Saturday, July 23, 2011

The Manufactured "Debt Crisis" and the American Ideology of Debt.

[Preliminary note: for the few people who read this blog, the economic analysis will be self-evident. But it still really has to be said. Again and again and again.]

Contrary to what the elite class says, there is no debt crisis. It's a manufactured issue. Its sole purpose is to provide ideological cover for an assault on the New Deal and the Great Society. And, thanks in no small part to Mr. Obama, it appears to be working.

Evidence that there is no debt crisis includes the following: interest rates on bonds are still astonishingly low. In fact, for five year bonds, the real interest rate (adjusted for inflation) is negative. That means that (at least for now -- unless the US actually defaults) the financial markets still regard the US treasury as the safest place to put their money.

To make the matter clearer (for those not familiar with economics): were the bond markets (those who lend money to the government) worried about the level of US debt, they would be demanding a higher interest rate, to compensate them for the risk. But, as noted above, interest rates are exceptionally low.

Are we clear about this? Look, let's think this through. Everyone seems to have some vague notion that "debt is bad," but no one can say exactly why. All they know is that if there own household was in debt, that would be bad. (Although it would only be "bad" in some circumstances. In many cases, it's a good thing. If all debt were bad, no family would, say, take out a mortgage for a home, and no business would ever invest. So, even if the analogy to a household or a business were valid, which it isn't, the notion that debt is necessarily a bad thing would still be specious.)

So, under what circumstances would debt become "bad" for the US government (or any government)? Answer: if the financial markets decided to stop buying debt. If that were to happen, then, yes, we'd be in trouble. But there's simply no evidence of that happening. Again, the most powerful evidence would be high interest rates. But they aren't. By a long shot.

So if the very players (the bond markets) who should be concerned about the level of debt aren't concerned, why is all of Washington acting as if there is a crisis? Why does America seem to be so certain that we shouldn't raise the "debt ceiling"? (The very existence of which, as a legal device, is absurd -- Congress already appropriated funds; having to pass another law saying that the US will then go ahead to spend those funds is idiotic.)

My sense is that the issue of debt is far less an "economic" issue in this country, as it is a quasi-religious, moral issue. It seems a function, partly, of our puritanical heritage. A person who is a spendthrift, takes on debt, and lives beyond his means, is often regarded as having a certain defect of character. Spending is regarded as vice. Saving, on the other hand, is regarded as virtuous. (The religious nature of our reaction to spending was captured brilliantly by an episode of South Park, which I discussed in a post last year)

There is a massive cultural contradiction in our national psyche here. Capitalism will not function without spending. It just won't. The entire system is predicated on the profit motive. And businesses cannot make a profit if they don't sell. And if they're not profitable, they have no reason to hire. So, without spending, you can say good-by to any hopes of lowering the unemployment rate. Everyone knows this. Everyone. Regardless of party or ideology. The most dramatic example I know of this is: after 9/11, President Bush told us all that it was part of our duty as Americans to keep shopping. (I remember when that happened. Part of me thought "why are we talking about shopping at a time when thousands of people were killed? Isn't that, um, unseemly?" But I also knew the answer. A collapse in spending could mean business failures and increases in unemployment)

So while, on one level, we all know how critical spending is for the functioning of capitalism, we also, sometimes in the same breath, express a kind of moral revulsion at anyone's failure to save.

I wrote on this at great length on this cultural contradiction in another post (the first blog post on here that I wrote, last summer.) So I won't delve into the matter much further here. I will make one point of clarification though, which is that I am not claiming that these sorts of quasi-religious and moral objections to the debt are the driving factors behind the political economy of debt reduction. That, it seems to me, is largely a function of class war. That is, in the final analysis, the driving force behind "debt reduction" is the attempt to eviscerate the successes of the New Deal and the Great Society. However, even if the quasi-religious American anti-debt fervor doesn't account for why elites are so obsessed with the debt ceiling, I do think it accounts for why the issue of the debt ceiling plays so well for the American public. So, for example, much of the real motivation behind the attempt to cut spending is that elites want, for example, to loot Social Security and Medicare. But the reason they can get away with it, or at least have a chance of selling it to the public is because of (what I am calling) the American ideology of debt.

Per this ideology, debt is a simply "bad" (all economic analysis aside) in a moral or quasi-religious sense -- or, more specifically, a person in debt has no self-control, or self-discipline. Therefore, anyone in debt needs to be taught a lesson. They need to take their medicine, or "eat their peas" as Mr. Obama said. (The message there is obvious -- we may not like these spending cuts, but they are good for us. But he's wrong. They are not.)

This remarkably punitive -- almost sadistic attitude (in the sense that I think we, in our national psyche, sometimes get pleasure, or at least a kind of gratification, in seeing this particular kind of punishment) -- in my opinion, is remarkably good at facilitating the class war launched by the elites upon the rest of us.

And the rest of us, for psychological reasons entailing a kind of perverse gratification in believing that this kind of deprivation is necessary way of building our moral character, will be all-too-willing to allow the elites to continue to screw us over.

This is the tragedy of the particular intersection of moralistic American culture and cynical economic policy. And it is why (at least at the moment) I am not terribly optimistic about the prospects of the American public resisting this assault.

But I'm still hopeful that that will change. (Call it, if you like, the audacity of hope.)

Addendum: As usual, I've found myself anticipating possible objections to the above. So perhaps I should clarify. I'm not saying there isn't anything virtuous about saving. More specifically, I think that the notion of saving as a virtue performs a real and valuable function, insofar as it is difficult for human beings to delay gratification. So it makes sense that we would have developed a moral or religious code that rewards saving. This kind of moral code functions as a kind of survival strategy, as it were, for the species. The problem is the irrational or even counter-productive uses to which we put this otherwise useful moral code. There are, in my opinion, many of these, including, as I noted above, when the desire for discipline morphs into a sort of brutality (which is something I think has happened in America). But, from the standpoint of understanding capitalism, the most of notable of distortions of this moral code is the failure to understand the paradox of thrift in capitalist economies -- i.e., that too much savings can create a commodity glut, which in turns creates unemployment and low capacity utilization (or, in Marxian language, surplus population and surplus capital.) Indeed, I would go so far as to say the fact that, for capitalism, savings can be a problem or a threat is just one of the many reasons the system is an irrational one. (I discussed similar reasons in posts from last year, including this one.)


  1. Silvo,

    I take all your points about the contradictions of juxtaposing "needing to spend" & "debt is bad." But I'm not sure that I buy the argument that this is a "manufactured" debt crisis. Your support of that argument is that interest rates are so low and investors continue to buy US debt. But... (1) The biggest holder of US debt is the Federal Reserve. (2) Investors seem to be running to gold, silver, and other precious metals. (3) Many investors would love (read: prefer) to be investing in China, and China is really struggling to keep them out!

    I would also venture to guess that the so-called Eurozone crisis is remarkably good for the dollar - without the debt problems in Europe, everyone would be running to change their dollars to Euros.

    I'm glad you're writing again!

  2. Hey Snow
    On investor behavior. 1) True enough about the Fed. But that just amounts to saying interest rates would be higher if the Fed weren't pursuing expansionary policy. I would imagine we'd nonetheless see at least some discipline from the bond markets if they were concerned about t-bills. 2) Do you think the movement of assets into gold is about lack of confidence in public debt? Seems as at least as much to protect against full-scale collapse in the private markets. (Anyway, it's not clear that there's as much movement into gold as some claim, what with all these "all-time-high" statements failing to distinguish between nominal and real prices.) 3) Fair point about China. Though I think that would change if there was some real GDP growth here -- which sure as hell ain't gonna happen if we do the austerity thing.
    Which of course I know you're not advocating. It's just a way of saying that it's meaningless to look at debt without looking at the debt-to-GDP ratio; and that you can lower a ratio either by reducing the numerator or raising the denominator. You know all this of course, but it's a point that I think gets entirely lost in the debt discussion. (Something I thought of putting in here, but decided to save until some other post)
    And fair enough about the Eurozone. Yes, if there weren't debt problems there, surely European debt would look more attractive. (Although of course what that really illustrates is that we have a crisis of global capitalism on our hands -- but that's a different point altogether, and would require an entirely different discussion.)
    [oh, and thanks for the props on writing] :)

  3. Come back Mark the blog world misses you.