• Monthly
  • $25
  • $50
  • $100
  • $other
  • use PayPal

SPRING FUNDRAISER

Is it time for our Spring fundraiser already? If you enjoy what we offer, and have the means, please consider donating. The sooner we reach our modest goal, the faster we can get back to business as (un)usual. Please, stay safe and we’ll see you down the road.
FacebookTwitterRedditEmail

The Coming Savings Writedowns

Photograph Source: Michielverbeek – CC BY-SA 4.0</>

Debts that can’t be paid, won’t be. That point inevitably arrives on the liabilities side of the economy’s balance sheet.

But what of the asset side? One person’s debt is a creditor’s claim for payment. This is defined as “savings,” even though banks simply create credit endogenously on their own computers without needing any prior savings. When debts can’t be paid and debtors default, what happens to these creditors?

As President Obama showed, banks and bondholders can be bailed out by new Federal Reserve money creation. That is what the $4.6 trillion in Quantitative Easing since 2008 was all about. The Fed has spent the last few years supporting stock market prices (and holding down gold prices) by manipulating the forward option markets.

But this artificial life support to keep the debt overhead afloat is nearing the reality of the debt wall. The European Central Bank has almost run out of available euro-bonds to buy. The new fallback position to keep the increasingly zombified U.S. and Eurozone financial markets afloat is to experiment with negative interest rates.

Writing down savings by a few percentage points helps bring the glut of creditor claims marginally back towards balancing bank deposits with the ability of debtors to pay. But such marginal moves are rarely sufficient. A quantum leap is needed.

Governments have long followed a basic guideline when faced with a need to devalue their currencies (for instance, as the dollar was devalued against gold in 1933). Nothing is worse for a politician or central banker than to be overly shy when it comes to devaluation. The motto is, “Always depreciate to access.” That means at lest 25 percent, often a third when a basic structural adjustment is needed.

The recent experiment in negative interest rates writing down savings as a necessary compliment to the inevitable debt writedowns means that financial policy makes are beginning to fact the hitherto unthinkable fact that many zombie companies and debtors have no foreseeable means of paying the amounts that they owe on paper.

The tendency of debts to grow exponentially at rates in excess of the economy’s ability to create an economic surplus to pay creditors has been known for nearly 5,000 years. My book “… and forgive them their debts” describes how ancient Near Eastern rulers recognized the inherent tendency of financial dynamics to cause instability, leading to debt bondage and forfeiture of land to creditors.

To prevent this rising indebtedness from tearing their realms apart, rulers started their first full year on the throne by clearing away the overhang of arrears that had been accruing on personal and agrarian debts. The aim was to restore an idealized “mother condition” in which bondservants were liberated, able to start with a Clean Slate with their self-support land returned to them, in balance with regard to their income and outgo.

An analogy would be the idyllic condition that the U.S. economy would achieve if we could restore the financial situation that existed in 1945. The end of World War II left an economy in which most families were almost debt-free. Families and businesses and were rife with cash, as there had not been much opportunity to spend during the wartime years, and the Great Depression had wiped out substantial debts. Returning soldiers were able to start families and buy homes by committing to pay only 25 percent of their income for 30 years. This era was as close as the United States came to a Clean Slate. Today it seems an unrecoverable golden age – as the ancient Near East seemed to be to debt-wracked imperial Rome.

Germany’s Economic Miracle consisted of its Allied Monetary Reform of 1948 – a Clean Slate erasing most personal and business. That debt cancellation was fairly easy because most debts were owed to Nazis, and the Allies were glad to see their savings claims for payment wiped out.

Fast forward to today: Indebted students graduate with an obligation to pay so much education debt that they cannot qualify for mortgages to buy homes of their own. Marriage rates are down, U.S. home ownership is plunging, and rents are rising. Automobile debt also has soared, leading to rising default rates second only to student debt defaults. The overhang of junk-mortgage debts that crashed the economy in 2008 remains on the books of families who managed to survive the ten million foreclosures under the Obama bailout of Wall Street. (His constituency turned out to be his Donor Class, not the junk-mortgage victims among his voters. He characterized them as “the mob with pitchforks” to the banksters he invited to the White House to celebrate his bailout.)

By driving down interest rates, the Fed’s policy of Quantitative Easing has subsidized an enormous debt buildup without increasing the interest burden proportionally. This has enabled corporations to carry much higher debt and even indulge in leveraged buyouts and stock buyback programs.

This QE policy has made financial engineering much more enriching than industrial engineering. But it has painted the U.S. and European economies into a corner. At some points interest rates will inevitably begin to rise back up. Some countries will have to increase rates in order to borrow to stabilize their exchange rates when their balance of trade and payments falls into deficit. Other countries will simply see that the game is over and will give up the pretense that the personal, corporate and public-sector debt overhead can be paid.

It is to prepare for this inevitable eventuality that Europe is experimenting with its trial run of negative interest rates. Once the technique is established, it will prepare the way for the inevitable step of writing down national savings in line with the economy’s ability to pay.

That ability is shrinking much more than at any time since the 1920’s, which gave way to the Great Depression despite the many debt writedowns of 1931-32. The exponential mathematics of compound interest have created more and more claims on personal income and corporate cash flow, leaving less and less to be spent on goods and services.

Until a debt writedown occurs, storefronts will continue to close, arrears will mount, students will continue to postpone marriage and family formation, high-risk bonds will begin to give way and default.

That should be what economic theory is all about. But for the past generation, economic models have pretended that banks and creditors act responsibly enough not to make bad loans. Pension fund managers pretend that they can provide for future retirement by corporate or public employees by earning 8 percent annually ad infinitum, doubling every 7 years, as if this is really possible in an economy not really growing outside of the Finance, Insurance and Real Estate (FIRE) sector (and even so, growing at only 1 or 2 percent). How then can the economy pay its debts without imposing financial austerity much like Third World countries subjected to IMF austerity programs?

Today’s economic orthodoxy denies that this debt problem can exist. Debt dynamics and the exponential growth curve of compound interest does not exist in the parallel academic universe that somehow has been situated in the social science department instead of the literature department as science fiction.

Perhaps someday a revamped economics curriculum will include the study of history to see how earlier societies have coped with the inherent tendency of debts to increase faster than the ability to be paid. It is a long history with many examples. Western civilization has failed to solve the financial problem that Near Eastern societies were able to cope with by intervening from “outside” the economy.

But these formative debt experiences are as repressed today as sexual drives repressed academically before the work of Freud. Academic economists are financial prudes. Debt cancellation is historically the solution. Quantitative Easing and bailouts of the One Percent can only be a temporary substitute. We should think of them as “abstinence” from recognizing the need to write down bad loans (“savings”) along with the bad debts.

 

More articles by:

Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics.  He can be reached at mh@michael-hudson.com

June 01, 2020
Joshua Frank
It’s a Class War Now Too
Richard D. Wolff
Why the Neoliberal Agenda is a Failure at Fighting Coronavirus
Henry Giroux
Racial Domestic Terrorism and the Legacy of State Violence
Ron Jacobs
The Second Longest War in the United States
Kanishka Chowdhury
The Return of the “Outside Agitator”
Lee Hall
“You Loot; We Shoot”
Dave Lindorff
Eruptions of Rage
Jake Johnston
An Impending Crisis: COVID-19 in Haiti, Ongoing Instability, and the Dangers of Continued U.S. Deportations
Nick Pemberton
What is Capitalism?
Linda G. Ford
“Do Not Resuscitate”: My Experience with Hospice, Inc.
Medea Benjamin - Nicolas J. S. Davies
Who Are the Secret Puppet-Masters Behind Trump’s War on Iran?
Manuel García, Jr.
A Simple Model for Global Warming
Howard Lisnoff
Is the Pandemic Creating a Resurgence of Unionism? 
Frances Madeson
Federal Prisons Should Not be Death Chambers
Hayley Brown – Dean Baker
The Impact of Upward Redistribution on Social Security Solvency
Raúl Carrillo
We Need a Public Option for Banking
Kathy Kelly
Our Disaster: Why the United States Bears Responsibility for Yemen’s Humanitarian Crisis
Sonali Kolhatkar
An Open Letter to Joe Biden on Race
Scott Owen
On Sheep, Shepherds, Wolves and Other Political Creatures
John Kendall Hawkins
All Night Jazz All The Time
Weekend Edition
May 29, 2020
Friday - Sunday
Tim Wise
Protest, Uprisings, and Race War
Nick Pemberton
White Supremacy is the Virus; Police are the Vector
T.J. Coles
What’s NATO Up to These Days? Provoking Russia, Draining Healthcare Budgets and Protecting Its Own from COVID
Benjamin Dangl
Bibles at the Barricades: How the Right Seized Power in Bolivia
Kevin Alexander Gray - Jeffrey St. Clair - JoAnn Wypijewski
There is No Peace: an Incitement to Justice
Jeffrey St. Clair
A Few Good Sadists
Jeff Mackler
The Plague of Racist Cop Murders: Ahmaud Arbery, George Floyd and the COVID-19 Pandemic
Joshua Frank
In Search of a Lost Socialism
Charles Pierson
Who are the “Wrong Hands” in Yemen?
David Schultz
Trump isn’t the Pope and This Ain’t the Middle Ages
Andrew Levine
Trump Is Unbeatable in the Race to the Bottom and So Is the GOP
Ramzy Baroud
Political Ambiguity or a Doomsday Weapon: Why Abbas Abandoned Oslo
Pam Martens - Russ Martens
A Growing Wave of Bankruptcies Threatens U.S. Recovery
Joseph Natoli
Conditions Close at Hand
N.D. Jayaprakash
No Lessons Learned From Bhopal: the Toxic Chemical Leak at LG Polymers India 
Ron Jacobs
The Odyssey of Elias Demetracopoulos
J.P. Linstroth
Arundhati Roy on Indian Migrant-Worker Oppression and India’s Fateful COVID Crisis
Melvin Goodman
Goodness Gracious, David Ignatius!!
Roger Harris
Blaming the COVID-19 Pandemic on Too Many Humans:  a Critique of Overpopulation Ideology
Sonali Kolhatkar
For America’s Wealthiest, the Pandemic is a Time to Profit
Prabir Purkayastha
U.S. Declares a Vaccine War on the World
David Rosen
Coronavirus and the Telecom Crisis
Paul Buhle
Why Does W.E.B. Du Bois Matter Today?
Mike Bader
The Only Way to Save Grizzlies: Connect Their Habitats
Dave Lindorff
Pandemic Crisis and Recession Can Spark a Fight for Real Change in the US
FacebookTwitterRedditEmail