Money and the Turning of the Age

SUBHEAD: When debts become unpayable.
By Charles Eisenstein on 13 March 2009 in Reality Sandwich http://www.realitysandwich.com/money_and_turning_age [Editor's note: Please, click above to read all of this lengthy article at its source.]
This article is fourth in a series, and draws on background covered in "Money: A New Beginning," Part 1 and 2, and "Money and the Crisis of Civilization."
image above: A view of Orlando. Florida's "WonderWorks" from http://edp.org/Travel/Florida/index.html
As the economic meltdown proceeds to its next phase, we begin to see the unreality of much that we thought real. The verities of two generations become uncertain, and despite a lingering hope that a return to normalcy is just around the corner -- in "the third quarter of 2009" or "by the middle of 2010" -- the realization is dawning that normal isn't coming back. When faced with an abrupt shift in personal reality, whether the death of a loved one, or the Gestapo coming into town, human beings usually react first with denial. My first response when tragedy hits is usually, "I can't believe this is happening!" I was not surprised, then, that our nation's political and corporate leaders spent a long time denying that a crisis was underway. 
Consider some quotes from 2007: "The country's economic fundamentals are sound," said George W. Bush. "I don't see subprime mortgage market troubles imposing a serious problem. I think it's going to be largely contained," said Treasury Secretary Paulson. "A recession is unlikely." "We are experiencing a correction in the housing sector." "America is not in recession." "It is likely that housing prices won't recover until early 2009." Of course, many of these pronouncements were insincere, efforts at perception management. The authorities hoped that by controlling the public perception of reality, they could control reality itself; that by the manipulation of symbols they could manipulate the reality they represent. This, in essence, is what anthropologists call "magico-religious thinking." It is not without reason that our financial elites have been called a priesthood. Donning ceremonial garb, speaking an arcane language, wielding mysterious inscriptions, they can with a mere word, or a mere stroke of a pen, cause fortunes and nations to rise and fall. You see, magico-religious thinking normally works. Whether it is a shamanic rite, the signing of an appropriations bill, or the posting of an account balance, when a ritual is embedded in a story that people believe, they act accordingly, playing out the roles the story assigns to them, and responding to the reality the story establishes. In former times, when a shamanic rite was seen to have failed, everyone knew this was a momentous event, signaling the End of the World, a shift in what was real and what was not, the end of the old Story of the People and the beginning, perhaps, of a new one. What, from this perspective, is the significance of the accelerating failure of the rites of finance? We like to scoff at primitive cave-dwellers who imagined that their representations of animals on cave walls could magically affect the hunt. Yet today we produce our own talismans, our own systems of magic symbology, and indeed affect physical reality through them. A few numbers change here and there, and thousands of workers erect a skyscraper. Some other numbers change, and a venerable business shuts its doors. The foreign debt of a Third-World country, again mere numbers in a computer, consigns its people to endless enslavement producing commodity goods that are shipped abroad. College students, ridden with anxiety, deny their dreams and hurry into the workforce to pay off their student loans, their very will subject to a piece of paper with magical symbols ("Account Statement") sent to them once every moon, like some magical chit in a voodoo cult. These slips of paper that we call money, these electronic blips, bear a potent magic indeed! How does magic work? Rituals and talismans affirm and perpetuate the consensus stories we all participate in, stories which form our reality, coordinate our labor, and organize our lives. Only in exceptional times do they stop working: the times of a breakdown in the story of the people. We are entering such times today. That is why none of the economic measures enacted so far to contain the crisis have worked, and why the current stimulus package won't work either. None go deep enough. The only reform that can possibly be effective will be one that embodies, affirms, and perpetuates a new story of the people (if we can agree on one). To see what that might be, let us dig down through the layers of failing realities and their relationship to money. When the government's first response to the crisis -- denial -- proved futile, the Federal Reserve and Treasury Department tried another sort of perception management. Deploying their arsenal of mystical incantations, they signaled that the government would not allow major financial institutions such as Fannie Mae to fail. They hoped that their assurances would be enough to maintain confidence in the assets that depended on these firms' continued solvency and prosperity. It would have worked if the story these symbolic measures invoked was not already broken. But it was. Specifically, what was broken was the story assigning value to mortgage-backed securities and other derivatives based on unrepayable loans. Unlike camels or bushels of grain, but like all modern currencies, these have value only because people believe they have value. Moreover, this is not an isolated belief, but is inextricably linked with millions of other beliefs, conventions, habits, agreements, and rituals. The next step was to begin injecting massive amounts of cash into failing financial institutions, either in exchange for equity (effectively nationalizing them, as in the case of Fannie Mae, Freddie Mac, and AIG), or in exchange for essentially nothing whatsoever, as in the TARP program. In the latter, the Treasury Department (using your tax dollars) guaranteed or bought banks' toxic assets in hopes of improving their balance sheets so that they would start lending again, thus keeping the credit bubble expanding. It didn't work. The banks just kept the money (except what they paid to their own executives as bonuses) as a hedge against their exposure to untold quantities of additional bad assets, or they used it to acquire smaller, healthier banks. They weren't about to lend more to consumers who were already maxed out, nor to over-leveraged businesses in the teeth of a recession. Property values continued to fall, credit default rates continued to rise, and the whole edifice of derivative assets built upon them continued to crumble. Consumption and business activity plummeted, unemployment skyrocketed, and people in Europe began rioting in the streets. And why? Just because some numbers changed in some computers. It is truly amazing. It only makes sense when you see these numbers as talismans embodying agreements. A supplier digs minerals out of the ground and sends them to a factory, in exchange for what? For a few slips of paper, or more likely, in exchange for some bits moving around in a computer, which can only happen with the permission of a bank (that "provides credit"). Before we become too alarmed about the impending giveaway of $8 trillion dollars on top of the $2 trillion we have already given to the wealthy, let us touch back again upon the reality of money. What actually happens when this money is given away? Almost nothing happens. What happens is that bits change in computers, and the few people who understand the interpretations of those bits declare that money has been transferred. Those bits are the symbolic representation of an agreement about a story. This story includes who is rich and who is poor, who owns and who owes. It is said that our children and grandchildren will be paying these bailout and stimulus debts, but they could also simply be declared into non-existence. They are only as real as the story we agree on that contains them. Our grandchildren will pay them only if the story, the system of meanings, that defines those debts still exists. But I think more and more people sense that the federal debt, the U.S. foreign debt, and a lot of our private mortgage and credit card debts will never be repaid. We think that those Wall Street tycoons absconded with billions, but what are these billions? They too are numbers in computers, and could theoretically be erased by fiat. The same with the money we owe China. It could be gone with a simple declaration. We can thus understand the massive giveaways of money in the TARP, TALF, and PPIF programs as yet another exercise in perception management, though this time it is an unconscious exercise. These giveaways are ritual acts that attempt to perpetuate a story, a matrix of agreements, and the human activities that surround it. They are an attempt to uphold the magical power of the voodoo chits that keep the college grad on a career path and the middle-aged man enslaved to his mortgage; that give the power to a few to move literal mountains, while keeping the many in chains. Speaking of China, I find it instructive to look at the physical reality underlying the trade deficit. Basically what is happening is that China is shipping us vast quantities of stuff -- clothes, toys, electronics, nearly everything in Wal-Mart -- and in return we rearrange some bits in some computers. Meanwhile, Chinese laborers work just as hard as we do, yet their day's wages buy much less. In the old days of explicit empires, China would have been called a "vassal state" and the stuff it sends us would have been called "tribute." Yet China too will do everything it can to sustain the present Story of Money, for essentially the same reason we do: its elites benefit from it. It is just as in Ancient Rome. The elites of the imperial capital and the provinces prosper at the expense of the misery of the people, which increases over time. To keep it in check, in the capital at least, the masses are kept docile and stupid with bread and circuses: cheap food, cheap thrills, celebrity news, and the Superbowl. Whether we declare it to end, or whether it ends of its own accord, the story of money will bring down a lot with it. That is why the United States won't simply default on its debt. If it did, then the story under which the Middle East ships us its oil, Japan its electronics, India its textiles, and China its plastic would come to an end. Unfortunately, or rather fortunately, that story cannot be saved forever. The reasons are complex, so I'll just point you in the right direction if you want to research it yourself. Essentially, at some point China (and other creditor nations) will have to appreciate its currency, replace exports with domestic demand, and raise interest rates in order to combat disastrous inflation caused by its pumping yuan into its economy in exchange for all the dollars flowing in from its exporters. The result will be a run on the dollar, a global calamity that will put an end to money as we have known it. When that happens, our government will have only two choices: extreme austerity measures such as those we have long perpetrated on other countries through the IMF, or a bout of currency-destroying hyperinflation. The latter is probably inevitable; austerity would only stave it off temporarily. That would be the end of our current story of money, for it would render all financial wealth (and debt) worthless. When money evaporates as it is doing in the current cycle of debt deflation, little changes right away in the physical world. Stacks of currency do not go up in flames (but even if they did, that is not too momentous a physical event). Factories do not blow up, engines do not grind to a halt, oil wells do not dry up, people's economic skills do not disappear. All of the materials and skills that are exchanged in human economy, upon which we rely for food, shelter, transportation, entertainment, and so on, still exist as before. What has disappeared is our capacity to coordinate our activities and focus our common efforts. We can still envision a new airport, but we can no longer build it. The magic talisman by which the pronouncement, "An airport shall be built here" crystallizes into material reality has lost its power. Human hands, minds, and machinery retain all their capacities, yet we can no longer do what we once could do. The only thing that has changed is our perceptions. Clearly, the TARP program and other bailouts are also an exercise in perception management, but on a deeper, less conscious level. Because what is money, anyway? Money is merely a social agreement, a story that assigns meaning and roles. The classical definition of money -- a medium of exchange, a store of value, a unit of account -- describe what money does, but not what it is. Physically, it is now next to nothing: slips of paper, bits in computers. Socially, it is next to everything: the primary agent for the coordination of human activity and the focusing of collective human intention. The government's deployment of trillions of dollars in money is thus little different from its earlier deployment of empty words. Both are nothing but the manipulation of various types of symbols, and both have failed for an identical reason as well: the story they are trying to perpetuate has run its course. The normalcy we took as normalcy was unsustainable. It is unsustainable on two levels. The first level is the debt pyramid, the exponential growth of money that inevitably outstrips the real economy. The first level of unsustainable normalcy is based on what Michael Hudson calls "the miracle of compound interest." Interest rates always tend to exceed the rate of real economic growth, which in the absence of defaults means that money grows faster than the volume of goods and services it buys, and that debt grows faster than gross domestic product (GDP). This has indeed been the case in the last 60 years in the United States, as private debt has risen from about 50% to about 350% of GDP. This cannot go on forever: to take an extreme example, a dollar invested at only 3% interest in the year 1 A.D. would be worth about $100,000,000,000,000,000,000,000,000 today. Such sustained exponential growth is obviously impossible, so what happens? What must happen is that from time to time, some of this money must disappear through one of two ways: defaults, or inflation. Both of these results are ultimately good for debtors and bad for creditors; they transfer wealth to those who owe from those who own. Inflation means that the real value of loans shrinks over time: loans are repaid with cheaper dollars. Defaults mean that some creditors don't get paid back at all, and have to take a loss. U.S. fiscal policy for the last two generations has attempted to prevent both, but the narrow road between them is shrinking to nothing. If income from production of goods and services is insufficient to service debt, then the creditors begin to seize assets instead. This is what has happened both in the American economy and globally. Mortgages, for example, were originally a path toward owning your own home free and clear, starting with 20% equity. Today few ever dream of actually one day repaying their mortgage, but only of endlessly refinancing it, in effect renting the house from the bank. Globally, Third World countries find themselves in a similar situation, as they are forced to sell off national assets and gut social services under IMF austerity programs. Just as you might feel your entire productive labor is in the service of debt repayment, so is their entire economy directed toward producing commodity goods to repay foreign debt. Eventually, debtors run out of seizable assets. The crash underway today should have actually happened many years ago, except that various phony and inflated assets were created to keep it going a little longer as the financial industry cannibalized itself, covering debt with more debt. The efforts to shore up this edifice cannot work, because it must keep growing -- all those debts bear interest. Yet the authorities keep trying. When you hear the words "rescue the financial system," translate it in your mind into "keep the debts on the books." They are trying to find a way for you (and debtor nations too) to keep paying and for the debt to keep growing. A debt pyramid cannot grow forever, because eventually, after all the debtors' assets are gone, and all their disposable income has been devoted to debt payments, creditors have no choice but to lend debtors the money to make their payments. Soon the outstanding balance is so high that they have to borrow money even to pay interest, which means that money is no longer flowing, and can no longer flow, from debtor to creditor. This is the final stage, usually short, though prolonged in our day by Wall Street's financial "wizardry." The loans and any derivatives built on them begin to lose their value, and debt deflation ensues. I have just described the leadup to a deflationary depression. As it dawns on our leaders that we are not experiencing a mere "retrenchment," "correction," or "recession," but are at the brink of a full-fledged deflationary depression, they are now beginning to act accordingly. When debts become unpayable, one can either reduce or eliminate the debt entirely, or one can try to increase the income of the debtor so that he can continue to make payments. The holders of wealth, whose interests determine government policy, would obviously prefer the latter, since a reduction in your debt is a reduction in their wealth. Consequently, the first response of the Obama administration to the deflationary crisis is economic stimulus. It will be more reluctant to adopt the second option, although we are beginning to hear calls for bank nationalizations, debt writedowns, and debt forgiveness now as well. Both responses have as their ultimate goal the reigniting of economic growth, something nearly everyone agrees on. Here we enter into a second, deeper, story of money. I believe that even the most radical measures proposed today can have at best only a temporary effect: if they instigate economic growth it will be anemic and short-lived. That is because economic growth as we define it today, and money as we define it today, is part of a Story of the People that too is becoming obsolete. Reflecting this obsolescence, the true nature of the crisis will become apparent as each progressively more radical solution fails to restore the status quo. What we are facing today is not merely a Minskian bubble collapse, nor merely, even a deflationary unwinding of credit: it is nothing less than a Marxian "historical crisis of capital," resurging now at a time when all the measures that have kept it at bay for two centuries have finally been exhausted.

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