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Musings Report 2023-42 10-14-23 The Debt Dragon Is Eating Its Own Tail
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The Debt Dragon Is Eating Its Own Tail
One of my professors in university told a story that I've remembered for 50 years. (The specifics of the class and professor have been lost to the passage of time, but the story remains sharply etched in memory).
The story is undoubtedly apocryphal, but it describes a fundamental truth.
The anthropologist is visiting an indigenous tribe that only recently acquired access to Western goods. The women are working into the night hand-crafting goods to sell for cash. When the anthropologist asks what the money is being earned to buy, the answer is "to buy the kerosene for the lamps so we can work at night."
So you're working into the night to pay for the kerosene for the lamps you need to work into the night. Um, OK....
This makes no sense, as the output of the work (money) is consumed by the work itself. So why do the work in the first place?
It seems obvious (to me) that the global Debt Dragon is eating its own tail in a similar fashion.
To understand this dynamic, we must start with the economy of old, when credit was scarce and generally a function of trade / commerce: those with goods to sell would meet those with money to buy in a trade fair. Credit was backed by the goods being traded--the equivalent of purchase orders or letters of exchange--were traded with credit, and then settled for cash (in the old days, silver or gold) at the close of the fair.
In other words, credit was short-term and settled once the trade was completed. A modern-day equivalent was the American Express Card of a generation or two ago: it wasn't a credit card with a balance carried forward, the monthly charges had to paid in full at the end of the month. For those in business, an American Express Gold Card was like an automated purchase order: you took delivery on goods and services and settled the trade at the end of the month.
In the current global economy, credit is now the lifeblood of any purchase above a low threshold. Very few people can buy a house, vehicle or university education with cash that has been saved out of wages.
The key change is that the purchasing power of wages has lagged the rise in the cost of living and so there is not enough left in discretionary / disposable income to save for major purchases.
The net result is that a great many households are working to service the debts they took on so they could work to pay the interest on their debts.
In other words, we're working to pay the debts we acquire to live. Without credit, we could not buy a house, car, university education, airfare and vacation and so on.
We are working to buy the kerosene so we can work late into the night. The kerosene in the modern economy is debt.
But debt generates an expense above and beyond paying back the loan: interest and its associated fees and penalties. The more debt we take on, the greater the share of our income devoted to interest.
This expansion of credit/debt to fund everyday life has catapulted finance to dominance: the real-world economy is in thrall to finance, for without credit --borrowing money--the real-world economy would quickly grind to a halt and collapse into depression.
Reliance on borrowing money to fund everyday life effectively optimizes the entire economy for debt origination and service rather than for productive labor and investing to increase productivity.
Since wages have fallen so far behind the cost of living, people feel that speculating in asset bubbles is the only way they can make enough money to get ahead of the debt machine eating them alive.
So the second-order effect of an economy optimized for debt origination and service is an economy optimized for unproductive, risky speculation in financial games.
If we look at the sources of human well-being, we find 1) autonomy, 2) belonging and 3) validation of our contributions to the group, i.e. our effort and competence. When these are missing in our lives, we experience emotional exhaustion, depersonalization and a lack of recognition and achievement, all of which lead to burnout and social defeat.
A financialized economy that optimizes debt origination and service isn't an economy optimized for human well-being. It is optimized for exploitation (of borrowers by lenders) precarity, i.e. financial insecurity and anxiety (should income fall below the level needed to service all the debt).
Finance and borrowing money were not always the dominant drivers of the economy. When wages bought far more goods and services, it was possible to save up the money to buy a car cash or work your way through four years of state university without taking on any debt. I know because I did both.
I have made a close study of the purchasing power of wages in my own life, as I have records of my income and expenses stretching back 50+ years. We all know official inflation understates the real loss of purchasing power, but the BLS Inflation Calculator gives us a handy tool to convert past earnings and expenses into present-day dollar values.
I've been self-employed most of my 54 years of working, and my income was very low for long stretches in virtually every decade. This is the tradeoff I made to have autonomy and pursue avocations which are inherently financially risky. My core survival strategy has always been extreme frugality and DIY--do it yourself.
This is why I recall or have records of specific prices and hourly wages stretching back 50+ years. (The Social Security portal has your entire taxable earnings history online.)
What the Inflation Calculator doesn't show is the decline in quality and durability of products, which are a form of declining purchasing power. A washer or refrigerator purchased 40 years ago was expected to last 25 to 30 years, or even longer. Now these appliances fail (often due to failed electronic components) in as few as three or four years, and the average lifespan is under 10 years. So earnings today buy far less quality and durability regardless of the price tag: "cost savings" are not actually savings if the device's lifespan is a mere fraction of its previous lifespan..
In the early 20th century, credit was generally local and limited. If you couldn't afford the full price of a new bicycle, the local merchant would take $1 a week until it was paid off. (I know this from family history.) Mortgages were by today's standards short-term--7 years, 10 years--and required hefty collateral (down payments). Credit beyond local merchants was non-existent for many families.
One of the forgotten aspects of the late 1960s-early 1970s Counterculture was its emphasis on frugality and a strong aversion to debt. (A popular book that sold thousands of copies was titled How To Live On Nothing. Yes, an exaggeration, but extreme frugality was part of the value system and lifestyle.)
Debt was anathema to those who shared this ethos and so we did everything in our power to avoid borrowing money or pay off any loan as fast as possible. We built our own house at 26 years of age with savings and earnings. I borrowed $5,000 from the local bank to finish the house ($18,000 in today's dollars) and paid it off in less than two years.
I remember one of my close friends D.C. saying that if you weren't saving 50% of your income, you weren't serious about your goals. D.C. and his wife were public school teachers and lived in a WW2-era Quonset hut with laughably low rent. (45 years later, the Quonset hut is still in use. That was good steel.)
I saved half my income and reckoned I lived well on the other half: I had my own modest studio apartment ($700 in today's dollars), my own car and enough disposable income to enjoy wonton min and other fine dining at low-cost restaurants--virtually all of which are long-gone--that served working-class customers.
As a carpenter-trade worker I earned around $14,500 annually in 1976-77 when I was 23 - 24 years old, which is around $73,000 in today's dollars. This is close to the average household income which around $67,000 to $71,000, and not too far from the median household income of $81,000 annually.
In terms of purchasing power, this is highest income I ever earned by far.
I was able to save over $5,000 per year, which is more than $26,000 in today's dollars. We bought a lot in 1979 for $12,000 cash, which is about $50,000 in today's money, and built a house ourselves (hiring subcontractors for the roofing, electrical and plumbing) for around $21,000, about $70,000 in today's dollars. (We inherited nothing and were not given any financial help by our families. We did it all ourselves, and didn't expect anything other than this.)
In lower cost regions of the nation, it's still possible to find a lot for $50,000 and build your own house for $70,000 in materials and a few subcontractors.
The trick is doing so with cash savings and earnings hustled on the side while you build the house, i.e. without an inheritance or taking on decades of debt payments.
It's difficult to save 50% of one's income in today's high-cost economy. The cheap places to rent are mostly gone, the cheap cars are gone, the cheap college education is gone, the affordable healthcare insurance is gone.
In 1987 I bought a super-clean 8-year old Honda Accord that had some miles but had been very well-maintained for $2,600 from a private seller. This is around $7,000 in today's dollars. I paid cash, of course. A super-clean 8-year old Accord today will cost 50% to 100% more--$11,000 to $14,000, or even more. My guess is $14,000 is a reasonable value; you would be lucky to find a super-clean, very well-maintained Accord for only $11,000.
It's impossible to rent a studio in Honolulu (or any other desirable metropolis) for $700. I couldn't buy full healthcare insurance for my young workers for $50 a month like I did in the mid-1980s--that's $143 per month in today's dollars.
As Peter Turchin and other historians have documented, there are social and economic cycles--not precise, but close enough. Add Turchin's 50 years to 1973 (war, oil shock and recession) and here we are with destabilizing wars, high oil prices and inflation, and divisive political partisanship.
We're experiencing a dynamic that was suppressed during the decades of globalization and financialization: inflation. Now that globalization and financialization have run their course--there's no way to push interest rates below zero for long, and all the cheap materials and labor have already been exploited--inflation is embedded in a new up-cycle of higher bond yields and costs.
Higher interest rates triggered the most severe recession since the Great Depression in 1980-82. Now our society and economy are far more dependent on debt than we were 40 years ago, and so the financial fragility of households and enterprises exposed to higher interest costs is far higher.
In the long view, this long, steep decline in the purchasing power of wages was papered over by radically increasing the debt loads on households and enterprises, and reducing the monthly debt service by steadily dropping interest rates. This cycle has ended, and interest rates will march higher along with inflation.
Wage-earners have little choice but to accept a reduction in purchasing power, but capital will abandon investments that don't keep up with inflation in favor of those that do. If you need capital, you'll have to raise interest rates to attract and retain capital.
Labor is finally awakening to the impossibility of earning enough to avoid debt-serfdom, and so we see increased unionization efforts and strikes for higher wages.
But there's no escaping the Dragon of ever-expanding debt service eating its own tail. There's no way to pay higher interest on ever-rising debt and have enough left over to spend freely enough to keep the economy from contracting. And once contraction replaces expansion, the ability to service debt and take on more debt collapses.
The Debt Dragon consumes itself and vanishes in a cloud of defaults, bankruptcies and write-downs. The debt disappears not because it was paid off but because it was destroyed by defaults, bankruptcies and write-downs.
Extreme frugality and an aversion to debt might become fashionable again, or they may simply become the New Normal. The inflation-debt-destruction cycle has just begun, and we cannot know the end date or the ultimate conclusion. But we can already see the Debt Dragon consuming its own tail in real time. Papering over a steep decline in the purchasing power of earnings with more debt was never a permanent fix; it was always a thin-veneer illusion of permanence that's now ending.
Those that pursue extreme frugality and an aversion to debt now will have a head start that will become increasingly valuable as the cycle accelerates.
Highlights of the Blog
Downward Mobility and Life on the Margins 10/13/23
On Thin Ice 10/11/23
The Many Flavors of Doom 10/9/23
Best Thing That Happened To Me This Week
I was just complaining to a friend that we have what seems like hundreds of feet of pumpkin vines winding through our jungle and taro patches, but no pumpkins. So it was delightful to happen upon a big ripe 11-pound pumpkin while harvesting chayote and chayote shoots. The other photo is the result of a few minutes of foraging through the homestead: papaya, lemons, lime, tomatoes, eggplant and chayote.
We also harvested a nearly 40-pound stalk of bananas. One hand had 24 bananas. We give away most of this bounty, along with hundreds of pounds of breadfruit, lychee, etc. This is why I say that growing food is a social process.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
US surgeons are killing themselves at an alarming rate. One decided to speak out.
Have You Heard the Philosophy? or, Encountering the Buddha in Disguise (via Ryan K.)
Buckethead - Robot Dance & Nunchucks 5/7/2016 (1:48 min)(via Atreya) -- Buckethead is unique...
‘Saint-Tropez has become LVMH Ville’: locals slam super-rich ‘takeover’ -- the same complaint everywhere....
For the U.S. and China, It Starts With Listening
New heart syndrome identifies link among obesity, diabetes and kidney disease (via Cheryl A.) More than 90% of adults fall on the CKM spectrum, Ndumele estimated, driven mainly by record levels of obesity and Type 2 diabetes in adults and children.
Eddie Van Halen - Crossroads (3:10 min) Eddie plays Eric Clapton's historic 1968 live solo note for note...
Refusing to fly has lost me my job as a climate researcher. It’s a price worth paying.
A New "Brave New World" -- where pushing meds has taken us....
Seconds -- Galloway on the wonders of weight-loss meds... no mention of what health benefits don't accrue when you simply consume less highly processed food but don't actually eat healthier or increase your fitness....
"What we need is not a new technology but a new way of living." Bernard Rudofsky
Thanks for reading--
charles |
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