The scientist Albert Einstein reportedly described compound interest as the ‘eighth wonder of the world’. That may be true for the financiers who benefit from it, but for the rest of society it is better described as one of the worst scourges of the world. The anthropologist David Graeber, who authored Debt: the first 5000 years and coined the slogan ‘we are the 99%’, observed that debt crises have occurred for thousands of years, requiring regular periods of forgiveness to prevent total collapse.
The global economy was already teetering on the edge of such a debt crisis before the coronavirus hit. The economic shutdowns have accelerated the damage. As Graeber noted in 2017, whenever there is a system of virtual money based on agreements rather than an underlying thing (known as ‘fiat money’ in the current system because it is underpinned by government dictate) the way to maintain social stability has been to have periodic debt cancellation. There is to be no relief for debtors this time, though. All the focus in the neoliberal capitalist system is instead on finding ways to protect creditors. ‘Basically we did it backwards,’ says Graeber. ‘They come up with this idea that nobody should ever default — which is absurd.’
The effort to protect creditors has led to increasingly reckless policies. The first move by the US Federal Reserve was to bail out big corporations, especially banks, by buying up not just government debt but also corporate debt, the latter often above market value. It is effectively giving free money to big companies, who then use it to buy back their own shares and pocket the profits. Meanwhile, the money intended for smaller businesses in America is not being distributed because, well, the banks consider it too risky to lend.
Australia did not go that far. The Reserve Bank has been buying back Federal and State government debt and putting it on its balance sheet (quantitative easing), but it has not been buying company debt.
The second step, as it became obvious just how economically disastrous the shut downs are (making it harder for debtors and renters to pay what they owe, which is of course the only thing that matters), is massive government spending. Japan’s stimulus package is 21 per cent of GDP, Australia’s 10.2 per cent, the US 13.2 per cent, Brazil 11.8 per cent and so on.
The thinking seems to be that if that extra government debt becomes unsustainable then the central banks can buy back a portion of it and put it on their balance sheet, eventually ‘forgiving’ it through some form of financial sleight of hand. It confirms Graeber’s point that the system is set up solely to protect the creditors, not debtors. This is debt forgiveness for creditors, not debtors. The problem, however, is that many debtors and renters can’t pay after the lockdowns so the Federal Reserve is also considering sending digital payments on mobile phone apps to all US citizens just to keep the ball rolling. It is becoming ever more absurd.
'These problems have no easy solution. What we are witnessing is the entrenching of a neoliberal, corporatist oligarchy in the US whose greed and lust for power is fast undermining that country’s democracy.'
If, as is very possible, Australian banks get into trouble because of falling property prices as households try to reduce their levels of debt, one of the worst in the world, then the banks will almost certainly seek help from the Australian government (and perhaps even the Reserve Bank). There will be no relief for mortgagees, though.
Critics of fiat currency are saying: ‘I told you so’, pointing to gold or bitcoin as alternatives. But it is obvious what the flaw in that argument is. What are gold and bitcoin valued in? US dollars. What are US dollars? Fiat currency. They are really investment assets; neither can be used as a means of exchange in any meaningful way because they are too clunky (bitcoin is like using a note with thousands of receipts attached to it).
These problems have no easy solution. What we are witnessing is the entrenching of a neoliberal, corporatist oligarchy in the US whose greed and lust for power is fast undermining that country’s democracy. In Europe and Australia it is more of a shift towards socialism: attempts to protect most of the population using government spending. Although a more humane response in the short term, in the long term it will create another kind of debt servitude.
Neoliberal capitalism and socialism tend to be seen as the only options; a gloomy choice between either big business or big government. But it need not be so. The writer GK Chesterton coined the word ‘distributism’ to describe another economic pathway, in which assets are widely owned (Australia’s superannuation funds are a step in this direction). He argued private banks should be banned to prevent them from profiteering from debt and compound interest. That principle should be extended to all players in the finance sector who make money out of money in an infinite regress. In order to stop the parasites killing the host, the parasites have to be eliminated, or at least constrained.
Chesterton called the twin enemies Hudge (big government) and Gudge (big business). Over a century later, they remain the problem.
David James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.
Main image: Australian banknotes (Melissa Walker Horn/Unsplash)