Today our chambers of representation and government are filled with politicians and bureaucrats, who are largely careerists who cling to power, but very few statesmen who seek to secure the future generations. While this may be an overly general statement, and men and women of good faith undoubtedly also hold important positions, most seem to be unaware of the dire connection between debt and revolution. However, there is a clear connection between the ruin of societies due to debts incurred during war, and the stubborn reluctance of the holders of debt to find reasonable ways of dispensing such onerous obligations upon the common person. After incurring debt to finish the cold war, what was legitimately an existential threat to our freedoms and way of life, the United States has foolishly continued to incur debts which have now reached a critical juncture, which if not immediately addressed will lead to a time of troubles unseen in our country.
The burden of debt has led to revolutions and times of troubles which have lasted hundreds of years, all ultimately leading to the downfall of great republics and democracies. Ancient Athens is perhaps the first example worth exploring. The constitution of ancient Athens describes the situation of athens which caused the city state to suffer through it's first major recorded constitution. It is written that before Solon, the famed writer of athen's first democratic constitution, large and wealthy landowners, through deception and fraud had caused the majority of the population to fall into a deep debt, which could not be paid off. This debt caused the citizens of Athens to fall into serfdom, which eventually led them to revolt against the wealthy. Fortunately for Athens, Solon was respected by both the upper and lower classes that he was able to effect a compromise wherein he cancelled all public and private debts, pushing off the downfall of Athens of some few centuries. However, Athens, having then incurred more war debts in her war against the Persian empire, and then her feud against Sparta, built an empire and then turned what was once her allies to her serfs, demanding all the silver to pay down the debt incurred in maintaining the Athenian navy. Eventually, this so weakened Athens that she was conquered by her less civilized Macedonians to the north. Hence ended the great democracy of Athens.
The roman republic faced a similar fate, when the small landowners of the republic incurred great debts during the war against Hannibal. The subsequent years of troubles eventually led to the rise of dictators, the propagation of private armies, and the rise of an oligarchy who feuded with each other while using the common roman citizen as pawns in the political machinations of the large landowners who had swallowed up the small stakeholders of the society. After a number of dictators, self appointed or otherwise, Caesar marched on Rome and placed himself as a tyrant at the head of the roman senate. In a final attempt to save the glory of the empire after caesar's death, his nephew, Octavian, used the private wealth he inherited from his uncle, to establish the roman empire, which lasted for another 500 years before being undermined by it's own debts, incurred from paying barbarian tribes to fight it's wars ands enlarge it's empire. Another article will describe the political economic models of imperial overstretch, which more properly belongs on this blog, as admitted, many of my entries here are not scientific in any way. But I am on vacation now and do not have access to the tools required for writing something close to a scientific article.
The next example in history that comes to mind is the American revolution, which occurred because the British had incurred too much debt to pay for its 100 year war against the French, which to form as the french and Indian war in the colonies. In an act of desperation, the british government ordered the colonists to pay the debt incurred on their behalf, which as most know, ended in the declaration of independence, and the cancellation of the colonists public debt for the French and Indian war, and the establishment of a new government, after much bloodshed and war.
Quickly following this, and perhaps from the same 100 year war with the english, the French monarchy could no longer maintain it's public debt, and after a failed attempted to raise taxes from the estates general, who were themselves too indebted to save their system of government, the French revolution occurred, which ended in the napoleonic wars and a deep reaction within Europe, which halted progress and change for nearly half a century.
During world war 1 the Russian empire incurred debt which it could not pay, and soon thereafter, the soviet union arose. The Russian revolution was one of the bloodiest and most feared among for the international instability it caused. The soviets were able to reestablish a semblance of stability by canceling it's foreign debt,
The German civilization, which held some of the greatest achievements in philosophy, music, literature, and science at the time, and perhaps still, also collapsed soon thereafter, when it's war debts led to inflation, the concomitant loss of faith in the newly established Weimar republic and rise of hitler, who also canceled the public debt of germany. However the damage to the society, which is only as strong as it's weakest and youngest generation was done, and the society devolved into one which exalted magical thinking over rationality and science.
Finally the soviet union, which was relatively stable and successful in modernizing itself, despite the repression of it's people, was also finally undermined by the war debts it incurred after the war in Afghanistan.
This brings us to the united states. While it is also true that there were many countries which were able to incur debt without collapsing, such as the british (I cannot think of many others off the top of my head), although their empire did collapse due to their debts as did the French empire of the 20th century, the examples are difficult to find. The total national or federal debt is ~14 trillion (I won't bore you with all the zeros). The total state and local debt is 3.22 trillion. The total unfunded liabilities is 59-100 trillion. While the total us household and nonprofit net worth (assets such as ownership of land, private corporations, bonds, and other valuables minus liabilities such as us household debt which is 13.5 trillion including mortgages, credit debt, and other financial obligations stands) is said to be approximately 55 trillion. Thus, if we temporarily forget about unfunded liabilities, since those liabilities would ultimately be paid out to households, the total net value of the united states stands at perhaps 38 trillion.
Not too bad, although there is no way those unfunded liabilities are going to be paid out, given it is 2 to 3 times the total value of all the wealth possessed by the citizens of the us, unless of course there is inflation, which there will be, since the fed has raised it's inflation targets. This is probably what Tim geithner means when he repeated states in his congressional Testimony that a deficit with a growth rate of 2-3% of GDP is sustainable, since he assumes that there is not only economic growth, but also inflation to make up the spread in the interest rates the us treasury pays for its debt. However, this is a dangerous assumption given the loss in confidence many lenders, both foreign and domestic are having in the us, with many major credit agencies warning of a potential downgrade in their rating of us paper. further, given the erosion in human capital among the young of today and their penchant for studying unproductive subjects and racking up more debt to do so, it does not seem likely that the current rates of economic growth will continue in a straight line regression as most economic models tend to assume. Remember, these are the same economic models which predicted that home prices would also continue to rise at steady rates...forever. In fact, they dropped by almost 50% and have not recovered. I have not looked at the congressional budget offices projection that healthcare reform will actually reduct the debt in the future after another initial spike, but given the past performance of government economists, this idea should also be taken with a grain of salt.
So is there a solution? Perhaps it lies in convincing the holders of us government debt. So who is the largest holder of us debt? From the agitprop being spewed by the media some might say, china! That would seem troublesome, but in fact, china and other foreign countries hold only a small portion of our debt. The largest holders of our national debt, which will have to rise in order to pay for the unfunded liabilities, is actually...the federal reserve bank, and the social security trust fund.
The government owes itself more money than anyone else. How does that work? The social security trust fund is actually comprised of treasury notes, since the government already borrowed all the cash we have faithfully paid into that fund and has already spent it. with that pot of cash gone, the federal reserve is the lender of last resort, and it has been very busy lending the treasury money of late, although the actual labor involved is not much more than pressing a button on a keyboard. Money doesn't even have to be printed anymore. All the fed has to do is make new numbers in it's bank account and purchase treasuries with that money. One of the top holders of federal debt is also us pension funds, who can borrow money from the fed at .25% and then invest that money in more treasury bills and earn a guaranteed return on its investment, giving the government another means to borrow money.
So the federal government simply has to pay the federal reserve the 1% interest to continue operating, instead of actually raising money to pay for all the stuff it does, which as time continues to march on, and interest and debt continue to accumulate, will make the primary function of the federal government to pay interest on it's treasury bills. Already interest payments stand at something like 25% of the operating budget of the federal government. Not to worry that money is being paid into social security and back to the fed, with some going to china Europe, japan and Taiwan, who all now have a vested interest in the solvency of the united states And the system as it stands.
Now let's think about where the interest paid to the fed goes? Some of it, I believe actually a very small portion goes to private banks, but before anyone kicks and screams bloody conspiracy, this number is small. Most of the Feds profits are actually returned the treasury! So that means the interest the treasury pays on it's bills goes right back to the treasury, the pay more interest on it's treasury bills, and do all the other stuff the federal government does. Now my head is starting to get dizzy.
The implication is that the federal debt is actually somewhat meaningless, and the only real disaster would occur if the tea party maniacs have their way and revoke the fed and put us back other gold standard. But revolutions have been started by people less crazy than the tea party gold bug fanatics who do not understand an oz of our voodoo economics called monetary policy, and subscribe to something called hard money economics, which again, only benefits the rich. However, while their solutions are disastrous for the country,and would likely lead to a real bloody revolution or war, their reasoning is sound. This system does distort the economy as they say.
Money should not be viewed as an absolute value, but as a way to apportion the real resources within the economy, which include physical capital such as factories, computers and such real tangible things, land, and labor such as services, healthcare, and education, and well as consumables such as food. The public sector has worked hard to make sure we have plenty of food and services, as my assertion at the beginning of this essay about the shortsightedness of our politicians and bureaucrats may have been said in too much haste, since they do understand the ancient dictum of bread and circus to maintain stability. And this likely explains why food prices have been relatively stable, as are basic services such as tv and public education. However, the distortions to the rest of the economy are more and More apparent. Because so much of the money in America is now tied up and recycled by the federal and state government, a large portion of the economy is dictated by the needs of the public sector, serviced by the so called private sector, which is actually not private but a subsidiary of the public sector. This means more and morel people are employed by sectors which are subsidized with loans and policies from the public sector, and those that are not are doomed to wither away from lack of money, the lifeblood of the economy. Examples of such sectors are:banking, finance, large industrial corporations, insurance, automobiles, utilities, military armaments, academia, healthcare and high technology. Nothing wrong with that. All those sectors of the economy do nice thing, Except that the government directly and indirectly picks winners and losers. Losers such as the suckers who purchased real estate at the high of the market in 2007. Suckers such as people who do not wont to work in command style hierarchies which are cavorts by the public sector. Command style organizations, which have grown to be larger than the entire soviet bureaucracy once was. While small businesses, the building blocks of free enterprise and the foundation of the so-called american dream are left to fend for themselves within the winds of government policy. Individuals can no longer expect to make a living without being dependent on a large organization overseeing their activities. Not even doctors, lawyers, merchants and farmers can expect to be freeholders in our society. The consequence being that there are very few individuals capable of making public decisions which are not beholden to some interest group.
Now I'm not going to the the "c" word to describe this (communism) since in reality it is closer lot the "s" word - and no, I am not talking about socialism, I am talking about sovietism. But this brand of public command style capitalism is uniquely American because of the subtlety of the salesmanship involved. And what could be wrong with something that is uniquely American?
Some complain my blogs only depress people, so I'm trying to keep this as uplifting as possible. thus I conclude with what I perceive as one potential policy solution which would have to originate from the federal reserve. To enlarge the scope of it's activities to direct finance of small businesses and individual entrepreneur on a small scale in a manner that is similar to micro finance, something i tentatively call jury style banking which is brief discussed and elaborated in another article. Sure it might not be profitable in thoe traditional sense, but at the least it should break even. And it will certainly perform better than the massive losses incurred by the so called private sector over the last two years, which were only printed by a similar program for large organizations created by the fed, which fed buckets of record profits to the big banks over the last two years. This program might be similarly profitable, but instead of funding a small group of self important bankers and their clients, it might actually serve to improve the skills of many more people, who ultimately comprise the true wealth of a country, as neither gold, silver, factories, or paper money have any value without skilled workers with high morale exercising their initiate and will to self improvement which has been the foundation of the success of america from it's origins.
This might smell of socialism, but let's be frank, we are already a socialistic society. However, the current brand of us socialism only serves to maintain the welfare of large organizations and their wealthy owners as well as a horde of old retiring shareholders, and finally a horde of entitled poor, who are by and large kept poor by the policies which keep them from starvation, but serve no purpose in developing their innate abilities and skills as well as developing their own sense of self worth and initiative. all three groups form voting blocks which make it far easier for politicians to secure their offices, since their audience costs, the number of people they have to satisfy to stay in power, are far reduced. The federal reserve holds the key to preventing a collapse of the system due to the enormous inefficiencies a demoralized and deskilled population created by this perverse system of economics, just as the federal reserve holds the majority of government debt. But whatever the solution, it has to be implemented not in 20 years when social security collapses. Or when retirees find out their pensions are worthless except to buy subsidized corn, and corn syrup products, and universal healthcare with long queues. The solution needs to be implemented tomorrow, and the electorate must demand this from their representatives instead of throwing out nonsense solutions such as reverting to the gold standard, which is understandable given the complexity of the problem, the reluctance of mainstream policy makers and commentators from addressing the real problems in the economy, and the demagogic appeal of the tea party message and their aesthetically pleasing spokespersons.