Column #45 DEFLATING THE "DEBT" BUBBLE VIA BANKRUPTCY

(Week 8 - Wednesday, Sept. 17)

One of the great secrets of the capitalist system is that it depends on bankruptcy to survive. This is how air is let out of the bubble of unsupportable "debt" attached to our money supply due to the demand for ever greater "interest" payments attached to the issuance of our dollars. Otherwise pressures associated with "debt" would become too high for the system to be sustained. Indeed, if one were to check the historical record, this is how capitalism has achieved longevity. The trick for those players who would survive, and even prosper, is to make sure that the air expended is someone else's air.

Regular episodes of widespread financial failure restore a sort of pseudo-confidence in the system because anyone whose balloon doesn't get popped experiences a sense of relief, is in a positions to exercises relatively more control in the social order for his "success," can feel like a "winner" (one of the "smart" ones), and may even wax righteous in their faith in the system. After all, so the thinking goes, does not the occurrence of such periodic convulsions to the economic order provide a way to weed out its "less fit" players (for the good of all or course), and correct "imbalances" in the system (never mind that these "imbalances" are due to the instability inherent in a system in which there is never enough money in circulation for people to pay their debts)?

A prime example of how the debt-bubble-deflation-through-bankruptcy process operates has transpired in the Midwest Farm Belt over the century - almost since the establishment of the Fed. At the time of the passage of the Federal Reserve Act, a third of the people lived on the farm, and at the start of WWII it was still a quarter of the populace. Now less than two percent remain, and it is questionable as to how many of these are "farmers" in the sense of being independent entrepreneurs (as opposed to subcontractors for major food cartels).

In the history of the world there has never been a population that has been evicted off its land, much less from a plain as fruited as the American Midwest, without wrenching trauma. How then was this fiercely rooted rural society removed in little over a generation? It was done by creating a context in which it was not possible for the occupants as a whole to make the ends meet in their financial lives (i.e. pay their expenses, earn a living, and have enough to reinvest into another crop), and then let them work it out in a desperate scramble to see who could hang on.

The factor that made the farm situation untenable was not, as claimed, "over-production" (in a world where tens of thousands of children perish each day of starvation-related causes). It was, rather, the so-called "debt" against a money supply that is "borrowed" into existence from private banks on terms that made it financially "impossible" for the producer (in this case the farmer and supporting rural businessman) to receive enough for his product in the marketplace to avoid the necessity of taking on ever more "debt".

For reasons that are complex, the shortfall of buying power available to complete the market cycle in any "debt-money" regime was directed first in a concerted way against the rural sector (as historically it has generally been). Meanwhile, there were policy papers put out by corporate think tanks that, for example, called for ". . . a program, such as we are recommending here, to induce excess resources – primarily people – to move rapidly out of agriculture." (An Adaptive Program for Agriculture – by the Committee for Economic Development (CED)). The practical way to do this was to manipulate the monetary situation in such a way that farmers could not receive for their product a "parity price" (one that would allow them to make a living, and keep them in structural balance with other participants in the economy).

Fundamentally, the "farm problem" is in reality a monetary problem. Historically, it almost always has been. The key to evicting the rural population from the land was to hide its true nature with a subterfuge ("farmers are being too productive"), and then rig the markets so that their financial collapse played out over a period of time.

Accordingly, farmers were obliged to go broke at a rate of a percent or two per year. Those still struggling to not be one of the losers typically saw no other course but to show up at the auctions of their bankrupt neighbors and pick up the equity in their capital supplies and equipment at pennies on the dollar. Old "debts" (air in the bubble) were wiped out in part because not enough could be salvaged, and the net "indebtedness" of the countryside experienced some relief, but the growth of the bubble resumed, and eventually almost everyone went down, except those who had deep enough pockets, or a position of advantage within the system (e.g. large corporate operations), sufficient to enable them to pick up the pieces of their neighbors' ruined lives. This process was wrenching, both for the rural folk involved directly, and the country as a whole.

The vital rural community is now virtually gone, and what is left effectively are corporate farming contractors (which often are now getting good prices and high subsidies), "Wal-Mart" regional commercial strips (to which there adhere increasingly satellite communities), and food imported from "cheap-labor" plantations (where the Mexican farmer is being economically driven off his land, and effectively compelled to migrate across our southern border).

Of course, since the demise of the rural areas, the "debt-bubble-deflation" scheme has moved on to the manufacturing sector, as our industries (e.g. the automotive complex in Flint) have been shipped overseas. Now the "service industries" are being forced out (e.g. the transfer of customer-service phone banks to India), followed closely by the intellectual sector (e.g. hi-tech programming).

Naturally, this has all been extremely traumatic, but these "adjustments," going back to the pre-WWII days, exist yet in the memory of our more elderly fellow citizens who lived through them. Still, we as a nation have not noticed the economic elephant in the room; i.e. the debt-bubble-deflation-through-bankruptcy process.

The "debt" bubble has to be deflated somewhere, and it was inevitable that the game should move at last to the banking-and-finance sector, which has been most instrumental in bringing this distress to the rest of the economy. This is what is happening at present.

Richard Kotlarz
richkotlarz@gmail.com

The complete set of columns from this series is posted at the following websites:
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm