Although the European bank solvency crisis is called a “sovereign debt crisis,” it’s really the problem of the banks who hold the bad debt. Beyond that, however, it points out the disease that afflicts all the developed nations: the magic beanstalk they planted has reached the sky. It can’t grow any more, and it hasn’t yet reached Schlaraffenland, the giant’s land in the sky where the roast chickens fly into your mouth.‡
They talk of a “European” crisis, but Greece, Italy, Ireland, Portugal, Spain, Great Britain, and all the other countries, including the United States, have built the same statist death trap, namely, their economic growth depends on borrowing, inflation, and state spending, and that beanstalk has reached the sky. Can’t grow any higher, because the drag of interest payments, inflation, and state spending now bleeds the productive sector so badly that its existence is imperiled.
The Greek disease
The bait for the Greek Disease is the Free Lunch. Government, after all, is so rich that we can all build ourselves a cushy nest of jobs and benefits under her eaves and feed there fatly forever. This self-delusion rests upon the socialist/Keynesian myth that resources have no limits, and that everybody can have most everything if only government in all its wisdom runs the economy. Spending doesn’t matter. Debt doesn’t matter. The solvency chickens never come home to roost. In the long run, we’re all dead.
The self-righteous like to wag their fingers at the Greeks & blame them for their laziness and spendthrift ways. Better watch out! When you’re pointing your finger at
Greeks, three fingers are pointing back at you. Every single developed nation has built the same dirigiste/ statist/socialist/Keynesian economy, undergirded and safety-netted by government jobs, welfare, and pensions and manipulated by laws, regulations, fiscal policy, and most of all, central bank monetary manipulation — Germany at the top of the list. The German central bank, the Reichsbank, was founded in 1876, shortly after the German empire in 1871. In the 1880s Bismarck had already installed socialism by old-age pensions, accident insurance, medical care and unemployment insurance to co-opt his socialist opposition. Where did the Greeks learn their tricks?
I don’t have the income figures for other countries, but in 2010 I researched the 15 Southern U.S. states’ Gross Domestic Product or “income.” What I found was astonishing: the productive sector is vanishing.
In those states, which I reckon are typical of almost all states, about 20% (one-fifth) of all income arises from direct state and local government spending. Another 30% (3/10) comes from direct federal government spending. Altogether, over one-half (50%) and up to three-fifths (60%) of state income arises from direct government spending. (You don’t want to know about the size of the indirect spending.)
Ignore for a moment whatever tiny fraction of the economy the state really needs to spend chasing criminals and . . . and. . . uh, well, doing whatever else the state does better than private enterprise. The fact remains that more than half of all income in the U.S. economy arises from direct government spending. Remember that not one nickel of all that spending produces anything. I don’t care how much Obama & all the politicians talk hogwash about government “investing” in the economy, all the money for that spending must be taken away from people who actually produce something other people want. To the economy, that spending is a tax, a cost, an expense, a burning of money and capital. So while less than one-half the economy’s participants labor away to produce something or serve someone, the other more-than-half simply drags the other half down by building prisons & four lane roads to nowhere, guarding prisoners, regulating, investigating, persecuting, interfering with production, taxing production, and writing tickets to producers.
In the grossest terms, every one person producing something supports himself plus one other person producing nothing. Half work, half live off the other half. There ain’t no economy, there’s only half an economy.
The U.S. and Greek systems don’t differ in kind, only in degree. Percentage-wise maybe more Greeks live off government jobs and pensions than Americans do, but the common unsquelchable tendency is to increase the number of government jobs & benefits, because after all, everybody is always seeking a safe, cushy nest, and politicians get elected by selling favours for votes. Inevitably, at some point, whether that’s 60% or 75% or 80% of income arising from government I don’t know, a country runs out of enough producers to keep the system afloat. Everybody cannot live off everybody else.
It gets worse
In the 1930s fascism masquerading under the name of Keynesianism seized control of governments around the world. Since then governments have changed economic structure and practice root and branch.
No curb on spending
Abolishing gold convertibility freed all governments with central banks from the “tyranny of the bond markets,” as the head of the New York Federal Reserve, Beardsley Ruml said in 1945. Since governments no longer had to redeem their currencies with silver or gold, they no longer had to fear that bonds markets would punish their overspending with higher interest rates. Why did they need the bond markets? They could print all the money they needed out of thin air.
In fact, they didn’t need taxation for revenue, either, since they could print all their spending needs. Thus the purpose of taxation shifted from raising revenue to controlling people.
Yet the fascist system is not quite that simple, or that efficient, and forever threatens to fall off the tracks, lurching from side to side between hyperinflation or capital starvation and deflation. If the government inflates too much, the public loses confidence in the currency and a hyperinflation might result.
Oh, and government borrowing (they still borrow because the alternative is hyperinflation) can also drive up interest rates, even crowd private borrowers out of the market, choking off investment in production and economic activity.
Since the 1930s statism has created an economic structure that finances not by equity created from production, but by borrowing. Because all the money must be borrowed into existence from the banks now, every dollar born brings a new interest rate burden with it. Continued growth depends on borrowing, and borrowing depends on inflation to create new money to pay the interest burden on the old borrowing. If the inflation stops, the money supply shrinks, the interest can’t be met, and the bankruptcies begin.
Deflation is unthinkable. Financing by borrowing also hides within itself certain other fishhooks. The borrower must invest the loan in some production generates at least enough profit to pay interest and amortize the loan and pay the borrower. But at what cumulated borrowing does the interest burden eat up all of the profits? Or, at least so much of the profits that the producer loses incentive to produce and goes to work for the government?
And as the debt keeps on piling up on individual borrowers, it is piling up on the economy as a whole.
Add another log to that camel’s back: borrowing for consumption. How much can consumers borrow before they break under the interest burden? But consumer spending is “the engine of the economy.” What happens when consumers won’t spend?
Success begets excess
Whoops! Here’s another nasty feedback loop: success begets excess. Bankers don’t make money NOT lending, so they have a strong spur to lend. That spur digs deeper when a hot bubble arises, like the real estate bubble. Banks lend into the bubble, make lots of money, and loan officers reap big bonuses, so they lend lots more until at last all the gullible have been plucked and no new victims appear.
Then comes the “bust,” but the banks want to make theirs coming and going.
When banks lend, they lend something that costs them nothing: their credit. They don’t lend money, they lend credit. The credit has value only because of the state monopoly franchise which created the bank, which reflected glory entices others to receive that credit as if it were money.
Now get this: Banks lend nothing, and nothing but their own credit. Therefore the correct measure of the banking franchise’s value and the bank’s profit is the total amount the bank has loaned, not the bookkeeping “profit.” Moreover, a bank cannot lose anything on a loan that cost it no real money or value, because it never loaned anything of value, only its credit, created by the miracle of double entry bookkeeping on its own books.
But the banks want it both ways, in good times and bad. They want borrowers to pay interest on the credit they loan them, sometimes two or three times the value of the collateral,‡‡ plus they want the borrower to pay back the principal, and never mind whether he loses money.
Think of it this way: suppose I was issuing “Moneychanger bucks,” just printing them up in the basement, with my smiling picture on them. You come to me and ask for $10,000 worth, and I give them to you in exchange for a mortgage on your house. Ask: how much did my $10,000 in Moneychanger bucks cost me?
Thus banks around the globe were happy as a hog in slop to keep on lending into what any idiot knew was a risky, rickety, overblown real estate market (and sovereign debt market), but when it busts they want to shuck all that risk off on the borrowers and make them repay principal and interest
There’s only one problem with that: there’s not that much money in the world, the borrowers don’t have it, and the collateral isn’t worth it. And even if the banks end up seizing the collateral through foreclosure, the collateral is worth nowhere near the credit they loaned to buy it. It was the banks’ lending (creating artificial demand) that blew the collateral’s price all out of proportion to economic value.
Instead of writing off the debt that cost them nothing to create, the banks insist they must be paid every penny. Yet the banks’ demand cannot be granted unless both nations and individuals be bound to perpetual debt slavery.
Get this straight: the debt cannot be repaid. No country can “grow its way out.” All the public debt we are talking about is not a “mortgage.” Governments borrow constantly for current expenditures. Government debt – the “national debt” — more nearly resembles a “perpetuity,” that is, a security whose interest runs forever but whose principle is never paid off. And yearly, monthly, weekly new principal is added to that perpetuity, raising the interest payment.
At last the question becomes, how much interest can we pay and still eat? At some point, income can’t pay the debt, for individuals or nations.
The only answer at this neck-deep point is debt forgiveness. Not a debt moratorium, not an extension and re-scheduling, not a remission of interest, but an outright debt jubilee. The debt is declared unpayable and worthless, and bankers and borrowers alike start all over again. Otherwise repaying government debt and private debt becomes a drag so colossal on the economy that growth can never overcome it.
Undoubtedly some, but not all, banks would perish. This is the “unthinkable” that in 2008 led the U.S. congress to bail out banks to the tune of $700 billion and the Fed to write checks to banks around the world to the tune of $16 trillion.
Let us examine this question dispassionately, from a rational standpoint alone. Rationally, what economy can long suffer incompetent fools to run its financial system? That the big banks were sucked down by the derivatives and mortgage crisis wasn’t mere bad luck, bad timing, or a bad hair day. Rather, it resulted directly from the banks’ rash recklessness, silly greed, criminal lack of diligence, and incompetence. Pray, why would anyone in his right mind want to keep such ridiculous enterprises alive? They deserve to die the death they have worked so hard to earn.
Let us examine this question passionately, morally, compassionately for both fools and wise suckered by the banks’ fraudulent inducement to borrow and their own bad judgement.
The first question our minds reach astonishes us in its piercing simplicity: why would any popular government create titles of nobility and monopolies? Why would any government grant to one small group at the expense of the vast population the right to create what passes for money out of thin air? What social purpose does that serve? What justice does that answer? What can it be called but the seizure of government by coup d’etat, the worst imaginable corruption and cronyism? What is its name but slavery? What morality, what justice, what national interest, what brotherly love consists in enslaving most of the population to a very few?
Why it cannot be fixed
The tapeworm has now grown large enough to threaten its host’s life.
I believe I have explained why the institutional bias tends unalterably to inflation. Inevitably and regardless how much it hurts the dollar, the authorities will inflate. They have no choice. For government spending, for bank survival, for paying the interest burden, to keep the masses docile, the central bank must inflate or the system dies. Deflation of the money supply will never happen, because the entire system is built to inflate, and knows it must inflate or die.
People who criticize government & central bank stimulus schemes don’t get it. The stimuli aren’t intended to solve any economic problems lastingly, only to supply inflation while the usual borrowers – the public – are not borrowing. If the public won’t borrow, the government must, and the central bank must inflate. The central bank will monetize everything in sight.
Further, I believe I have shown why the economic mess in Greece, Ireland, etc., etc., down to the U.S. cannot be easily fixed. Too large of a percentage of the workforce produces nothing but receives income from government. And that percentage ineluctably continues to grow because selling government favors is the stock in trade of politics. More than that, government labor has entrenched itself with unions and self-conscious interest groups who, as we saw in Greece, Wisconsin, and Ohio, will hit the streets and riot if anyone threatens to take away their government sucker.
Well, maybe how it might be fixed
It isn’t really true that these things absolutely cannot be fixed, only that no statesman appears with courage and resolution enough to do what is needed. Here is a beginning:
2. Abolish the fractional reserve banking franchise and outlaw all but 100% reserve banking. ¶
3. Restore silver and gold currency by opening the U.S. mint to free and unlimited coinage. Let the government declare a two year moratorium on taxation and pay its expenses by minting and spending the gold allegedly in Fort Knox. Phase out Federal Reserve currency over two years.
4. Close down government command of the economy by eliminating government jobs (over some workable period), privatizing education (the biggest government program), and abolishing most government regulation, but fulfilling all obligations under social security and under welfare programs. (Don’t even try to tell me the folks on social security haven’t “earned” their pensions. Government forced them to pay into social security, stealing the money they could have much more lucratively invested for retirement.) Abolish all taxation except constitutional duties, imposts, and excises or apportioned direct taxes.
5. Abolish the limited liability corporation, making everyone fully liable for all his actions.
What would happen? Economic hardship would abound for two, maybe three years, but the bad debt and bad investments would be cleansed and the financial system reformed on a sound footing. Labor would be shifted from non- productive government jobs to productive private sector jobs. New economic liberty would offer entrepreneurs real and not illusory opportunities, and they would create millions of new jobs.
In other words, fixing the economy only takes freedom, honest money, and a level playing field without government interference, things we are not likely to get under the present fascist system until it cannot roll even one inch further.
But that day will come. It may tarry, but it will come. Be ready.
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‡ Schlaraffenland is the German name for Cloud Cuckoo Land or the Land of Cockaigne or Luilekkerland (lazy, luscious land) in Dutch. In this fool’s paradise, nobody works but everybody gluttonizes to his gut’s content.
‡‡ Go do the math. On a 20-year mortgage, you pay the principal amount about twice. On a 30 year mortgage, about three times.
‡‡‡ Don’t tell me it can’t be done. Solon did it in ancient Greece, and it’s been done countless times besides. World did not end when the “unthinkable” happened. In fact, it improved.
¶ I pass over as optional making fractional reserve banking a capital crime punishable by hanging, drawing, quartering, and beheading without benefit of clergy but with the violators’ heads being mounted on pikes at expressway entry ramps as a warning to others. It goes without saying that the Federal Reserve System must also be abolished, its buildings torn down, and the ground sown with salt and seeded with ravenous chiggers.