Historically, you’ve been able to tell everything you need to know about a government by the quality of its money.
Deacon Bainbridge, The Golden Pinnacle, by Robert Gore
Debt represents moral issues that transcend its economic role. The heart of debt is a promise: to pay the agreed upon interest and repay the principle at an agreed upon date in the future. The name of one class of debt—bonds— carries an unmistakable moral connotation: one’s word is one’s bond. Creditors must assess character—the willingness to repay—before they evaluate borrowers’ incomes, assets, and future prospects—the ability to repay. That formulation looks quaintly anachronistic, which tells you all you need to know about contemporary morality. As debt has become the centerpiece of global economics, so too has it become emblematic of global ethics, or more properly, their absence.
In 1913, a perceptive few recognized the political and economic dimensions of the new income tax and central banking legislation; fewer still recognized the philosophical and moral implications. Under a real money standard (money defined as: a medium of exchange, a store of value, and a unit of account, with intrinsic value, and not a liability of an individual or entity, e.g., a gold standard), the creation of debt hinges on the supply of real money and its value relative to goods and services. So limited, most debt will be incurred for productive uses that have a prospective return greater than the cost of debt service.
When governments and central banks are not so limited, they can create fiat debt at will. In 1971, President Nixon completed the transition begun in 1913 away from the convertibility of dollars for gold. Since then, the dollar has been a fiat debt unit. The government and the Federal Reserve can produce an unlimited amount of fiat debt units, not just Federal Reserve Notes, but member banks’ reserve balances at the Fed, and Treasury bills, notes, and bonds.
Deacon Bainbridge, a fictional character, was right on the money, so to speak. The quality of a government’s money is an infallible moral bellwether. A moral government would not be involved in the monetary system at all. Production of fiat debt amounts to fraud and counterfeiting. Its only “backing,” implicit at that, is the government’s ability to steal from its productive citizens. General acceptance of such intrinsically valueless debt requires legal compulsion. Fiat debt depreciation and devaluation steals from creditors for the benefit of debtors, which invariably includes the government doing the depreciating and devaluing.
When debt becomes a government-administered shell game relying on fraud, theft, and compulsion, the ethics of debt break down throughout the society. Neither the coercive welfare state nor the imperial warfare state would be possible without fiat debt. If the government had to extract its funding from a real money economy, with a finite and limited supply of currency, every dollar taken from that economy for income redistribution or bombs would be a dollar that could not be spent for private investment, production, or consumption. The real cost of government spending, and the real burden it placed on the economy, would be direct and clear. Long before governments reached the roughly 40 percent of the GDP they currently spend (combined federal, state, and local governments) their parasitic load on the economy would kill the host. The unethical means of funding the welfare and warfare states indict their ends; intellectual and moral bankruptcy precede fiscal bankruptcy.
Any entity that continuously spends more than it takes in will inevitably go bankrupt. Governments do so with monotonous frequency; insolvency has probably eliminated more of them than wars and revolutions. Such a fate looms for a host of governments that have made promises to their citizens they cannot keep. The mounting spending and debt loads these promises entail have exerted an ever-increasing drag on the economically productive and have shrunken opportunities. Less-than-bright future prospects has led to shrinking birth rates, which negatively feed back into economic drag.
The above characterization obviously applies to most of Europe, Japan, and China, where debt has funded not welfare benefits in the Western sense, but massive and often unnecessary infrastructure spending, factories, and other commercial projects that keep the population employed and docile. The US has its welfare state, but it also tries to militarily maintain its version of “order” in the world, a confederated empire. A mini welfare state resides within the warfare state. An appreciable portion of the trillions the US has spent on the military-industrial-intelligence complex has been dictated by domestic political considerations, unnecessary to achieve policy objectives, even if one holds that Pax Americana is a legitimate objective. A military limited to an actual defensive mission would shrink the warfare state and its embedded welfare state dramatically.
Debt has become a lifestyle in most of the developed world, the foundation of the modern economy, devoid of moral considerations. Impressively credentialed economic “experts” hold that expanding debt is the essential propellant of economic growth. Obtaining one’s first credit card—and consequently a credit score—is now an important rite of passage, with the ultimate ascension into full creditworthy consumer-hood marked by one’s first mortgage.
Republicans, long holding themselves out as a bastion of morality, look set to nominate a man for president whose corporations filed for bankruptcy four times, and who claims that stiffing creditors is a legitimate business tactic. Democrats look set to nominate a woman who wrote a book that supposedly demonstrates her solicitude for future generations, but whose proposed spending will only add to the government’s mountain of debt and unfunded promises it cannot pay. It takes a village to raise a debt slave.
An aviary of canaries in the credit coal coal mine face a mass die off, models all of responsiveness to something-for-nothing political “demand” and exemplars of contemporary economic theory. Which one expires first? Europe’s Mediterranean spendthrifts? America’s walking dead municipalities, with their underfunded pensions and medical plans? Japan, where debt is over four times the GDP and adult diapers now outsell baby diapers? China, as its staggering debt refuses to heed the commands of the commanders of its command economy? Oil exporting nations, revenues slashed by 70 percent? South America, in a reprise of its historical role as the deadbeat continent? It doesn’t really matter, because with today’s inextricably intertwined financial system, where virtually every financial asset is someone else’s debt or equity, when the first ones go the rest follow in short order.
Ethics are in harmony with reality. Living within our means is a requirement of survival, not a quaint homily. Perpetually living beyond our means is as impossible as perpetual motion, meaning our multiply mortgaged future is indeed bleak. Impending default has been preceded by a wholesale default of morality and reason. When the financial collapse arrives, the protestations of “good intentions” will be as phony and useless as the scrip currencies and debt littering the globe.
QUALITY MONEY, QUALITY READING