Sunday, November 27, 2011

Morality and Debt

We have presented the producer-consumer problem as the basic problem in economics. (See: )

However much money the consumer starts with, the consumer must spend his money until the producer has it all, and then the system collapses, (or the consumer runs into debt, and then it collapses.) When the market for the producer’s surplus collapses, the system then implodes. How then to maintain demand in the consuming sector, so it never runs out of money (demand) and will always provide a market for the producing sector?

We have used producing and consuming sectors in the original analysis, and as a kind of shorthand. We could generalize the problem and instead say the powerful and the weak sectors, where the real value of goods exchanged between sectors is equal, or even slanted so that the weak sector produces more than the powerful sector, and thus it is the powerful sector that is the ‘consuming’ sector. But the powerful sector is able to secure a greater proportionate revenue than the weak sector. (It uses its power to do this. We can define the powerful sector as that which is able to secure a higher proportionate revenue than the weak sector, defined as that sector unable to do so.) The powerful sector has a higher profit margin. And so it accumulates the money of the weak sector, and eventually acquires it all. Then it runs the weak sector increasingly into debt.

The moral implications of the terms producer and consumer, are, here, absent. In the reality, where the weak sector produces more than the powerful sector, they are inverted to appearances: The powerful creditor sector has not earned its wealth, but gained it through manipulation and force and fraud, that is, what ever instruments it has at its disposal that make it the more powerful, and the weak debtor sector has not become debtor through sloth. The weak sector is the producing sector, but its wealth is taken through the greater power of the creditor sector.

Does the creditor sector produce or consume? Well, the whole point of extending credit in the present is to, in the future, consume more than one produces. It is a matter of ordering. First, one produces more than one consumes, extending credit. Then one consumes more than one produces, collecting on the debt. However, this initial production by the creditor sector of surplus, to ‘hook’ the weak sector, is not necessary, but only the least unjust.

Whoever controls the flow of money controls the economy. The creditor sector need only start with a portion of the money. Then by collecting more in interest from the producing sector than the creditor pays the producing sector for what it consumes, the creditor sector will accumulate the money of the weak sector. This is the money of the producing/debtor sector. See:

And the video

Especially from about 32 minutes on, but watch the whole thing.

The consuming/creditor sector need not ever have produced anything.

Now the creditor sector seeks to loan to producers, because only producers can pay them back. Only those who produce more than they consume, who are net producers, can pay back loans, in any real sense. So either the creditor sector starts as a consuming sector, or it becomes one. The creditor sector must be a consuming sector, since in order to be paid back, it must allow the producing/debtor sector to produce a real surplus, and make the producing/debtor sector hand that surplus over. It consumes an ever greater portion of that surplus, as the producing /debtor sector becomes more in debt. The producing/debtor sector must become ever more in debt because there is never enough money in circulation to pay back the principal and the interest on the loans the creditor sector extends. This proceeds until the producing/debtor sector owes more in interest than it can produce, and must consume its capital to maintain payments. The creditor/consumer takes some of the production the weak producing/debtor sector needs to maintain itself and its production.

Thus we come to an inversion of the original problem. The consuming/creditor sector has the surplus of money, and the producing/debtor sector is starved of the money needed to support itself. It contracts. But it is leveraged against itself. That is, its nominal net income is negative, because the burden of what it owes, the interest burden, nominal interest times money owed, is greater than its profit margin times how much it produces. (The situation is even worse where a portion of the principal must be repaid.) So it is perpetually in the state of losing money That is, rolling over ever more debt.

Now the question arises: Why are corporations flush with cash? First, they are not. See:

Second, labor also constitutes part of the producing sector, and labor is losing money.

Why are the banks in debt? The banks are just a front. They owe also. Who do they owe? They owe themselves. That is, they are front corporations which, when they fail, will have no assets, but the assets will have been transferred to another corporation with the same owners. The one percent.

As the producing/debtor sector contracts, it is ever less able to repay its debts to the consumer/creditor sector, which debts increase even as the producer/debtor sector’s ability to repay decreases. Austerity cripples the producer/debtor sector, effectively making its debts larger and more difficult to pay back. More and more of its assets are transferred to the consuming/creditor sector, until the producing/debtor sector is stripped of its assets.

The details of this process are interesting in themselves. The consumer/creditor sector controls the quantity of money available to the producer/debtor sector. (But there is only money to pay the principal, never enough to pay the principal and the interest.) When it extends more credit, there is more money, and the price of things goes up. The members of the producer/debtor sector must borrow to keep up. (It is a failure of the commons. If no one borrows, no one has to borrow. If some borrow, the others have to, to keep up. Note also, the creditor/consumer sector can drive up prices by increasing its own demand, thus forcing increased levels of debt on the producer/debtor sector.) Then when the consumer/creditor withholds credit, there is less money, and the price of things, particularly assets, goes down. Not only that, when there is less money, there is greater unemployment, businesses contract, and, because money is needed to repay debts, more debts that cannot be repaid. Consider housing. By withholding credit, the price of houses is driven down. And there are more foreclosures.

Now it is argued that assuming a debt is purely voluntary, and that therefore the resulting indenture is essentially freely entered into. Assuming this excuses a process and result that is to many people intrinsically repellant, the assuming of debt may, under some circumstances, itself be compelled. Indeed, purely voluntary situations are rare. There is almost always some degree of force of circumstance, and often circumstance where one’s choices may be limited to a choice of evils. When the cost of living exceeds income, one is left with the choice of starving, or dieing of exposure, or assuming debt, and at least postponing the day of reckoning. Or, in the absence of universal health insurance, many are vulnerable to the choice of assuming debt or dieing of their malady. Similarly, where education is necessary to advancement in society, yet its results uncertain, one is left with the unhappy choice of almost certain poverty or a chance at either prosperity, if as a result of the education one secures adequate employment, or debt peonage if one does not. In either case, the debt must still be repaid, but in one case one is able to pay it off, and in the other one may not be.

Another instance where one assumes debt without choice is through agency, eg the government. Then there is the businessman seeking to preserve his business, or the farmer seeking to pay for planting his crop.

Then there is fraud.

And as ownership is concentrated, monopoly can be expected to be more and more of a feature of economic processes. It is the nature of monopoly to provide to less than the market needs, and people need to borrow to pay the rents collected by- those who extend credit.

In an environment where others assume debt, the resulting increase in the money supply drives up the cost of living, making it more difficult to sustain one’s life style without borrowing. Further, this life style may be deserved, that is a reasonable proportion of a person’s contribution to society. It is essentially unfair that someone who makes a considerable contribution to society be yet forced to live a life of penury. Yet those who blame him for the assumption of debt effectively condone this.

We have shown that being in debt need not imply a moral obligation to repay: The debtor, far from being lazy, may produce for society more than his fair share. Indeed, the lazy and indolent are not extended credit. Only the producers are sought out by creditors, who effectively seek to indenture them.

The debt may have been forced on the debtor, often by circumstance induced by the creditor. Even if not, the perpetual obligation often resulting from overbearing interest amounts to a form of slavery, and this is reprehensible.

The creditor has no implicit claim to moral superiority. Neither should the debtor berate himself as morally inferior, and as deserving of indenturship.

The true immoral behavior may thus be on the part of the creditor.

1 comment:

  1. This post is intense. Completely apolitical: I like that.

    "the interest burden [is] nominal interest times money owed..."

    So many people speak only of the rate of interest, and not of now often the rate must be applied, and therefore they miss the root of the problem. But you nailed it.