Wednesday, February 29, 2012

Thinking about debt and money

New monetary discussions are beyond necessary.  But, I have been waiting for someone else to bring up the subject because even though my chapter on monetary theory is by far the most downloaded of any in Elegant Technology, there is so much bad information out there and so many crazy people pushing crazy theories (a return to the Gold Standard, anyone?) I wasn't about to emphasize my own monetary discoveries until some more mainstream types got on board.  This has taken far longer than I expected. There is plenty of source material from especially the 1870s through the 1890s when money was the hottest political topic in the land.  So serious scholars should have been able to build their cases quickly.  But anyway, I am NOT about to bitch about the new blood now that they finally shown up.

Here's what we know.  The monetary progressives won a significant victory.  Money has evolved even beyond paper.  It is now as flexible as any time in history.

Unfortunately, we are still stuck with the myths from the old gold days.  Can we destroy those myths before they kill us?  Time will tell.  But folks are now working on it.

What We Owe to Each Other
An Interview with David Graeber
David V. Johnson FEBRUARY 15, 2012

David Graeber leads a busy double life. By day, he is an anthropologist at Goldsmiths, University of London. By night, he is an anarchist and activist, best known for being the “Anti-Leader of Occupy Wall Street,” as Bloomberg Businessweek dubbed him. In his latest book, Debt: The First 5,000 Years, Graeber marries his academic and activist selves by dissecting our moral confusion about debt, showing both how contingent our intuitions are in the light of anthropology and how our obtuseness has led to the mass suffering of austerity programs and financial crashes. In part one of his two-part interview, Web Editor David Johnson talks to Graeber about why we don’t put babies’ lives ahead of Citibank’s shareholders, what it means to be a conservative nowadays, and whether we should renew the tradition of debt jubilees.

David Johnson: What inspired you to write the book?

David Graeber: It came out of the strange moral power that debt has over people. So many times you’re talking to people about the depredations of the International Monetary Fund in the third world, telling these horrible stories about the thousands of babies dying of preventable diseases because people aren’t allowed to maintain malaria-eradication campaigns or basic health services due to austerity measures and debt servicing, and people respond, “Well, yeah, but you can’t say they don’t owe the money. People have got to pay their debts, come on!” That common-sensical notion not only that it’s moral to pay one’s debt, but also that morality essentially is a matter of paying one’s debts can bring people to justify things that they would never think to justify in any other circumstance. For the most part, decent people tend not to think killing lots of babies is justifiable under any circumstances. But debt somehow changes all that. Why is that?

DJ: You launch the book with an anecdote about debating an attorney who was an otherwise decent person but who insisted that countries indebted to the IMF must pay back their loans. The book is a sort of rejoinder to her and to people like her, but it’s a very long-winded answer, in that you appeal to 5,000 years of history and anthropology. Why doesn’t your immediate answer—“Look, the consequences of forcing these countries to pay their debt are babies dying of malaria and starvation”—suffice?

DG: Obviously my immediate answer wasn’t enough or she wouldn’t have said what she did. That’s why I felt I had to write the book: because you’d think it would be self-evident that killing thousands of babies—so that Citibank avoids losing one percent of its interest on a loan which is the tiniest percentage of its portfolio and will not actually affect the lives of their shareholders in any way—is wrong. You would think that would be morally self-evident, but it’s not.

DJ: In some ways the argument of the book reminded me of the philosopher Bernard Williams.

DG: How so?

DJ: He thought that morality was a “peculiar institution” in that it places so much weight on the notion of obligation over all our other values, and things we care about and find important—the thought that we ought morally to do something is supposed to trump everything else we value. In a similar way the book examines how debt—the notion that you ought to pay your debt, you ought to pay what you owe—has this peculiar grip on us that trumps or silences other concerns. more
Just to prove that Graeber is not exaggerating things, we see this news out of India.  When they gave the Peace Prize to the Grameen Bank in 2006 for "microfinance" as a favored route to economic development, I knew that oil money had turned the Norwegians into hopeless neoliberal yuppies. (Nuppies?)
Hundreds Of Suicides In India Linked To Microfinance Organizations
Feb. 24, 2012

MUMBAI, India (AP) — First they were stripped of their utensils, furniture, mobile phones, televisions, ration cards and heirloom gold jewelry. Then, some of them drank pesticide. One woman threw herself in a pond. Another jumped into a well with her children.

Sometimes, the debt collectors watched nearby.

More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the government of the south Indian state. The state blamed microfinance companies — which give small loans intended to lift up the very poor — for fueling a frenzy of overindebtedness and then pressuring borrowers so relentlessly that some took their own lives.

The companies, including market leader SKS Microfinance, denied it.

However, internal documents obtained by The Associated Press, as well as interviews with more than a dozen current and former employees, independent researchers and videotaped testimony from the families of the dead, show top SKS officials had information implicating company employees in some of the suicides.

An independent investigation commissioned by the company linked SKS employees to at least seven of the deaths. A second investigation commissioned by an industry umbrella group that probed the role of many microfinance companies did not draw conclusions but pointed to SKS involvement in two more cases that ended in suicide. Neither study has been made public.

Both reports said SKS employees had verbally harassed over-indebted borrowers, forced them to pawn valuable items, incited other borrowers to humiliate them and orchestrated sit-ins outside their homes to publicly shame them. In some cases, the SKS staff physically harassed defaulters, according to the report commissioned by the company. Only in death would the debts be forgiven. more
And here we find Michael Hudson explaining (VERY WELL) the principles that informed the monetary discussions of my youth.  From the National Farmers Alliance to the Greenback Party to the Non-Partisan League to the Social Credit movement, to the National Farmers Organization, almost everyone between the Appalachian Mountains and the Sierras, from Mexico to well into Canada, agreed with some version of what Hudson told a cheering throng in Italy monday night.  I am so delighted he is doing this, I want to give him a hug!
Two Thousand Italians pack a Sports Arena to learn that There Is An Alternative
Our Very Own Oscar Night in Rimini

I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature.

The conference was organized by reporter Paolo Barnard, who had studied MMT with Randall Wray and realized that there was plenty of demand in Italian mass culture for a discussion of what actually was determining the living conditions of Europe – and the emerging financial elite that hopes to use this crisis as an opportunity to become the new financial lords carving out fiefdoms, privatizing the public domain being sold off by governments that have no central bank to finance their deficits, beholden to bondholders and to Eurocrats drawn from the neoliberal camp.

Paolo and his enormous support staff of translators and interns provided an opportunity to hear an approach to monetary and tax theory and policy that until recently was almost unheard of in the United States. Just one week earlier the Washington Post published a review of MMT, followed by a long discussion in the Financial Times. But the theory remains grounded primarily at the UMKC’s economics department and the Levy Institute at Bard College, with which most of us are associated.

The basic thrust of our argument is that just as commercial banks create credit electronically on their computer keyboards (creating a bank account credit for borrowers in exchange for their signing an IOU at interest), governments can create money. There is no need to borrow from banks, as computer keyboards provide nearly free credit creation to finance spending.

The difference, of course, is that governments spend money (at least in principle) to promote long-term growth and employment, to invest in public infrastructure, research and development, provide health care and other basic economic functions. Banks have a more short-term time frame. They lend credit against collateral in place. Some 80% of bank loans are mortgages against real estate. Other loans are made to finance leveraged buyouts and corporate takeovers. But most new fixed capital investment by corporations is financed out of retained earnings.

Unfortunately, the flow of earnings is now being diverted increasingly to the financial sector – not only to pay interest and penalties to banks, but for stock buybacks intended to support stock prices and hence the value of stock options that managers of today’s financialized companies give themselves. As for the stock market – which textbook diagrams still depict as raising money for new capital investment – it has been turned into a vehicle to buy out companies on credit (e.g., with high interest junk bonds) and replace equity with debt. Inasmuch as interest payments are tax-deductible, as if they were a necessary cost of doing business, corporate income-tax payments are lowered. And what the tax collector relinquishes is available to be paid out to the bankers and bondholders who get rich by loading the economy down with debt.

Welcome to the post-industrial economy, financialized style. Industrial capitalism has passed into a series of stages of finance capitalism, from the Bubble Economy to the Negative Equity stage, foreclosure time, debt deflation, austerity – and what looks like debt peonage in Europe, above all for the PIIGS: Portugal, Ireland, Italy, Greece and Spain. (The Baltic countries of Latvia, Estonia and Lithuania already have been plunged so deeply into debt that their populations are emigrating to find work and flee debt-burdened real estate. The same has plagued Iceland since its bank rip-offs collapsed in 2008.) more


  1. I´m am not a communist, I couldn´t be since I have never read any Carl Marx book.
    But there really really should be an upper limit to the amount of money (or digital credit or whatever represents the "ability to pay goods")a single person can own. I´d say the price of a normal house in the western countries (300.000 USD).

    Could the folks that studied economics come up with a scientific upper limit?

  2. That is quite all right to not be a Marxist and still be interested in monetary theory. I have heard monetary discussions since I was a boy and I cannot think of one person who was a Marxist so it's obvious this is not a debate favored by them. In fact, this is why I have never been interested in the theories of Marx.

    I have provided a link to my chapter in "Elegant Technology" on monetary theory. I discuss the subject in much greater depth there. Hope you can read it. But yes, there are limits to how much money can legitimately be created. This limit is a result of many factors but the most serious limit is imposed by the environment. The other important factor is the upper limit imposed by the skills and hard work of the population. The only factor that doesn't make the list is what the banksters want.