Global Debt Hurricane

Capitalism has been in crisis for the last fifty years. First came twenty years of serious inflation, followed by a global production model seriously lubricated by an overabundance of money creation — i.e. debt. Debt is the antithesis of Torah Judaism. Not only is interest on loans forbidden in Biblical Israel, but all personal loans (without interest) are to be forgiven within seven short years.

Capitalism is the exact opposite. Capital is, in fact, debt. Banks create debt out of invisible money manipulation and loan it to capitalists so they can make money through the sale of a commodity. Also, capitalists make money off the rise in value of money — for instance, as a security or a stock. Because capitalism is a system to make money off of money, it forever needs a constant infusion of more and more debt in order to sustain its perpetual circulation (continual growth). In other words, to pay off the interest on debt to the the banks, capitalists usurp surplus value from the market exchange for their commodity (profit) and keep a substantial portion to reinvest in the necessary next round of production.

In such a system, the realization of profit is never enough to compensate completely for interest on the initial investment loan and the capital needed to restart the process again. Hence, the necessity for a second loan to maintain the next round of production. In other words, the capitalist simply cannot get off the debt merry-go-round and survive without a constant infusion of new money creation from the banks. In capitalism, debt is piled upon debt in a perpetual motion machine that is both fragile and in a kind of permanent crisis. Growth must be continual for both the banks and the capitalists to survive.

But capitalists need customers to buy the commodities they sell. Without sales, profits fall and bank interest does not get paid back. Who are the great bulk of these customers? They are the workers who sell their labor to the capitalists for money wages. In capitalism, wages represent the total worth of laborers — the lower the wages, the more profit for the capitalists to repay the banks and establish another round of production. Also, the cheaper the laborer’s wages, the more money the capitalist can keep from workers, the more they have as customers themselves for other market commodities. In capitalism, if growth is sustained (a constant if), capitalists tend to become affluent and/or wealthy, while laborers languish at a basic level of mere survival and permanent financial angst.

If wages are too low, the workers need massive amounts of debt to buy the myriad of capitalist commodities for sale on the market. If wages become too high, then the capitalist’s bottom line suffers. Somewhere between these two poles of crisis, the government (the state) has been tasked to ameliorate the situation. This is done through the use of another form of debt, fiscal debt which causes governments to borrow vast amounts of money by issuing promissory notes and bonds. In the US these notes and bonds are called treasuries.

But as government debt accumulates, customers for these notes and bonds become worried that the governments will renege on their financial obligations. So, governments are forced to raise interest rates on their debt securities in order to attract customers. However, rising interest rates are anathema to the ability of government, workers and capitalists to pay back debt. Unlike the agrarian balanced system of biblical Judaism, capitalism cannot be sustained without debt and interest payback. So, capitalism has a real problem with government debt. On one hand, it relies on government spending as the customer of last resort to sustain capitalism’s perpetual growth model; but when government spending rises to unsustainable heights, fears of a debt crisis forces spending restraint for fear of fiscal collapse.

In 2008, the world banking system was near collapse. It faltered due to the demise of US workers wages throughout a thirty-year period of the movement of US factory production overseas. The global crisis of inflation (1965-1985) had been beaten on the backs of working people. However, in order to keep the economy going, the US central bank (the Federal Reserve) created new monies in order to buy treasuries. This monetary infusion staved off a myriad of financial crises by keeping the price of money (interest rates) low.

As factory production was relocated toward global cheap labor, the Federal Reserve’s lower-than-normal interest rate policy was used to prop up the economy. This monetary stimulus was only possible because price inflation had been cured by the introduction of low-income workers from countries new to the industrial production model. Eventually this policy of easy money (low interest rates) created a huge housing bubble in the US. Mortgages were turned into securities and sold around the world. Because the US government guaranteed many of these mortgages, the toxic nature of their quality simply went unnoticed.

Millions of hard-pressed workers used their houses as cash cows for second and third mortgages. In the same way, speculators from all over the world used the low interest rates to buy all forms of financial instruments, using cheap loans to purchase slightly higher interest-bearing instruments in what became known as the “carry trade”. The US had morphed from a production economy to a service and financial casino economy. Then in 2007 and 2008 the global banking system almost collapsed.

Since 2008, the only thing that has changed is that the debts have increased substantially, as the Federal Reserve policy has become extreme. Interest rates have been at rock-bottom prices for nine straight years. Meanwhile, as the economy slowed, government tax receipts were reduced. US government debt now stands at twenty trillion and rising. With record low interest rates, the financial sector of the economy has increased. Now there are massive stock and bond market bubbles, along with a feverish merger mania of corporate giants. The major banks dwarf all other banks, especially the small community institutions. Finally — as if the Federal Reserve has learned nothing — an affluent housing market bubble has been established among the upper ten percent of the US population. All of these bubbles have only exacerbated wealth and income inequality around the world. The wealth of the top 0.1% now exceeds the bottom 50%.

However, for all the debt accumulated in the last ten years, US economic growth rate remains tepid. The essential contradictions of capitalism remain: Who will buy the commodities produced for the market if wealth and income inequality continue to widen? Today, capitalism remains in deep crisis. It is caught between the enormous fragility of low-interest-rate bubbles and the massive fiscal and deflationary consequences of raising rates to cure the fever. For every 1% of interest rate rise, the US government must spend 200 billion dollars. At 5% on interest rates, that figure will skyrocket to a trillion dollars a year on interest payments alone.

Meanwhile, this capitalist model — built on perpetual growth –is fundamentally against the laws of nature. Perpetual growth is the same as cancer, it will eventually destroy the natural organs of the healthy body of the earth (global warming and environmental catastrophe). G-d’s creation must stay in balance for a human economy to survive. This is precisely why the Hebrew Bible forbids interest on loans and restrains debt to a mere seven years, at most. The human penchant for limitlessness and greed drives an archaic system (capitalism) hell-bent on destruction. The emergence of a moral human economy will go a long way toward both the ecological and historical redemption that we as Jews all desire.

I’d like to wish everyone a happy and peaceful New Year. My blog will return after this month’s High Holy Days.