Thursday, October 2, 2008


(Week 10 - Thursday, Oct. 2)

With respect to the "debt"-based monetary system, we have reached a tipping point, and which way the situation will fall is uncertain. While the productive capacity of the physical economy has virtually ceased to grow (or declined), the economic expansion it has heretofore generated is slowing, and financial ledgers burgeoning with new "debt" can no longer be balanced with new money secured by actual production. That is why, for example, state budgets across the nation have gone from being balanced, or even flush with extra money a decade ago (in my state, Minnesota, they even sent out a rebate to taxpayers), to huge-cash flow deficits now, with little visible sea change in physical reality to account for it.

The stock market is in precipitous decline. Housing prices are no longer supportable in real terms, and are falling. Good paying jobs have been systematically shipped abroad or replaced with minimum wage positions. The newest crop of college graduates, already saddled with student loans and credit card debt, face a declining job market, and will not be able to provide the economy with the upwardly mobile spending impetus that has traditionally driven its growth. People's ability and willingness to go into new debt has in the aggregate been maxed out. Old debts, obligations and entitlements (both private and public) made under expectations of ad-infinitum exponential economic growth are coming due. The environment is being depleted. The infrastructure is crumbling. The baby-boomers are entering retirement.

The net effect of all these factors is that the "debt" load can no longer be serviced adequately with new borrowing within the constraints of the domestic market. Federal Reserve banker John Exter warned, "the Fed is locked into this continuing credit expansion. It can't stop. If ever bank lending slows . . . the game is up, and the scramble for liquidity starts." and "The Fed will be powerless to stop a deflationary collapse once it starts."

Judging by the strident stories in the newspapers, it would seem that the "deflationary collapse" has begun. Clearly there is a danger of such a thing happening, but as a nation and a world, we are entering an unprecedented time and it is difficult to say what scenario might play out.

The proponents of the "rescue plan" may indeed get their $700 billion dollars, and "save the financial system". What that means is that the obligation will be added to the "national debt". This "debt" is a ruse in the sense that it is never paid down anyway, but it does cause a further escalating of "interest" charges to be taken out of tax revenues to "service the national debt"; until, that is, these charges grow large enough to eat up the whole budget, and the government has to borrow every dollar it needs to fund its operations. This is a theoretical extreme, of course, and it is hard to imagine the situation getting to that point before the system breaks down completely.

If the rescue plan, as conceived, were implemented, it would, in the short run, inject a huge fresh stream of cash into circulation. When combined with the fact that a lot of "debt" that the money supply had been supporting will have been wiped out through bankruptcies (mostly in the productive sector), the freed-up "liquidity" (cash flow) may allow the economy to revive for a time. Politicians who voted for the scheme will boast about how it "worked", and the country will be setup for a round of "debt"-money expansion that is more crushing to its citizens than before.

It would certainly not be long, however, before the economy is back at the same impasse. By this time even more massive "interest payments on the debt" will consume public revenues. The productive capacity of the economy would almost certainly have deteriorated due to the supposed need to pour ever greater portions of its financial capital into "servicing debt", more and more buying power would have been lost to snowballing consumer "debt", and we would have become a nation that is even more dependent on living off borrowed money, while those abroad work for inadequate compensation to supply our material needs.

What is more, much greater control will have been invested in a small click of power brokers who would increasingly run our society in exchange for keeping the monetary spigot turned on. Already there are widespread reports in the media of proposals to "reform" or "streamline" the system by concentrating ever more power and authority in the Fed. It will become an unaccountable de facto government to an even greater extent than it is now.

Inevitably, at some point the journey down this path of "compounding-debt" will not be sustainable. The economy will "collapse" anyway. Are we there now, or can the reckoning be put off again until some time in the future? I don't know. Civilization has never been in this position before. In a world in which subsistence skills have been largely sacrificed to the mixed benefits of technology, and mutual global dependency has become the norm, one can only imagine what a "collapse" of the monetary system might look like. I will offer some sobering, as well as hopeful, thoughts on this in tomorrow's column.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites: