Invasion of the Moneylenders – Part 3 – “The black hole of debt”

By Peter Ewart

(This is the third in a series of articles on the banking and credit industry.  The other articles were:  “Invasion of the Moneylenders – Part 1 - Debt is Good"” and “Invasion of the Moneylenders – Part 2”)

Astrophysicists believe that deep in space “black holes” exist where matter has literally collapsed into itself.  These black holes have such powerful gravitational fields that they suck all nearby planets, stars and stellar gases into their infinite darkness.  Indeed, these fields are so strong that light itself cannot escape.

In today’s modern world, debt is our economic equivalent to these cosmic black holes.  Like a black hole, Debt and its relentless and ruthless lieutenant, Compound Interest, pulls everyone and everything it can into its Stygian realm.  As anyone who has ever endured bankruptcy knows, not even light escapes, especially at the end of the month when the credit card bills arrive.

These “black holes” of debt exist at the personal level in abundance, even when the economy is in the midst of “good times.”  But they also exist on a grand scale, at the level of government and corporation.

Today, there is only one way to describe the amount of debt in the world – absolutely frightening.  Future generations will look back in amazement at the herds of politicians, bankers, corporate leaders and establishment economists who have refused to address or even acknowledge the extent of the problem, and who, in fact, have contributed greatly to it.  Like Nero, they have their fiddles.  And, yes, while Rome burns, they play, and play, and play.

Some say that things are different today than in 1929.  The Federal Reserve, big banks and governments have various mechanisms and structures to avert any kind of general economic collapse or hyperinflation such as happened in Argentina a few years ago.

Financial analyst Tony Allison agrees that indeed “things are different today”, but not in the way Federal Reserve Chairman Bernanke and others would argue (1).  They are in fact worse.  For example, when the great crash of 1929-30 came, the U.S. Federal debt was only $16 billion.  In 2007, it is approaching $9 trillion, which is about 56 times larger.

Things are so bad that New York’s famous “debt clock,” established by eccentric real estate mogul Seymour Durst about 20 years ago, will be obsolete in two years once the debt reaches $10 trillion.  The reason – it’s a digital clock and there is no enough room for all the digits.

Financial journalist John Ince points out that the George W. Bush government, in its term of office, “has borrowed almost as much as the governments of all the other presidents of the United States combined [i.e., since 1776]” (2).  In fact, the U.S. government pays more in interest on the debt “than for education, health care, and homeland security combined” (3).

A number of State governments within the U.S. are approaching, or have reached, disfunctionality and collapse.  In the wake of Hurricane Katrina, Louisiana is an economic basket case, with many neighborhoods in New Orleans still in ruins, and the local government there barely operational.

In the state of New Jersey (which hasn’t had a bad hurricane recently), the longterm government debt is about $150 billion.  According to State Assemblyman Rich Merkt, “in a couple of years, the state could go insolvent” (4).  A number of state and municipal governments throughout the country are in similar straits.

In 2005, U.S. household debt (including mortgage loan and consumer debt) was estimated to be $11.4 trillion.  As Nobel Laureate Joseph E. Stiglitz points out, the household savings rate in America is at “levels not seen since the Great Depression, either negative or zero” (5).  The situation is not much different in countries like Britain, Canada or South Korea.

In some ways, the situation at the corporate level in the U.S. and elsewhere is worst of all.  Because of deregulation and other factors, an unprecedented amount of financial speculation, manipulation, risky investments, “leveraged buyouts” and downright swindling has been allowed to take place.  And some insiders are beginning to speak out.

Satyajit Das is one of the world’s leading experts on the murky world of “credit derivatives,” which are “financial instruments that transfer credit risk from one party to another” and where, through the alchemy of finance capital, “borrowed money” buys more “borrowed money”. 

Rather than putting the blame of the millions of ordinary Americans who were sucked into various credit schemes, Das blames the financial industry and regulators who used these unsophisticated people as pawns and created a huge mess.  His views are quite surprising given that he himself is reported to have made tens of millions in the back alleys of the derivative market (6).

Cutting through the jargon, perhaps another way to describe these complicated economic processes known as “derivatives” is that they resemble a glorified form of “cheque kiting.”  The difference is, of course, that for an ordinary person, cheque kiting could net him or her 2 to 5 years in a federal penitentiary; but for derivative “kiters”, holed up in Wall Street skyscrapers, it means millions, even billions of dollars of profit, and, maybe dinner at the White House with George W. Bush.

In this strange world of derivatives, with its “collateral debt obligations” and “asset backed commercial paper”, a “single dollar of ‘real’ capital supports $20 to $30 of loans.”  As a result, on world markets, these risky derivatives stand at about $485 trillion, which is about “eight times global gross domestic product of $60 trillion.”  Describing such a situation as a “house of cards”, as Joseph E. Stiglitz does, could be misleading in that we may be giving a bit too much credit to its stability.

In the last few years, the mainstream financial press has been ecstatic about all of the corporate “leveraged buyouts” that have taken place in North America and abroad involving railroads, utilities, pulp mills, communications and other industrial sectors.  Big companies got much bigger, and they have often done so buy using relatively small amounts of capital to leverage massive loans obtained through hedge funds, banks, pension funds and other sources.  Strange as it may seem, these takeover companies, short of funds, sometimes have the audacity to put up, as leverage for loans, the assets of the very company they are negotiating to takeover.  Indeed, their CEOs are then praised as “geniuses” in business magazines and given huge bonuses.

The economic situation is severely complicated by the fact that, because of deregulation, lack of transparency, and the “slicing, dicing, and packaging” of vast amounts of “toxic debt”, many companies, mutual funds, pension funds, and so on, do not know what their actual financial status is.  “No one really knows what is going on,” says Global Research’s Richard C. Cook, “except that on any given day an announcement if made that another fund or company has been wiped out” (7).  This has gotten so bad that some financial institutions are refusing to honor previous arrangements and obligations that they’ve had with each other.

As business magnate Warren Buffett has quipped, “it’s only when the tide goes out that you learn who’s been swimming naked.”  And, it might be added, the list of companies without bathing suits is growing rapidly

Some business analysts suggest that the housing and credit crisis should start turning around by the end of 2008.  Satyajit Das, the “derivative” man,  doesn’t think so.  When asked whether the crisis is in the “second” or “third” inning, Das laughs and says that it is still caught in the middle of the “national anthem.”

What is growing increasingly clear is that our black hole of debt combined with other economic factors, such as the loss of manufacturing capacity, the plunging dollar, and so on, could dramatically transform our economy and entire way of life in the U.S., Canada and other countries.

Benjamin Friedman, Harvard professor and author of “Day of Reckoning,” makes the point that “When a nation becomes a debtor nation, this signals a fall of international stature, as evidenced by the fall of the Dutch Empire in the 1600s, the Spanish Empire in the 1700s, and the British Empire in the 1800s.”  Today, the U.S. is the largest debtor nation in the world, owing more to other countries “than the rest of the world combined.”  Will it, too, go the way of the Dutch, Spanish and British empires?

One of the ways a dominating country can get rid of its debt is by devaluing its currency and literally foisting the problem onto other creditor countries – a tactic that the U.S. is currently following.  These creditor countries, like China and Japan, wake up one day and find that the U.S. treasury bills and other securities they bought last year have lost much of their value.

Yes, the U.S. may have alleviated some of its debt problems.  But such a move can have a heavy economic and political price, including the destabilization of the global financial and monetary order, among other things.

Next in series of articles: “The Invasion of the Moneylenders – Part 4 -  “Sixteen Tons”

Peter Ewart is a college instructor and writer based in Prince George, British Columbia, Canada.  He can be reached at: peter.ewart@shaw.ca

Notes

1. Allison, Tony.  “A Sea of Debt.” Financial Sense WrapUp.  Oct. 12, 2007. 
2. Ince, John.  “America’s Addiction to Debt Finally Crashes the System.” AlterNet.  Sept. 18, 2007.
3. Scurlock, James.  Maxed Out: Hard Times, Easy Credit, and the Era of Predatory Lenders.
4. Merkt, Rich.  Quoted in “Rich Merkt: N.J. Facing Point of No Escape from Debt.” Njpols.com.
5. Stiglitz, Joseph E.  “The Global Economy is Exposed to America’s Houses of Cards.” The Daily Star.
6. Das, Satyajit, quoted in “The Credit Crisis Could Be Just Beginning” by Jon D. Markham.  TheStreet.com.
7. Cook, Richard C.  “How Far Will the Crash Go and What Do We Do Now?”  Global Research.
8. Friedman, Benjamin.  Day of Reckoning.

Email | Print | Facebook | Twitter | Digg | Del.icio.us