| OPINION/ ANALYSIS
|
'We're all debt slaves trapped in a death spiral'
October 10, 2008
By Joseph Edozien
The package sold to the American congress by treasury secretary Henry Paulson will not prevent the breakdown of the financial system based in New York and London.
The breakdown is terminal.
Sooner or later, by one winding path or another, we are entering a new epoch of world history.
This unravelling is global because of the intercontinental reserve currency status of the dollar, fronting also for the euro and the pound sterling.
The financial system of today is now at the limits of its self-sustainable expansion as a self-made credit bubble. It is insolvent, bankrupt. We have here an insolvency death spiral being disguised as a temporary liquidity shortage. And it threatens to bankrupt the entire inter-linked Western-centric central banking system of the world.
The American and British investment banking system is no longer a financial intermediary in the true sense of the term, but has rather become a credit conjurer: creating more credit on the basis of credit as collateral in a manner delinked from real production requirements and solely to generate paper profits to keep the system itself going.
To survive the natural limits and inherently slower pace of real economics, the lending system must now make loans secured by other loans that are themselves based on yet other underlying loans.
People blame this "financial magic" on greed, but it is more correct to blame it on the nature of the beast of interest-bearing money creation itself.
Compound interest, interest on interest, is exponential, meaning explosive, in character and therefore demands infinite room for expansion. This is unsustainable because an infinite space for growth cannot be contained in an evidently finite world.
For a time, this compound interest-driven monetary growth can be sustained, when it outstrips the possibilities of real economic production, in towers of debt built on debt.
At the "real-world" base of this tower of credit upon credit are working people living beyond their means, having been seduced by easy credit based on insecure incomes and now trapped on an endless work treadmill to meet their credit obligations.
A subtle form of "debt slavery" for ordinary people is what keeps the system working at its base. And we need this debt for houses, cars, furniture, appliances, and so many other contrivances of modern life that advertising, and our own materialism, tells us we must have.
As the grim leveller of globalisation and forced overproduction in the face of insufficient consumption places downward pressure on mass wage levels and incomes, the foundation of the "tower" begins to crack and buckle and the whole tower starts teetering. Each level of the tower then falls in an unstoppable cascade as the floor beneath it buckles, sways, cracks and sinks.
In one word, the hidden problem, the cat among the pigeons, is "derivatives".
Financial "derivatives" are so called because they are financial securities based on other financial securities, usually many levels away from the real collateral on which financial securities normally depend.
Since these financial derivatives are in effect based on statistical predictions about market movements and changes in the values of other financial instruments, they lose their value and become negatively priced when the bets on which they are based turn out wrong.
In the aggregate, these bets assume that perpetual economic growth is the reality.
In conditions of contraction or stagnation, the bets turn out wrong and can pull down the whole structure.
Credit default swops, which brought down the world's largest insurer, AIG, are only one type of derivative.
They are merely the now most visible tip of a most gargantuan iceberg.
There are many other types of complex financial derivatives that are all ultimately "financial casino" gambles on the creditworthiness of underlying financial securities of various sorts, all of which have become dangerously remote from real-world collateral.
The financial derivatives shadow economy behind the scenes of world finance is now well over 30 times the size of the world's real economy. But it is ultimately linked to the ability of the world's real economy, the people who struggle to make ends meet, to service the underlying debt at the base of the global credit tower.
That underlying debt is the day-to-day debt that you and I now struggle with in increasing difficulty. Our struggles are now reverberating upwards as the downward pressure from above makes our ability to meet our obligations that much harder. We are all now being squeezed by the debt monster growing like a Frankenstein out of the control of the too-clever-by-half debt conjurers who created this financial freak.
When the debt repayment ability of the financial slaves at the real-world base of the credit tower becomes challenged, the shadow economy comes tumbling down. And what is lost are ultimately two things: the debt-based lubricant of the real economy and the confidence of economic participants in the transparency and efficacy of the financial system within which they do business.
When people lose their faith in finance, this becomes an existential threat to the whole system and its masters since the system is in the end a system of blind faith: a confidence trick.
This is why, when the wily masters of high finance become "victims" of their own misdeeds, governments rush in to save them with a speed and urgency we do not see when millions of ordinary citizens suffer blows from hurricanes, tsunamis, floods, and other disasters not of their own making.
We have to ask: "Who really is being saved?" Is it us, the real victims of usury-based finance, or is it the usurious systems and their masters who are being saved by extending our debt slavery? This is a reasonable question to ask. It is a question about economic justice.
In sum: the innocent will once again pay for the sins of the guilty.
In the name of saving the financial system of our jobs and pensions, you and I are now being asked, in truth, to save our financial masters from themselves in a manner that will only extend and entrench our debt slavery to them.
We - at least, for now, our brethren in the United States - are being tricked by being asked to hand over our tax wallets with the threat of a financial gun pointed straight at our livelihoods and our pensions. We are being told, in effect: "Hand over your taxpaying ability, no questions asked, or we'll shoot down your job and your pension." This indeed is robbery of the most brazen kind.
What can we do? We can first of all try to understand what is being asked of us before we do it. For if it is done there, it will eventually be done in other "theres", and perhaps even here. What happens in the US usually eventually spreads around the world. The American collapse will trigger corresponding aftershocks here within a year or two at most.
The American taxpayer is being asked to buy, at some fictional value, bad debt that is unpriceable because it has negative value. The American taxpayer is being asked to buy unredeemable liabilities as if they were genuine assets.
Thus, a fiscal contagion is being unloaded from fleeing plutocrats onto the backs of unsuspecting citizens who have nowhere financially to run and hide.
In the American system, it is true that the taxpayer will ultimately hold the bag of bad stones, but it will be a bigger and heavier bag than he is being told. First of all, the money to "buy" these bad stones is not there. It will be created by issuing government securities to borrow the money to buy those bad stones. This money will be borrowed in the name of the American taxpayer from the very same people who ultimately now own the bad stones.
Why? Because the US treasury will borrow the money from the US central bank, which will issue the money as a loan. But the interest on this loan will not be paid to the American public, but to those who collectively "own" the Federal Reserve Bank, and that is not the American people, but ultimately the very banking system that is the entity that is being "bailed out" or "rescued" from itself.
In other words, ordinary citizens, through the borrowing power of the American state, will be forced to borrow from the debt conjurers to "buy" the bad debt held by those self-same debt conjurers. Most of this bad debt, by an astronomical margin, is not even bad loans to ordinary citizens, but bad loans made among the plutocratic financiers themselves. For example, investment banks loan billions to hedge funds, which then use the billions to make private equity mega-deals worth multiples of the billions they borrowed.
If the public "bailout" of these usurious plutocrats were not so devious, one would marvel at the brazenness of the "rescue". It is cynical in the extreme and it is appalling.
"Innocent citizens, in the form of your government, borrow more from me to save me from the bad debts on my books which I borrowed from my friends to make more money for myself while the getting was good, and after I've salted away my personal profits.
"If you don't borrow more from me now to save your job and pension, and save me from myself and my friends, you will have to pay more later while losing your job and your pension in a financial system collapse of my own making. Your money or your livelihood!"
This is the old technique of socialising the losses, having privatised the profits.
Even if such a scheme passes the confused and frightened citizen smell test, it would only set up an even more spectacular crash later.
The basic problem, debt based on debt to multiple levels of debt creation, has by no means been solved. It is a "solution" of the same nature as the problem. We solve the "debt problem" by creating yet more debt, eventually leading to higher taxes, higher prices, lowered social security, lost pensions, and lost jobs for ordinary citizens.
All that has been accomplished, at best, is to delay the inevitable financial and economic collapse, and at ultimately even greater cost and vastly more widespread pain.
Moreover, the $700-billion total cost figure being floated is a pure fiction. It is a number with no basis. At the very least, although it is not presented as such, it is merely an initial down payment.
Given the truly epic size of the bad derivates pyramid, certainly well over $1 000 trillion at the very least, any such "rescue" will end up costing in the region of $10 trillion at the very least if it is to have anything more than a temporarily delaying and purely psychological impact.
More likely, it will take in the region of $100 trillion to save the derivatives pyramid and keep it from deflating catastrophically. This system is not saveable, no matter what anyone says.
And the last people we should look to for reassurance are the financial casino gamblers who created the problem in the first place. They must know that $700bn is insufficient and is an arbitrary figure. Their thought must be to lure the ill-informed taxpayer into their bad gamble and then keep him there once he is caught and has no way to escape the trap. They will then keep incrementally raising the price of the "bailout" to the taxpayer, each time being "shocked" at the "unexpected" increase in cost.
The main effect of this financial breakdown on people in the real economy will be a painful shortage of money as there will be a severe contraction in credit for real economic transactions. It will simply be harder to get loans to do anything productive. This will lead to a self-reinforcing downward spiral of cost-cutting across the real economy.
There will be a great depression, centred mostly in the US and Europe. And it will be a long depression of at least one to two decades, culminating in new currencies of the same basic nature as the old and usurious or in new types of currency and exchanges. Or there will be a large and destructive war, the conditions for which are being laid now.
It all depends on the gullibility of the public and whether fear and pain lead the grassroots to compliance in their own financial dispossession or to a liberating and active search for new and better ways of economic and financial organisation.
It is time for the public to take a keen and informed interest in its own economic destiny, given that public power lies in knowledge.
Ignoring the avaricious wolf at our door will not make him go away.
We will need gentleness of soul so we don't rip each other apart in our frustration and pain from broken material lives and dreams during the coming times of turbulence.
There will be no escape as the beast is everywhere and we were all complicit in our own entrapment. We will also need openness of mind and heart so we, the financially dispossessed, and we will be financially dispossessed, can find ways to work together to create functional living alternatives at the grassroots level where we all meet and live.
We have just been handed a once-in-a-millennium opportunity to make high finance serve the public interest, on our terms, rather than the other way around, as has been the case.
We must seize this unusual moment to make finance the servant rather than the master of our lives.
Edozien is chair of the SA New Economics network.
This article was first published in the Cape Times
|
|
|
|
Related Articles
News
Markets
Technology News
Company News
International
Today's Quote
"Make no mistake, they are bowed, but not completely beaten" Who said that?
|
Business Forum
Keep an eye on the stock exchanges - and your investments - from our markets page.
|
Belt tightening has made a dent even in those industries aimed at making people look prettier, perkier, poutier and, of course, younger.
Read more ...
|
|
