Sunday, September 26, 2010

Default Is Class Warfare

Many people believe that debt is more-or-less equally distributed across all social classes and therefore cancels out amongst them.  The example that is frequently, if totally erroneously, used is that Joe Janitor borrows money from Pete Policeman who has deposited his savings at a bank.  Unfortunately,  this type of financial reality only exists in the movies - for example in "It's A Wonderful Life"  with its Bailey Building and Loan Association.  In the film bankers are the good guys who try to create social justice and equality by lending to one and all, while an evil slumlord is trying to bring them down.

However, "real" financial reality is much closer to a much older work of fiction: Dickens' "A Christmas Carol"  and the chasm separating Ebenezer Scrooge from Bob Cratchit.  That is to say, a small percentage of people (the "monied" class) hold as assets the debts of everyone else.

With this is mind, I maintain that the assumption, service and ultimate default of debt is best analyzed  and understood not in terms of straight economics but as aspects of political and social science, at least where household and public debt is concerned (public debt being another form of personal debt, since it is assumed in the name of the people).  Straight economics - if there ever was such a thing - is completely inadequate to help us understand the dynamics involved, particularly when debt exceeds a certain percentage of income and becomes onerous.

Most every politician and economist will forcefully say the same thing: default is equivalent to disaster.  Really?  Why?

If the "bottom" 90% of the people owe their debts to the "top" 10% and can no longer generate enough earned income to service them and maintain a decent lifestyle, isn't default a great benefit to them?  Doesn't the destruction of debt - if properly handled, mind you - create social and economic justice for the vast majority of the people?  Or should the 90% keep slicing off pounds of flesh?

Yes, default means that the top 10% will suffer a radical diminution to their accustomed living standards, but is this so bad?  To paraphrase: "Where Are The Peoples' Yachts?"

So far in this crisis we have fought fire with more fire as our collective governments have forced the people to assume even more debt, purportedly to "salvage" the likes of AIG and Greece.  But it isn't them who are being "saved", of course, but their creditors.  How fair is that?

One of these days "the people" will wake up and realize that properly managed debt default is far and away to their advantage but I am not holding my breath.  Social-political leaders and their media mouthpieces are default atavists - or, more precisely, are paid to be.

16 comments:

mannfm11 said...

That was short and sweet. I have been thinking about this idea myself and the paradoxes are so deep. I think it is fair to say that in this kind of economy, if you have it all, then you can't have any of it. Once a small group owns all the debt, there is nothing left to collect or add. Moreso, the problem is that when one is allowed to add as profit, what they loaned to get back, then the event called profit never really happened and the game is up. To go on, the business must turn around and lend their potential customer more money to do business with them, so they can claim some debt profit. But, at some point, they must loan them the payment to make the payment or the debt is worthless. We have reached that point. It isn't that one group just has all the money, but they have all the money and all the debt and better yet, they own the money machine. There is only one group of economists that make light of this, the Austrians. Without debt, the producer has to pay the worker enough to buy his goods. The idea of one side cheating the other cannot carry on for long or the manufacturer or provider of goods either has goods he can't sell or has to sell at a loss. Only through the slight of hand called banking can this system reach the point is has reached today.

It isn't only that the debt has to be iiquidated, but there has to be money transferred to the consumer in order to restart the process. He has to be able to buy without borrowing or we stuck in the same circle. As much as I hate people to be rewarded for mistakes, things like haircuts on mortgages are necessary, but then again the banks are insolvent.

Lord Blagger said...

You're conclusion is correct, however, lets do a bit of analysis.

If we take the UK, a state pension is 5K a year. Cost 130K to provide because its inflation linked.

For lots of poor people that is their sole asset. It's a debt because its unfunded.

Default and you take all of their 'assets'

For the rich, they will have real physical assets. Property, goods, and probably more important skills.

The real observation, I wouldn't start from here.

Until governments get forced to put proper accounting in place. Pensions = liabilities. The problem won't be solved

Debra said...

Reading this post brings many questions to my mind.
Last week at Mish's place, somebody was leaking a rumor ? a truth ? about people more or less defaulting on their mortgages, and going down to the local shopping mall to splurge. True or not ?
Well... you might say.. if it IS true, why not ? SINCE the powers that be are "enslaving" the people, why shouldn't "the people" go out and shrug off that yoke ?
...
This brings me back to my grandmother during the BAD OLD DAYS of the Great Depression.
To HER.. A DEBT WAS SACRED.
She would do her level best to repay it, whatever the cost...and SHE was not questioning whether the powers that be WERE LEGITIMATE in having her repay that debt or not.
Naive, right ??
...
This brings us right down to bottom level of the social contract. IF the powers that be are "milking you" (but... WHAT makes YOU think that they are milking you... MORE than the powers that be have ALWAYS milked those who ARE NOT the powers that be ??) what makes it right for YOU to turn around and break the social contract ?
If... NOBODY respects the social contract then...
Maybe... THAT is the DISASTER that the politicians have their eyes on ?
Maybe... it is a SYMBOLIC disaster more than an.. ECONOMIC one ??
I fully agree with your analysis that these issues are fundamentally SOCIAL and political ones.
The delicate SOCIAL issue involved in default, and particularly in sovereign default is more about losing FAITH and LEGITIMACY in our own EYES, and in the eyes of others in the world.
Legitimacy is very important. IDOLATRY OF MONEY has led us to believe that legitimacy is NOT important.
I know I sound as though I am being inconsistent on this matter, and perhaps I am.
These days what seems the MOST IMPORTANT to me is getting out of money idolatry by bolstering up our beliefs in OTHER THINGS than money, which has become a LAST RESORT in the absence of any kind of a belief system.
My grandmother would not have defaulted on HER debt because, among other reasons, she was a BELIEVING Chrisitan, who acted on her beliefs, in a social context where she was surrounded by MANY OTHER believing Christians.
We are light years away from that right now...
We need to find new beliefs, or resurrect the old ones. THEN.. the money problem will calm down. But until we do this POSITIVE WORK (and default is a negative act, isn't it ??), we will continue to have these problems.
I'm afraid that default, on a PSYCHOLOGICAL level, remains intricated with the idea of failure, AND MAYBE THAT IS NOT SUCH A BAD THING, EITHER ??
It is a form of.. social control, per above.
Do we REALLY want a society with NO forms of (internal) social control ?
Personally, living on the soil where the French Revolution came about, I vote NO.
And I am definitely NOT someone who speaks lightly about social control. I am an anarchist. Y'll know that..
An anarchist who nevertheless is not particularly attracted to SOCIETAL revolution.
I prefer... the INTIMATE revolution that can take place in an INDIVIDUAL'S HEART (and mind).

JP said...

Barry! You're all over the place these days!

Denninger, here, Generational Dynamics. Everywhere! You need to get yourself unbanned from Bearchat. Have you tried to talk to Lee about that lately?

mannfm11 says:

"It isn't only that the debt has to be iiquidated, but there has to be money transferred to the consumer in order to restart the process. He has to be able to buy without borrowing or we stuck in the same circle. As much as I hate people to be rewarded for mistakes, things like haircuts on mortgages are necessary, but then again the banks are insolvent.."

Well, right now, if you read what Doug Noland is saying, we've apparently fired up the big guns of soverign debt origination and reflation is going strong. At low interest rates, there isn't much in the way of interest to be serviced on the newly originated debt. And the money is being transferred to the public in the form of unemployment, Medicare, and Social Security. The Pentagon is also getting it's share of the debt.

I think this party has some room to run. It won't feel like prosperity to many peple and that's going to result in some severe political problems.

Of course, it's not reflating the consumer, but it's reflating the markets.

I haven't paid any attention to what Steve Keen is saying about this, but at least he's figured out that the level of debt matters. Try telling that to the Keyneseans or whatever they are these day. The Bernakeists or Turbo Tax Timmyists.

The elites are clueless and we are heading toward a financial abyss. It's just going to take some time to get where we are going.

JP said...

Hellasious says:

"Most every politician and economist will forcefully say the same thing: default is equivalent to disaster. Really? Why?"

The debt is going to be defaulted upon, it's only a matter of when.

Right now, the massive debt origination is keeping the system running.

I don't think there's a way out of the box.

So, we are going to get more and more debt until something really really interesting and financially destructive happens.

Given that our elites are currently a mixture of self-absorbed, clueless, and sociopathic, that means that whatver happens is problably going to be very unpleasant for everyone.

JP said...

Debra says:

"Last week at Mish's place, somebody was leaking a rumor ? a truth ? about people more or less defaulting on their mortgages, and going down to the local shopping mall to splurge. True or not ?"

Since many of these people lied about how much money they earned when they got the liar loans, this is probably true.

There is systemic fraud up and down the economic food chain.

The housing bubble was one giant breach of the social contract.

"Everybody" lied and now Uncle Sam is left holding the bag.

fat_tail-rider said...

John Hussman of Hussman Funds has been making the same point for some time now, advocating that we think of what needs to be done as "restructuring" rather than "default":

"The fundamental problem is that we have not, as a global economy, accepted the word "restructuring" into our dialogue. Instead, we have allowed our policy makers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses. By failing to do that, we have failed to address the essential problem faced by the world, which is that we have created more debt than we are able to service."

Instead of letting the market clear by sticking it to bondholders and stockholders who made the bad bets that brought the economy down, the federal government piled more debt onto the public to bail the malefactors out. With Bush in the White House, that was utterly predictable. That Obama would campaign as the candidate of hope and "change you can believe in" and then extend the Bush economic policies was not. Obama's utter capture by the Geitner/Summers/Goldman Sachs cabal, and his marginalization of Paul Volcker and Elizabeth Warren, is one of the most egregious political betrayals I have seen in my lifetime.

OkieLawyer said...

Debra:

Last week at Mish's place, somebody was leaking a rumor? a truth? about people more or less defaulting on their mortgages, and going down to the local shopping mall to splurge. True or not?

I have my doubts, Debra. I have been reading this "rumor" -- on Mish's site. in particular -- for over a year. If this rumor were really true in any significant way, I would think there would be far more consumer demand leading to a robust recovery. For me, it doesn't pass what we lawyers call "the smell test."

JP:

I haven't paid any attention to what Steve Keen is saying about this, but at least he's figured out that the level of debt matters. Try telling that to the [Keynesians] or whatever they are these day.

This is actually known as Modern Monetary Theory (MMT), Chartalism or neo-Keynesianism. The idea is that governments create money and its issuance is unrelated to the existence of any commodity.

Debra said...

I am having a roaring fight over on another blog about the nature of "fiat" money, and the relationship between the money problem and the language one.
I believe that "fiat" money (and somebody was kind enough to remind me that "fiat" does not mean "faith".. BUT IT DOES TIE INTO IT... because "fiat" FOR THE PEOPLE WHO FIRST STARTED USING THE WORD IN RELATION TO MONEY naturally conjured up associations with the expression "fiat lux", which is what GOD said in the CREATION STORY, huh (right Hell ? ;-) ) ?? Our ancestors maintained, or tried to maintain a difference in THEIR minds between what God created and what man made.
Now.. "fiat" currency, if we tie it into that last statement, starts taking on some ideological implications that are not at all innocent, in my book.
So when we are "creating" money, we are...
You fill in the blanks.
This aspect of the problem ties in to the question of the referent in linguistics, and OUR relationship to it.
Once we have.. measured, weighed, observed, named, classified, bought and sold the furry four legged creature in front of us which we call "dog", have we EXHAUSTED our relationship to that little critter ?
NOT IN MY BOOK.
And our money ? Just how.. TANGIBLE is it to us, and WHERE DOES IT COME FROM ? WHO HAS THE RIGHT TO MAKE (not create...) IT ?

Hellasious said...

Dear Debra, re fiat money and God (or god):

Ha! I have been writing the next post for 2-3 days and here you come along with this comment today. ESP..'cos the title is going to be "The (Unholy) Trinity Of Money: Holy Smoke".

Anyway, fiat does not mean faith, of course, but "credo" does and that's where "credit" comes from.

Today's money is all about enforced faith (fiat credit). So, rage as much as you like, because you are ultimately correct.

Best,
H.

Anonymous said...

"Default is Class Warfare"

However as you so eloquently stated.

"...So far in this crisis we have fought fire with more fire as our collective governments have forced the people to assume even more debt, purportedly to "salvage" the likes of AIG and Greece. But it isn't them who are being "saved", of course, but their creditors. How fair is that?..."

Not very..... and I might add, not likely to be sustainable into the foreseeable future. Therefore, it's not a question of if, but when...?

Best regards,

Econolicious

Debra said...

I will bring my little fight over here, because... over on the other blog at least ONE PERSON thinks that I am a nutto.
You know..
CREDO means.. I BELIEVE.
Right ?
And we used to say.. CREDO IN UNUM DEUM, for example.
It's been a while since I heard that one, except in sung masses.

Anonymous said...

I would argue defaulting on debt is actually bad for the 90% because moving forward, they will live paycheck to paycheck, unable to borrow again unless they sign up for an even more burdensome interest rate than was the case with the original loan because the 10% will now require additional compensation to cover the heightened probability (and recently realized) of default.

I believe restructuring debt is prudent, either prior to or following default, rather than the slate just getting wiped clean. That way, the lenders who provided financing at the highest cost of capital for the borrower (namely equity holders) should get little to nothing (and I don’t understand where people argue this hasn’t occurred) while the lenders who were willing to lend at a more reasonable interest rate for the borrower in exchange for a claim to the borrower’s hard assets as potential recourse, should be first in line when it comes to trying to maximize recovery values.

The GM restructuring (unfortunately, involving a subordinate claim by the pension fund) was a case that directly against US bankruptcy code, where the White House selectively choose winners and losers. It was a bit disheartening to hear the President of the US trying to publicly shame some creditors and endorse others when all creditors were seeking to minimize their losses. I don’t have an exact quote but basically it was support for the GM pension fund owners and shame for mutual funds, hedge funds and private equity funds. The irony is amazing considering the biggest investors in mutual funds, hedge funds and equity funds are pension funds (state or local teacher, firefighter and nurse retirement plans, such as CALPERS in California).

Yet, a friend of mine who runs a distressed investment fund disagrees. Go figure. So I’m curious to know what other people here think about how GM's default was handled.

Hellasious said...

Dear Anon. on "Living paycheck to paycheck"

Well, that's exactly my point,

Earned income (wages, etc.) should provide for a good lifestyle and a modicum of savings, besides.

Instead, we have become so accustomed to borrowing to enhance our lives that we now take it for granted that it should always be so. That being cut off from credit is equivalent to, say, being denied a good education or decent healthcare.

Regards,
H.

Anonymous said...

Debt is owed on the basis of trading for goods and services. A good Marxist should know that real production is the only thing that matters.

When a government defaults it means it owes a larger number of real goods and services than it can extract from producers. This usually happens when the real economy collapses and even the capitalists are not producing enough.

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