Debt initially dazzles and deceives, then it disappoints, disillusions, devastates, and destroys.
The thing governments do best is borrow. Performance varies across the range of their purported functions—warfare, maintenance of public order, provision of goods and services, redistribution, regulation—but they all go into debt. The structure of governments and their underlying philosophies also vary, but there’s one commonality. They are set up to optimize their own borrowing. Thus, central banks are essential.
There is a cottage industry devoted to the minutia of central bank personnel, policies, and pronouncements and what they mean for humanity’s future. Actually, cottage industry is not a correct characterization. No cottage industry could generate the kind of money paid to central banking’s acolytes.
After months of speculation, President Trump named Jerome Powell as the next Chair of the Board of Governors of the Federal Reserve System. If you know why the Fed exists and how it operates, the speculation was so much dross. The Federal Reserve exists to “facilitate” the US government’s issuance of debt. Mr. Powell will do what Janet Yellen, Benjamin Bernanke, Alan Greenspan, Paul Volker, G. William Miller, Arthur Burns, and every chairperson has done on back to the first one, Charles Hamlin: make it easier for the government to borrow. All of the other candidates would have done the same.
Central banks, their fiat debt, and ostensibly private banking systems that either control or are controlled by governments (take your pick) have facilitated unprecedented global governmental indebtedness. Suppressed interest rates and pyramiding debt via fractional reserve banking, securitization, and derivatives have led to record private indebtedness as well. The totals so dwarf the world’s productive capacities as measured, albeit imperfectly, by gross domestic product figures that the comparison yields an inescapable conclusion: most of this debt cannot be repaid.
A debt instrument is a promise to pay interest over the life a loan and return principle at a date certain in the future. If a private debtor dies before that date certain, his creditor can look to his estate for satisfaction of its claim, which has precedence over the claims of heirs. However, the creditor cannot go after the assets of those heirs. A government that borrows, on the other hand, is pledging repayment from the income streams and assets of future generations, binding parties that may not even exist at the time the debt is incurred. Specious as it is for governments to bind present taxpayers to debt repayment with only their “implied” consent, it is odious in the extreme for them to bind future generations incapable of any kind of consent.
Compounding governments’ culpability, their increasing debt loads make it that much harder for those future generations to repay. Debt that funds productive investment can be considered a factor of production. Just like any other factor of production, it is subject to diminishing returns. At some point the gross return of debt is so scant that after debt service costs, the net return is negative. Additional debt actually reduces rather than adds to economic growth.
This is already happening with debt-funded productive investment, but that’s not the worst part of the story. The lion’s share of debt funds consumption, which generates no offsetting return at all. If you borrow $10 and buy $10 worth of goods, the proper accounting for your transactions is that you’ve increased both your liabilities and assets by $10. There has been no increase in either your income or your net worth. Had you invested the $10, there is a possibility that your income and net worth might increase in the future. When debt funds consumption, it is always a net negative, unless the debtor can borrow at zero or negative rates.
The national income accounting of the US and most other nation ignores debt, so when a government borrows $10 billion and buys $10 billion worth of goods and services, it adds to the gross domestic product, official national income increases $10 billion. Virtually every dime a government spends some politician or bureaucrat will label as an “investment.” However, the claimed returns are dubious or nonexistent; the lion’s share of developed country budgets funds consumption.
In the US, the increase in government debt has been larger than the increase in GDP every year since the 2008 financial crisis. Under the accounting standards the government mandates for the private sector, the US is going backward, getting poorer. Future generations will carry an ever-expanding debt load with a shrinking ability to repay it. The aging population and unfunded pension and medical liabilities—promises made by governments, but not technically debt—exacerbates this bleak scenario.
This year the world has become aware of Mohammad bin Salman, the Saudi Arabian crown prince and heir apparent to the throne. It will be a long time, if ever, before we know the full story behind his recent maneuvers to consolidate his power. However, 32-year-old Salman is emblematic of what will probably be the future’s most consequential conflict: debt-ignited intergenerational strife.
Saudi Arabia sits on one of the world’s largest pools of oil, which has funded a welfare state on steroids. The Saud tribe and its allies have arrogated unfathomable wealth. The benefits with which they buy off ordinary Arabs make work an unattractive option; laborers are imported from other countries. However, the sand is running on this happy state of affairs. Beneficiaries and their “needs” have expanded faster than oil revenues. The country’s foreign exchange reserves are shrinking. It has issued debt and is contemplating a partial sale of Saudi Aramco, the national oil company.
Perhaps the young prince is seeing the writing on the wall and has decided to do something about it. Get rid of the old farts, their multitudinous wives, mistresses, siblings, children, nieces, and nephews, the conspicuous consumption and the shopping jaunts to London and Beverly Hills. Seize their jets, yachts, and fat bank accounts, certainly quite a haul. Start diversifying the economy. Wars in Syria and Yemen cost money, it’s true, but youth is inconsistent. The prince probably does not want his generation’s future (he’s reportedly popular among the young) further mortgaged by a kleptocratic oligarchy.
If so, he’s not alone. Across the developed world, the younger generation faces a future already mortgaged by a kleptocratic oligarchy. Unlike the prince, they can’t do anything about it, and relatively few are even aware of it…yet. Debt initially dazzles and deceives, then it disappoints, disillusions, devastates, and destroys. The oldsters got the first two, the youngsters will get the last four. The former reassure themselves: we vote, the kids don’t, we’ll protect our benefits. Debt deceives. Mounting public pension problems are a harbinger: you can’t squeeze blood from stone, not matter how many vote for it.
A collapse of the debt skyscraper of cards is inevitable, the issue is who bears the losses. Amidst the devastation and destruction, the young may cast a gimlet eye on the benefits their elders have voted themselves, and decide they’re less than willing to fund them. They may decide a generational uprising is in order—perhaps outside the boundaries of the normal political process—and a reshuffling of the remaining assets. The developed world’s elderly could find themselves in the same position as the oleaginous old thieves who ran Saudi Arabia: bereft of power and wealth. Except their reduction in circumstances may not be quite as tolerable as house arrest in the Riyadh Ritz-Carlton.
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Who will save the children….
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Robert, If you have time, would you be willing to comment on this guy’s suggestion for governments to follow what he calls Japan’s lead in canceling its national debt, please?
Start at 6:10 for the intro, the argument begins around 6:30. Thank you in advance!
Thanks for passing along the video. I watched the part you recommended. Let’s do a thought experiment of our own. Say a government issues 100 percent of its debt to its central bank, in exchange for whatever the central bank uses as its fiat debt–scrip, central bank reserve notes, or a deposit liability in the name of the government. What has happened? Fiat debt has been exchanged for fiat debt. The central bank could then retire the government’s debt. What has really happened? Nothing at all.
What’s been eliminated here is the government buying goods or services with its fiat debt before it is exchanged in the secondary market by the central bank for its fiat debt. Governments don’t issue debt to exchange it for the central bank’s fiat debt, they do so to buy goods and services. Those who receive the fiat debt in exchange can then exchange it for the central bank’s fiat debt. Because both the government’s and the central bank’s fiat debt can be produced at will, they will continually produce it to command real goods and services. This is the very definition of inflation, and between the government and the central bank, they will produce enough fiat debt to depreciate its value against real goods and services. It is in their interest to do so.
The Japanese are playing a shell game, obscured in part by the rest of the world, which is playing the same shell game. It is replacing the government’s fiat debt with central bank fiat debt, that’s all. It’s a distinction without a difference, exchanging one piece of paper for another. There are no free lunches.
My oldest told me when he was 15 that when his generation takes over, they will pull the plug on every welfare program for seniors….
I told my son if he became a debt slave to support seniors, I’d disown him.
I could see the potential for a Khmer Rouge type uprising among our nation’s youth. If a young, charismatic politico arises and starts spouting a lot of what they are being indoctrinated with ( white privilege, baby boomer privilege, Cultural Marxism and socialism as the answer for true equality- to name a few) we may very well see a generational purge in the USA.
Some of their thinking is actually justified but the source of their ills is misdirected. It is not fair to pay for lavish retirements, pensions and SSI of a monstrous populace of retirees. It isn’t right that the young should be forced by law to carry expensive insurances to pay for the aging.
Instead of disowning him, why not join with him and overthrow the corrupt gov’t?
A better idea indeed.
“The collapse of the debt skyscraper of cards is inevitable.” Maybe. Growing up in Socal in the 50’s was idyllic. My brother, our buddies and I would sit in the shade of the patio and have marathon Monopoly games. You know the rules, Mr. Gore. You get two $500.00 bills, four $100.00 bills, etc. BUT we wanted the game to go on. So, every body got more money. And, when houses and hotels were mortgaged, we helped out our buddies to keep them in the game and keep the game going, which sometimes was for days until we got tired and did something else.
This is what happened in 2008. Bush, Cheney, and Hank Polson(sp?) decided to help out their buddies and keep the game going. The game is STILL going and will CONTINUE to go on as long as EVERYONE agrees to the rules of the game. And EVERYONE, from the Chairman of the FED to the POTUS, to the corrupt hacks in Congress, to the Amerikan Sheeple will go along because the alternative is too horrible to contemplate.
Your “inevitable collapse” is a long way off, if in fact it ever happens. The makers of the RULES will change the RULES to keep the Sheeple secure in their cheap entertainments and debt bucks and the pols at all levels of the Leviathan entrenched. No one wants a scenario described in PATRIOTS, ONE SECOND AFTER, etc. Bleib ubrig.
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Don’t think we have the time to cancel our debt, watch all the way through will definitely get your attention: https://www.youtube.com/watch?v=9KLA99TlW-k
The people didnt ship US jobs via premature/unconstitutional trade deals..
The people elected politicians who have US borders to be swinging gates for decades
The people arent printing the monies to fund 50 million invaders and
the welfare state the politicians/corporations Willfully created
Gold… The currency of Kings
Silver.. The currency of Gentlemen
Barter… The currency of the helots and serfs
Debt.. The currency of slaves
I wonder who has the gold and who is actually carrying the weight of the debt in this formerly free collection of ‘states’?
Seems obvious but most do not want to ponder that question.
Great job as always Robert.
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