The Inevitable Jubilee
National debt is a cancer. It starts out small and then multiplies. Eventually, it reaches a point where it can’t be ignored, spreading itself through every layer of the economy until it threatens the life of its host.
Many would say that the U.S. is at this point. Having accumulated more debt than any other nation in history, there is little hope that it can ever be paid back without a combination of some very drastic and unrealistic measures. On greater inspection, paying it back is probably never going to happen and may even be mathematically impossible to do so.
This raises the question then—how did we get to this point? Because really, it’s not a pretty picture of what things start to look like once a nation is forced into reducing its debt. Just look at Greece.
For most people, the answer is fairly obvious: society has been borrowing money to live beyond its means. The real question though is why has this been allowed for so long? That is, up until the point where our financial system is on the verge of failure?
First, let me ask you a question. How much could you afford if you had to pay cash? Think about it: cars, houses, college tuition, healthcare? Perhaps even rent, gas, food, or electricity?
For most of us, there’s absolutely no way we could finance our current standard of living without either borrowing or living off credit. This simple fact of life for those who live in societies where lending and credit are freely available—which also drives up prices—may find it hard to understand that other “less developed” countries don’t live like we do. That is, quite surprisingly, they use hard-saved cash for their purchases rather than borrowing from a bank or “money lender” and paying interest.
Now, to be perfectly honest, lending itself adds a significant value in facilitating business and trade in ways that wouldn’t exist otherwise. It allows individuals the opportunity to afford certain assets, like a college degree or even a major surgery, that can significantly raise their standard of living. This purely philanthropic viewpoint of the relationship between banking and society couldn’t have been stated any better than when the CEO of Goldman Sachs, Lloyd Blankfein, revealed he was doing “God’s work”; going on to say, “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.”
In a perfectly balanced world, this sounds very nice. However, over time, we find a huge structural imbalance develops when individuals, businesses, and governments become overly dependent upon borrowing. People stop saving, wasteful spending proliferates, and, worst of all, a dynamic feedback is created where society itself cannot function without the perpetual growth of debt and borrowing. A “virtuous" cycle is now quite vicious instead. This is where much of the world finds itself today.
So how do we prevent this sort of system from developing? Because, eventually, everyone ends up losing in the end. Those who lent money to Greece just took a 50% loss on their investment. There could be much greater losses to follow. In the Great Depression, lenders had no choice but to forgive the loans they made since people had already sold everything they owned. Even then, the assets sold for collateral weren’t worth close to the original amounts. The simple truth is that much of the paper wealth—stocks, bonds, etc.—had simply lost all or most their value. The illusion of wealth generated by a vibrant lending system vanished.
In light of the similarities between then and now, some prominent names are beginning to warn that the only cure for our troubling situation is some form of massive debt relief, or Jubilee—a biblical commandment given to Israel to wipe away all debt every 50 years and start with a clean slate.
Others, however, say such an idea is preposterous—setting a dangerous precedent that would cause banks to constrain further lending and kill any hope for a recovery. "Give us money or we're all in trouble! Take away our money and we're all in trouble!" Sadly, given how dependent we’ve become upon debt, this is probably not far from the truth, which also means that any massive form of debt jubilee probably won’t gain political acceptance unless, like in the Great Depression, no other options remain.
Unfortunately, what most people seem to miss, is that the original notion of a Jubilee was never intended to be applied after a society has already been enslaved by debt. It was meant to prevent the insidious power of debt and lending from ever taking root in the first place. Regardless, whether a society chooses to voluntarily rebalance its scales or not, eventually the invisible hand of the market will step in and balance them for us by default. Perhaps politicians should be wary of that point and take the necessary steps while certain options still exist. Let's not forget, there is already rioting in the streets.
About Cris Sheridan
Cris Sheridan Archive
|08/21/2014||The Collapse of Macroeconomics: An Interview With Dr. Woody Brock||bcast|
|08/12/2014||Diane Coyle – GDP: A Brief But Affectionate History||bcast|
|08/11/2014||Is a Long-Term Secular Bull Market in Stocks Possible?||story|
|08/06/2014||Still No Sign of a Bear Market – Here's Why||story|
|08/06/2014||Dan Wantrobski on the Long-Term “Market Map” and What It Means for Stocks, Commodities, and Interest Rates||bcast|
|08/05/2014||The IMF’s Laura Kodres on the Shadow Banking System and Future Risks||bcast|
|07/30/2014||The Trillion Dollar Question: What Happens When Quantitative Easing Ends?||story|
|07/30/2014||Conference Board’s Ken Goldstein: U.S. Economy Speeding Up||bcast|
|07/29/2014||Richard Duncan: Prepare for Correction Once QE3 Ends||bcast|
|07/24/2014||Consensus Building for 2016 Stock Market Bubble, Crash||story|