(A few weeks ago I accepted an old friend's offer to hang out with him in Duck, North Carolina, which is in the Outer Banks. He's an old college buddy, and it was really great to spend a few days talking about the kind of topics that interest us both.
(Today I spotted a post at A Tiny Revolution that got me thinking about the things we consider "real" or not, and then got me thinking a lot about what we're doing economically.
(Because the post touched upon a lot of the things me and my buddy had discussed, I ended up sending him a fairly lengthy email on these topics and including a link to the ATR post. I figured it was lengthy enough and, well, substantive enough that I could post it here as a diary.)
Hey, remember that discussion we had in Duck about how Math isn't actually real, that it's just a formal system we made up to help describe the world around us. As I said then, the claim that "Math isn't real" is -- strictly speaking -- not true. Math is real as a formal system, as any system of thought can really exist as a system of thought, but it doesn't have the same ontological "realness" as the physical world. It maps incredibly well onto the "real" real world (what is called an "isomorphism") that we often forget this, but it isn't real the way that the earth and the sun and the stars are real.
Geometry is a good example of how math isn’t real. We all grow up learning Euclidean geometry, but there're tons of non-Euclidean systems out there too, and although each system contradicts the others, they are all "real" to the same degree. When we evaluate the value of each system, what we are really evaluating is its efficacy for explaining, describing or mapping certain things. For example, when building a house on a residential lot, Euclidean geometry works just fine. The lot is not at all "level" -- indeed, given the curvature of the earth it pretty much can't be, but the area under consideration is so small that the curvature of the earth can be safely discounted. However, if you are plotting long-distant routes for planes traveling internationally, we have to take the curvature of the earth into account if you want to find the most efficient (i.e., shortest route, least fuel used) way to get from one place to another. Same with navigating ships over long distances. If you simply drew a straight line between two points on a Cartesian map, you'd end up traveling much longer and using more fuel than necessary. So, we plot travel routes on a globe, or on flat maps that take into account the curvature of the earth (at least we used to; now we use computer software that does the same thing), and we take those routes.
Which has the interesting effect that if you plot the shortest, quickest route this way, and then you superimpose that route on a flat, Catesian map, the map makes the route you just plotted look like you are not traveling in a straight line but are, instead, traveling in a broad arc. But the point here is that this is only what the route looks like because the flat, Euclidean geometry implicit in your standard Cartesian map is actually not very useful when plotting long distances on a curved surface. That doesn't mean, of course, that Euclidean geometry is "wrong," or "not real" -- just that it is a real system of thought that nevertheless doesn't have universal application and doesn’t exist outside of our own heads.
I've been thinking the same thing about money. Actually, I've been thinking this for a while now. Like everybody else, I always thought I knew what money was, until I took some economics courses and learned all about the different measures of money (M1, M2, etc.). It was an eye-opening experience to discover that every loan -- that is, every debt -- could increase the money supply because the extension of credit -- that is an agreement to pay back more money over time -- actually called into being money that hadn't existed before. "Money," properly understood, is simply a 6.5 billion person contract, or agreement, as to how we measure value for goods and services and -- with respect to debt and credit in particular -- how we measure the time value of goods and services. This, after all, is what "interest rates" are: it is obviously more valuable to have $100 now then it is to have $100 a year from now. If the interest rate is 10%, then what we have decided is that having $110 a year from now is just as valuable as having $100 right this moment. That right there is the time value of money.
I think I mentioned this in Duck, too, but one of the things I find helpful to keep in mind when discussing what money "is" or "is not" is the difference in experience between the Spanish, Portuguese, French, Dutch and British when the New World was being colonized. The Spanish, in particular, being the first to arrive began immediately hunting for "riches" in the form of gold, silver and jewels. They found quite a bit of these riches, loaded up their ships and year after year brought this stuff back to Europe. Immediately, it made Spain the "richest" nation in Europe, because now Spain could pay other nations for the goods and services that it wanted. However, this shortly caught up to Spain, because although Spain now had much more in the way of currency, there wasn't actually any real increase in goods and services. More money chasing the same level of goods and services had Spain experiencing years and years worth of 400% inflation levels.
On the other hand, the French and British territories in North America didn't have large deposits of gold and silver. (If such things did exist, I have no doubt that the French and British would've done exactly what Spain did; I'm not claiming that these guys were any smarter than the Spanish). So the things that got shipped back to France and Britain were things like tobacco, lumber, fur pelts, etc. (Also, sugar from Jamaica, Haiti, Barbados, Guadalupe, etc.) In other words, their economies did not get flooded with more currency, but with things that actually had intrinsic value - i.e., things that could be used in and of themselves, and not merely exchanged for other items. The influx of more goods at relatively cheap prices (after all, much of this stuff was just there for the taking . . . from the Indians), give rise to real prosperity. Before not too very long, the British and French had become much richer nations that Spain in a real sense. By the 1700's, Spain was an also-ran as a Great Power.
But the recent economic clusterfuck has got me thinking about the concept of "money" some more. To a certain extent, there has been a real diminishment of wealth in this country. When an asset, like a house, goes from being valued at $325,000 all the way down to $180,000, obviously the person who owns the house has seen a net loss in worth. But, again, this is only a monetary loss; that is, the valuation of the house has been lowered, but the house's intrinsic, ontological value has remained exactly the same. That house still provides shelter, warmth, a place to store your stuff, a place to go home to, etc., etc., etc., and so while the valuation may be lower, the intrinsic value remains exactly the same. (Take away: "value" and "valuation" are not equivalent concepts.)
The same thing is true with respect to America's manufacturing capacity, such as it is. We still have the same number of factories, the same (actually, due to population growth, greater) number of workers willing to work, all of the same natural resources, etc. But the financial debacle has halted credit, scared the crap out of tons of people, and so while all of these national assets -- including our workforce, which counts as a national asset no matter what the corporatists tend to believe (i.e., that labor is a "cost" to the bottom line) -- still exist and have exactly the same value, their valuation has plummeted because the financial world got itself in a bind and stopped credit, and that halted the economy, and without the economy humming along all of these assets are sitting idle.
And yet, now we are being told that the single greatest danger facing America is . . . the deficit?
Let's be real clear here: Bush the Dumber's decision to run up a huge deficit by (i) cutting taxes for the wealthiest Americans, and (ii) fighting two wars at once "off the books," makes it more difficult for us to do what we are supposed to do when the economy tanks: run up gov't deficits in order to keep the economy going until the private sector kicks back in. It is more difficult (presumably) because it involves going into greater debt, which means that we will have a greater debt burden to pay off. It may even make it more difficult for us to raise money, because (presumably) other nations -- China, Britain -- look at the level of debt we've accumulated and wonder if our economy will be able to grow enough to carry the increased debt load; if not, then loaning money to us may seem riskier, which means in order to attract that money we'd have to offer higher interest rates. (Although, of course, that hasn't happened. Nobody really thinks that America won't be in a position to continue to make interest payments, the U.S. bonds are still considered the safest investment in the world, and interest rates haven't moved a bit -- so a sudden loss in confidence by the world is not something we probably need to worry about).
But, again, let's be real clear here: the U.S. deficit had nothing to do with the economic collapse. The economic collapse came about because large financial institutions were willing to create bonds based on crap collateral, convinced themselves they had "diversified away" the risk that goes with bonds based on crap collateral, and then sold insurance policies multiple times on the same bad bonds which guaranteed payment to anyone holding such an insurance policy if the bond it insured went bad. And then they traded these bonds, parts of the bonds, and the insurance policies amongst themselves to further "diversify the risk" that one of these bonds might go bad.
Of course, it was all smoke and mirrors. Any 12-year old would be able to tell you that if you have a crappy investment in your portfolio, your portfolio isn’t going to turn into gold just because you decide to stock it with a lot of different crappy investments. Once housing prices stopped rising as quickly as they had over the past few years, new owners couldn't refinance and began defaulting on their mortgages in rates never seen before.
(This, by the way, is an example of the "Black Swan event" that you and I also discussed. America had never seen default rates as high as this on mortgages before -- people tend to make sure they pay their mortgages, 'cause they don't want to lose their house -- and so the bankers had insisted that it was impossible to experience default rates this high. This, of course, is stupid. Europeans had never seen a black swan until they arrived in Australia, but that didn't mean that black swans don't exist. Same/same, we had never seen default rates this high, but -- then again -- we had never had banks intentionally giving out mortgages to people with no verifiable income or credit (the "no-doc" loans). We had never had banks giving out mortgages under which people could choose to pay only their interest, at a low-low teaser rate, or pay no interest at all while they tried to flip the home or refinance it after housing prices had made it worth more. The banking system had left behind the known risk practices it used to employ (Europe) and sailed off into new, uncharted territory (Australia). Truly, truly stupid to think that things in this new "Australia of lending practices" would be just like things in the old "Europe of lending practices.")
Once default rates hit this new high, suddenly everybody realized that all the bonds that had been written using the mortgages for collateral were, well, maybe worthless. And that meant that the insurance policies that had been issued were, well, worth a lot. And they had written more insurance policies than they had written bonds. And both had been traded in just about the least transparent way possible, which meant no institution knew what any other institution had on its books. Which meant that no one knew anymore which institutions were solvent and which institutions weren't, and no one really knew whether they were solvent themselves. And they stopped lending, which caused the economy to screech to a halt, which brought on the worst economic times since the Great Depression.
But NONE of it was caused by the gov't debt load.
* * *
The problem with the debt load, though, is that most people don't understand this. I swear, talk to the Average Joe (for example, Joe the Plumber) who doesn't really follow this stuff and doesn't grasp even the most basic economic facts, and he'll tell you that the economy is bad because "we've been living beyond our means, taking in too much debt." Well, yes if you are referring to the debt churned out by Wall Street and its mortgage-backed crap bonds, etc., but NO if you mean government debt. But for decades now we've been hearing about how the deficit is gonna kill us, so when the economy goes bad and people watch politicians on the TeeVee talk about the deficit, they think the two things are connected.
(Mostly, this has been coming from Republicans. After Reagan and Bush the Smarter spent 12 years exploding the deficit, Clinton came into office and was told by Alan Greenspan that it was incumbent upon him to soothe the bankers and bond market by taking steps to get the deficit under control. If the deficit was not addressed, the banking class was afraid that interest rates would go up. "You mean," he famously said, "my domestic agenda is restricted because I've gotta clean up the mess left behind by the previous administrations?" Greenspan assured him this was the case, and Clinton spent most of his domestic agenda doing things like gutting the federal welfare system and worrying over "small ball" stuff like school uniforms. Of course, by the time he left office the federal gov't was running a surplus every year.
(Then Bush the Dumber came into office, slashed taxes for the wealthy, spent like a drunken sailor on shore leave who liked to shoot up things real good, and left a mammoth budget deficit behind, and an even more mammoth federal debt. Now Obama is in office and -- once again -- the Republicans are telling us that we can't get any of our domestic policies enacted because we've gotta soothe the banks and the bond market by getting the deficit under control. Even though, as mentioned below, there is no evidence that interest rates are going up at all.
(Anybody else think there might be a pattern?)
All of which means that now it has become impossible politically to do anything that might help the nation recover. One out of ten people are unemployed, and the stooges in DC act like this is because they "don't want to work." Like, suddenly, 10% of the American workforce woke up one day and said, "Y'know what? Fuck it. I don't feel like working today." All at once. This is plainly ridiculous. People who are out of work have families, they have food they need to pay for, electricity they have to pay for, rent/mortgage payments to meet . . . and we're supposed to think that 10% of them just suddenly decided they don't care about any of this? And while this is going on, we are being told that the deficit is the biggest problem facing America, and that we can't spend any more money, and so we are going to cut off unemployment benefits, and that this is good anyway because if people can't get unemployment benefits then they will be forced to get a job. What jobs? Where? With whom?
Taking steps to keep American families from starving to death should be the first obligation of the government -- much more so than "keeping the nation safe." I mean, let's be real, here. We have The Bomb and there isn't another country even close to being in our weight class when it comes to conventional warfare. We're safe. Nobody else is going to destroy America. But we might and, in fact, we will if we think that reducing our debt load needs to take precedence over keeping Americans from starving.
* * *
With all of this by way of background, I came across an interesting post this morning over at A Tiny Revolution, the link to which is reproduced below at the end of this email.
I thought it was interesting for a couple of reasons, not least of which is the contention that money isn’t "real." I’m pretty sure that the author means that in the same way that I meant "math isn’t real." Money exists as part of a real system, but it is just a system of thought and of values, and it has validity so long as we all – collectively – decide that it does.
(Check out the comments, as well, and you’ll see further examples of the difficulty we humans have in distinguishing between actual things and concepts, and the symbols we use to measure those things or concepts. One of the first commenters points out that gold and silver are real. Uhhmmmm . . . yeah. As others go on to explain, gold and silver are real just the same way that a dollar bill is real or a stone disk is real. But stone disks and dollar bills have little to no intrinsic value. A stone disk could be used to prop a door open, I suppose, and a dollar bill has exactly the same intrinsic value as any piece of paper of comparable size, but that doesn’t mean that – in and of themselves – they are money. Same/same with gold and silver, which can be used for jewelry, some manufacturing applications, as conducting agents, etc., but this also doesn’t mean that – in and of themselves – they are money. The fact that they function as money is nothing more than a social convention upon which everybody has pretty much decided to agree.)
I also enjoyed the fact that the author points out that paying off or defaulting on debts presents no moral issue. Debts are, as the author states, nothing more than contracts. When you borrow money, you sign a note which is nothing more than a contract that explains that – in exchange for receiving the money right now – you will pay back more money over time.
This is an important point. The law recognizes no moral obligation to satisfy contracts, although it will require you to pay contractual damages if you breach the contract. This is why you can’t get sued for punitive damages (designed to punish bad behavior) when you breach a contract. The law does not recognize that breach of a contract is bad behavior. And for a very good reason: sometimes it is in the best interests of everybody to breach a contract.
For example, suppose you had an old Ford Falcon that was in good shape and had a blue book value of $20,000, and you wanted to sell it. You need the money and so you sign a contract to sell it to John’s Used Cars for $15,000. The deal makes sense to you because you need the money now and you don’t have the same means to flog the car that John does. So you can get $15,000 immediately, which you would prefer to have rather than holding out hope that someone answers your newspaper ad and you might get a little more. John, on the other hand, can sell the car reasonably quickly for $20,000, so he will make a $5,000 profit on it.
But then you mention to your co-worker, Bill that you are going to sell the car, and Bill tells you that he has always admired the car – it reminds him of the car his dad had when Bill was growing up – and that Bill would be willing to pay you $22,000 to get the car. Even though you have a contract with John, you should breach that contract and sell the car to Bill. Because it is best for all parties. Bill has a car that he values more than $22,000, so he has come out ahead on the deal. John is out $5,000 (difference between the value of the car and what he agreed to pay you), so you’ve gotta pay John $5,000. Now he is just as well off as he would have been had you honored the agreement, and he doesn’t even have to wait to find a buyer in order to get his money. And you ended (after you paid John) with $17,000 instead of $15,000. So you are better off.
Everybody wins.
Contract law recognizes these realities, and so does not punish people who break their contracts . . . other than to insist that those people remain liable to the non-breaching party (in this case, John) for any contractual damages that party has suffered as a result of the breach.
Now, this is an important point too, because most people don’t believe this. Most people have been taught and fully believe that if you break a contract or, more specifically, if you owe money, then you have a moral obligation to pay that money back no matter what it costs you.
Bullshit. No one else in the economic world believes that. Corporations break contracts all the time, and while they may have to pay contractual damages, no one ever accuses them of being evil because they broke the contract.
And corporations break promises to pay money all the time too. How many times have we seen corporations (the airlines come to mind) go through a bankruptcy restructuring which involves them walking away from pension obligations they have to their workers, or breaking negotiated union contracts? We saw that with General Motors, when it got bailed out; suddenly, the reason we were told GM was in trouble was not because it had decided to sell huge, gas-guzzling SUVs and trucks that became unsalable when gas his $4.00/a gallon, but was because of the huge debts it owed its workers and retired workers under the contracts that GM negotiated and agreed to, and therefore – we were told – it would be okay for GM to break those contracts and screw over the workers. It made business sense.
In fact, the only contracts that I can recall being told were sacrosanct and couldn’t be broken were the banksters’ contracts. "Hey," said the banks who were gobbling up American taxpayer dollars after destroying the American economy, "we have contracts with these people to pay them a salary and a huge bonus. We don’t have a choice about paying this money." (Hmmmm . . . . I wonder what the difference is between a guy working on the assembly line at a GM truck factory, and a guy pulling in several million dollars a year on Wall Street. I wonder . . . . ).
This is the reason bankruptcy is part of our federal Constitution (a lot of people don’t know this, but bankruptcy is an area of law reserved to the federal government. It was included in our founding document, the Constitution, just like the Bill of Rights.) Bankruptcy gives people a chance to discharge debts that have so crippled them that they have no hope of ever again becoming economically productive actors if they are required to pay those debts off in full. So we have a whole area of the law – uniform across the nation – that explains how assets can be disposed of, debts partially paid, and the remaining debts discharged permanently, so that people (and businesses) can start over again. Bankruptcy makes a lot more sense than the old way of doing business, which was to throw you in jail (debtor’s prison) if you couldn’t pay your debts.
But, make no mistake, the same people calling for austerity now (gotta tighten that belt, cut off unemployment, destroy or at least drastically scale back social security) would love to go back to the old ways.
Don’t believe me? Here is a link to David Walker, on CNBC’s Squawk Box decrying how "easy" it has become for people to "walk away" from debt by declaring bankruptcy, and talking wistfully about how we used to have debtor’s prisons if you couldn’t pay your bills: http://www.youtube.com/...
The sad thing is, this type of thinking makes sense to a lot of people, because most people are decent, honest people and they do think they should be on the hook for paying off their debts no matter what the circumstances. ‘After all,’ they reason, ‘I do owe the money. I did promise to pay. I don’t want to break my word.’
A month or so ago I was listening to a news program on NPR and the topic was whether the federal government should get involved with helping people whose houses were "underwater" (declining house prices meant they now owed more than the house was worth) by getting banks to refinance their mortgages and take a partial default on the loan. The calls seemed to be running 2 to 1 against this being a good idea, because "those people borrowed the money, those people have to pay."
But this is ridiculous. For a lot of "those people," it makes a great deal more sense to let the bank foreclose on the house and try to sell it, than it does to continue to make payments on a loan that is twice the value of the house. And, y’know what, when the bank negotiated the terms of the loan the bank agreed to take that risk. The bank agreed to loan money and assume the risk of default, in exchange for taking a security interest in the home. So when the homeowner walks away and says, "Go ahead, foreclose," the bank isn’t getting screwed here . . . the bank is getting exactly what it agreed it would get. If a corporation did the same thing on an investment property, nobody would think twice about it (Shit! How many times has one of Donald Trump’s companies discharged its debts in bankruptcy? It’s been more than a few.), but – for some reason – when your neighbor does it that makes him a bad person.
Make no mistake about it . . . . the wistfulness David Walker displayed in that YouTube clip for bringing back debtors’ prisons is no exaggeration. I have come around to the belief that what the creditor class increasingly wants to create is – in essence – debt slaves.
Remember when the last bankruptcy reform bill was passed a few years ago (and that was truly a bipartisan screwing that poor- and middle-class Americans got; I’m looking at you, Joe Biden)? One of the things that they did was make it harder to discharge credit card debt. And we heard then the same sort of things we hear now about how individuals, actual honest-to-God people, have a moral obligation to pay off on the debts they undertake, and how if they can’t pay those debts it is their fault for getting in over their heads.
Really? Really? With respect to credit cards? ‘Cause I was always told – by the banks issuing the cards – that the reason the banks were charging 25%, 28%, 31% on credit cards, is because the cards are so risky. ‘Well, there is a greater chance of people defaulting on credit cards, which are not secured by any collateral, so we have to charge higher interest in order to assume that greater risk.’ That was the explanation.
But, now, we are being told that people should be forced to pay off their credit card debt in full. In fact, we are being told that – as a nation – we’ve decided to make it much more difficult for this type of debt to be discharged in bankruptcy; instead, it’ll follow you around for the rest of your life until you eventually pay it all back, 31% interest rate charges and all. Now, that sounds to me like we just eliminated a substantial portion of all this "risk" credit cards are supposed to carry with them . . . but did anyone notice the banks suddenly lowering the interest rates on their cards to reflect this lower degree of risk they were taking on? Not a chance.
The bottom line is that creditors love people who get in over their heads with debt so long as those people aren’t allowed to walk away from that debt. It is a great business model. You give a certain sum to somebody at – oh, hell, let’s be conservative – 15% interest, and now you have a guaranteed 15% rate of return on that investment. For life. It’s even better if you are one of the Big Banks with access to interest free loans from the Fed. Now you get to borrow taxpayer dollars at no cost, loan that money back to the taxpayers at 15%, and keep all the profits. Is it any wonder the Big Banks have become profitable again? I’m no business marvel, but if you loaned me money for free, let me lend it to people at 15%, and then made sure that those people would be forced to pay me back at that rate, in full . . . . yeah, I’m pretty sure I could do well in that business.
Again, this is bullshit. Any discussion about debt has to dispense with the idea that paying back debt involves any kind of moral decision. If the banks don’t want to lose money, then don’t lend money to people who can’t pay you back. If you loan money to someone to buy a house, and you secure that loan by taking a mortgage on the house, and then the borrower walks away and lets you have the house . . . well, that is what you bargained for. Quitcher whining and maybe, I dunno, get a little better at deciding what loans you want to issue. ‘Cause that’s, y’know, your job.
* * *
Well, that was a bit of diversion.
The final thing I’d like to point out about the post to which I’ve linked below, is that I’ve been wondering whether the U.S. does actually ever intend to make good on its debt.
Oh, I know . . . like we talked about, the U.S. has been looking around for a long time for a way to default on the debt it owes to its citizens. That is why we keep being told that Social Security is broke. No, it isn’t. Ever since Alan Greenspan came to Ronald Reagan in the early 1980’s and proposed that SS taxes be raised in anticipation of the increasing number of retirees when the Boomers retire, Social Security has been building up a huge savings all ready to be paid out when the crunch comes. Social Security is fine.
If . . . if the U.S. government actually honors its debts. That Social Security surplus is held in the form of U.S. bonds – safest in the world – which means that SS loaned its surplus to the U.S. operating budget in exchange for repayment at the rate of interest on the U.S. bond. This was one of the ways we could continuously cut taxes and increase spending – the fact that we were borrowing from our own Social Security trust account.
Now that it is come time to repay that money to the people who have been paying into the fund all these decades, the politicians really, really don’t want to do it. So you’ve seen a concerted effort to convince Americans that Social Security is "broke" and we have to cut benefits. If they get away with this, I think it’ll be very interesting how the U.S. government can explain to the rest of the world that: "Hey! We know we just stiffed our own citizens . . . but, c’mon, we’d never do that to you guys! You should continue to loan us money and finance our huge trade deficit." That’ll be an interesting needle to see threaded.
But, lately, I’ve begun to wonder if we won’t just end up defaulting on a portion of all the debt we owe. Again, the lenders would be stiffed, but as the article at the link below goes on to point out . . . so what? Not having to service a portion of our debt might free up enough money that the government could actually get serious again about spending money on real goods and services – infrastructure and education, for example – that might lead to real prosperity. And, if that happened, we’d be able to get credit again in a few years anyway.
So, y’know, check out the post at the link below and let me know what you think.
--Swellsman
http://www.tinyrevolution.com/...