will be too big to bail.

I like to think that the debt problem is caused by malfeasance of bankers and the wealthy.   The reason I like to think so is that this is a solvable problem.

The worse possibility is that the possibilities for economic growth have been exhausted, and that there is nothing left to invest in that is as profitable credit card debt, student debt and other forms of debt.

China’s debt threatens its economic miracle

January 11, 2016

asian-debt-has-rocketed-since-the-crisis-while-the-us-has-paid-down-its-debts-as-a-percentage-of-gdp

I read a couple of articles the other day about how China’s amazing economic growth may hit a wall because of overhanging debt.

Countries get in trouble when the overall debt—governmental, individual, business and financial—increases at a faster rate that the output of goods and services (GDP).

What this means in the short run is a transfer of wealth from taxpayers and workers to holders of financial assets.  What this means if it goes on long enough is a financial crisis.

As economic Michael Hudson wrote: Debt that can’t be paid, won’t be.

The point of about debt is that no matter how rich you are, you can pile up more debt that you can pay.  And no matter how large and strong a nation’s economy, the economy can pile up more debt than can be paid.

The United States in the 1920s is an example.  The USA had the world’s strongest manufacturing economy.  It had a large domestic market and strong exports.  Yet it took more than 10 years to fully recover from the financial crash of 1929.

China has many more governmental powers to head off a crash than the U.S. government did back then.  The question is how they will be used.  Propping up failed companies and financial institutions does not solve the underlying problem.

The world as a whole is in the same situation, so it is not as if global economic growth will solve China’s debt problem—or America’s.

LINKS

China’s $28 Trillion Problem: the dark side of China’s debt by Mike Bird and Jim Edwards for Business Insider.

How China Accumulated $28 Trillion in Debt in Such a Short Time by Jim Edwards for Business Insider.

The $26 trillion dollar debt problem that is crushing competitiveness in China by Nick Edwards for the South China Morning Post.

Is the Chinese Economy Really in Trouble? by Eamonn Fingleton for The Unz Review.  The case for not selling China short.

Heed the fears of the financial markets by Lawrence Summers for the Financial Times.

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An ‘economic hit man’ tells his story

September 22, 2015

I read CONFESSIONS OF AN ECONOMIC HIT MAN by John Perkins on the recommendation of a fellow blogger known as Holden.

Perkins wrote this memoir in 2004 about his work as an international economics consultant in the 1970s.  He said his job was to intentionally make bogus projections of economic growth for Third World countries such as Indonesia, Ecuador and Iran.

The idea was to encourage developing countries to borrow heavily to finance economic development projects using U.S.-based contractors.  The countries’ leaders were promised that these projects would bring about rapid economic growth, and make their countries prosperous and modern.

14273_johnperkins_nWhen the countries became unable to finance their debt, this created opportunities for American and international companies to buy up their national assets at bargain prices.

And even when the economic development plans worked, they only benefited tiny elites while leaving the majority of the people just as badly off or even worse off.

To stay in power, the elite accepted U.S. military aid in return for supporting U.S. foreign policy or hosting U.S. military bases or both.

Perkins said he was in on U.S. negotiations with Saudi Arabia following the 1973 oil embargo, which led to the U.S.-Saudi alliance which endures to this day.

The Saudi royal family agreed to manipulate oil production in order to protect the U.S. economy from big fluctuations in world oil prices.  The Saudis further agreed to invest their revenues in U.S. Treasury bonds

In return, the U.S. Treasury Department invested the income from those bonds in infrastructure projects, all carried out by U.S. contractors, to give Saudi Arabia the appearance of being a modern country.  The U.S. Defense Department provided a military shield for this weak, thinly-populated country against enemies such as Iraq and Iran.

The problem, as I see it, is that it has made the United States hostage to Saudi ambitions to dominate the Middle East.

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Mark Blyth on ending the creditor’s paradise

March 5, 2015

An American economist, Mark Blyth, author of Austerity: the History of a Dangerous Idea, gave a talk to members of the German Social Democratic Party on why so-called austerity is a bad idea.

I write “so-called” because the dictionary meaning of austerity is doing without things you don’t really need.  Food rationing in the UK and USA during World War Two is an example of austerity.  It doesn’t mean prioritizing the requirements of holders of financial assets over the needs of everybody else.

Here’s why Blyth had to say.

Back in the 1970s, a period that now seems quite benign, corporate profits were very low, labor’s share of income was very high, and inflation was rising.  We were told that this was unsustainable, and new institutions and policies were constructed to make sure that this particular mix of outcomes would never happen again.

austerity-depressionIn this regard we were singularly successful.  Today, corporate profits have never been higher, labor’s share of national income has almost never been lower, and inflation has given way to deflation.  So are we happier for this change?

What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.

In such a world, why would you, the average worker, ever get a pay rise?

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The new normal: Links & comments 7/29/14

July 29, 2014

Soak the Rich: An exchange on capital, debt and the future by David Graeber and Thomas Piketty, translated and reprinted by The Baffler.

David Graeber is an anthropologist and radical anarchist known for his book, Debt: the First 5,000 Years, which looks at the origins of money, taxes and debt.   Thomas Piketty is a politically moderate economist known for his book, Capital in the 21st Century, which looks at the persistence of gross inequality during the past few centuries.

I admire them for their opposite virtues—Graeber for his bold and original speculation, Piketty for his research and his refusal to assert anything that can’t be backed up by data.

Graeber believes the capitalist system is doomed.  Once it goes away, people will have a chance to create a new system without fear of bosses or police, and Graber does not see any point in trying to describe the specifics of what that new system will be.

Piketty says history indicates that capitalism has proved amazingly resilient in the face of change, and that there is no reason to think this time is different.  Furthermore, he said, any society has a need for capital, the means to invest accumulated wealth into the means of creating new wealth.  (This is a different definition of capital from the one in his book).  His attitude toward capitalism is: Mend it, don’t end it.

One thing they do agree on is the centuries-old tendency for wealth to be concentrated in a few hands, and the danger this poses to a democratic society.

On the Causes of Investment Decline in the U.S. Economy by Dr. Jack Rasmus, the Green Party’s shadow Federal Reserve chair.  Hat tip to Bill Harvey.

I have long thought that increasing the earning power of average Americans would make many things fall into place.  If people had more money to buy stuff, merchants would sell more stuff and manufacturers would make more stuff, and this would be to everybody’s benefit.

Jack Rasmus suggests that maybe this isn’t so.  Maybe getting people into debt and putting the squeeze on them is more profitable that creating useful goods and services.  If that’s so, we can’t look to private enterprise to recreate a high-wage, full-employment economy.

His solution is a massive public works program, which I agree is needed, but doesn’t address the problem he describes.

Defending Trade Unions While the Justices Are Away by David Coates.  Hat tip to Labor News in Rochester, NY.

Labor unions helped maintain American prosperity in the mid-20th century by fighting for good wages and job security.  But the union movement is handicapped by laws and court decisions that increasingly restrict unions while freeing corporations of responsibility.

In Harris v. Quinn, the Supreme Court ruled that home health-care workers in Illinois could not be required to pay dues the Service Employees International Union, but they were still entitled the benefits of the SEIU contract and to SEIU representation.  It is as if the Supreme Court ruled that I could not be required to pay my Rochester Gas and Electric bill, but RG&E is still obligated to supply me with gas and electricity.

Chris Dodd Warns of Coalition Between Populist Democrats and Republicans by Zach Carter for the Huffington Post.

Ex-Senator Chris Dodd, a Connecticut Democrat, gave a speech warning against trying to strengthen the Dodd-Frank financial reform bill.   He said in a speech to the Bipartisan Policy Center that opening up the bill to amendments would open a “Pandora’s box” that would be dangerous the financial services industry.

He said warned against right-wing Republicans and left-wing Democrats teaming up against Wall Street.   He probably was thinking of a bill co-sponsored by Senator Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) to break up the “too big to fail” banks, an unacceptable type of bipartisanship.  Dodd said breaking up big banks is unnecessary.

As Court Fees Rise, The Poor Are Paying the Price by Joseph Shapiro for National Public Radio.

The criminalization of poverty by Radley Balko for the Washington Post.

A majority of U.S. states have recreated the equivalent of debtors’ prisons.  They are trying to make their criminal justice system self-financing by charging fees for public defenders, the cost of a jury trial, room and board for jail and prison time, and parole and probation costs.   Poor people who can’t pay these fees go to jail, even though this has been ruled unconstitutional.

 

A David Graeber reader: links to articles

September 9, 2013

debt_david_graeber

David Graeber’s Debt: the First 5,000 Years is a brilliant work that reinterprets history in a new way and shows how payment of interest-bearing debt has come to be regarded as the obligation that overrides all moral obligations.

Here is a set of links to articles that explain what Graeber is all about.  The first is an article in the New Yorker about who Graeber is.

David Graeber and the Anarchist Revival by Kalefa Sanneh for the New Yorker.

Next some links to Graeber explaining his ideas in his own words.

What Is Debt?: an Interview with Economic Anthropologist David Graeber

Debt: the First Five Thousand Years by David Graeber.  This is his outline of the basic idea of the book for the Anarchist Library.

And some links to critiques and reviews.

The Debt We Shouldn’t Pay by Robert Kuttner for the New York Review of Books.

David Graeber’s Debt: My First 5,000 Words by Aaron Bady for The New Inquirer.

The Very Last David Graeber Post by Brad DeLong.  A scathing critique of the concluding chapter of Debt by a professor of economics.

Debt: the First 500 Pages by Mike Beggs for Jacobin magazine.  Why he found Graeber’s main arguments “wholly unconvincing.”

In Defense of David Graeber’s Debt by J.W. Mason for Jacobin magazine.

And the full text of the book.

Full text of ‘Debt: The First 5,000 Years’  [added 4/29/2015]

David Graeber on debt as a false religion

September 9, 2013

If debt through compound interest is an obligation with no upper limit, and if it is in law an obligation which transcends all other obligation, then the idea of debt is like a religion—the sacrifice of all other values to Mammon.  Or so it has long seemed to me.

debt230People today world are still sold into slavery to pay their debts.  Nations are required by international organizations to sacrifice the welfare of their people in order to pay debts to international banks, even debts incurred by previous rulers to acquire the means to keep their people down.  Overhanging debt holds back our economy, yet a write-down of debt seems unthinkable.

David Graeber is an American who teaches anthropology at Goldsmiths, University of London; he also is an anarchist who was one of the originators of the Occupy Wall Street protest.   In his book, Debt: the First 5,000 Years, he attempted to explain the origins of the moral, religious and social meaning of debt.

Debt: the First 5,000 Years is profound, interesting, difficult and, at times, sometimes questionable.  Graeber clarified and expanded my own insight about the nature of debt.  He made me see world history in a new light.  I wonder about some of his assertions, but do not have the knowledge to refute.  I would willingly take a semester course with this as a textbook.

You can click on the title above to get Graeber’s outline of his idea for the book.   In what follows I’ll try to explain what I got out of it.

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What do we owe the world?

September 9, 2013

The following passages are from DEBT: the First 5,000 Years by David Graeber.  

We owe our existence above all:

  • To the universe, cosmic forces, as we would put it now, to Nature.  The ground of our existence.  To be repaid through ritual: ritual becoming an act of respect and recognition to all that beside we are small.
  • To those who have created the knowledge and cultural accomplishments that we value most; that give our existence its form, its meaning, but also its shape.  Here we would include not only the philosophers and scientists who created our intellectual tradition but everyone from William Shakespeare to that long-since-forgotten woman, somewhere in the Middle East, who created leavened bread.  We repay them by becoming learned ourselves and contributing to human knowledge and human culture.
  • To our parents, and their parents—our ancestors.  We repay them by becoming ancestors.
  • To humanity as a whole.  We repay them by generosity to strangers, by maintaining that basic communistic ground of sociality that makes human relations, and hence human life, possible.

… … These are nothing like commercial debts.  After all, one might repay one’s parents by having children, but one is not generally thought to have repaid one’s creditors if one lends the cash to someone else.

Myself, I wonder:  Couldn’t that really be the point?  Perhaps what the authors of the Brahamanas were really demonstrating was that, in the final analysis, our relation with the cosmos is ultimately nothing like a commercial transaction, nor could it be.  That is because commercial transactions imply both equality and separation.  These examples are all about overcoming separation: you are free from your debt to your ancestors when you become an ancestor; you are free from your debt to the sages when you become a sage; you are free from your debt to humanity when you act with humanity.

All the more so if one is speaking of the universe.  If you cannot bargain with the gods because the gods already have everything, then you certainly cannot bargain with the universe because the universe already is everything—and that everything necessarily includes yourself. 

One could interpret this list as a subtle way of saying that the only way of “freeing oneself” from the debt was not literally repaying debts, but rather showing that these debts do not exist because one is not in fact separate to begin with, and hence the very notion of canceling the debt, and achieving a separate, autonomous existence, was ridiculous from the start.

§§§

Solitary pleasures will always exist, but for most human beings, the most pleasurable activities always involve sharing something: music, food, liquor, drugs, gossip, drama, beds.  There is a certain communism of the senses at the root of most things we consider fun.

§§§

… the Church had been … uncompromising in its attitude toward usury.  It was not just a philosophical question; it was a matter of moral rivalry.  

Money always has the potential to become a moral imperative unto itself.  Allow it to expand, and it can quickly become a morality so imperative that all others seem frivolous in comparison.  For the debtor, the world is reduced to a collection of potential dangers, potential tools, and potential merchandise.  Even human relations become a matter of cost-benefit calculation.

Exactly so!

Medicine for an economy sick with debt

July 9, 2012

Ratio of total U.S. debt to U.S. economic output

Our great recession is due to the bursting of a debt bubble, and not just the normal ups and downs of the economic cycle.  We had an economy in which many and maybe most Americans were unable increase their earning power, but maintained their material standard of living by going deeper into debt.  As long as the real estate bubble and the stock market bubble lasted, they were able to keep on borrowing.  Now that the bubble has burst, and it is time to pay up.

The old Keynesian medicine doesn’t seem to work.  As long as the government pumps money into the economy, there is some recovery, but noy enough to keep going when the government stimulus ends.  Paul Krugman proposes a stronger stimulus.  If deficit spending can spark sustained economic growth, he says, that growth will make it possible to pay down the debt in the long run.  Very true, but what if it doesn’t?  What if deficit spending just adds to the deficit and nothing more?

“Austerity” doesn’t work either.  Cutting necessary government services — schools, road maintenance, public health — just creates a different kind of deficit, if you look at things that way.   This “saving” is going to have to be made up by much more spending in the future.

Meanwhile we’re stuck.  As Sarah Jaffe of AlterNet put —

The student loan debt alone is going to be a trillion dollars sometime in the next couple of months. That’s a trillion dollars that we’re all paying in interest to Sallie Mae, to Citibank—mine was with Citibank for several years—to Wells Fargo, to Discover Card Services, which bought a bunch of student loan debt recently, and to the federal government. But we’re not paying that into our local businesses. We’re not paying this into the corner store. We’re not paying this to the farmer’s market. We’re not paying this to anything. We’re not buying a home because we have student loans or we’re not going back to school because we have a home loan.

Debt has been a substitute for wage increases in this country for about the last thirty years, give or take.  Real wages haven’t gone up in a really long time.  We’re mortgaging our future on credit cards and home equity.  And when the housing bubble popped, and the credit markets froze, we suddenly realized exactly how little we had that wasn’t promised to somebody else already.  It becomes a drain on the future. 

via n + 1: Debt.

Inflation is one historic method by which nations have made their debts go away.  We don’t want to go that route.

The other historic way to address the debt problem is to “restructure” the debt—have people pay what they can afford, so much on the dollar, and chalk it up to experience.  The creditors learn to be more careful in the future when they lend money.  The debtors find that it is much more difficult to borrow money.  Both are able to move on to new things.

During the 2008 election campaign, there was talk of something called “cramdown”—giving federal bankruptcy judges the authority to restructure mortgages in hardship or legally cloudy cases.  Various proposals have been advanced for giving relief on student debt.  Internationally, government debt crises almost always result in a restructuring of debt, but usually after a period of “austerity” in which the public is subjected to higher prices, lower wages, higher taxes and denial of essential government services.

I think that when you borrow money, you have a moral obligation to make a good-faith effort to pay back the money.  But when a borrower is honestly unable to repay a loan, it means both the borrower and the lender have acted unwisely (or are the victims of bad luck), and they both should suffer.  The lender suffers by taking a loss; the borrower suffers by having to pay up to the limit of what they can and by not being able to borrow in the future.  But you cut short the agony.  You make it possible to start fresh.

Click on n + 1: Debt for a panel discussion of debt by David Graeber, author of Debt: the First 5,000 Years; Mike Konczal of the Roosevelt Institute; Brian Kaltenbrenner of Occupy Student Debt; and Sarah Jaffe of AlterNet.

Click on Okay, Folks, Let’s Put Aside Politics and Look at the Facts for useful charts and information from Henry Blodget of Business Insider.   Blodget is a Wall Street guy who thinks the answer to the federal budget deficit is a combination of tax increases and cuts in Social Security, Medicare and Medicaid.  My problem with this is that Social Security (contrary to the propaganda) is solvent and Medicare delivers health insurance more efficiently and at lower cost than for-profit health insurance systems.  It is true that Medicaid spending is a problem, but I think a solution needs to be something other than denying essential medical care to poor people.  That said, Blodget provides a great deal of good information.

Click on Hubbert’s Third Prophecy for more useful charts and information from ClubOrlov.  The post concludes with an argument against banking as such, which I don’t understand and with which I probably would disagree if I did understand it.  That said, there is a lot of good information, as well as food for thought about exponentially increasing debt in a world that cannot sustain exponentially increasing economic output.

Click on Parsing the Data and Ideology of We Are the 99% for an analysis by Mike Konczal of the demands of the people on the “We Are the 99 Percent” Tumblr page.  His conclusion was that their basic demands were debt relief and the means of basic economic survival.

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May 15, 2012

Hat tip to Kmareka.com.

Debtors’ prisons in 21st century USA

April 30, 2012

When I was a boy in school, I was astonished to learn that there was such a thing as imprisonment for debt in 19th century Great Britain and the United States.  It didn’t make sense.  If somebody owes you money, how can they pay it back if they’re in jail.

Imprisonment for debt was abolished in the United States in the 1830s, but now it is making a comeback.  Here are some examples:

  • Breast cancer survivor Lisa Lindsay, a teaching associate in Herrin in southern Illinois, was sent a $280 medical bill in error and was told she didn’t have to pay it.  But the bill was turned over to a collection agency which got a court order, resulting in state troopers taking her from her home to jail in handcuffs.  She ended in paying $600 in collection and court costs just to settle the case.
  • Disabled roofer Jack Hinton, also an Illinois resident, was jailed for failing to make a $300 payment on an old debt to a lumberyard which he was under a court order to pay.  The judge said he was in defiance of the court court because he once had $1,000 in cash, although Hinton said he used the money to pay other bills.  Hinton’s wife got him out of jail by borrowing $300.
  • Jeffrey Stearns, owner of a concrete company in Hancock County, Ill., was arrested at his home for not paying $4,088 on a loan he took out to buy a pickup truck.  He was handcuffed in the presence of his four children and taken to jail, where he was strip searched and sprayed for lice.  He didn’t deny owing the money, but said he didn’t know he was being sued.

Iif you borrow money, you have a moral obligation to repay it, but I don’t believe this moral obligation overrides everything else in life, for example, the obligation to keep your children fed, clothed and sheltered.  If someone willfully refuses to pay their legitimate debts, creditors are entitled to garnish their wages or seize and sell their assets.  If someone owes more than they possibly can pay, then they can go through bankruptcy and pay what they can.  There is no need for imprisonment.

Technically none of these people were arrested for debt as such.  They were arrested for paying to obey court orders.  It amounts to the same thing.  In some states, courts and governments actively add to debtors’ burdens.  Alabama charges a 30 percent collection fee. Florida allows private collection agencies to add a 40 percent surcharge.  In addition, many Florida counties have private collection courts, which have the authority to send debtors to prison but there is no right to a public defender.

Another abuse is charging for access to the legal system.  Alex Tabarrok, who posts on the Marginal Revolution web log, wrote that some states charge fees for public defender services, pre-trial jail expenses and court costs even when the person is acquitted of the crime.   People can go to jail for not paying up, or they can lose their driver’s licenses—which is almost as bad as being in jail in terms of employment.

Click on Jailed for $280 and Welcome to Debtors’ Prison by CBS News and Debtors’ Prison for Failure to Pay for Your Own Trial by Alex Tabarrok on the Marginal Revolution web log for the sources of my facts and additional details.

Secrets of the U.S. economy

July 25, 2011

Click to enlarge

Why no youth revolt?

May 2, 2011

A friend of mine noted that 20th century political revolutions of the left and right were led by young unemployed college graduates, as were the recent protests in Egypt.  Since unemployment among recent U.S. college graduates is the highest on record, he wonders if and when there will be a similar explosion in the United States.

One reason for the lack of an American youth revolt, in my opinion, is that so many recent graduates are too busy paying off their college loans.  They spend too much time looking for jobs or working multiple jobs to have time for political activity.  And they are aware that, in today’s labor market, getting a reputation as a troublemaker or dissident will make you unemployable.

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Is higher education turning into a ripoff?

April 28, 2011

Higher education is increasingly becoming a ripoff, writes Malcolm Harris on the web log of n + 1 literary magazine.  College tuition has increased sevenfold (adjusted for inflation) since 1978, but the average quality of education has gone in the other direction.  The salaries of administrators continually increase; those who do the teaching are being asked to do more for less pay and job security.

Students are continually being told that they have no economic future if they don’t go to college, so they take on crushing loads of debt.  American college graduates owe more than $800 billion in college loans.  American college loan debt now exceeds American credit card debt, while unemployment among recent college graduates is the highest on record.

If tuition has increased astronomically and the portion of money spent on instruction and student services has fallen, if the (at very least comparative) market value of a degree has dipped and most students can no longer afford to enjoy college as a period of intellectual adventure, then at least one more thing is clear: higher education, for-profit or not, has increasingly become a scam.

via n+1.

I’ve written about this previously, but Harris told me things I hadn’t known.  Student loan debt is securitized and repackaged into something called Student Loan Asset-Backed Securities, aka SLABS, just like the subprime mortgage loans.  So you have the potential for the same kind of crash.

Another thing I hadn’t known is that, under the  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, no education loan, even money borrowed on a credit card, cannot be discharged through bankruptcy.  Before 2005, this only applied to federal government loans.

That means a college graduate with an outstanding college loan is in a form of indentured servitude.  If the graduate defaults, he or she is in the position of a debtor’s prison inmate on a work release program.

Unless something changes, college loans are headed for the same kind of financial crash as mortgage loans.  And colleges and universities seem to be following the failed pattern of U.S. manufacturing industry, and setting themselves up for the same kind of failure.  What happens to the higher education industry when their potential students come to realize they are not getting value for money?  Will they reform, or fall into the same cycle of cutting costs and quality of product?  This is a familiar script.

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The real national debt

April 25, 2011

Double click to enlarge.

I just came across an interesting Wikipedia article, with facts and figures indicating that the federal government’s debt, which we hear so much about, is only a part of U.S. indebtedness.  We call the government’s debt the national debt, but it is small compared to the  total debts of financial institutions and of individual Americans.

The green strip on the chart is the federal government’s debt, the yellow strip is the total debt of American households, and the orange strip is the total debt of American financial institutions.

In 1946, the total US debt-to-GDP ratio was 150%, with two-thirds of that held by the federal government. Since 1946, the federal government’s debt-to-GDP ratio has since fallen by nearly half, to 54.8% of GDP in 2009. The debt-to-GDP ratio of the financial sector, by contrast, has increased from 1.35% in 1946 to 109.5% of GDP in 2009. The ratio for households has risen nearly as much, from 15.84% of GDP to 95.4% of GDP.

via Wikipedia.

According to this article, the bulk of the debt held by U.S. financial institutions – $8 trillion worth – consists of government-guaranteed mortgages, which is nearly equal to the federal government’s own debt.  This means the government’s potential liability is nearly double what is reported.  (I can’t get used to quoting figures in trillions of dollars; for me, billions of dollars are an unimaginably large amount.)

What I get from the chart and the accompanying article is that the best way to improve the debt-to-GDP ratio by putting Americans to work on useful things, which will increase the GDP and gives us the means to pay down our debts.

Click on Financial position of the United States to read the full article in all its complexity.  Click on the discussion thread for argument as to the meaning of the figures.

Hat tip to Obsidian Wings.

Discredited S&P may downgrade US bonds

April 19, 2011

Standard & Poor’s Corp. announced yesterday that the United States government was on its watch list to lose its AAA rating for government bonds.  AAA is S&P’s highest rating for safety.  The United Kingdom also is on the watch list, and Japan has lost its AAA rating.  This is a big deal because the lower the credit rating, the higher the interest rate a borrower must pay to get credit.

It is amazing to me that S&P ratings are still taken seriously.  S&P, along with Moody’s and Fitch’s, the other two big credit rating agencies, gave AAA ratings to mortgage-backed securities, leading millions of gullible investors to think they were safe investments.  Mortgage defaults led to the crash on these securities, bringing on the financial crisis and the recession we now are in.  Yet little or nothing has been done to improve the rating system, establish regulatory oversight or hold the rating agencies accountable for their results.

The recession made the government lose revenue and increase spending, which is one of the main reasons why the United States is in a debt crisis – if it is.  So S&P, which helped create the problem, is dictating to the United States government what to do to solve the problem.

I wrote  “if it is” because the U.S. ratio of debt to Gross Domestic Product is slightly less than the world average, and countries such as Germany and France, which have a higher debt to GDP ratio, also have a better credit rating.

The U.S. government, unlike the Wall Street banks, does not pay S&P for its credit rating, so maybe its rating of Treasury bonds is unbiased.  On the other hand, maybe S&P is merely pushing the Wall Street political agenda, to ignore unemployment and cut the deficit.  Instead of the government regulating Wall Street, Wall Street is dictating to the government.

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DEBTris: where the billions went

January 5, 2011

This is the first of a series of animated visualizations planned by David McCandless, a London-based data journalist and information designer.  Click on Information Is Beautiful to see his web site, which includes a UK version of this animation.

Here is McCandless’s presentation of similar information in static form.  Click twice to enlarge.

Click on Information Is Beautiful visualizations to browse more presentations like this.

Hat tip to The Browser.

How to be rich and miserable

September 26, 2010

1.  Accumulate a very large amount of debt.

2.  Decide to care deeply about what people who are a lot richer than you think of you.

3.  Spend all of your money and then some trying to keep up with them.

via Obsidian Wings.

Usury as a religion

May 12, 2010

The bailout of the European banks, like the bailout of the U.S. banks, shows that society has assumed an obligation to the banking system that takes priority over all other obligations.  The Greek government did not default on its debts, nor did the governments of Portugal, Ireland, Italy or Spain.  The crisis arises from the fact that the big bankers feared Greece might default on its loans, and jacked up interest rates accordingly. This of course increases the risk, which is further increased by speculators betting on default. The rescue operation being undertaken by the European Union and the International Monetary Fund is not a rescue operation of the people of Greece, who are likely to have to endure high unemployment, lower wages and worse public services, but a rescue operation for the banks.

So the obligation to repay loans takes precedence over all other obligations.  And the nature of compound interest is such that the burden of a debt can increase without limit.  If you have a potentially infinite obligation that takes precedence over all other obligations, is this not the equivalent of a religion?

When I studied history and economics in college, I was taught that the traditional Jewish, Christian and Muslim teachings about usury were one of the chief obstacles to modernity and progress. Some 50-odd years later, seeing the stranglehold the financial system has over the part of the economy that produces goods and services, I think it is time to revisit those teachings.

I recognize, of course, that someone who borrows money has an obligation to pay it back.  And I recognize that lenders have a right to be repaid for their inconvenience and risk.  The problem is the unlimited nature of compound interest – that someone can pay back the principal of a debt many times over, and still be deeper in debt than before.  This was the basis of debt slavery in the Roman Empire and of slavery in many parts of the world today; it was the basis of indentured servitude and the old-fashioned company town.  It is the plight of poor countries to the International Monetary Fund and the international banking system.

I am intrigued with the idea of Islamic banking, which sets a cap on compound interest. This is done through various mechanisms. In one of them, the lender theoretically “buys” an asset or an interest in an asset that is being pledged for security, and then allows it to be bought back in installments at a greater price but a fixed price.

I do not think Islamic-type banks will compete successfully in the international marketplace, because their capital will increase at a slower rate than traditional banks.  But perhaps there could be a system for chartering banks organized on such principles, or for using such principles in student loans or other government loan programs.