Capital is enough

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

The global economy is not simply suffering from a European debt crisis. Debt itself is in trouble. This morning on Radio National there was an interview with David Graeber, Reader in Social Anthropology at Goldsmith University London and author of “Debt — the first 5,000 years.” Graeber, who is involved in the Occupy Wall Street movement. He made the point that debt is a promise and then asked the question: ”Why are some promises considered more important than others?” Why is a promise to repay to a bank considered inviolate, while the politicians’ promise to say, eliminate university fees (in the case of the UK) considered something easily broken because “circumstances have changed”.

It is a good question. Why does moral hazard apply to governments, as we are now seeing with Greece, but not to banks? You know, the ones that loaned to Greece. And farmed out the CDOs and the CDSs and on, ad infinitum in lighting the fire that led to the global financial crisis. The Greek debt crisis is still likely to be solved in the usual way: let the country default and then recapitalise the banks that had exposures. But that, again, leaves banks with no moral hazard (and remember, the GFC started when Lehmann Brothers was allowed to go down because regulators were keen to avert moral hazard — lesson, banks are not subject to moral hazard).

Graeber made the point, confirmed by others, that there have been periods in human history when money was driven by intangible agreements, credit. And there have been other periods when it was more a tangible thing to be exchanged, various iterations of what we now call cash. He also made the point that there is usually an institution that oversees the credit creation system to stop it getting out of hand. That is exactly what is lacking in the current global capital markets. There is nothing to oversee the hyper growth of derivatives or high frequency trading or endless debt games, because there is no global institution that equates with the global markets. It is a clash of the market state and the nation state (or regional quasi-state like the EU). The market state is winning, which is probably why we are all on the brink of losing everything.

The problem with the credit version of money is that its growth mens that eventually the sums do not add up. Compound interest always outpaces real economic activity; the two will eventually decouple. And when that happens, someone has to clear up the mess. Herman Maley, formerly an economist with the World Bank, makes this point:

““Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?”

I am not sure that one should aim for a steady state economy, but there is no doubt at all that the creation of entirely new forms of leverage in the use of derivatives, high frequency trading et al. is not only unsustainable — we are still reeling from the effects of just one type of derivative, CDOs — but it represents an entirely new form of credit growth, a sort of hyper, hall of mirrors credit growth. This is not just the unsustainable curve of compound interest. It is compound interest multiplied several times, using mathematical models and computers.

To repeat, the daily cross border transactions in the global capital markets are about $US3.2 trillion. That is simply laughable, a collective insanity that could only ever have had one outcome and we are now seeing a glimpse of what that is.

Money itself is on the line. Equity capital is already in deep trouble. Peter Strachan, who runs a newsletter in Western Australia, has recently called for an alternative stock market in Australia (to the ASX and ChiX) that bans high frequency trading and CFDs and all the leverage games. Companies are sick, he says, of having price earnings ratios below 10, and dividend yields that are above 10. It may not be long before the Occupy Wall Street movement is matched by an Exit Wall Street movement instigated by big American companies.

But the bigger issue is what will happen to debt? Credit is the lifeblood of any economy, and blind governments have allowed credit itself to be debauched, all in the name of the absurd ideology of “free markets”. And the absurd notion that capital (that is agreements) is scarce. Maley found this out:

When I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow.

That figure is now hundreds of trillions. It is time to stop these debt games and stop pretending that the tail can wag the dog.

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  1. The Heretic

    Concerning this paragraph…
    ‘Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow.’… Capitol never has been the seeds from which prosperity grows. capitalism is a culture and methodology by which individuals gain renumeration from their work and a system of motivation (via an inculcated belief in the value of money) by which institutions or people can motivate each other to complete a transaction. This is an important element of successful economy, but other very important factors that need to be present are a healthy environment, some natural resources, and a society where most individuals are reasonably trustworthy, willng to cooperate, and civil if in conflict with each other. There is also the element of wise priority , either via consensus or leadership, that allocates some effort and resources toward addressng future needs of the nation.

    1. Ray Phenicie

      ‘capitalism is a culture and methodology by which individuals gain renumeration from their work and a system of motivation (via an inculcated belief in the value of money) by which institutions or people can motivate each other to complete a transaction.’
      Thank you for pointing that out. That message should be elaborated on and spread far and wide.
      I hereby move that we supply these motivating factors so the folks in the lower 30-40% (or 59%?) strata of the current economic system may get a helping hand out of the financial swamp they’re in.
      Before we move off on this somewhat fantastic journey perhaps a quick glance at Modern Money Theory will help set aside any fears of ‘where will the money come from?’

      1. Subsidized (state and Fed) mass Transit so every Metropolitan area can move at least 50% of its working population on a system other than automobiles. Eventually this should supply rides to 75% of the daily commuters. This would lift a huge cost burden off the neediest consumers who may spend anywhere from $4-600/month on transportation.

      2. An education system open to everyone at low or no cost-that cost would be determined by the student’s ability to pay.

      3. A health care system that delivered health care instead of wrong treatments, broken delivery and excessive costs for everyone.

      4. Plans for urban revitalization that would bring wilderness areas back into our backyards instead of pushing the wilderness further and further into the far reaches of our lands.

  2. Earl Killian

    You touched briefly on a rather fundamental issue: the need for a steady-state economics. It is rather obvious that exponential growth of wealth cannot continue on a finite planet because wealth consists of matter, energy, and knowledge, and the finiteness of the planet limits the first two, and the finiteness of the human brain limits the third.

    What is not so obvious is that the collision of exponential growth with hard limits is not that far off. Certainly the mass of the Earth and the solar energy flux are hard limits to the first two, and the calculation of when 2%/y growth reaches those is rather trivial and rather soon. We will run into softer limits even sooner than such really hard limits.

    Thus as you say, we need a steady-state economics, but only one or two people in the world appear to be working on that. Why? Because the change to such an economics will only occur after a catastrophic collapse. Nothing else will motivate such a large change. Thus such a project is for the post-Dark-ages rebuilding. One has to be a really long-term thinker on such a project.

    Debt makes no sense in a steady-state economics. Without growth, there is no ability to pay a return on investment (either debt or equity). Thus one needs a totally new motivation of pooling capital to foster innovation (we don’t want steady-state to mean innovation-free). The trick is to figure out how to do this sensibly (e.g. I don’t think saying the government will do it is satisfactory). I have one answer, but this margin is too small to contain it. :)

    1. pastafarian

      Those interested in this topic may want to see if they can find a copy of Steady-State Economics (“The Economics of Biophysical Equilibrium and Moral Growth”), by Herman Daly, copyright 1977. It was available in paperback.

      I’m afraid I have to agree with Earl Killian:

      …[T]he change to such an economics will only occur after a catastrophic collapse. Nothing else will motivate such a large change. Thus such a project is for the post-Dark-ages rebuilding.

      Too many of us are no readier for steady-state economics now than we were in 1977.

      1. Carla

        ….for those interested in how we might continue to live in a finite world, will give you some info, and also provide you the opportunity to join the more than 8,000 people from all over the world who have signed and endorsed the position statement of the Center for the Advancement of a Steady State Economy.

        Thank you, Yves, for mentioning the term “steady state economics.” How we can expect, or even desire, infinite growth on a finite planet is beyond me.

      2. Nathanael

        Biophysical equilibrium and moral growth — I like that description.

        I presume that can include intellectual and technological growth (at whatever rate we can manage, based on our intelligence and wisdom) so long as that maintains biophysical equilibrium. :-)

    2. Paul Jurczak

      “the change to such an economics will only occur after a catastrophic collapse” or series (possibly infinite) of collapse followed by a period of growth. Capitalism is very skillful in oscillating.

    3. invient

      Oh great, now it’ll be another 350 years before we figure it out! Although this time I doubt math will be involved.

      I guess that leaves time for those dark ages, although I am invested in the idea that humanity wont start killing each other after a systemic collapse of an antiquated system based on fallible assumptions (such as infinite resources…)

    4. Nathanael

      Because the human brain is not theoretically limited in its intelligence powers (particularly with genetic engineering ;-) ), we *can* have continuous growth.

      We *cannot* have any of these:
      (1) exponential growth
      (2) continuous growth in population
      (3) continuous growth in resource consumption

      We can *only* have growth in technology and cleverness. This growth will *not* be exponential, but it can probably be better-than-linear.

      I think the “slow growth in intelligence only” economy I suggest is much, much, much more like a “steady state” economy than it is like the current economy.

      I think, however, it might be a more popular idea.

    5. Tiercelet

      Small quibble:
      “Debt makes no sense in a steady-state economics.”

      Not true. *Interest-bearing* debt makes no sense in a steady-state economics. We will always have, or should always have, people who have more helping people who have less, with that favor returned when the time is appropriate, whether to the original benefactor or to society as a whole. But it should be intuitively obvious that we can never have a world where everyone lives off the interest payments.

  3. Economics Considered

    Thanks for one of the most perceptive and applicable assessments of the fundamental paradigm of the current country and interlinked global economies that I have seen.

    I am not adding any value to what is in the post, but from a personal standpoint some items that I really appreciate seeing in ‘print’:

    – debt can only be used once – as opposed to the fuzzy notion that some leveraged percentage can be repeatedly daisy-chained and create many times the original debt amount in money in the system. Jeepers.

    – the amount of repayments for ultra-multiplied debt obligations far exceeds the productive capacity of the planet to do that repayment. Can you say ….

    – the quasi-religious belief that ‘growth’ is something that has to be fanatically pursued (at all costs and risk) and that steady performance is something to be derided and castigated and even punished

    – the blind belief that there can be growth regardless of whether there are concrete and absolute limitations on resources, current technology, and current productivity paradigms. – and the concomitant fanatical refusal to even slightly consider a sensible moderation to match current limitations.

    – that the technical exercise of extracting money simply from the manipulation of money channel infrastructure (rather than from value added and productivity) can be anything other than eventually destructive of the whole economic paradigm

    – that ‘free trade’ has some mystical (mythical) quality that somehow or another renders trade imbalances anything but untenable and ultimately destructive. And that somehow or another the ‘debt’ of the imbalance somehow doesn’t have to be repaid at some real and tangible value sometime.

    So many incredibly fundamental realities in one piece.

    Perhaps we can see another time an assessment of how infrastructure productivity has on an on-going unviable basis created a large number of completely unneeded workers who are now completely isolated from the remaining closed system. Coupled of course with the inane acceptance that worker product of other countries can be consumed in place of home country worker product and that some magical mythical use for those discarded home country workers will somehow spontaneously appear.

    Again, thanks.

  4. mmckinl

    David Graeber has authored the most important work on the theory of money and debt in decades ~ “Debt — the first 5,000 years.”

    Not since The Club of Rome published “The Limits to Growth” have the tenets of the “infinite growth” mantra been so challenged.

    Recently Richard Heinberg has documented the fallacy of infinite growth in two books … “Peak Everything” and “The End of Growth”.

    For the numbers on the end of growth Jeremy Grantham, the Chief Investment Officer of GMO Capital (with over $106 billion in assets under management) has crunched the numbers.

    “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”

    “The undeniable law of diminishing returns was overcome by technological progress – a real testimonial to human inventiveness and ingenuity.But the decline in price was not a natural law. It simply reflected that in this particular period, with our particular balance of supply and demand, the increasing marginal cost of, say, 2.0% a year was overcome by even larger increases in annual productivity of 3.2%. But this was just a historical accident. Marginal rates could have risen faster; productivity could have risen more slowly. In those relationships we have been lucky. Above all, demand could have risen faster, and it is here, recently, that our luck has begun to run out.

    Simply put: Infinite growth on a finite planet is impossible.

  5. Three Wickets

    Not sure I follow. Progressive economists (at least the modern Keynesians) have been arguing that with treasury yields this low and the private sector continuing to deleverage so much, the public sector (if not some parts of the private sector) needs to releverage. Is MacroBusiness saying we need to keep deleveraging everywhere. Isn’t that the inflation-obsessing, capital-preserving, Republican point of view.

    1. Yves Smith Post author

      The MacroBusiness post is not really talking about public debt. Note its comment at the top about the perceived sanctity of bank contracts versus any other kind.

      It is much more about the belief of capital, particularly private debt capital, as a driver of growth.

      The MMT view of government debt is that it is necessary and desirable if the business sector is not investing enough to use private savings (that is a crude but not inaccurate summary). Government deficits (and surpluses) are salutary as a way of accommodating the actions of households and businesses. That’s why they prefer automatic stabilizers, you don’t get into politicized pork driven legislation (and automatically stabilizers have their spending fall in good times, again no need for discretionary action).

      For instance, Germany was hectored in the US right after the crisis for not spending enough on stimulus. German readers protested in comments that this reflected a lack of American understanding of how German social safety nets worked, that a lot of spending would happen without emergency legislation being passed. And they were proven correct.

      1. Three Wickets

        Thx. Interesting about Germany. In many ways, the German economy has become the EU economy. Not sure austerity in the peripheral economies immediately following the global financial collapse was good policy, though restructuring was probably inevitable regardless. One way the policy does make sense in hindsight is if Germany was planning to disengage eventually and was working out a repayment schedule.

      2. don


        You remain intent on seeing future economic growth as necessary — your thinking being that economic growth is required to prevent a large segment of the population from further decline. Thus the need for increased government spending.

        The difficulty with this belief (and it is a belief — as much as one might also consider it pragmatic), is that it assumes the validity and necessity of continued growth. Granted, we live in a society organized around the economic principle that continued and finite economic growth is necessary or a permanent state of economic decline will ensue. It can be referred to as GOD: grow or die.

        No doubt your thinking is similar to others of the MMT view and of the liberal status quo in thinking that once growth is restored then real reforms can be pursued that will eventually remove the parasitic dominance of high finance and the gross inequalities that plague the economy.

        Aside from the impracticalities of increased government spending to the degree necessary to offset existing economic stagnation is very likely not forthcoming due to the dysfunctional political system, perhaps we are left with little choice but to agitate for radical reform now, rather than presuming that it can be sought later after the existing damage is mended. Such reform would presume the validity and necessity of a sustainable economy to replace GOD.

        I would go so far as to suggest that this might be the only realistic (and admittedly very long term view) ‘demand’. Only by taking a very long term view will we also be facing up to the overriding fact that the US population has an extreme deficit in political consciousness required to make radical reform a reality.

        Lastly, for your readers, Herman Maley’s last name is Daley.

        1. Yves Smith Post author

          With all due respect, you have this a bit backwards.

          As long as we have population growth and/or productivity gains, you should see economic growth. Those are the long term drivers.

          People have discussed that it is possible to have more growth with lesser resource consumption, but businesses are not oriented to operate that way. Lazy exploitative growth is easier to achieve and sometime has higher returns than sustainable strategies (I’d stress the easier part as the big driver).

          So you need to get population growth under control first and foremost. No one is serious about that. You’d also need government incentives or punishments to make sustainable growth strategies more attractive than they are now. With neoliberalism ascendant, I don’t see how that happens.

          1. don


            By sustainable I certainly don’t mean to imply sustainable growth. Use of the term sustainable generates all kinds of misunderstandings. By sustainable I rely on a definition more in line with that used by Daley: sustainable not only economically but in terms of decreasing natural resources availability at ever increasing costs, reflective of an environment where ever growing surplus capital is channelled into high finance as avenues for investment in production decline, itself a symptom of overproduction.

            To assume that population growth by necessity implies economic growth is simply erroneous. There are more than adequate examples of just the opposite throughout history. Today, in the face of ecological deterioration such as climate warming, that is all the more the case.

          2. Nathanael

            I think we are all agreed that thanks to hard resource limits, we’re going to see population decreases whether we want to or not, and that it would be better to do it with planned parenthood (birth control, education and empowerment of women) than with mass starvation.

            I think we are all agreed that the only possible form of economic growth which is sustainable on a planet with hard resource limits (like ours) is the intellectual / technological. And I think we’re all agreed that that is unpredictable in its pattern (no compound interest there).

            I suspect we are arguing semantics.

    2. JimS

      When people say the government needs to borrow right now because the economy is depressed, they just mean (whether they know it or not) that the rich people have stopped investing savings in the employment of labor, so the government should take those savings away from the rich and invest them involuntarily.

      But taking rich people savings away today, in the form of tax, would require legislation and a lot of screaming. Fortunately, the government can borrow right now without any legislative requirement. Since “to borrow is to tax”, they, or a future government, can do the taxing part later.

      If rich people don’t like it, they should stop having these synchronized snit fits (which is all a depression is).

  6. F. Beard

    There are at least 4 forms of money, not just 2:

    1) Tangible money such as gold – too many flaws to consider.
    2) Debt based money – sophisticated but crooked and unstable.
    3) Fiat – the only ethical government money form.
    4) Equity based money – sophisticated, ethical and probably stable in aggregate. Common stock is an equity based money.

    1. Three Wickets

      There isn’t that much difference between stocks and bonds. As for fiat, total net worth of the US is around $75 trillion. Total fiat money stock including excess reserves at the Fed is $2.6 trillion. What should we do, print the difference. There might be a problem with inflation. Or maybe erase our $185 trillion in total financial and tangible assets and start from scratch.

      1. F. Beard

        There isn’t that much difference between stocks and bonds. Three Wickets

        Bonds require payment and interest in a 3rd party currency. Common stock can serve as currency itself with no borrowing. Assets including labour and raw materials would simply be bought with new stock issue. Goods and services of the common stock company would be sold in exchange for its own common stock.

        As for fiat, total net worth of the US is around $75 trillion. Total fiat money stock including excess reserves at the Fed is $2.6 trillion. What should we do, print the difference. Three Wickets

        The entire population, including savers, should receive equal bailout checks until all debt to the counterfeiting cartel is paid off.

        There might be a problem with inflation. Three Wickets

        The risk of serious price inflation could be precluded by banning further counterfeiting – so-called “credit creation” – and metering the bailout checks to just replace existing credit as it is paid off.

        Or maybe erase our $185 trillion in total financial and tangible assets and start from scratch. Three Wickets

        I don’t see how. A general bailout should fix the entire economy from the bottom up, including the banks and savers.

        The “catch” is that we must eliminate credit creation, at least during the bailout period. However, non-credit lending would still be allowed and there should be an adequate amount of new fiat to lend.

        1. Nathanael

          I don’t think it’s practically possible to ban credit creation, since people have done it spontaneously throughout history (think “You owe me now.”) Heck, Islam attempted to do it — lending money at interest is banned under Islamic law — and for centuries people have found ways around it.

          Lending by itself doesn’t increase the money supply of course, so it doesn’t create essential macroeconomic problems. The first money supply problem is created by being able to *trade* debts (“You owed me, but I sold your debt to Joe”) — and *THAT* we can outlaw by making it unenforceable.

          The second money supply problem is created by fractional-reserve lending. I also doubt that it’s possible to prevent this from happening even by outlawing it — checks evolved spontaneously — but as this amounts to a private money supply, I’m sure you’re basically OK with it too. Though it needs to be closely watched. Deposit insurance would mess this up.

          So rather than deposit insurance, what we need is a Post Office Bank which is effectively the *only* insured bank, where people can deposit government fiat money and have it absolutely guaranteed to be there. In fact, it would simply take the money and promise to print new money when you withdraw money. And because it’s part of the government, the government can tell exactly what effect it has on the money supply, and know how much money it can spend while maintaining government fiat money supply at the levels it wants to. :-)

          Sound good, Beard?

  7. Fiver

    Great to see this piece here. The need for some sort of “steady state” economy is perhaps the pivotal question of all future human history. Hope a lot more people see it.

    I’ve for decades called myself (largely to myself) an eco-socialist, meaning an advocate of “survival with decency” a term that recognizes as fundamental the problem of the impossibility of open-ended “growth” of the human population (at both ends of the lifespan) and even faster growth of total human activity ecological impacts per human in a finite biosphere while seeking a solution that does not involve cutting loose half or more of humanity or the entire natural world. This is not a puzzle for some distant future. It’s right on top of us – certainly in your lifetime if you’re under 40. Under some scenarios, within 20 years, as we “duke it out” recognizing the limits well before the limits are hit. In some respects (Iraq, Libya, China, Indonesia and the South Pacific, the Arctic, Congo, Brazil, many more) the mass scramble is already under way.

    While I agree with the sentiment (above) that a system collapse may be a necessary condition for the introduction of such a sustainable economics, we don’t know for a fact that it cannot be done to avert a collapse. I prefer to think we can – with an outbreak of solid leadership and some real luck – an ecological or other system scare big enough to turn the thickest of heads. And I think the path generally is the deliberate dismantling of globalized supply lines, and mega-systems, re-localization of economies to the maximum extent possible oriented toward more regional and local production for local needs. Not an end to all manner of production and trade – just an end to hyperwaste.

    1. Susan the other

      This also eliminates the need for Congress. Congress has always met to deliberate pork. If the economy is sufficiently localized we can turn the National Capitol building into a Smithsonian Annex. All our failing democracy needs is a network of computers and we can have direct, deliberative democracy.

      I’m wondering where all the talk went about decentralizing the Grid. Every town can create its own power supply. We know that. So why is Obama bragging it up about spending several billion on modernizing the Grid? Maybe the only modernizing is along proposed high speed rail lines. That’s not a bad idea.

    2. Dirk77

      Maybe steady-state economics—and steady-state living on earth—is an idea whose time has come. It would be bitter joke if the species that came to understand evolutionary collapse was unable to avoid their own.
      (The Jacques Costeau quote, “Population growth is the primary source of environmental damage”, comes to mind.) I don’t have anything to add apart from thanks for posting this Yves, and commenters for their further reading suggestions.

  8. Jack E Lohman

    Look, until we eliminate the rot at the root, we will forever be in trouble. The wide income disparity is caused — 100% — by political corruption. Politicians taking money from rich people who want to get richer, all to write laws that keep the money flowing in their direction. Stop this corruption (with public funding of campaigns) and these politicians will start making laws that benefit the country. Some will benefit the rich and some the poor, but they will be uncorrupted.

    Jack Lohman

    1. McKillop

      Perhaps publically funded election campaigns will resolve some of the problems of corruption; here, in Canada, a small subsidy (and start towards public funding) is now threatened by the current government and called out as a betrayal of ‘freedom’ to the individual’s choice.
      There are also other means to corrupt: consultants’ positions, board memberships, bookdeals with outrageous advances, speaking tours, university presidencies, and so on. We’ve seen it all, yeh?
      I do not wish to discourage efforts towards positive change, but rather to add my small voice.

      1. aet

        Proportional representation would help A LOT, in Britain, Canada, and the USA, to get politicians closer to actually representing the public – rather than just an exclusive segment of the public.

        The need to build broad support does wonders for improving legislation!

        1. Carla

          “They all cheat. It isn’t a right or left thing here.” — Steve

          You can say THAT again. Our little (tiny) group studying and promoting publicly funded campagins here in Cuyahoga County, Ohio, worked and studied and ressearched. We finally invited a state senator from Maine, where they HAVE publicly funded campaigns to come and speak to the public here in NE Ohio.

          We cobbled together the money to pay for his plane ticket. Several of us chipped in out of our own pockets. The Maine state senator did not charge a fee or any other expenses. We publicized the gathering, in Sept. 2008, while the most expensive Presidential campaign in history was being waged, online and with thousands of fliers. We invited everyone we knew. We had a local, pretty-high-profile citizen who had run for Attorney General of Ohio and lost, introduce our guest speaker and discuss the need for Campaign Finance Reform with him.

          It was a really dynamic and exciting program. Actually, it was amazing. Outside of our own tiny group and the senator’s grandmother, about 15 people showed up.

          You can’t sell public funding. It may be easier to shut down the entire financial system.

          Maybe we’ll see.

          1. Carla

            After “You can say THAT again,” I should have said: but the alternative to cheating is public funding of campaigns, and nobody’s interested. Sorry.

  9. aet

    This article gets at something i’ve been wondering about lately: why are the Greek government’s contracts with its lenders considered more sacrosanct, more worthy of fulfillment , of being kept, than those contracts and promises it has made with its employees, and the Greek public?

    That is to say, why would the Greek government rather break contracts of employment with its workers, rather than stiff its foreign lenders?

    I mean – who is deciding which obligations the Greek government is to keep, if it cannot keep both the promises made to the lenders, and the promises made to its employees or the public (the latter in the case of health care spending, education, or social security, or whatever income support programs they have in place to allow their indigent and unemployed citizenry enough $$$ not to starve)?

    In a democracy, who decides just whom the Government is to stiff ?

    “Well we have a democracy; but we have made these deals with some important institutions , so we cannot do what we promised to you we’d do , or that which you wish us to do; for our obligations to them, outweighs our obligations to you.”

    Would , does , it make a difference, if the money is owed to resident, local lenders or to foreign lenders? Why or why not?

    I wonder if there’s any answers, or if I’m even asking the right questions!

    1. Crazy Horse

      Some years ago I started a business and raised funding through the venture capital route. At a certain point the venture capitalist told me to stiff a client for a half million dollars because the client had left himself legally vulnerable. When I refused the Golden Rule was explained by the Venture Capitalist’s legal staff. It is very simple: He who has the Gold Rules.

      Why doesn’t the Greek Government (or the US Government) accord equal importance to promises and obligations to its citizens rather than to the international banking elite? Moral Hazard and moral responsibly are nice concepts for debate among academic liberals— in the real world class interest and the power to dominate determine the actions of politicians who serve at the pleasure of their masters.

      1. Blurtman

        Right. Repayment of US treasury bonds is sacrosanct, but repayment of Social Security trust fund special treasuries is up for grabs.

    2. super390

      On the capitalist ideological plane, the answer to your question is that the government exists to protect property, not people, so its obligations to property are greater than to workers. That’s not in the Constitution, but it appears to be an unwritten rule that was resurrected by the New Right. The Right’s more pragmatic lie was that capital is the only true source of productivity, while labor is just stupid animals being whipped in the right direction.

      1. Carla

        Actually, I think protecting property over people IS in the Constitution, or at least the rights of propertied people over the rights of those without. Remember, when that Constitution was written, people (women and blacks) WERE property. And the people who wrote it liked it that way.

  10. WorldisMorphing

    In short, dumb “Carrot & Sticks” system programing will not sustain, maintain or improve ‘The Construct’ we have built over the centuries. Now we need coordination and an agreement on what the situation -IS-.
    …purpose should be reinstated as the ideal incentive…

  11. Timothy Gawne

    From John Stuart Mill:

    “It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living, and much more likelihood of its being improved, when minds ceased to be engrossed by the art of getting on. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labour. Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment [editors note: recent studies have put the physical standard of living of the modern third-world below medieval europe!], and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers, become the common property of the species, and the means of improving and elevating the universal lot.”

  12. PhilJoMar

    In the Critique of Economic Reason Andre Gorz argued for a pretty substantial but slow decrease in working hours. What is the point of making so much crap when there’s so little time left after every day and at weekends to enjoy the benefits of science and technology that we (the public) fund through our work both manual and intellectual? When work hours were cut to 10 in the UK in the nineteenth century it actually brought forward various techniques that increased production. We have an efficient agriculture, an extensive built environment, more clothes than we could ever really need so aren’t we chasing our own tail far too much given the amount of workplace stress and anxiety, the hordes of depressed workers, and the huge amount of workless households? A new deal on working hours will not happen until it does so there’s no point in being cynical about the possibility. It’s much more doable than some of the eco-mush about human destiny etc. Just a thought anyway.

  13. G

    “Credit is the lifeblood of any economy, and blind governments have allowed credit itself to be debauched, all in the name of the absurd ideology of “free market”

    – In a free market, do we have CDOs? Do we have some of these things that created such a debt problem? In a free market, banks DO have moral hazard with their decisions. So, I argue, that under current Keynesian economics, the existence of the Fed, and our fiat money system, we created this pretend “free market” that keeps getting referred to.

    In a free market…we would have had some serious bank implosions, some lessons learned, and banks making different decisions.

    I argue that this is a creation of fiat money, the removal of moral hazard from banking, and unintended consequence of the the vulnerability of Keynesianism to corruption.

    Under a Keynesian system, their is no such thing as a free market. In theory perhaps…yes. In reality…no.

  14. Anonymous Jones

    Fantastic post.

    I think the most critical topic was set forth at the top, “Why are some promises considered more important than others? Why is a promise to repay to a bank considered inviolate…?”

    The one thing that bothers me with discussions of “debt” is that people, as usual, don’t understand how much a word contains, that the word is itself simply a heuristic for a concept that rarely fits within their one narrow definition.

    Debt is certainly capital, and people seem to treat it as if it is something wholly apart from equity capital, that these two categories are clearly distinct and radically different.

    Every investment (i.e., every attempt at deferred consumption), whether we apply the label debt or equity, is unique, but the classes of equity capital and debt capital overlap (have an indistinct boundary) and have many similarities.

    As I have pointed out before in the comments, I have written “preferred equity” documents that most objective people would point to and say, “well, that’s really what I think of as debt,” and I have written “subordinated debt” documents that most objective people would point to and say, “that’s really no different than equity”. This is not my entire point, and I only being it up to try to show that it is possible that the line between debt and equity is a little more blurred than most have yet realized. Certainly, the form of the documents (the *type* of promise made) is not always determinative of how we “think” about the promise as “debt or “equity”.

    OK, so anyway, we can disregard the blurred line issue and acknowledge that a “hard money loan” and a “common share of corporate stock” can obviously be classified as “debt” and “equity”, respectively. They are at the far ends of the debt-equity continuum. But step back, and you can see their similarities. They are both claims on future payment streams. They are classes of the same beast.

    Let’s say you are starting a company and need $100 of capital. You put in $20 of equity. You get friends to put in $30 of preferred equity. You round out the financing with $50 of debt at 10% interest.

    These are all claims on the future income stream of your company. They simply have higher priority among themselves. If you think of it as a one hundred item stack of $1 dollar bills, the bank starts out with the bottom 50 bills. If the company loses $40 in the first year, the bank still has its original 50 bills, it has gained another 5 bills on top of its 50 at the bottom of the stack (the interest), but the preferred equity has lost 25 of its bills and your equity is completely gone. Alternatively, if the company made $40 in the first year, the bank still has its 55 bills at the bottom (as in the previous example), the preferred equity has its 30 bills just on top of that (plus some split of the extra thirty five), and you have your 20 bills at the very top (plus the remainder of the profit split), still precariously set up for being blown away with the wind.

    Basically, all these words are just labeling different parts of the same thing (i.e., a way to split up this pie, whether it shrinks or expands), and the labels sometimes do us a disservice in making us think the parts are radically different. These claims, regardless of label, simply have different priorities of repayment, and because of their different priorities, they are “priced” differently.

    Back to the point at the top, why do we feel that debt always has to be repaid when it obviously is not always repaid?

    Even in recourse debt, the recourse nature is subject (always!) to the ability of the debtor to either have, or be able to generate, assets with which to repay the debt. We can make all the promises we want, but we do not know the future well enough to know whether or not we can meet those promises. It is impossible.

    Debt is not magical. It is rather like equity in many ways. It should not be seen an inviolate promise.

    Like all agreements, debt should be enforced by the community when the community determines it has a vested interest in enforcing such an agreement. It should be subject to all the restrictions on enforcement that make sense (many of which have developed for hundreds (or thousands) of years, like unconscionability, bankruptcy, etc.).

    [Obviously, personal debt and government debt are somewhat more complicated beasts, but I am simply trying to make a point about the overuse and misuse of the word (and concept of) “debt”.]

  15. Hugh

    Excellent post. The essence of class war is to divide, distract, and misdirect the 99% so that the 1% not only keep the wealth they have stolen from the 99% but can continue their looting. Selling the line that contracts to the 99% are negotiable/voidable but those to the rich are sacrosanct is an example of this.

  16. Susan the other

    If there is so much free-floating capital out there chasing too few opportunities, maybe I almost understand the title to this article: Capital is enough. We do not need debt any more because it is not the debtor who is begging for money and gain, now it is the capitalist who seems to have used up his last drop of credit. You want to invest in my project then you will have to pay compound interest on the privilege to do so. That’s what Greece should tell its bondholders! You want to make money off of our misery? Pay us. We’ll agree, democratically, to sell you our misery but it won’t come cheap. If you don’t like it take your money someplace else. But you probably won’t find a better deal.

  17. sgt_doom

    Geez, if any blog post (and a very good one, indeed) requires the three most enlightened bullet points I’ve ever seen, written in a short summary by Dr. Goldberg, affiliated with the University of Sydney (although not on its faculty), after researching the financing of infrastructure public-private partnerships in Australia:

     Paying equity dividends with virtually no cash flow available (CCT)

     The introduction of large spurious amounts of debt capital of unknown origin to
    augment cash flow, and the drawing down of fictional amounts of capital from
    reserves (LCT).

     The use of dual entries to disguise the non-amortization of project debt (M2).

    (Items in parens refer to specific projects studied.)

    The above could refer to the vast majority of securitized deals emanating from Goldman Sachs, JPMorgan Chase, etc.

  18. steve from virginia

    Hmmm … It said ‘Naked Capital(ism)’ but is really The Oil Drum. I bet there is an Art Berman analysis of shale gas (fraud) here, somewhere.

    It’s hard to tell where Graeber leaves off and Yves begins, but it doesn’t matter that much. Yves believes in growth, I say where is it? Where is the beef? The returns on waste are insufficient to produce new inputs, the ‘good’ that is needed to waste. How can there be growth?

    How can there be profits?

    Good to see Frederick Soddy’s name in print, maybe the world is indeed changing, a sense of dawning realization. I just got an email from a friend of mine Gregor Macdonald and he suggested peak oil issues are settled, time to move on … maybe it is. Be that as it may, the real problems in the real world with the real economy are not with banks, bankers, negligent regulators, etc. (even though they do not help) the real problem is at the end of everyone’s driveway, it’s it or you.

    It’s a machine, a robot, a toy. It cannot love or hate, it cannot feel it simply destroys until it breaks down … times one billion.

    The convenience machines have turned the humans into cockroaches, scurrying along the wall behind a giant fridge. Our humanity is gone, our civilization has been destroyed, our senses have been shrunken to bug- size, what is left of us to ruin? Next up for us to deal with is implacable nature who does not notice us or care about our problems. Does she care about bonds and interest rate swaps? Meanwhile, the robots gobble voraciously the energy needed by the humans. I don’t think this is a good economic strategy. Maybe I’m missing something.

    Where to: I think steady-state is a trap, a dead end. The waste-based economy cannot be adjusted to run at a stop. Something else is needed, it’s not clear but conservation must become an economic virtue: people must get rich by the act of conserving.

    Debt/derivatives prove hyperinflation as a strategy can work … for minutes or nano-seconds. Maybe those Zimbabweans weren’t so dumb after all.

  19. Jono

    If promises to and from bank debts don’t have to be met, then we would all go to the bank tomorrow and withdraw our money very quickly. The bank may say – yes, we promised to give you your money back, but, e have changed our mind and decided to honour our promises to our shareholders of a higher dividend. No one would be able to get a loan for anything (eg, car, flat, mobile phone contract). Including Greece to pay its employees. Probably very quickly people would set up a system by which debt was one of those promises you have to keep.

    The reason’s governments break their promises is because of how representative democracy works. We elect representatives to make decisions on our behalf for 2, 3 or 4 years. If they break their promise to say, for example, cut corporate taxes, then that is their decision and we have elected them. If we really don’t like it we will not vote for them the next time. And they may be breaking their promise because often the said promise would cause more bad than good overall.

    The reason governments may fire people is because, as far as I understand, it was not a “promise” to hire people into perpetuity, it was an agreement for someone to provide services in exchange for payment and this agreement had terms and conditions for ending.

    1. Nathanael

      If promises to pay government employees — particularly the soliders and police — are not met, the government suffers the equivalent of a “bank run” and generally collapses.

      Look at history.

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