Tuesday, 2 April 2013

Financial Meltdown

Debt Forgiveness is the Last and Only Remedy
by Zeus Yiamouyiannis, Ph.D

 Finally serious economists are considering a position I have been maintaining and writing about since the 2008 financial meltdown. Whatever its name— erasure, repudiation, abolishment, cancellation, jubilee—debt forgiveness, will have to eventually emerge forefront in global efforts to solve an ongoing systemic financial crisis.
    “On a grand scale the only way to erase counterfeit money and (counterfeit) assets of hundreds of trillions of dollars is to erase the debts associated with those fake assets. (Let me underscore again, these are not “toxic” assets, they are fake assets.)… Forgiveness in general, and forgiveness of debt in particular, stand as virtues if they free us up to acknowledge, address, and learn from our culpability, start anew, and create forward.”
    Debt forgiveness, therefore, accomplishes two important things. It eliminates the increasing and outsized portion of productive enterprise to pay off unproductive obligations, and it clears the ground for new opportunities, new thinking, invention, and entrepreneurialism. This is why the ability to declare bankruptcy is so essential in the pursuit of both happiness and innovation.
    Currently we are mired in a “new normal” and calls for “austerity” which are nothing more than the delusional efforts of a status quo to avoid the consequences of its own error and fraud and to profit evermore. So bedazzled by the false wealth created by debt multiplication and its concomitant fantasy of ever-higher returns, this status quo continues to be stupidly amazed that people are not spending and that the economy is not picking up. But how could it be otherwise?
    Productive wealth has been trapped in a web of parasitic theft, counterfeiting, liability evasion, non-regulation, and prosecutorial non-accountability. All the fundamental attributes of a functioning exchange economy have been warped to reward creative criminals. I spoke extensively about this in my posts from 2008. ( Imaginary Worth, Empire of Debt: How Modern Finance Created Its Own Downfall (October 15, 2008)
    The unsustainable nature of debt
    Two observations: 1) Fabricated/parasitic so-called “wealth” destroys value by diluting the value of productive wealth. 2) Debt/credit that cannot be paid back is never an asset and is always a hot-potato liability (needing to be foisted to a greater fool to garner “profit” and transaction fees):
    “The models [modern debt are] based upon had no contact with reality. They assumed unlimited growth and ability to pay. When matched against the reality of people paying ten times their salary for mortgages that actually added more money owed to their principal (i.e. with negative amortization), required no money down, and set up “balloon payments,” large step-ups in payments after a few years) there is no possible way they could NOT default in a predictable span of time.”    Systemically, all debt that charges a percentage (“usury”) originates in delusion. Debt grows exponentially indefinitely, growth (income and otherwise) cannot. This leads to a widening condition where the fruits of productive “growth” devoted to interest payments increase until those fruits are entirely consumed.    Once this happens, stores of wealth (hard assets) begin to be cannibalized to make up for the difference. You see this in Greece with its sale of public assets to private companies, and in middle-class America where people are liquidating retirement accounts to pay for their cost of living.
    This problem is compounded by a private Federal Reserve that lends money into circulation at interest, and then allows the multiplication of this consumer debt-money liability through fractional reserve banking. The money in circulation today could pay only a small fraction of the total private and public debt.
    That fact alone is evidence of a kind of systemic fraud. “If you just work hard enough, save, and make sensible decisions, you can get out of debt” could only physically work for a bare fraction of the population, given the money-to-debt ratio. The rest would have to simply default to clear the boards.
    This is why debt forgiveness makes not only moral but rational, mathematical sense. Finances require balancing to be coherent. There must be some way to redress systemic imbalance. One has to be able to “zero the scales” to get an accurate weight of value and to re-establish healthy value creation.
    Some analysts are beginning to see the forest through the trees in terms of debt forgiveness. Steve Keen, Australian economist and current deflationist, and Michael Hudson, American economic contrarian and prescient essayist, are both using clear-sighted reality-based financial analysis to debunk accounting games that obscure the untenable debt situation and to call for debt forgiveness.
    How can selling sovereign assets and imposing austerity on Greek citizens (taking money out of their hands through higher taxes and lower benefits) do anything other than hollow out value and contract the Greek economy in the face of a deep global recession? Michael Hudson: It can’t. Greece’s debt needs to be written off.
    “It seems unreasonable and unrealistic to expect that large sectors of the New European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage…
    Other well-known commentators are not seeing the debt forest at all. In their contentious debates over deflation and inflation, neither Rick Ackerman nor Gonzalo Lira seem to be aware of the overwhelmingly fraudulent nature of present global debt– including the 600 to 1,000 trillion dollars of fabricated notional wealth represented by the derivatives markets, fraudclosure, and a host of other sources.
    Rick Ackerman: “’Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.’ Inflationists and deflationists implicitly agree on this point… and we differ only on the question of who, borrower or lender, will take the hit    “Both Rick and Gonzalo left out the obvious third way–debt forgiveness. No… debt does not have to be paid by someone; it can be absolved, especially debt created upon fraudulent and/or counterfeit-ridden practice… (D)erivatives are not real wealth, and neither was the ostensible climb in the values of housing resting in large part on those phony-wealth derivatives.
    The only “real wealth” here revolves around ability to produce real and needed goods (to allow us to survive), and the ability to create something that increases one’s quality of life (to promote our thriving). Precious little of the present global economy involves either one of these. Yeah, if we use FASB standards and Goldman Sachs accounting, we can pretend our worthless junk is all really simply very rare, “unique condition” collectibles worth trillions of dollars.
    Debt creates scarcity, which stimulates fear, which drives manic competition, which favors opportunism, collusion, and concentrations of power, which translates to abuse, which results in a collapse of legitimacy for the economic system. Overreach causes a breaking point, and we are getting close to it.
    This possibility of epic reprisal may very well compel banks to come to the table around debt forgiveness to avoid violent backlash and criminal prosecution, even over preserving their gravy train companies. The bitter irony of these companies and their galloping greed is that they ended up victimizing each other by selling junk to each other and extracting all the real value in salary and bonuses.
    Their assets rest on notional values, that when unmasked would drive each into immediate insolvency. They have simply been scam artists, producing little value and extracting mountains of money.