the rest of the article:
By confusing capital and credit, Friedmanite economics obliterates truth. It makes the cost of
running the merry-go-round of debt-breeding disappear. It makes capital destruction invisible. The
stock of accumulated capital supporting world production, large as it may be, is not inexhaustible.
When it is exhausted, the music stops and the merry-go-round comes to a screechy halt. It does
not happen everywhere all at the same time, but it will happen everywhere sooner or later. When
it does, Swissair falls out of the sky, Enron goes belly-up, and Bear-Sterns caves in.
The marginal productivity of debt is an unimaginative taskmaster. It insists that new debt be
justified by a minimum increase in the GDP. Otherwise capital destruction follows ? a most
vicious process. At first, there are no signs of trouble. If anything the picture looks rosier than
ever. But the seeds of destruction inevitably, if invisibly, have sprouted and will at one point
paralyze further growth and production. To deny this is tantamount to denying the most
fundamental law of the universe: the Law of Conservation of Energy and Matter.
The captains of the banking system in effect deny and defy that basic law. They are leading a
blind crowd of mesmerized people to the brink where momentum may sweep most of them into
the abyss to their financial destruction. Yet not one university in the world has issued a warning,
and not one court of justice allowed indictments to be heard from individuals and institutions
charging that the issuance of irredeemable debt is a crude form of fraud, calling for the
punishment of the swindlers issuing it, whether they are in the Treasury or in the central bank.
The behavior of universities and courts in this regard could not be more reprehensible. Rather
than acting to protect the weak, they act to cover up plundering by the mighty.
The inconspicuous beginnings of irredeemable debt have blossomed into a colossal edifice, a
fantastic debt tower that is bound to topple upon the prevailing complacency and apathy. Actually
‘tower’ is a misnomer. Rather, what we have is an inverted pyramid, a vast and expanding
superstructure precariously balanced on a tiny and ever-shrinking gold foundation ? the only
asset in existence with power to reduce gross debt. The construction has no precedent in history,
and no place in theory, whether Ricardian, Walrasian, Marxian, Keynesian or Austrian. As a
matter of fact, no one is analyzing the process. Research has been placed under taboo by the
powers that be, lest diagnosis reveal the presence of cancer caused by irredeemability. There is
no known pattern or model that would apply to its mechanism in terms of equilibrium analysis.
Two negative conclusions emerge. One is that the edifice of irredeemable debt must grow at an
accelerating pace as markets for derivatives providing ‘insurance’ to holders of debt proliferate.
The insurer of debt must also be insured, as must the insurer of the insurers, and so on, ad
infinitum. This is due to the fact that the risk of collapsing bond values has been created by man.
In contrast, the risk of price changes of agricultural commodities are created by nature, and the
futures market provide insurance, with no need to re-insure. The other conclusion is that the
unwieldy size of the debt structure excludes the possibility of a normal correction: a major
liquidation would dwarf the calamities of the Great Depression.
It is a delusion to think that the government can splatter debt all over the economic landscape to
cover up its warts, and reap everlasting prosperity as a result. The stimulation and leverage of
debt has always caused stock markets to boom, so that the impact of debt was aided and
magnified by the added paper wealth which, in turn, increased the propensity to spend and
borrow still more. Businessmen are supposed to be more realistic in contracting debt. Yet the
pattern of increase in corporate debt has also changed tremendously. Whereas traditionally
corporations used to finance their capital needs in a ratio of $3 in debt for every $1 in stock, in the
years leading up to 1971 they issued $20 in debt for every $1 in stock, with the ratio sky-rocketing
thereafter.
We hear arguments that economists have by now learned how to control the economy with the
so-called built-in stabilizers. Debt has largely lost its sting as a consequence, we are told. For
example, bank deposits can now be insured. They couldn’t in the 1930’s. But when the
government itself is loaded with debt, and runs boom-time deficits, the built-in stabilizers may
backfire and destabilize the economy further. The government has commitments so great that its
endeavor to offset a depression in our vast economy can only result in a loss of confidence.
Anxious withholding of purchasing power in the private sector could far outweigh anything the
government can add. To make matters worse, government income is highly dependent on a
prosperous economy. The magnitude of the problem of offsetting a depression is grossly
disproportionate to resources available.
One of the marks of great delusions is that nearly everyone tends to share them. It is a sorry tale
? any delusion gives rise to a rude awakening in due course. Public attitudes to debt have
changed so radically since 1971 that today indebtedness is practically a status symbol, instead of
a shameful condition it used to be in a by-gone era. The most striking reversal in traditional
American attitudes towards debt is the widespread acceptance of perpetual national
indebtedness, copied by perpetual personal indebtedness ? a never-ending lien on future
income.
Perhaps the worst aspect of the regime of irredeemable debt is the lowest level of morals
followed by governments in modern history. It is epitomized by an elaborate check-kiting
conspiracy between the U.S: Treasury and the Federal Reserve. Treasury bonds, contrary to
appearances, are no more redeemable than Federal Reserve notes. It’s all very neat: the notes
are backed by the bonds, and the bonds are redeemable by the notes. Therefore each is valued
in terms of itself, rather than by an independent outside asset. Each is an irredeemable liability of
the U.S: government. The whole scheme boils down to a farce. It is check-kiting at the highest
level. At maturity the bonds are replaced by another with a more distant maturity date, or they are
ostensibly paid in the form of irredeemable currency. The issuer of either type of debt is usurping
a privilege without accepting the countervailing duty. They issue obligations without taking any
further responsibility for their fate or for the effect they have on the economy. Moreover, a double
standard of justice is involved. Check-kiting is a crime under the Criminal Code. That is, provided
that it is perpetrated by private individuals. Practiced at the highest level, check-kiting is the
corner-stone of the monetary system.
But our world is still one of crime and punishment, tolerating no double standard. The twilight of
irredeemable debt is upon us. The sign is that banks are reluctant to take the promissory notes of
one another. Significantly, this also includes overnight drafts. The banks know there is bad debt
at large, and they don’t want to be victimized by taking in some inadvertently. What the banks
don’t yet know, but will soon learn, is that all irredeemable debt is bad debt, and there is no way
to rid the system of poison through administering more.
Redeemability of debt is not a superfluous embellishment. It has a function of fundamental
importance: the proper allocation of resources to the different channels of their utilization. The
obligation to redeem debt hangs as the sword of Damocles over the government, just as it does
over the head of every economic participant. It compels economy and foresight. It forces
balancing of income and expenditures. It adjusts claims and commitments. It limits expansion by
shifting resources away from the incompetent, and away from unhealthy projects. The regime of
irredeemable debt creates an escape route from commitments by the promise of eliminating the
pressure of solvency. Whether it promises eternal prosperity, or it promises eternal subsidies, it
does not matter. The results are the same. They consist in misleading people, enticing them to
skate on thin ice, and luring them into financial adventures, private or public, which are not
warranted by the ability to pay. The logical consequence is wholesale bankruptcy of individuals as
well as that of the political setup. Losses breed more losses, until they become an avalanche.
The present crisis is just the first sign of that denouement. More is on the way.
It is still possible to escape the catastrophe which this process would entail. The way out is to
open the U.S. Mint to gold and silver, as advocated by presidential candidate Dr. Ron Paul. The
logic of this remedy is that it would mobilize potentially unlimited resources, presently tied up in
idled gold, and re-introduce the indispensable means of debt-retirement into the economy.
Failing to bring gold back, where are we heading? The short answer is: we are marching into the
death-valley of collectivism. The alternative to re-introducing redeemable currency is that the
debt-behemoth will force the imposition of a capital-levy type of taxation ? à la Solon, 594 B.C. |
