Paul Krugman has been blogging his head off dealing with various manifestations and aspects of what I call the global debt “crisis” (read my rationale for this in the next paragraph). Debt arises when people who need to spend today don’t have the funds to do so and are granted credit by those who have funds today but don’t feel like spending them immediately. The counterpart to this is that debtors will be able to draw from the stock of goods available today (for consumption or productive use) beyond their current means, while the creditors will willingly reduce their corresponding claims on today’s goods in exchange for — if things go as planned — more of them in the future.
To examine the issue, I propose (see my opening statement above) that, instead of looking at the U.S. public debt “crisis,” the Greek debt “crisis,” etc. separately, we view them all as what they truly are, namely manifestations of one and the same global debt “crisis.” Here is a way to think of this: Consolidate the balance sheets of all households in the globe into two: (1) the balance sheet of the extremely rich (.0001% or so of the global population) and (2) the balance sheet of the rest of us. Assume that everything (asset or liability) is ultimately held by households (or by individuals, it doesn’t matter). And let each household take a flat proportion of its corresponding government(s)’s net worth (negative, if public liabilities overwhelm public assets). Simple arithmetic. (This division, by the way, will intersect almost exactly with the social division that Marxist economists and sociologists emphasize between those who own wealth as capital, the “capitalists,” and those who don’t and, hence, must make a living mainly via their labor income, the “workers.”)
Then we’ll clearly see this pattern: The rest of us are net debtors and the extremely rich are net creditors. This is to be expected. It follows from the definition of extremely rich. In other words, the U.S. public (and household) liabilities, Greek public (and household) liabilities, etc. — all the debt issued by the rest of us one way or another — will be assets of the extremely rich. They hold that debt in their portfolios as an asset. This, by the way, suggests that the extremely rich are in a perfect position to demonstrate their love of humanity by forgiving that debt (or a small portion of it), which would amount to an immediate solution of the debt “crisis.” But let me not get ahead of myself here….
Why is this a “crisis”? (At this point, I should probably remove the quotation marks. I don’t want to give the impression that this crisis is merely an illusion that we can dispel by closing our eyes. The point of the quotes is to note that the debt issue can and should be separated from the employment issue, at least in theory.) Well, it is a crisis (see? — no quotes now) because the extremely rich are extremely nervous about the ability of the rest of us to repay it, and they do not want to admit that the debt is worth less than they thought it was worth when they got into it — and take a haircut. When they lent the funds, they expected benefits from it (think some handsome real interest, real as in adjusted for inflation), but now they are questioning their judgment. What were they thinking?
What Keynesians like Krugman are saying to the moronic ideologists of the extremely rich that just don’t get it is: “This doesn’t require the added grievance of unemployment except in your twisted minds. In fact, unemployment will make it harder for the rest of us to repay that debt. So, give us a break! Unemployment can only make matters worse, since then the rest of us will have even lesser means to repay the debt. So lend more money to governments, have governments spend that money to reduce unemployment, and then the whole debt will look smaller (as a proportion of an augmented economy) and the problem will get under control.” (And this is aside from whether we should keep military expenditures at their current level, which — in the U.S. case — are at record high levels!)
The Keynesian approach (fiscal and monetary expansion), if conducted seriously (as Krugman says, WWII suggests what kind of fiscal expansion is necessary to lower the unemployment rate to decent levels), will translate into moderate inflation. The neat thing about this approach is that inflation will sanction an effective redistribution of wealth from the extremely rich to the rest of us, but it will do it behind the scenes, as it were. It will be something happening in the obscure guts of a monetary economy, which most mortals find as enigmatic as black magic. So the populace won’t get ideas, you know. The sacred institutions of private ownership, markets, and social inequality will remain in place. In fact, they may even regain some of the credence and legitimacy lost in the crisis. It seems like a reasonable deal for the extremely rich: The angle of your slice will be narrower by just a few degrees, but because the whole pie will expand (and the system will avoid more radical challenges), you’ll wind up eating more pie. And people won’t notice how that really happened.
But the moronic wing of the extremely rich don’t care for that. They hate it when the pecking order gets disrupted. If the extremely rich remain extremely rich, and even grow richer in absolute terms, but they become relatively a tiny bit less rich by comparison with the rest of us, that is just unbearable for them. They care a lot about preserving the pecking order. Anything that disrupts it, that flattens the social hierarchy is intolerable for them. So, no go. Their “solution”? Unemployment! Liquidate, liquidate, liquidate! — which (as the Keynesians note) can only make the debt “crisis” worse.
But unless the rest of us become richer (compared to the extremely rich), we won’t be able to honor our debts to the extremely rich. Catch 22! So, one way or another, the solution will consist of some form of wealth redistribution. Talking about Greece, allow me an abrupt digression here: I recently read about what is perhaps the first documented case in history in which a solution to a debt crisis occurred. Apparently (I’m no expert on these historical matters and I’ll be glad to stand corrected if a better version of events comes forth), Solon’s reforms (Solon being one of the Seven Sages in Ancient Greece) in the emerging stages of the Ancient Greek civilization ushered for the the first time in documented history the legal framework of what we know now as private ownership. Well, it turns out that, as a result of these reforms, after a spin of the wheel, households and the Greek proto-state accumulated very high debts that made creditors extremely nervous. Before private ownership rights were introduced, people were just used to helping, and being helped by, one another without keeping a precise tab of what they gave or took. Clearly, this arrangement wasn’t good for Greek society at this point, and that’s why private ownership was adopted. I would claim that what was necessary in Ancient Greece is proving to be intolerable today, but let me leave that argument to my posts on socialism. Suffice it to say here that, at some point, this polarization in wealth holdings forced Solon to push the reset button and decree the elimination of all debts, so that they could avoid social disintegration and get things going again!
I believe that some enlightened minds among the extremely rich that read Krugman (and understand him) can see that some version of Solon’s reforms are called for now. I mean, the two of them who read and understand Krugman. Given the situation, they ought to be willing to accept the haircut, as long as people don’t notice. They just want for this solution to disguise what actually happens — modest wealth redistribution at their expense. Perhaps this debt ceiling political brouhaha will help some of the moronic ones come around to the Keynesian approach. Again, that approach will use inflation and financial wizardry to disguise the fact that wealth is being taken from the extremely rich and given to the rest of us to the point where the extremely rich feel less nervous about our ability to repay the debt, so they are willing to keep the capitalist casino open.
Krugman has referred to FDR and WWII repeatedly. FDR’s case is, of course, a recent reenactment of Solon’s reform of his reforms. But I can think of another case: Mexico in the late 1980s. It is well known that Carlos Salinas commits electoral fraud to become president in 1988. As a result of low oil prices, high public debt service, and US Treasury/IMF-imposed contractionary macro policies that devastate the country for over half a decade, the Mexican government finances and the Mexican people’s tolerance are about to snap. Fidel Castro tries to organize an international revolt against the banks in Latin America, the banks respond with divide-et-impera, and Fidel’s initiative doesn’t get much traction. Soon after his inauguration, Salinas sends his people to negotiate with the banks. While the negotiations are taking place, back in Mexico City, Salinas calls his ministers to a carefully choreographed urgent “secret” meeting. A good actor, Salinas tells his ministers solemnly that “secrecy” is of the essence and that Mexico will default if the negotiation team comes back empty handed. Even Cuauhtémoc Cárdenas, leader of the opposition and victim of the electoral fraud, will come around to support him. The country should get ready for a default and deal with Wall Street’s rage. Banks learn of the “secret” plan and fold meekly. Mexico’s foreign debt is effectively slashed by one fifth or so. Mexico’s economy can breath again. Solon and FDR applaud from the high heavens. The banks insist on one condition though — do not make public this violation of the sacred rules of private ownership, keep it all shrouded in secrecy, and/or — since you can’t cover the sun with your thumb — use a series of sleight-of-hand, creative financial deals (a few “Brady bonds” here, a few “swaps” there, and similarly obscure schemes) to pretend that banks aren’t taking a substantial haircut. No big deal is made of the affair. In 2003, Argentina forces foreign banks to a similar “restructuring” of its debt, but the Argentinians are more vocal about it — which the banks hate.
So, if history is any guide, some form of wealth redistribution in our favor will ensue, sooner or later. But, like in Mexico’s case, the later it happens, the more the extremely rich and their nasty political minions will make our lives miserable for that. There is nothing like a prolonged economic depression to show people who’s boss. That’s what they have for us in store. But, why don’t we — “the rest of us” — try and get ahead of this tragic game?
I mean, What are we? Chopped liver? Isn’t it time to revolt and push everywhere we can for one version or another of debt repudiation? We need to force the Solons of today to push the reset button again. But, if we’re going to get into that trouble, shouldn’t we try and go for more? How about working to remake the whole global economic arrangement?
History cannot be just an endless going on this ever-more-wasteful merry-go-round. We need a truly democratic — i.e., a socialist — economic arrangement. Pronto.