7 Mar 2015

Debt is like Meth

Debt is like methamphetamine. We can spend a lot more than we normally would, but after days of not sleeping we have to crash. Debt allows us to mine the future for wealth, to spend what we have yet to earn. Just like amphetamine allows us to continue to burn energy long after we would normally need to rest. But at some point the debt repayments soak up all of our disposable income  - either because we have too much debt or because the interest rates go up. The latter is one of the reasons that central banks around the first world are holding their interest rates at or near zero. A rise now, when households are once again accumulating debt, could precipitate another recession as people diverted spending into debt repayment. As we are accumulating debt again we'll reach this stage in any case.

Ironically governments are far better equipped for this - they borrow at very low interest rates and can print money. The government is in a reciprocal relationship with the rest of the economy. If the government tries to run a budget surplus then the rest of the economy must run a deficit to pay for it (in excess taxes). Whatever the theory, the facts is that this is how the economy works.

Debt is methamphetamine. Banks are cooks. Governments are "Better call Saul".
In this scenario the banks are drug dealers. They make money from interest payments. And as we see without external limits they will just keep on pushing debt onto anyone and everyone with no thought for the consequences. They will lie and cheat in order to keep making more money. The banks have broken bad and started cooking meth.

Banks and governments are run by the same people. The secretary of the US treasury is almost inevitably a former big finance executive (often from Goldman Sachs) and treasury execs end up working in finance where their connections make it easy for them to lobby. So the legislators and the beneficiaries of the legislation are the same execs. This means that the regulatory branch of government is hobbled. Despite massive malfeasance in the subprime mortgage scam, something that came out in the Senate investigations, the Goldman employees had magically not broken any laws. Similarly here in the UK the major banks had been manipulating world interest rates for profit for years and no one was held accountable - the firms were fined, but the people who engineered this fraud were not.

Successive governments from both left and right had removed constraints and oversight from the debt pushers to allow them to make profits unfettered. The idea was that it would make everyone wealthier. But what happens is that the top layer take their cut and don't pay any tax, and they ensure below inflation pay rises for the lower layers. So only the top layers benefit. Government ministers present and former are very much part of this layer.

No comments:

Post a Comment

Keep is seemly & on-topic. Thanks.