La Fed y la política vía Project Syndicate

En su reciente debate con su oponente Hillary Clinton, el candidato presidencial republicano, Donald Trump, dijo enfáticamente que la presidenta de la Reserva Federal de Estados Unidos, Janet Yellen, persigue motivaciones políticas. La Fed, sostiene Trump, está aplicando sobredosis de estímulo monetario para hipnotizar a los votantes y hacerles creer que la recuperación económica está en marcha. No es una idea completamente descabellada, pero yo no veo que sea así. Si Yellen está tan decidida a mantener los tipos de interés congelados, ¿por qué ha intentado promover en los últimos meses las tasas de más largo plazo al insistir en que la Fed probablemente debe aumentarlas más rápido de lo que hoy cree el mercado?

Se sabe, por supuesto, que los banqueros centrales ayudan a los candidatos antes de las elecciones al permitir que aumente la inflación y al mantener el empleo en alza. Durante la campaña por la reelección del presidente Richard Nixon en 1972, el mandatario sermoneó duramente al presidente de la Fed, Arthur Burns, sobre la necesidad de sacar adelante la economía y así ayudarlo a derrotar a su rival demócrata, George McGovern. Nixon obtuvo una victoria resonante, pero las políticas de Burns ayudaron a desencadenar la inflación mundial de los años setenta y trajeron aparejada la disolución del sistema de posguerra de tipos de cambio fijos. Los efectos a largo plazo fueron catastróficos.

¿Acaso Yellen lanzará una repetición de los malos tiempos de los años setenta, cuando la inflación estadounidense llegó a los dos dígitos? Lo dudo. Si bien no es difícil imaginar que Yellen en privado sienta por Trump el mismo escaso aprecio que él siente por ella, muchos observadores no ven señales de que la inflación esté a la vuelta de la esquina.

Es verdad que algunos todavía insisten en que si la Fed no aumenta de manera urgente los tipos de interés y controla la masa monetaria, la economía estado­unidense seguirá los pasos de Zimbabue (donde la inflación superó con creces el 25.000% a finales de 2008). Pero el argumento de que la expansión del balance de la Fed se traducirá en una alta inflación ha sido profundamente erróneo en los últimos seis años. La inflación en Estados Unidos se ha mantenido consistentemente por debajo de la meta y, aún hoy, los rendimientos de los bonos reflejan un profundo escepticismo sobre si la Fed tiene o no la voluntad o la capacidad de sustentar el crecimiento de los precios en la meta oficial del 2% de manera consistente.

Por cierto, los bancos centrales que han intentado aumentar tipos de manera prematura, inclusive el Banco Central Europeo (BCE) y el Banco Nacional Suizo, se han visto obligados a revertir el curso, y la Fed quiere evitar ese desenlace. A la economía de Estados Unidos le está yendo mucho mejor en estos días, y el momento de subir más los tipos probablemente esté cerca.

Ahora bien, es absurdo pensar que se vayan a implementar más incrementos de manera inmediata. De hecho, todavía existe una tendencia bajista de las tasas de interés en el mundo. El BCE y el Banco de Japón continúan muy inmersos en una modalidad de flexibilización, al igual que muchos bancos centrales más pequeños. La Fed ya está permitiendo cierta contracción simplemente al no prestarse al juego, y dejar que el dólar estadounidense se aprecie.

A decir verdad, los bancos centrales no son inmunes a la manipulación, y combatir las presiones políticas es una batalla interminable. Durante la crisis financiera, se les pidió a las autoridades monetarias que asumieran poderes temporarios de emergencia, incluidas compras masivas de bonos del Gobierno y del sector privado. Para la mayoría, incluida la Fed, todavía no hay una salida clara a la vista, y esto ha tornado más difícil el problema del aislamiento político, con o sin una elección.

Algunos creen que la única salvación es un retorno a la era del patrón oro de finales de los años 1800, cuando los Gobiernos fijaban el precio de su moneda en oro, dejando poco margen para la interferencia política. Desafortunadamente, los fanáticos del oro, curiosamente —o quizá por tozudez—, son ignorantes de las crisis financieras crónicas y las recesiones profundas de esa era. En definitiva, el patrón oro colapsó, después de que los Gobiernos se vieron obligados a abandonarlo durante la Primera Guerra Mundial y luego nunca más pudieron restablecer la confianza pública del todo.

Pensadores con más visión de futuro señalan a las criptomonedas privadas, como el bitcoin, como el futuro del dinero. Su argumento es que sacan a la política por completo de la ecuación. Pero esto también es muy ingenuo. Los Gobiernos ya pueden impedir que las criptomonedas circulen en la economía legal al restringir el acceso bancario, imponer leyes tributarias y también obstruir la capacidad del comercio minorista de aceptarlas. (Y, como explico en mi nuevo libro, La maldición del efectivo, el bitcoin difícilmente pueda considerarse un sustituto a largo plazo de los billetes de alta denominación).

Sí, la tecnología blockchain es muy apasionante y tal vez tenga muchas aplicaciones en la banca, las finanzas y en toda la economía. Pero no es ninguna garantía contra la influencia política en la inflación. En la larga historia de la moneda, desde la acuñación hasta la llegada del papel moneda, el sector privado puede innovar, pero en definitiva es el sector público el que toma el control. Al final de cuentas, el Gobierno siempre podrá controlar las reglas.

Irónicamente, la mejor manera de aislar a los bancos centrales de la presión política sería expandir su caja de herramientas para permitir una política efectiva de tipos de interés negativos, aunque esto llevará tiempo (como también analizo en mi libro). Mientras tanto, la Fed y otros bancos centrales tendrán que seguir caminando por una cuerda floja que los torna especialmente vulnerables a la presión externa. Afortunadamente, la Fed hoy tiene una presidenta que puede y está dispuesta a hacerle frente al embate.

John Locke y la teoría cuantitativa del dinero

En esta crisis nadie esperaba que, ante el incremento de la base monetaria la velocidad del dinero no solo permaneciera estable como preveían los monetaristas sino que cayera como lo ha hecho:

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La teoría cuantitativa del dinero, parte de una identidad, la ecuación de cambio, según la cual el valor de las transacciones que se realizan en una economía ha de ser igual a la cantidad de dinero existente en esa economía por el número de veces que el dinero cambia de manos:

P * Q = M * V

dónde:

P = nivel de precios
Q = nivel de producción
M = cantidad de dinero
V = número de veces que el dinero cambia de manos, es la velocidad de circulación del dinero

Resulta, pues, una magnitud muy importante para la formulación de la política monetaria. Mientras que los keynesianos consideran que la velocidad de circulación del dinero puede variar si cambia la oferta monetaria, poniendo con ello de manifiesto la importancia de la política fiscal frente a la monetaria, los cuantitativistas o monetaristas consideran que, a corto plazo, la velocidad de circulación del dinero permanece constante o, por lo menos, su variación puede ser predicha con facilidad.

Locke interpretó el Interés como el precio del Dinero, por lo que cualquier cambio en la cantidad de éste afectaría la marcha monetaria del país. En este sentido, su análisis económico dio un impulso significativo a la teoría monetaria que actualmente es una de las ramas principales de la economía.

Ante esta reacción los Bancos Centrales deben meditar como pueden reactivar la economía haciendo que, en una sociedad con exceso de capacidad la velocidad del dinero no se desplome ,y eso creemos que va a ser a través de una política fiscal que por un lado reduzca los impuestos de donaciones y sucesiones para mitigar el efecto del envejecimiento de la población y por otro acometiendo obras de infraestructuras necesarias que incrementen la propensión marginal al consumo de los nuevos integrantes del mercado laboral. Es decir, reducción de impuestos e incremento de gasto productivo a través de la emisión de bonos a perpetuidad a tipo cero por parte de organismos supranacionales que sean comprados por los Bancos Centrales emitiendo dinero, lo que es lo mismo que hablar de un “helicopter money” en toda regla que ayude a los más desfavorecidos y mitigue el efecto del populismo surgido por la desigualdad de rentas que la actual política monetaria ha generado.

John Locke nació cerca de Bristol, Inglaterra, un 29 de Agosto de 1632. Se educó en la Westminster School y en la Christ Church de Oxford. En 1658 se convirtió en tutor y profesor de Griego y Retórica. Más tarde volvió a Oxford y estudió medicina. Su punto de vista crítico del conocimiento constituyó el primer intento de una filosofía empirista, basada en la experiencia, es decir, lo real y práctico. Fue filósofo, teólogo, economista, profesor de griego antiguo y de retórica y pedagogo. Sin embargo hoy en día se le recuerda como filósofo y pedagogo. Sus ideas influyeron en Montesquieu, Voltaire y Rosseau, y gracias a los dos primeros, se extendieron por el continente europeo. Conoció a gente muy importante de su tiempo como Joseph Dryde, Isaac Newton y Robert Boyle. Estos dos últimos y Locke fueron de los primeros miembros de la Royal Society. Sus ideas de libertad y resistencia frente al poder absoluto de los monarcas influyeron en los filósofos que crearon la ideología burguesa de la Revolución Francesa y la Revolución Americana (la Independencia de los EEUU) y en la constitución de este último país.

Locke previó que la fijación legal de la tasa de interés a un nivel bajo llevaría a un colapso del comercio, porque la tasa de interés no reflejaría la “natural escasez” del dinero. Un colapso del comercio llevaría, alternativamente, o a una disminución de la producción o de los precios. “Si estos últimos bajan, los productos ingleses serán más baratos y nos llevarán a la pobreza”. Locke no ve esto como un acicate a las exportaciones y la producción.

Hasta ahora nos habíamos fijado en la ecuación por el lado del M * V pero Locke ya analizó las consecuencias no deseadas y es que si lo analizamos por el lado de P*V, una reducción de los tipos de interés a 0 o negativo lejos de incentivar el comercio y la economía lo que haría es hacerla caer el recesión. Nosotros lo hemos visto por el lado de BM * V pero él ya lo dedujo por el lado de los precios. Quién iba a prever que un incremento de la Base Monetaria generaría deflación ¿ Sin duda una consecuencia no deseada. Quizá se deba a que no es lo mismo realizar una política cuando hay exceso de capacidad. Otra vez estamos ante un ejemplo de lo que en economía se conoce como ley de las consecuencias no queridas formulada por Locke hace cuatro siglos.

The Next Recession Looms Large EuroPacific, by Peter Schiff

The Fed has tried everything they can to keep this expansion afloat.

Their only choice now is recession now or recession later.

Which will they choose?

Currently, economists and market watchers roughly fall into two camps: Those who believe that the Federal Reserve must begin raising interest rates now so that it will have enough rate cutting firepower to fight the next recession, and those who believe that raising rates now will simply precipitate an immediate recession and force the Fed into battle without the tools it has traditionally used to stimulate growth. Both camps are delusional, but for different reasons.

Most mainstream analysts believe that the current economy can survive with more normalized rates and that the Fed’s timidity is unwarranted. These people just haven’t been paying attention. The “recovery” of the past eight years hasn’t been just “helped along” by deeply negative real interest rates, it is a singular creation of those policies. Since June 2009, when the current recovery began, traditional economic metrics, such as GDP growth, productivity, business investment, labor force participation, and wage growth, have all been significantly below trend. The only strong positives have been gains in the stock, bond and real estate markets. We have had an “asset price” recovery rather than a bona fide economic recovery. This presents unique risks.

Asset price gains have been made possible in recent years because ultra-low rates have driven down the cost of borrowing, encouraged speculation, and pushed people into riskier assets. Donald Trump was right in the presidential debate when he noted that the whole economy is “a big fat ugly bubble.” Any rate hike could hit those markets hard across the financial spectrum and can tip the economy into contraction. Look what happened this January when the market had a chance to digest the first rate increase in 10 years. The 25 basis point increase in December 2015 led to one of the worst Januarys in the history of the stock market. Since then, the Fed has held off from further tightening and the markets have treaded water. There is every reason to believe that the sell-off could resume if the Fed presses ahead.

Our current “expansion,” which began in June of 2009, is 88 months old and is already the fourth longest since the end of the Second World War (post-war expansions have averaged 61 months) (based on data from National Bureau of Economic Research and Bureau of Labor Statistics). But although it is one of the longest, it has also been the weakest. Despite fresh optimism nearly every year, we have not had a single year of 3 percent GDP growth since 2007. More ominously, the already weak expansion is beginning to slow rapidly. GDP growth has been decelerating, averaging just 1% in the past three quarters (Bureau of Economic Analysis). And while hopes were high for a significant rebound in Q3, as has been the pattern all year, rosy estimates have recently been sharply reduced.

Typically, rate-tightening cycles start in the early stages of a recovery when the economy is still gathering momentum. As I have argued before, a rate tightening campaign that begins in the decelerating tail end of an old and feeble recovery is bound to unleash problems.

So I agree with those who believe that rate hikes now will bring on recession, but I disagree that we should keep rates where they are. They believe we need to keep the stimulus pedal to the metal… and when that’s not enough, to cut a hole in the metal and push harder. I believe that despite the short-term pain that will surely follow, we need to raise rates now to break the addiction before it gets worse.

The “keep rates at zero camp” argues that global economic developments have made traditional GDP growth nearly impossible to achieve. These believers in “the new normal” fear that the Fed is mistakenly waiting for growth that will never come. Larry Summers, the leader of this group, recently argued in the Washington Post that the Fed will never be able to raise rates enough in the short term (without plunging the economy into recession) to gather enough ammunition to effectively fight the next recession. In his view, to raise rates now would be to risk everything and get nothing.

Summers knows that central bankers now do not have the caliber of bazookas that their predecessors once carried (Bernanke was able to slash interest rates over 400 basis points in a few months). So he advocates continued stimulus until newer means can be developed to head off the next recession before it develops. (He promises to reveal those new ideas soon… really).

Given all the economic realities that central banking has attempted to suspend in recent years (such as the antiquated belief that lenders should be paid to lend rather than being charged for the privilege), it’s no great stretch for them to consider the next big leap and call for an age of permanent expansion.

To do this they must short-circuit the business cycle, which up until now has regulated prior monetary mismanagement. Rather than being some naturally occurring process, the business cycle actually results from artificially low interest rates. Mistakes are made during the booms, when rates are held artificially low, and are then corrected during the bust, once those rates are allowed to normalize. Ironically, the busts are actually the benign part of the process, and should not be resisted, but embraced. But to mitigate the short-term pain associated with actually correcting those mistakes, central banks typically opt to paper them over for as long as possible. The problem is that this time the papering over process has gone on for so long, and involved a record amount of paper, that correcting the mistakes now will necessitate a recession so severe that it is unthinkable. The only apparent “solution” is to make sure one never arrives.

To do so, the Fed must replace the “ups and downs” of the economy with the “ups and ups.” This futile process will likely involve the Fed intervening directly in the equity markets (by actually buying shares), or in the real estate market (by buying properties or making loans) or into the consumer economy by directly distributing money to citizens. But since contractions are necessary and healthy, especially when markets have gotten ahead of themselves, attempting to short-circuit them does more harm than good. Yet despite how crazy such a policy sounds, Yellen just suggested that she thinks it’s not only a good idea, but that the Fed is already giving it serious study. Given the damage our crazy monetary policy has already inflicted in the past, one can only imagine what kind of devastation awaits.

Just this week the International Monetary Fund issued a report about the dangers of global debt growth, which has reached $152 trillion, or roughly twice the size of global GDP. They noted that the growth of private debt has recently led the upswing. With negative rates actually paying some companies to borrow, should this be a surprise? And while it’s nice that the IMF raised a red flag, it’s pathetic that their only proposed solution is to call for governments to increase public debt through fiscal stimulus (based on what should now be the debunked theory that deficit spending creates growth).

Even more pathetic is Alan Greenspan‘s attempt on CNBC this week to blame the current low growth economy on Congress, and its failure to rein in entitlements. Greenspan is correct in his determination that “the new normal” results from the plunge in productivity gains that is a function of drops in savings and capital investment. But he can’t absolve the Fed. Had they not monetized the ever growing federal deficits, or kept interest rates artificially low for so long, market forces would have forced cuts in entitlement spending years ago. These actions, originated with Greenspan himself, enabled Congress to repeatedly kick the can down the road.

According to Greenspan, to spare the public the pain of higher interest rates, the Fed has no choice but to hold its nose and accommodate any level of debt Congress chooses to accumulate. But the ability to pursue unpopular policy is precisely why they are supposed to be politically independent. What good is an independent central bank that simply helps incumbents win reelection?

Given that the Fed has already unsuccessfully exhausted so much firepower, it is unfortunate that it never seriously questions whether their policies are actually harmful. Modern economists simply can’t imagine that throwing ever more debt on the back of a weak economy actually prevents it from recovering.

I think it’s high time the Fed finally moves rates well into positive territory. The next recession has been on its way for years, and it will arrive no matter what the Fed does, if it’s not already here. Sometimes reality hurts, but fantasy can be more damaging in the long run.

The real choice is not between recession now or recession later. It’s between a massive recession now, or an even more devastating one later. Either way, there is no Fed policy that will be able to fight it. But that is not because the Fed is out of bullets, but because it never had any real bullets to fire in the first place. All it had was morphine to numb the pain as the wound festered. Now is the time to bite the bullet, endure the pain, and allow the wound to actually heal. This will also allow us to finally bury the idea of a new normal, enjoy a real recovery with all of its traditional benefits, and actually make America great again.

Democracy and Debt, Michael Hudson

Has the Link been Broken?
*This article appeared in the Frankfurter Algemeine Zeitung on December 5, 2011.

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts [1]. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern rulers proclaimed Clean Slates to preserve economic balance

Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20% (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned:

the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by canceling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society – a conquest aimed at attaching interest-bearing debt claims for payment on as much of the economic surplus as possible.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s creditor oligarchy wins the Social War, enserfs the population and brings on a Dark Age

Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when the publican creditor “knights” arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside as a Dark Age descended.

Creditors find a legalistic reason to support parliamentary democracy

When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.

Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” notes Ehrenberg: “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”[2]

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy in an epoch when money was still the sinews of war.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.”[3] The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt” the least credit-worthy and worst armed country in Europe (as Steuart 1767:373 noted), fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance accommodates itself to democracy, but then pushes for oligarchy

While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”[4]

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 percent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting planning away from elected public representatives to bankers

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. government; oligarchy vs. democracy

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

Footnotes:

[1] James Steuart, Principles of Political Economy (1767), p. 353.

[2] Richard Ehrenberg, Capital and Finance in the Age of the Renaissance (1928):44f., 33.

[3] Charles Wilson, England’s Apprenticeship: 1603-1763 (London: 1965):89.

[4] Sun Yat-Sen, The International Development of China (1922):231ff.