The Hammer of Debt.


By David Malone

“…nobody would claim that their own thinking was ideological, just as nobody would habitually refer to themselves as Fatso. Ideology, like halitosis, is in this sense what the other person has.”
“Ideology” by Terry Eagleton. P.2

We all see the world through a lens of ideas and assumptions. The courageous man admits this to himself and checks with others who see things differently. The ideologue is the man who ignores and even denigrates anyone who does not see things as he does.

In almost every Western Democracy we are in the grip of dangerously arrogant and selfish ideologues.

Such people are not fast learners and are least inclined to try just when it is most urgent that they do. The ideologue whose world view centres on the ‘nail’, when faced with the screw, having seen them in action and been given a fair summary both of their uses and advantages, will turn to his assistant and say, “Bring me a much larger hammer.”  That is where we are today. It is the imperial, brute power stage.  It is the stage when what matters most about the hammer to those in power, is who has it.

Ideologies, world views, paradigms, whichever term pleases, do not go quietly in to the good night. Those whose power and position arise from and depend upon a particular arrangement of laws and assumptions will defend them no matter what the cost. Those in power can usually arrange matters so that the cost of defence falls on others while they know the cost of loss will fall on them.

Debt is the hammer of our age. Its original purpose was to accelerate growth. Which it does. But like many such accelerants, like steroids or speed, it has disastrous side effects which are never slow to manifest. In the case of debt the problems arise from a basic misunderstanding of what debt does. It is often suggested that debt increases growth. It does not. It hastens it. You can save up what it will cost you to build a new factory or you can borrow and build the factory sooner. The debt allows you to start growing sooner. But at the cost of siphoning away a little of the growth to pay the interest on the debt. So actually debt decreases your growth by the interest you pay on your debt. And that is the kernel of the disaster.

It will be argued that the cost of the interest on the debt is far outweighed by the profits that come from getting to market sooner. And this is of course true, as long as the demand is there when your factory opens. If it is, then you will grow sooner than your more cautious competitor and by growing sooner will grow for longer. So in good times, of growing demand, debt is the wonder tool that hammers all opposition. Everyone understands it, everyone wants it and those who sell it are as gods. Thus in good times of expanding demand, cheap energy and technological innovation, the amount of debt increases and with it, the pace of growth.

It doesn’t take a genius to realize that just as debt can speed up production so it can accelerate consumption as well. Don’t wait till you’ve saved up for your new widget. Borrow and have it now. Which innovation seems to double and triple the genius of debt. Not only can producers expand production quicker but consumers can consume, excrete and consume again all the faster too. And of course each encourages the other, with debt as the necessary laxative. For as long as the happy state flows freely, the sellers of the debt laxative, become immensely rich from the interest they charge to both sides, and powerful from being seen as masters of the miracle of debt which only they can make work.

Sadly the side effect, unseen in the good times, is how dependent the whole miracle becomes on continuing to grow and to do so ever faster and faster, in order to keep ahead of the increasing cost of the interest on the ever growing amount of debt. As soon as the rate of growth falters the instability of a system where both production and consumption have been accelerated by debt become apparent. But by then it is too late. The stupid but seductive answer is to pile more debt on the consumption-side to off-set any ‘temporary’ slow down. Advocates will always say, a slow down, even a crisis, will be temporary, just some animal crisis of confidence, bad weather, bad karma, communists, environmentalists  or sun spots. Whatever it may be it will pass. All that is required is a ‘bridging’ loan to get across the little dip and then normal debt fuelled service will resume. Advocates and defenders always say the ‘dip’ is small, contained, local, temporary and will definitely be over by Christmas. All these things were said in the first months of the present Bank and Debt Crisis. They were all absolutely wrong.

Nevertheless the ideologues recommended that if no one wanted mortgage backed securities right now, borrow to set up shell companies who will ‘buy’ the securities no one wants and give the appearance that all was still as it was supposed to be. The banks followed their own advice and did exactly this. And then, they went on, when confidence, buying and growth resume, just sell the stuff you bought in the moment of crisis.

For the merchants of debt and those who worshiped them, our political servants, it was clear. The problem was just a wobble in confidence. People were worried about the cost of the debt they had and were not sure about taking on more debt to out-grow it. Because they weren’t sure, so they didn’t take on more debt and this caused the very slow-down in growth that then did indeed imperil the ability of the entire system to stay ahead of the cost of its own debt. To the merchants of debt this was a self inflicted wound and the answer was to break the disastrous circle of doubt with a massive injection of easy credit and cash which would restore confidence and growth.

And so QEI. It was global but its centre piece was in the USA. QEI (USA) From 14th of December ’08 until 30th March 2010

The Fed bought:

  • $300 Billion of Longer term Treasuries,
  • $175 Billion of Fannie and Freddie Debt
  • $1.250 Trillion of Fannie and Freddie Mortgaged Backed Securities (MBS). That was QEI.

All this was debt forced upon the tax payer. It failed. The ideologues said, ‘No it didn’t, it was just not enough.’ So they did it again. That too failed. The ideologues said again. ‘No it didn’t. It would have been so much worse if we hadn’t done all this.’  Then last week, a senior banker told me that the huge French bank, Societe Generale, came within a hair’s breadth of running out of cash and this was the trigger for the sudden opening of the Fed swap lines and the general sudden return to ‘easing’ (think laxative) in money supply.

The ideologues, like the man with the hammer, have learned nothing and have no intention of trying to learn. Why would they. As long as the hammer is unchallenged then as the owners of said hammer they are top dogs. Should they admit the hammer has had its day then they are ripe to fall.

Now you might object that I am wrong about the bankers and their attitude to debt. You might well point out that the bankers have come to recognize how dangerous too much debt can be and hence their insistence on cutting public debt. A hurtful but, as our leaders tell us through crocodile tears, oh-so-necessary imposition of ‘austerity’. Surely this is proof that the bankers have learned?

I think not. You see in the banker’s world ‘public debt’ as they scrupulously refer to it, is absolutely different from the private debt of the financial world. Private, bank-held debt is what they might call, ‘productive’ debt in that, to their mind, it is what fuels the growth of the Private sector. It is what allows growth and consumption to be accelerated and commissions at banks to be engorged. Whereas, according to their ideology, public debt is unproductive in that it does not support growth but only welfare. I use welfare is its general dictionary meaning not the narrower meaning of ‘welfare state’. And welfare does not swell the bonus pool, nor the bottom line of banks nor bring forward consumption or growth.

It is this categorical difference in two kinds of debt which explains how the bankers can roar and threaten about the evils of public debt levels but see nothing contradictory at all in at the same time advocating further easing, printing, borrowing and general bailing out of banks. One is good debt – private growth fuelling, the other just a waste of money. Which they might benevolently overlook if it were not that public debt competes directly with private debt, and taxes (seen as allied with public debt) compete with taking on private debts.

In good times such competition can be tolerated but in tough times, when bankers must look to their own welfare, then public debts must be eradicated so that private debts can be made safe and then increased.

This is the hammer of debt. Our leaders worship it while the bankers own it.

At this moment many of us can clearly see the hammer of debt is now no longer a wonder tool nor the answer to our present predicament. Growth and the debt that accelerated it were inventions of the world of steam and then oil and all the technologies of petrochemistry, electricity and computation. It was the wonder tool of the brief moment when we were still small in number and the world was still big. Today we are very many and the world relative to our powers of consumption and destruction is small and shrinking.

But debt is a hammer and at this moment it is a weapon more than a tool. Notice how little now is said of ‘confidence’. It is no longer ‘confidence’ the bankers are primarily concerned to ‘restored’ but discipline. Since people have refused to return to ‘ confidence’, they must now be disciplined.  And debt is the means of enforcement. The hammer of debt has changed from tool to weapon.

We are being bludgeoned with debts and the austerity deemed necessary to pay for them. The Irish have just this evening been told they must suffer yet another two billion euros in austerity cuts to education and health. Yet the bail out of their worthless banks remains firm and will increase. In March the Irish state will still run out of money and more austerity will be called for while their banks will ‘require’ yet more ‘aid’ and ‘support.’

Our leaders believe in the miracle of debt fuelled growth. And indeed so deep are the debts that the banks and financial system are in, that only debt fuelled growth of the most insanely leveraged and reckless nature will save them now. So it is that far from reigning in recklessly unstable gambling of the financial system, it increases month on month. To take just one example, the financial trade in over-the-counter derivatives accelerated in the last six months by a colossal 18%. The total amount of such contracts at the end of June 2011 was $707 Trillion.

The high priests and princes of the ideology of debt and debt fuelled growth are not learning, not about to change or give away their power and position. They are becoming more aggressive and more ready to use debt as a weapon to simply bludgeon any perceived problems and batter in to silence any perceived opposition.

Bring me a much bigger hammer!


Courtesy of David Malone –

David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here:

David Malone will be giving a talk in Edinburgh on Tuesday Dec 6th at 7.30 pm at Saint Johns Church at the corner of Princess St and Lothain Road.