Down The Rabbit Hole: How To Enslave A Country

DOWN THE RABBIT HOLE: HOW TO ENSLAVE A COUNTRY

(Image from wikimedia commons)

If more debt means more money, then it stands to reason that there must be less money to go around as debt is repaid. Therefore, if the rate at which banks are making loans should be slower than the rate at which they are being repaid, this will result in a shrinking money supply. The consequences of this shrinkage are likely to be defaults on debts, bankruptcies and job loss- the kind of conditions, in other words, that's liable to see rising numbers of individuals and firms left with little choice but to borrow. So, paradoxical though it may be, any serious effort to pay off debt brings about economic conditions that leave us more indebted.

MINSKY'S HYPOTHESIS

This phenomenon may be related to the 'Financial Instability Hypothesis' that was put forward by Hyman Minsky. The gist of this hypothesis is that stability in a capitalist economy is actually destabilising, because it leads to greater risk-taking and debt. If we take an economy starting to recover from a long recession as our starting point, and we remember from the essay on loans how banks tend to be particularly cautious about lending in such conditions, then we can see how both banks and firms would err towards conservative borrowing and lending decisions. The only kind of loans likely to be taken out at this point would be small investments with minimal risk of default.

(Hyman Minsky. Image from Wikipedia)

But, as more firms succeed in paying off their debt, this will boost confidence and lenders will become more relaxed about their safety margins. This would result in more investment. As Andrew Jackson and Ben Dyson explained, "Increasing confidence in the future state of the economy leads to asset prices being revised upwards, and this, combined with the revision of acceptable debt structures increases firms’ ‘borrowing power’".

The recent recession and fledgling recovery will have resulted in a combination of rising prices and low interest rates, conditions that are favourable toward asset price speculation. The price of assets would be pushed up by such lending, and consequently holders of these assets would feel like their wealth is increasing. According to Jackson and Dyson, "Collateralised loans can be made to those who cannot afford them (for example, subprime/Ninja mortgages), safe in the knowledge that even if the borrower defaults, the assets (houses) can be repossessed and sold for a profit. Secondly, the increased demand for lending increases profits as long as banks are able to meet the increased demand for loans. This puts pressure on banks to innovate in order to increase their lending as much as possible (for example, through 'regulatory arbitrage')".

With the economy now fully in what Minsky called the 'euphoric stage', confidence is high enough for individuals and firms to become much more relaxed about carrying debt. Whereas in the post-recession stage only 'hedge' loans are taken out (that is, loans in which the borrower has the income to pay off both the principle and the interest), being able to profit from speculating on rising asset prices would lead to the emergence of 'Ponzi' loans, where the borrower has no ability to pay either the principle or the interest and is betting that it will be possible to sell the asset for more than what is owed.

All the while the economy may appear to be booming and the paper wealth of asset holders appears to be increasing. But, because most debts are being used to finance non-productive asset price speculation, there will be an increase in the economy's debt but no corresponding increase in the economy's capacity to repay its debt. As either market forces or central-bank intervention causes interest rates to rise, projects that were 'speculative' (able to pay off interest only, not the principle) at lower interest rates will become Ponzi under the new, higher rates of interest. Recall how Ponzi units have to sell their assets if they are to service their debts? Well then, the more Ponzi units there are, the more assets being brought to market there will be. But the increased interest rate means a reduction in the level of new borrowing for asset purchases, and so the increase in the asset supply combined with a decrease in demand for those assets leads to price reductions. This is bad news for borrowers in Ponzi positions, who find there is no way of escaping default.

THE BUBBLE BURSTS

The speculative bubble that had been inflating during the euphoric period is now set to burst. As nonperforming loans increase and the price of assets drops, businesses' expectations of the future are revised downwards, and in response banks reduce borrowing and charge more for loans (which is to say interest rates increase). Such conditions cause even more borrowers to see their hedge units become speculative, and their speculative units become Ponzi. People will be more pessimistic about the future, so there will be a lower demand for funding from business (caused also by the rising prices). Consequently, the expansion of the money supply that was happening in the boom period now begins to contract and in the absence of government intervention deflationary pressures will be created in the economy and the value of debt will increase, making it even harder for indebted firms and individuals to service their debts.

Summarising Minsky's hypothesis, Jackson and Dyson wrote, "periods of relative stability increase the likelihood of instability and crisis by increasing returns and thus the desirability of leverage. The banking sector, with its ability to create credit, facilitates this desire for leverage, which sets in train a series of events that culminate in recession and in some cases a financial crisis and depression".

URSURY

In describing debt in the fiat monetary system is involuntary and inescapable, some might be puzzled by the fact that there are those who don't appear to be burdened by debt in the slightest. This is explained by pointing out that the scenarios discussed above were largely concerned with the effects of paying off debt in aggregate. In reality such a scenario rarely plays out, and instead some members of society are under more pressure to get into debt and to repay it than others.

Before going on it might be worth pointing out that the systems and mechanisms under discussion here should not be considered all bad. Everything you ever hear or read about in banking and finance exists for a good reason; it's rarely the case that anything which has remained in operation in the market is straightforwardly fraudulent. Ponzi schemes, for example, often have a bad reputation but any business engaged in long-term investments will naturally lean toward Ponzi positions for at least part of their lives.

And what about the application of interest? To many of the major religions, charging a fee for lending money is called usury and is to be condemned. But, really, what is so wrong with charging interest on a loan? If you have worked to earn money and that money could be invested in boosting your own capital, then arguably there is nothing wrong with charging a fee to let somebody else risk your money.

Where the morality of all this gets murkier, however, is in those situations where interest is being charged on money that was obtained without effort and where the risks of default have been almost entirely passed on to others. This is the position that banks find themselves in. You may recall from previous essays how banks have the power to create money out of the 'promise to pay' (nothing, more or less). But anyone seeking a loan is not only charged interest on 'nothing'; they are also required to collateralise that loan by securing it against some tangible asset such as their property.

In a world where inflation eats away at money's purchasing power, where money is removed from the real economy to fuel speculation in non-productive assets and where interest is slapped on every loan, the result is bankruptcy that is not just the consequence of bad money management on some individual's behalf, but a mathematical certainty. And, as the Zeitgeist Movement pointed out, "this means the banks, which are always owned by members of the upper class to be sure, are taking houses, cars and property of the lower classes, simply because the money they created out of thin air in the form of a loan is not being returned to them. This is, in essence, a covert form of physical wealth transfer from the lower to the upper class".

THIRD-WORLD DEBT

Furthermore, we should not suppose that people always have a choice regarding whether or not to take on the responsibility of debt repayment. During the 1970s, the OPEC countries poured enormous amounts of wealth into Western banks. So much money was poured in, in fact, that the banks hardly knew what to do with it all. So financial giants like Citibank and Chase sent agents around the world who were tasked with getting Third World dictators and politicians to take out loans. Initially, these loans had very low interest rates, but tight US monetary policies in the 80s saw those rates rise to up to 20 percent. This meant the countries simply couldn't afford to service their debts. In response, the IMF ordered these countries to take steps such as abandoning free education or selling off their assets at giveaway prices to foreign interests. The result was the third-world debt crisis and poverty imposed on millions.

Bare in mind that those millions never asked for these loans in the first place. Instead, such decisions were made by unelected dictators and foreign financial interests. The money borrowed was placed directly into Swiss bank accounts, so it really benefitted the banks and the corrupt leaders. The ordinary people gained nothing from the deal, and yet when the lenders demanded repayment it was not the dictators they pursued but rather the impoverished people of those countries.

DEBT SLAVES

No doubt plenty of those people found they had little choice but to submit to work in sweatshop labour factories, or to become economic migrants vulnerable to exploitation, their numbers and scant bargaining power forcing down wages. What effect would that have had? More people on low incomes getting into debt and more wealth pushed upwards to the minority who control fiat money.

And that, really, is the whole point. Fiat money is created in the bank, invariably ends up in the bank, and along the way structural factors ensure the lower classes tend not only to transfer their assets to the rich and pay for the excesses of the rich, but are also obliged to submit to employment in order to avoid the bankruptcies that inevitably affect someone. What we are witnessing, in other words, is the outcome of a scenario described long ago by John Adams:

"There are two ways to conquer and enslave a country. One is by the sword. The other is by debt".

REFERENCES

The Zeitgeist Movement Defined"

"Modernising Money" by Andrew Jackson and Ben Dyson

"Cryptocurrency: The Future Of Money?" By Paul Vigna and Michael J Casey

"Rethinking Money" by Bernard Lietaer and Jacqui Dunne

"The Survival Manual" by Mark Braund and Ross Ashcroft

"Financial Fiasco" by Johan Norberg.

"Where Does Money Come From?" By Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson