The Twilight of Irredeemable Debt
by Antal E. Fekete,
Gold Standard University Live
April 28, 2008
Wagner’s opera Gotterdämmerung is about the twilight of pagan gods. The most powerful of the
latter-day pagan gods that has been guiding the destinies of humanity for the past two-score of
years is Irredeemable Debt. Before August 14, 1971, debts were obligations, and the word “bond”
was to mean literally what it said: the opposite of freedom. The privilege of issuing debt had a
countervailing responsibility: that of repayment.
On that fateful day all that was changed by a stroke of the pen. President Nixon embraced the
woolly theory of Milton Friedman and declared the irredeemable dollar a Monad, that is, a thing
that exists in and of itself. According to this theory the government has the power to create
irredeemable debt ? debt that never needs to be repaid yet will not lose its value ? subject only
to a “quantity rule”, e.g., it must not be increased by more than 3 percent annually. This idea is so
preposterously silly that “only very learned men could have thought of it”. If the thief is thieving
modestly, then he will not be detected. It never occurred to the professors of economics and
financial journalists that a modest thief is an oxymoron, a contradiction in terms. How did they get
to believing in irredeemable debt? The explanation is most likely found in Schiller’s dictum:
“Anyone taken as an individual is tolerably sensible and reasonable. But taken as a member of a
crowd ? he at once becomes a blockhead”. Economics professors and financial journalists are
no exception.
For a time it appeared that Milton Friedman was right. The world has become dedicated to the
proposition that it is possible, even desirable, to expand irredeemable debt in order to make the
economy prosper. Never mind the default of the U.S. government on its bonded debt held by
foreigners. Never mind people victimized by theft. Thanks to the quantity rule, they will never
notice the difference.
For all its seductive attractiveness Friedmanite economics is ignoring the effect of irredeemable
debt on productivity. It watches debt per GDP and is happy as long as this ratio stays below 100
percent by a fair amount. However, what should be watched is the ratio of additional debt to
additional GDP. By that indicator the patient’s condition could be diagnosed as that of pernicious
anemia. It set in immediately after the dollar debt in the world was converted into irredeemable
debt. The increase in GDP brought about by the addition of $1 of new debt to the economy is
called the marginal productivity of debt. That ratio is the only one that matters in judging the
quality of debt. After all, the purpose of contracting debt is to increase productivity. If debt volume
rises faster than national income, there is big trouble is brewing, but only the marginal productivity
of debt is capable of revealing it.
Before 1971 the introduction of $1 new debt used to increase the GDP by as much as $3 or
more. Since 1971 this ratio started its precipitous decline that has continued to this day without
interruption. It went negative in 2006, forecasting the financial crisis that broke a year later. The
reason for the decline is that irredeemable debt causes capital destruction. It adds nothing to the
per capita quota of capital invested in aid of production. Indeed, it may take away from it. As it
displaces real capital which represents the deployment of more and better tools, productivity
declines. The laws of physics, unlike human beings, cannot be conned. Irredeemable debt may
only create make-belief capital. |
