Debt is a Drug

Debt is a Drug

Geithner hadn’t set the dials wrong. He had made a choice about who deserved the government’s full attention and how aid would be distributed. And he had done it without any meaningful input from Congress, or even a public debate.

“It led to a breakdown and a lack of trust in institutions,” says Admati. “What we witnessed here … is kind of ominous. It raised a lot of questions about who controls society ― corporations or the elected government.”

-      Ten Years After The Financial Crisis, The Contagion Has Spread To Democracy Itself – Huffpost

By J.M. Hamilton (9-23-2018)

Much has been made about the opioid epidemic, and the number of lives lost due to pain pills and heroin addiction.  The drug du jour comes and goes - sometimes its coke, meth, or synthetics - but one drug apparently always stays in fashion: debt.

Debt, like drugs, erases inhibitions, provides temporary euphoria and a high, is a short to intermediate term palliative, and turns corporations and people into millionaires, perhaps even billionaires. Politicians - love debt - because it often provides a reprieve from making hard decisions, which the elected are loath to do.  Don't want to choose between Medicare/Social Security and the US empire, or the Surveillance state, that's easy... go to your friendly central banker and they'll ease the pain.  Politicians also love debt because fortunes - often spawned by debt - are used by the donor class to buy influence and finance the political process (i.e. purchase politicians).

Seemingly everyone's doing it.  Corporations use debt to engage in financial engineering; nation states attempting to keep bankers and economies afloat; tyrants and dictators use debt to build up their militaries and police states; and many Western democracies are engorged by debt.

As noted in Bloomberg, global debt has skyrocketed, since the 2008 Crash (another debt fueled orgy), from $173 trillion to $250 trillion.  So much for the deleveraging that many central bankers said would transpire, as part of their extraordinary money printing operations, engaged in after the Crash.

Banks and Wall Street drool over debt.  Debt - for bankers - generates fees, revenue, a plethora of speculative products (such as CLOs and derivatives/swaps), and a never ending stream of leverage.  Heh, and when profits are privatized, and losses are socialized ... what's not to like?

Many have noted the precipitous drop in the number of publicly traded companies, and the increase in privately held companies, and the rise of private equity.  Private equity, conveniently, receives scant, or no, attention from the congress and the regulatory bodies, and with tax law favoring debt over equity.... private, it has been said, has become the new public.  Financial reporting is easier, management & ownership can enrich themselves more quickly and away from prying eyes.  Heck, in a PE takeover, profits can be front loaded, and the risk takers are, ironically & ultimately, the bondholders.

In a publicly held company some degree of propriety is the order of the day, and profits are subject to taxation; while w/in a privately held company nearly anything goes - short of committing murder, and good luck trying to find someone to prosecute said murder - and interest payments are tax deductible.  In a privately held company, layoffs and pinks slip are de rigueur.

Not everyone is doing the drug, however.  Banks are said to have cut back, due to higher - post-crisis - capital requirements; but given the accounting shenanigans surrounding derivatives & swaps, repos, offshore & foreign operations rooted in nations w/ lax accounting, tax, & regulatory standards, who is really to say?  Per the aforementioned Bloomberg piece, global household debt has remained the same, since 2008 (w/ many families throughout the West cutting back, while China's private and public debt has ballooned).  

Like all hard drugs, debt is a stone cold killer.  Debt finances armies, martial actions, and since the turn of the century, endless - credit card - wars.  Hundreds of thousands have lost their lives, and some have estimated that civilians make up somewhere between 50 to 90% of all war casualties.  That's right, the blood of innocents covers central bank money manufacturing; bankers find blood to be an excellent lubricant for their smoking printing presses.  Sometimes the fatalities caused by the debt drug are less overt... Greece is the classic example of a nation that got hooked, thanks to enabling dealers/bankers and centrist - establishment - politicians. That debt (and the Goldman derivatives that obscured same) financed all manner of high living: lovely public employee salaries; patronage gone wild; early retirement; unsustainable public pensions; tax avoidance for the plutocracy; and the reelection of Greek - establishment - politicians, who like to take credit for the good times, and aren't around when the money comes due.

When the money comes due, the dealer, the enabler - the bank underwriters - are not held to account, but the user - the government and its people - are never let off the hook. Generally the fallout, or withdrawal, arrives in a cold turkey process, called austerity.  Social spending is cut, pensions are greatly diminished, and pubic sector jobs and salaries are slashed. Public assets are privatized.  And of course, plutocrats dodge the overdose, and still avoid taxation.  Instead, the people feel the pain and sometimes even death, as the economy goes into a tailspin.  

But the bankers, the dealers... they always win, despite committing all manner of crimes (from stealing from clients & depositors to money laundering & market manipulation, et al.).

Arguably, the title of the Fed Chairman should be changed to Dr. Feelgood.  The efforts of the Medellín cartel, and Pablo Escobar, have nothing on the likes of Greenspan, Bernanke, Yellen, and Powell.  The spillover effects from central bank actions, over the last decade, could fill volumes, and include, but are not limited to: intergenerational wealth larceny; a M&A market on steroids; the aforementioned financial engineering; cartel & monopoly formation throughout the economy; and wage & wealth inequality.

Banks perhaps - in addition to Big Pharma - are the only drug dealers, generally, esteemed by the elites and politicians within a society, and almost never are held responsible for their actions, unlike dealers in the illicit drug world.  

There's that key dichotomy again:  malum in se, versus malum prohibitum.  That is to say, just because something is legal doesn't mean - taken to the extremes - it isn't evil incarnate.  (Moreover, just because something is illegal today - say cannabis or in some countries, homosexuality - doesn't preclude the objective reality that said drug, or sexual orientation, is comparatively benign or natural.)

El Patrón

Like any proscribed drug, debt, in moderate doses can be beneficial.  It can spur a business, an economy, or help a household through a rough patch; but once addiction occurs, debt can lead to catastrophic and economy debilitating consequences.  As Harvard's Professor Rogoff has stated, it becomes a drag upon the economy itself (obviously, at present levels, both at the macro and micro level).  Debt distorts the public's reality of what is, and what is not important; in short, it distorts our perception of the value of everything. 

So how to cure and detox from this unsustainable global binge, before a web of derivatives & swaps take the world economy down into a deep black hole?  Or avoid a situation like that which occurred in Denmark last week, when Danske bank - with a balance sheet far greater than Denmark's GDP - found itself in deep trouble on money laundering charges.

The answer - as w/ any addiction - would seem to be a gradual and methodical taking away of the highly addictive substance in a controlled environment.  

Go to the source; go to the dealer.  Bankers - central, institutional, & shadow - have created this problem.  And central banks are the only institution that can suffer a write down, or hair cut, or countenance genuine debt forgiveness - necessary - to remove this ticking time bomb, nation state debt, from our lives.  

Regulatory checks on private equity (PE), and controlled, contained, and measured leverage ratios - for business and investments - would seem to be another obvious answer.  That is to say, caps on the amount of leverage PE can apply to a takeover target, and additional limits to the amount of bonds, securities, & stocks investors - & speculators - can purchase on the margin.

When the economy hits the skids again, all these highly leveraged private firms - if past is prologue - are going to have a hard time servicing their debt. Many will end up bankrupt, and millions of citizens will lose their jobs.

There are solutions to this debt pandemic: the aforementioned, the rewriting of tax laws, and taking away many of the myriad incentives for the ultimate narcotic's use.

Unfortunately, it will likely take another global depression, and a serious jones - the likes of which have never been witnessed - before anything is done about it.

Copyright JM Hamilton Publishing 2018 

Central Banks: Enemy of the People; Enemy of Populism?

Central Banks: Enemy of the People; Enemy of Populism?

Italy’s bonds rallied for a third day after the country’s leaders reiterated a pledge to respect European Union deficit rules.

-       Italy Bonds Rally as League Hits Reassuring Tone on Budget Plan – Bloomberg

I believe that banking institutions are more dangerous to our liberties than standing armies.

-                       Jefferson

By J.M. Hamilton (9-9-18)

Two reoccurring themes are starting take hold throughout Western democracies.

As predicted by JMH many years ago, centrist parties are being thrown to the curb (or having to bend like contortionists to retain power) in favor of populist parties, who proclaim that they will use the levers of government to look out for their citizens (as opposed to the Establishment, the 1%).  We've seen this in France, Germany, Greece, Italy, the UK, and the US of A (et al.).

The second emerging theme is that once in power, some populist parties are doing an about-face - in very short order - and not delivering upon their campaign promises to end austerity and use government fiscal policy for the betterment of the commonweal. 

Greece's Syriza Party, and just in a matter of weeks, Italy's populist coalition government - led by Five Star & the League - have done a ritiro.  Syriza came to power in early 2015 on a pledge to end economy crippling austerity, and Italy's aforementioned coalition ran on a pledge to install a flat tax and a universal basic income.  Both the Greek and now, the Italian governments quickly capitulated to the EU and ECB.  The radical Syriza went back to austerity, which has racked up a considerable body count; and Five Star/League have already promised that they will play by EU/ECB fiscal rules, in terms of government spending, which runs directly counter to the programs and promises that they ran & won upon.

Trump, of course, ran as a rightwing Senator Bernie Sanders.  Trump sowed discord and division, along w/ pledges and promises to turn the government from the establishment and place it, instead, back into the hands of the people.  Since entering power, Trump's actions can best be described: as one nation under plutocracy, divisible, with liberty and justice for wealthy white men. In short, POTUS Trump seems to be hanging his populist credibility upon an economy w/ low unemployment (while wages continue to stagnate, and 40 to 45% of US citizenry are considered to be impoverished), and a ginned up stock market (which benefits an elite few).  

To his credit, Trump does appear to be addressing trade issues, that have harmed the American worker and tax base, but the verdict is still out.

All three economies face head winds from globalization, AI, automation, concentrated markets (i.e. monopoly), crony capitalism, and catastrophic national debt.

So what to make of Syriza' and Italy's new populist government's retreat?  Well, we know both populist governments came into power under crushing national debt.  We also know that national commercial banks, within both countries, were in very deep trouble during the Great – Global - Recession, and many banks are still in trouble to this day. (In fact, w/ the help of Goldman Sachs, the Greek – establishment - government hid the extent of their national debt to gain EU admittance). 

Commercial bank bailouts (in the case of Greece, a backdoor German banks bailout) have been implemented and account for no small measure of the ongoing fiscal crisis & national debt, in both nations, as well as, economic turmoil (If commercial banking is the conduit for monetary & free market policies, and said commercial banks are unhealthy/unsound, then the economy will be unhealthy/unsound). When it came down to it, centrist parties - from Greece & Italy, encouraged by the EU & ECB - adopted neoliberal, pro-multinational/pro-commercial banking policies, of: fiscal austerity for the public; bank bailouts, paid for on the backs of the taxpayers & future generations; privatization; and cuts to education, pensions, and social services.

No wonder the establishment parties have been thrown out.

Recently installed populist parties, however, reverse course when the bond markets --- controlled by multinational banking interests, shadow banking, institutional investors, and central banks (i.e. the establishment) --- start dumping their country's bonds, which in turn jacks up yields, future borrowing costs, and debt service loads.

In short, each country's national debt --- created by the establishment political parties, w/ bank bailouts and pro-plutocratic tax policies, and corruption on a horrific scale --- is in turn used as a straitjacket against populist political parties and their pro-citizen campaign pledges.  (In the US in particular, we have the strange optics of endless warfare, costing trillions, and tax cuts for the wealthy, paid for by the nation's credit line, while the GOP does everything w/in its limited time & power to take a chainsaw to entitlement spending.)

Central banks, in this case the ECB (run by a Goldman Sachs' alumnus), basically threaten to enforce rules on fiscal spending, cut off the monetary assistance that was available for banks & the establishment political parties, and suddenly, pledge to normalize monetary policy.... if the populist parties don't shut up and play ball.  In turn, the populist parties are given a Faustian choice: enact their populist policies - and face the wrath of central banks, the establishment, rising interest rates, no debt relief/restructuring, and a collapsing economy; or play ball with the establishment and go back to austerity, a mediocre economy at best, an economy rendering a humanitarian crisis at worst, and centrist pro-neoliberal policies. 

So how can populist parties w/ draw from the Establishment's and Central Bank’s power play?

There are several tools available to them:

1) Hold a referendum freeing them from the EU's stranglehold, a la Brexit;

2) The country can default on their national debt that was created by corrupt centrist political parties, bank bailouts, and tax avoidance by the wealthy (this would also entail reinstalling their former national currencies);

3) The country can reject the ECB and the Euro, and end the EU's power play;

4) Populists can insist that the ECB, and central banks (including The Fed), expand their mandate to include the welfare of the Republic and its citizens (that is add rising wages - and an expanded social safety net - to monetary policy objectives);

5) Central banks can takeover commercial banking services --- dispense w/ the middlemen, commercial banking establishments, who frequently act w/ great malice against the people's interests --- and allow citizens to bank, directly, at the ECB or Fed (the stimulative impact of allowing Americans to earn the same yields at the Fed, versus the paltry sum handed out by US banks, would be considerable in the aggregate); and

6) Democratize the central banks, by allowing their boards, governors, and leaders, to be elected (to better insure the enactment of the expanded central bank mandate). Eliminate any private bank ownership of central banks, including The Federal Reserve.

These are just some of the ideas that would allow populist parties to act upon their mandate, and many are not new ideas.  (Note: None of these ideas are panaceas, and the cure might – at least in the short to intermediate run – prove as challenging as the neoliberal disease; but then again, if troubled countries act in concert, the threat against the establishment EU – and the possibility of breakup – may force the elites to provide serious concessions in the populist governments' favor).  

That said, until nation state debt is addressed, expect more of the same: more austerity for the people; more banking welfare; more using national debt as a cudgel against fiscal/monetary policies designed to benefit citizens; and more privatization – the sale of public assets – at fire sale prices.  Also, expect more populist parties to gain power and subsequently retreat.

What's in it for the elites (sole beneficiaries of central bank policies for the last decade)?  Well, multinationals are said to hate change and instability... if the current crisis continues, the people will increasingly turn to more reactionary/radical political parties (so as to make today's populist parties  - which are already becoming co-opted & owned, as the new establishment/centrist parties – look positively benign).

In short, w/out global financial banking regulation & reforms, democratization of central banks (or at least central banks w/ an expanded populist mandate), and the controlled, coordinated, & gradual write down of national debt ...  in terms of political upheaval, we, likely, haven't seen anything yet.

Copyright JM Hamilton Publishing 2018