Page 2 of
2 The
twilight of irredeemable
debt By Antal E
Fekete
changed tremendously. Whereas
traditionally corporations used to finance their
capital needs in a ratio of $3 in debt for every
$1 in stock, in the years leading up to 1971 they
issued $20 in debt for every $1 in stock, with the
ratio sky-rocketing thereafter.
We hear
arguments that economists have by now learned how
to control the economy with the so-called built-in
stabilizers. Debt has largely lost its sting as a
consequence, we are told. For example, bank
deposits can now be insured. They couldn't in the
1930s. But when the government itself is loaded
with debt, and runs boom-time deficits, the
built-in stabilizers may backfire and destabilize
the economy further.
The government has
commitments so great that its endeavor to
offset a depression in our
vast economy can only result in a loss of
confidence. Anxious withholding of purchasing
power in the private sector could far outweigh
anything the government can add. To make matters
worse, government income is highly dependent on a
prosperous economy. The magnitude of the problem
of offsetting a depression is grossly
disproportionate to resources available.
One of the marks of great delusions is
that nearly everyone tends to share them. It is a
sorry tale - any delusion gives rise to a rude
awakening in due course. Public attitudes to debt
have changed so radically since 1971 that today
indebtedness is practically a status symbol,
instead of the shameful condition it used to be in
a bygone era. The most striking reversal in
traditional American attitudes towards debt is the
widespread acceptance of perpetual national
indebtedness, copied by perpetual personal
indebtedness - a never-ending lien on future
income.
Perhaps the worst aspect of the
regime of irredeemable debt is the lowest level of
morals followed by governments in modern history.
It is epitomized by an elaborate check-kiting
(using a bad check to get money) conspiracy
between the US Treasury and the Federal Reserve.
Treasury bonds, contrary to appearances,
are no more redeemable than Federal Reserve notes.
It’s all very neat: the notes are backed by the
bonds, and the bonds are redeemable by the notes.
Therefore each is valued in terms of itself,
rather than by an independent outside asset. Each
is an irredeemable liability of the US government.
The whole scheme boils down to a farce. It is
check-kiting at the highest level.
At
maturity the bonds are replaced by another with a
more distant maturity date, or they are ostensibly
paid in the form of irredeemable currency. The
issuer of either type of debt is usurping a
privilege without accepting the countervailing
duty. They issue obligations without taking any
further responsibility for their fate or for the
effect they have on the economy. Moreover, a
double standard of justice is involved.
Check-kiting is a crime under the Criminal Code.
That is, provided that it is perpetrated by
private individuals. Practiced at the highest
level, check-kiting is the corner-stone of the
monetary system.
But our world is still
one of crime and punishment, tolerating no double
standard. The twilight of irredeemable debt is
upon us. The sign is that banks are reluctant to
take the promissory notes of one another.
Significantly, this also includes overnight
drafts. The banks know there is bad debt at large,
and they don't want to be victimized by taking in
some inadvertently. What the banks don't yet know,
but will soon learn, is that all irredeemable debt
is bad debt, and there is no way to rid the system
of poison through administering more.
Redeemability of debt is not a superfluous
embellishment. It has a function of fundamental
importance: the proper allocation of resources to
the different channels of their utilization.
The obligation to redeem debt hangs as the
sword of Damocles over the government, just as it
does over the head of every economic participant.
It compels economy and foresight. It forces
balancing of income and expenditures. It adjusts
claims and commitments. It limits expansion by
shifting resources away from the incompetent, and
away from unhealthy projects.
The regime
of irredeemable debt creates an escape route from
commitments by the promise of eliminating the
pressure of solvency. Whether it promises eternal
prosperity, or it promises eternal subsidies, it
does not matter. The results are the same. They
consist in misleading people, enticing them to
skate on thin ice, and luring them into financial
adventures, private or public, which are not
warranted by the ability to pay. The logical
consequence is wholesale bankruptcy of individuals
as well as that of the political setup. Losses
breed more losses, until they become an avalanche.
The present crisis is just the first sign of that
denouement. More is on the way.
It is
still possible to escape the catastrophe which
this process would entail. The way out is to open
the US Mint to gold and silver, as advocated by
presidential candidate Ron Paul. The logic of this
remedy is that it would mobilize potentially
unlimited resources, presently tied up in idled
gold, and re-introduce the indispensable means of
debt-retirement into the economy.
Failing
to bring gold back, where are we heading? The
short answer is: we are marching into the
death-valley of collectivism. The alternative to
re-introducing redeemable currency is that the
debt behemoth will force the imposition of a
capital-levy type of taxation - along the lines of
Solon, back in the Athens of 594 BC.
Antal E Fekete has since 2001
been consulting professor at Sapientia University,
Cluj-Napoca, Romania. He also runs the Gold
Standard University, whose next session is to take
place in Szombathely, Hungary from July 3-6 on
"The Bond Market and the Market Process
Determining the Rate of Interest". For more
information see www.professorfekete.com/gsul.asp
or contact GSUL@t-online.hu.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
