The Road to Debt-Serfdom   (January 25, 2013)

Ours is a dysfunctional debt-based Empire that buys the complicity of its debt-serfs with entitlement bread and circuses.

The road to debt-serfdom is paved by the banks and enforced by the Central State. If there is any point that is lost on ideologues, Progressive and Conservative alike, it is this: the first-order servitude and second-order tyranny of debt-serfdom can only occur if the banks' power is extended and protected by an expansive Central State.

Progressives are blind to the State's essential role in creating and empowering a parasitic financial Aristocracy, and Conservatives are blind to the tyranny of debt-serfdom imposed by the private-sector financial Aristocracy, i.e. the banking sector.

Answer these questions before reaching for your ideological blanket:

1. How many banks would loan penniless, near-zero-income students $100,000 if the State did not backstop and ruthlessly enforce its parasitic, exploitive "student loan" programs? Answer: none.

The consequence if the tyrannical State ceased to enforce the debt-serfdom of Student Loans: the Education Cartel would collapse in a odoriferous heap, and the banking Aristocracy would be stripped of a highly profitable State-run business.

2. Under what conditions would banks originate mortgages if the State did not guarantee mortgages via FHA and the other socialized-mortgage agencies? Answer: 30% to 35% down, hefty points and a higher rate of interest than FHA loans.

We can find the answer by examining the conditions banks demand for non-State backed loans. If the State wasn't backstopping the risk, what bank would be insane enough to originate a 30-year fixed mortgage at 1 point over official inflation and a negative rate when measured in real inflation? It makes no sense without State subsidies and guarantees.

What percentage of the mortgage market is purely private, i.e. not backstopped by FHA et al.? About 5%, and the terms of these private loans are considerably stiffer than those originated under the taxpayer-funded umbrella of FHA.

In other words, debt-serfdom is not possible without the State enabling and enforcing the banks' power. Blaming the banks for imposing debt-serfdom is like blaming the junkie for picking up a free bag of smack or a shark for wolfing down a seal: the banks will pursue the fattest, easiest profits out of basic self-interest, just like the rest of us.

If the banks can capture the State's regulatory and political machinery for a modest investment in bribery (oops, I mean political contributions, lobbying and revolving-door positions), then why wouldn't they do so?

The problem is thus not the banks' power, it is the State's power, as the State confers and enforces the banks' power.

There is precious little evidence that anyone in the current political Aristocracy has read the Federalist Papers, other than to pass an exam, and more's the pity. That a State run by people whose grasp of American history extends all the way back to the previous election cycle (or in extreme cases, to the Reagan era that began in 1981) is dysfunctional is unsurprising.

Madison feared both a central bank and a presidency that morphed into a functional monarchy. Madison's fears of a central bank were shared by his decidedly non-Federalist friend Thomas Jefferson, whose vision of a rural, localized America generally ran counter to the Federalists' keen awareness that a strong central state was necessary to provide for a defense of the nation and to act as an impartial enforcer of transparent markets and a prudent money/credit system.

(I say generally, as Jefferson was persuaded to execute the Louisiana Purchase, a decidedly Federal project of expansion, and he kept the Bank of the United States intact under his able Secretary of the Treasury, Albert Gallatin.)

The proper role of the Federal government in Madison's view was to act as a "disinterested and dispassionate umpire between different passions and interests."

In my analysis, the political Aristocracy running the U.S. has fulfilled Madison's nightmare, as it effectively operates a monarchical Empire on the Roman model. Though Louis XIV of France famously held that "L'etat, c'est moi"-- the state, it is me-- in the Roman and British empires, the monarchy/emperor system was a functional oligarchy in which the supposedly absolute monarchy/emperor had to consider the views and interests of the aristocracy.

A monarchical Empire is thus operated by a small aristocracy with a shared world view (i.e. Empire) and a very limited spectrum of opinions: that is the American Central State in a nutshell.

Alexander Hamilton, also a Federalist, understood the critical role of credit in fueling innovation, expansion and trade. He favored a central bank that issued sound money and prudent credit, on the 1780s Bank of England model. That the central bank would become the subservient handmaiden of private investment and commercial banks was incomprehensible.

Here is what has been lost in the debt-serf America we now inhabit: Albert Gallatin observed that America's rapid, diversified economic development resulted from "the absence of those systems of internal restrictions and monopoly which continue to disfigure the state of society in other countries."

If only our "leaders" read or understood Madison, Hamilton and Gallatin. But alas, they are supremely ignorant Oligarchs through and through, pleased to enforce debt-serfdom and then buy the complicity of the serfs with Federal entitlements and subsidies.

That too is the Roman model: a dysfunctional debt-based Empire ruled by a self-serving Elite which buys the complicity of its serfs with bread and circuses.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition 1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on

To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

NOTE: gifts/contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, David W. ($20), for your extremely generous contribution to this site -- I am greatly honored by your support and readership.   Thank you, George S. ($10), for your most generous contribution to this site --I am greatly honored by your support and readership.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings.

At readers' request, there is also a $10/month option.

What subscribers are saying about the Musings (Musings samples here):

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.

All content, HTML coding, format design, design elements and images copyright © 2013 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I am honored if you link to this essay, or print a copy for your own use.

Terms of Service:
All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

blog     My Books     Archives     Books/Films     home


Making your Amazon purchases
through this Search Box helps
at no cost to you:

to your reader:

Free Page Rank Tool #7 in CNBC's
top alternative financial sites

#25 in the top 100 finance blogs