Friday, April 16, 2010

Suspension Of Debtbelief

I have been a close observer of the Greek Debt Crisis for quite some time now.  What strikes me most is the absurdity of calling for additional debt as a solution.  It's not enough that Greece already has a government debt rapidly approaching 120% of GDP and cannot realistically fund itself through the markets, its government, the EU and the IMF are proposing that it takes on even more debt, albeit at lower-than-market interest rates, as a way out of its already untenable situation.

Let's go back a few years to the height of the debt bubble when Greece - already over-indebted  at 100% of GDP - could sell 10-year government bonds at a mere 25 basis points (0.25%) over Germany (the spread is now 400 bp).  I maintain that this required a suspension of disbelief equivalent to observing Harry Potter ride a broomstick over the skies of Hogwarts on the silver screen and accepting it as fact, i.e. total immersion into fiction-as-reality.  Park your brains at the popcorn stand, sit back at the comfy chair, sip the kool-aid and enjoy while the movie lasts.

What, me worry?  was the attitute. New Age Credit was flowing freely, whilst risk was supposedly being taken care of by newfangled instruments devised by the apprentice financial engineer-magicians.

Well, guess what folks? The movie's over. Suspension of disbelief is over. What's going on right now, best exemplified by the preparation of Greece to tap the IMF and EU for even more debt,  it's like those folks who stubbornly refuse to leave their seats staring forlonly as the credits roll over the black screen, hoping to eke just a smidgeon more of happy times.

We all need a radical reality check, to understand that our kool-aid was heavily spiked with debt acid.  That for a while we lived in a make-believe world where we acquired goods and services with a mere scrawl at the bottom of promisory notes that someone else - obviously dropping even heavier acid - accepted as prima facie "assets".

In other words, we need to suspend our "debtbelief", that debt is a panacea for all economic ills from stagnant earned income to a minuscule savings rate and the emasculation of the western manufacturing and technological base.



  1. I like this post.
    There's stuff I agree with in it AND OF COURSE, stuff I don't agree with in it.
    Hell, you need to take a peek in the saloon at what Thai has stuck down for Doctor John.
    On... Brotzmann brains, or something along those lines...
    It sounds a little wackier than believing in the God of Debt.
    But... the structure's the same underneath.
    Guess what ?
    The movie never ends...
    We have invented the idea of... "the end" for our own convenience, I.. believe.

  2. So you think Greece should lay off government workers and slash social programs? Leading to less consumer spending and further deterioration of the local economy?

  3. "Greece to tap the IMF and EU for even more debt, is like those folks who stubbornly refuse to leave their seats staring forlonly as the credits roll over the black screen, hoping to eke just a smidgeon more of happy times"

    Nice! Incredibly apt analogy!

    I can't believe the SEC announced that it was going after Goldman Sachs today. I feel giddy with hope!

  4. Anonymous, I don't know about Greece, but being from nearby I could make a couple of suggestions to tackle deficits:

    1. Corruption, tax-evasion. Small and medium business tax evasion is probably rampant. Like most restaurants, small shops, etc not declaring 50%+ of their earnings.

    2. Raise taxes above a certain threshold of income. Most of these countries are still below EU averages of taxation.

    1+2: Some of these countries exhibit inequality levels comparable to the US (either by evading or wage inequality). There is some space here to raise taxes.

    3. Tax pension benefits as like any other source of income (and not below).

    4. Work share. Where I come from, 20% of wages for civil servants are actually teachers. Very easy profession to reduce work-load in 20%, salary in 20%, and employ unemployed people with the savings (or just cash in).

    No lay offs. But some salary cuts. And tax raises. Was it not Roosevelt that took income tax to 80% or so? I some of these countries it is still around 45% (Sweden goes up to 57%).

    But in the long run corruption (high and low in the hierarchy) and trade deficits should be _the_ target.

  5. "the emasculation of the western manufacturing and technological base."

    Now that is the heart of the matter!

    There is nothing wrong with debt per se.

    Good Debt = Debt used to pay for investment in assets which will produce enough income to repay the debt with interest and generate additional income far into the future. Say, debt to develop an oil field, create a farm, build a highway system.

    Bad debt = Debt used to pay for immediate consumption. Especially where that consumption is imported. That debt generates no future revenue for payback.

    Problem is that the West, from Greece to California, has been using debt to pay for consumption instead of investment.

    There is a solution. Roll back excessive regulation which has driven industry overseas, destroying jobs and crippling the tax base. As the same time, redistribute the tax burden to promote productive investment.

    But first, Al Gore & his anti-industry anti-job friends have to go.

  6. Nice Post

    However I don't think your ever going to get much traction with the reality band wagon, for everyone knows it is the other guy who is at fault.

    Indeed, I seem to remember Anon told us so. ;-)

    Be well

  7. That said, I agree with your... diagnostic.
    We no longer believe in the God of Debt.
    So that means... that we need something or someone else to believe in now.
    One of my teachers told me that a defensive position was always more.. fragile than an INVESTMENT position.
    You can do a lot more while BELIEVING in what's ahead, and what you can do than while trying to defend what's behind you. A question of perspective ?
    From the little I've read about Greek SOCIETY'S position, austerity does not seem to me to be the answer. The middle and lower classes will suffer much more than all the others, of course, as usual.
    In order to zero in on corruption, you have to be funding lots of... fonctionnaires, civil servants and policemen to go around chasing bad guys.
    I continue to maintain that this is a waste of valuable resources which could be put to use in other ways.
    Encouraging the policeman mentality in all of us does not really make us very pretty. Nor graceful.
    We need to rediscover belief in OURSELVES in order to pull through right now.
    Chasing the bad guys will not do the trick.
    I cannot advance any... proof of this, of course.
    But I don't think that anyone else can advance any proof to the contrary, either...

  8. Bravo. Well said

    Debt is not the solution. It is the problem

  9. But is this stupid fight-debt-with-more-debt-ad-nauseam really coincidental? Perhaps holds some valuable insight in theis puzzle?

  10. Reality is what remains after the acid wears off.

    When I was tripping I thought I could fly and tried by running and flapping my arms from the ground, I ended up with a sprained ankle. My friend thought the same thing and tried to fly from the roof of a 12 story building, he didn't fare so well.

    Are we trying to take off from the ground or the roof? Accepting failure and default is taking off from the ground. Re-inflating failed business practices is taking off from the roof and the results may be fatal.

    When does the acid wear off for our fiat regime?

    One scenario: 1980 type inflation and interest rates. Our Treasury now finances debt to the tune of $700 billion, with the Treasury bringing in $2,500 billion in revenue this year. I know of no historical patterns but when over half of your budget goes to financing your debt (1980 inflation) that seems a wake-up call.

    Can we bump along like Japan for the next decade or two in a no-growth depressed economy? Hell would probably have a better feel for that.

    Solution? Maybe a reversion to a 1954 type of tax code with income multiplied by ten:

    Lift the cap on the wage (social securit) tax, eliminate the capital gains tax advantage and incentivise business creation through tax credits that employ wage earners.

  11. The problem with debt is the assumption (meme if you will), that it will always be paid back until it's not.

    Let's be kind and redefine the word "loan". Let's just call it a "gift".

    Italia will soon show up at our door with cup in hand.

    Best regards,


  12. The trick is that under a fiat currency regime debt is NEVER paid back, overall. It just keeps expanding because that's what constitutes money supply.

    Hence, if we want to establish Sustainability as our economic model (as opposed to Permagrowth) we absolutely need to sharply revise our attitudes for debt/money supply.

    The more I think about it, the Debt Bubble was Permagrowth's last hubris.

  13. Edwardo showed me through the door of this cool site called "Econosophy and other musings".
    Toby has a piece on fiat currency NOT fueled by debt.
    It sounds interesting to me, a neophyte.
    Here's the address :

    Toby writes.. longer posts than I.. That's something. But he SOUNDS like he's thinking and knows what he's talking about. An historian to boot.

  14. I'm sorry, did you not get the memo on debt? As long as it short term, say 50 or so years long, its all additive to GDP. Just spend and the rest will work itself out, per Keynesian mantra. Get a clue!