Saturday, May 23, 2009

The War on Debt

America, fuck yeah! Though seriously, today's missive regards the analogous campaign in the UK. Martin Wolf is always worth a read, and his column about how the UK should get tougher on its banking sector (or die trying) is no exception. But I've been over this argument that finance as an industry needs to shrink so many zillion times now that I'm starting to get bored with it. What really caught my eye in the column was this phrase:

The fiscal costs of this crisis will be comparable to those of a big war.

One of the interesting things about this crisis is the way it echoes some of the things that happened the last time we had a big financial crisis, ie. the Great Depression. Proceeding strictly by analogy, you would expect that the bursting of a massive credit bubble would result in debt-deflation, failed financial institutions and a massive contraction in the economy. Back then, the solution lay partly in the New Deal, but mostly in WWII, the greatest public works program of all time. Does this mean that we're in for an inevitable world war?

My arch rhetorical question makes it obvious that I expect history to rhyme rather than repeat itself, as the saying goes. We're not going to have another world war, I propose, because we already had one. Isn't that what Wolf's offhand remark suggests? We already had the war in the sense that we already paid for it, which, from an economic perspective, is the only thing that counts.

Bear with me here and we'll see if this makes sense.

Normally people only dedicate a lot of time to working and making stuff because they anticipate that in the not too distant future they will get something they want in return. This is great as long as everybody else keeps working so that your incremental output kind find a buyer. If your customer decides he can simply make do with less, then when you go to exchange your own output with him, you are bound to get less in return. This reduces your incentive to work, which then reduces his incentive to work, and ... it's the paradox of thrift all over again.

One good way to cure this is debt. In a closed system with inviolable contracts, debt is really just a promise to keep working. I can give you what I made today in exchange for just the promise that tomorrow you'll make some stuff for me. As long as we both keep our word and things stay more or less equal (I made promises to you and you made as many to me) this is a great way to overcome all kinds of timing issues like who has what and when -- we'll all just keep making stuff and it will come out in the wash at the end.

Unfortunately, debt has a tendency to get unbalanced. Let's imagine I'm doing all the lending because I'm making a lot more stuff than you are (relative to the amount I'm consuming myself). After a while it's going to seem like I'm doing all the work and you're doing all the promising, and we both start to get worried. I'm worried that you're not really going to keep working, and you're worried that you're just going to be working forever like a sharecropper, while I kick back and live off your foolish promises. So we both, quite rationally, stop working, and rideshare the same handbasket to hell (or at least reduced production). I guess this could happen with debt at any point, as any promise can be broken if trust collapses, but it seems to me that it's especially exacerbated in periods of income inequality, where one segment of the population is a net debtor and one a net creditor. When a system of mutual promises like this unwinds it runs the logic of economic cooperation in reverse, and we get a great depression.

I promise I'm heading somewhere with all that. It seems that the process of debt accumulation, if it gets unbalanced, came come to a sudden halt and then run in reverse. So the boom in credit, the bust, and the ensuing need to pick up the pieces are all linked.

Since the Great Depression of course, we have relied on the government to actively step in and pick up the pieces, rather than let the cycle of debt-deflation run its course. To stop it, you have to somehow get everybody to trust that they will be rewarded if they go back to work. Back in the day this was easier. The pharaohs were the only real consumers and were net debtors in a real sense (the slaves worked while they genetically engineered their cats) but they also controlled the apparatus of credit and technology. Instead of paying the slaves in food, you paid them in religion. A more modern society, even a fairly religious one like the USA, is more steely-eyed and cynical than this ... except when it comes to WAR.

War is really just a good excuse to keep everybody working and making stuff. Better yet, the stuff you make for war doesn't allow you to be any more productive -- it just explodes in the air or even reduces the total productive capacity by destroying your neighbors factory. It's the little piece of religion that an out of balance capitalist system needs in order not to collapse. War is a means of enforcing frivolous consumption that also allows the system to consolidate distributed debt (you owe me and I owe you) into one giant federal debt. If you make your definition of war more abstract, or just focus on its economic consequences, you can see how we've already been involved in one.

That's my story, which sets up my punch line, namely that debt is already a form of fascism. At first, it manifests the good side of fascism, the fact that we're all cooperating and working a lot now without worrying how we will be compensated in the future. But then it tips over into the totalitarian side of the phenomena -- you can't stop working, you need to keep marching alongside everyone else and produce more than you consume so that it can be symbolically wasted, or the whole system will fall apart. This time we're just wasting it on bankers instead of bombs.

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