The Company Store, Debt and Serfdom (October 24, 2008)
Way back in May 2006 I wrote about Michael Hudson's work on The New Road to Serfdom: A Negative-Equity Mortgage.
I am now thinking there's another analog to our entire economy: the company store. I actually lived in one of the last plantation "company towns" in Hawaii, and though Dole Pineapple didn't operate a "company store" in 1969, earlier plantations (and coal mining towns, etc.) did--and the set-up was sweet indeed.
Much like a serf renting/sharecropping land owned by a manor-house or nobility, the plantation worker needed to borrow money to buy food and other necessities at the company store, which just happened to operate as a monopoly and just happened to charge skyhigh prices. (The serf needed to borrow seed for the next planting, and money to buy food for the family in between harvests.) The rate of interest paid by the serf/worker was always much higher than market rates--another monopoly capital (and highly profitable) feature of the set-up.
The system's most pernicious feature: the worker/serf never escaped debt. Indeed, the system was constructed to increase the debt to the point it could never be paid off, insuring a lifetime of profitable servitude to the nobility/corporation.
Now the Powers That Be, as embodied in this Republican Administration and its lackeys/minions in both parties, have perfected an entire economy based on this "Company Store"/manor-house model.
As Jesse over at Jesse's Cafe Americain noted in The Safety and Immediacy of Liquid Assets in a Deleveraging Panic:
This is a critical point, and little debated or understood as it is emotionally charged with words like 'socialism.' Most do not understand the fractional reserve banking system, but it seems more official, more palatable, to give them billions, enormous sums, and to give the public as little as possible for fear of debasing the value of work and the currency.The power of the serf/company store model is only truly revealed by examining not just negative-equity home mortgages but negative-equity auto loans, credit card debt, etc. How about the serf who bought an SUV with no money/low money down? How much is his auto loan, and how much is the gashog SUV worth now? Far less than what he owes; he has hugely negative equity in not just his house but in his vehicles and indeed, in everything he "owns" which was purchased on credit.
And how about the clothing and TVs and other toys purchased on a zero-interest "teaser rate" credit card? How much is all that used stuff worth? Ten cents on the dollar? And what happens when the debt serf--who bless his naive little heart, actually believes the illusion that he is "middle class"--har har har--is late one payment? Bam! That zero-interest balance is suddenly being charged 23% interest.
Oh, and the late fee is $50. And one other thing--all the other credit cards he "owns" will also pop to 23% interest because, well, they can raise the rates whenever they want--but the official excuse is he's now a "credit risk."
As if he was ever not a credit risk?
Just like the worker and the company store, the credit card debt actually rises regardless of how much the worker pays. It's a beautiful lifetime system for serfdom/poverty and endless rentier profits for banks. Thus we read story after story in which a credit card balance of $1,500 balloons toover $5,000 as interest rates are jacked to 24% and huge late fees and overdraft fees are levied.
As Merle Travis wrote about the company store:
You load sixteen tons . . . what do you get?
Exactly what is the difference between the serf or the plantation/mine worker and today's debt-enslaved "middle-class" peasant?
A key con of the Company Store model circa 2001-2007 was that extracting money from your home equity was essentially identical to withdrawing savings. This conceit was enabled by absurdly low interest rates and essentially qualification-free money; if equity is like savings, then withdrawing it--at almost no extra increase in monthly mortgage payments!--was just like taking money out of a savings account.
Except for one little tiny feature of the equity extraction--it was debt, not savings.
Another key con was the illusion that this debt was essentially risk-free. With house prices rising, and loans getting ever cheaper, then only a fool would forego the chance to extract and spend the "savings" of rising equity.
As often noted here, real wages (as measured by purchasing power or adjusted for inflation) has been stagnant since the mid-1970s. Like the indentured serf, the average "middle class" (sounds so much better than debt-serf, doesn't it?) wage earner saw a seemingly golden path out of stagnating purchasing power: borrow more for a lower monthly payment.
But alas, the teaser rates on the adjustable-rate mortgage and the credit cards expired, and now the real costs are being levied.
Many readers write to remind me that "nobody forced anyone to take out the loan," and that is true. We all have so-called free will. But it is naive to focus on free will (which does not operate in a vacuum but in a cultural and historical context) and ignore the incredibly concentrated power of the Ministry of Propaganda. I have illustrated the rough inter-connected structure of the Ministry in this helpful little diagram:
Most astonishingly, the Ministry has succeeded in diverting the nation's attention from the Company store/debt-serf realities to a bogus "debate" over "socialism" and "capitalism." As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.
It simply indebts the serfs, convinces them via doublespeak, propagands and phony statistics that they are still gloriously "middle class" (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.
Nice set-up. No criminal extortion scheme could be more effective or venal.
We should note that the Democratic members of the Powers That Be all voted for the banker-bailout, knowing full well that the bankers/company store could have been allowed to go bankrupt and the $700 billion could have spent--if it was to be spent at all--on education, rebuilding bridges, transmission lines, and other desperately needed infrastructure projects.
But this could not be allowed to happen. Why? Because money spent on infrastructure flows directly into workers' pockets, removing the intermediary debt which is the entire key to the Company Store model. The Paulson bailout's key feature is that it does not put a single dollar in the pocket of a mere serf/worker--every dollar goes to save the current system, which is based on the serf borrowing money constantly at ever higher interest rates.
Correspondents Craig M. and Cheryl A. sent me this link to the inimitable Jesse, whose comments here provide a near-perfect wrapup to the company store/debt-serf model I have described: The New Deal for the Banking System as the Storm Gathers Strength:
We are seeing an enormous parody of Roosevelt's New Deal being rolled out in a hurried fashion for the bankers and the wealthy under the cloak of dire necessity prior to the likely change in political Administrations.I would add only this: the middle class is an illusion, a false construct created by the Ministry of Propaganda to provide self-delusional cover for the serfs whose pride might be pricked by a realistic self-assessment of their true servitude.
The only people who can claim to be middle class are those few with virtually no debt and an income independent of the corporations who view employees as expenses to be slashed and burned as needed and the soon-to-be-bankrupt welfare state. I would estimate that by this more realistic and rigorous definition, no more than 4% of the nation's households are truly middle class: independent professionals, small landlords, small business owners with no debt and agile, recession-resistant enterprises, etc.
I suggest the 4% number based partly on the Pareto Principle of 80/20 which can be further distilled down to 4/64: thus 1% of the populace owns 2/3 of the assets, a thin sliver of 4% are independent of the welfare/corporate state, 64% labor under the illusion they are somehow "middle class" and the balance are mired in undeniable poverty, which in this nation can be defined as no access to credit.
Here is a google search of the oftwominds.com archives for "Pareto Principle":
I have also documented this vast divide in wealth/asset-ownership many times. for example:
As one last example of the pernicious genius of the company store/debt-serf model, consider the bogus "elite status" offered to those with enough income to funnel through the system to make the owners even more money. Banks make money off the velocity of money, and the more you funnel through your checking account, the more money they can make off you. So if you have a large income and spend virtually all of it, they love you, they love you, they love you, and to express their gratitude for your servitude they award you various "elite" status gimmicks which are parodies of true elites.
Feel puffed up when you get to stand in your frequent flyer/"elite" line? Sorry to burst your balloon of pride, but the real elites are boarding their private jets out on the tarmac of Kona Airport.
There is one slight advantage to banks' "elite" accounts--which as we noted, are awarded based on you giving them large sums of money to leverage for virtually no interest paid--and that is you don't get nailed with the outrageous overdraft and late fees which are routinely levied on "middle class" accounts.
Indeed, these $50 lates fees and overdraft fees are a major source of banks' standard profits. That, and all the money provided by the "elites" free of charge.
There is no shame in being poor in this system; I am poor by "middle class" standards
of income and "ownership" of stuff, and I consider it if not noble them certainly
Sooner or later we have to recognize a massive fraud has been perpetrated. It needs to be revealed that major companies have trillions of dollars of junk on their books and are likely not solvent according to traditional notions of solvency. So we have a Catch-22, but not one that will be solved by hiding: expose the fraud and risk likely short-term collapse and re-scaling of economic confidence and systems, or cover the symptoms, hide the toxins, and allow them to fester and rot out the economy in a prolonged sickness that may spread and gain momentum beyond attempts to assuage the problems.I highly recommend reading the entire essay, as Zeus lists seven excellent propositions for fixing the fundamental issues.
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He routinely discusses things which no one else has talked about, yet,
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