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