“The entire world is living in a debt backed money box” (Nathan Martin)

A conversation with Nathan Martin, Editor of Nathan’s Economic Edge

HIGHLIGHTS

“In the early stages of monetary development debt works to add to productivity, but is less effective the more debt there is.  Once the point of debt saturation is reached, adding more debt leads to negative output and to higher unemployment.”

“The private sector became completely debt saturated and the debt began to collapse so the government stepped in to compensate.  By doing so they transferred the private risk into sovereign risk.  The governments of the world are now also debt saturated.”

“Today there is far more debt than “money,” something I don’t think any economic theory is equipped to deal with.”

“The function of the multiplier is not linear, it is exponential.  The equations used to model our economy do not account for these phenomena.  Their models appear to work relatively well when debt levels are low in an economy, but as you move closer to debt saturation they begin to break down.”

“The only real solutions will be found by changing WHO controls the money and by nations producing their own sovereign money that is produced as an asset, not a liability.”

“All debts get repaid in one way or the other.  There are only two ways to discharge it; pay it back or default.  There is no such thing as “inflating away debt,” that is a myth.”

“The system has forced us into a corner of the box were we are darned if we do and darned if we don’t.  There is a clear escape route that can only be found by jumping outside the walls of the debt money box.”

“There will be no escaping the failure of our current monetary system until we escape from the paradigm of the debt backed money box in which we have all been placed.”

FOREWORD TO THE INTERVIEW

Financialization & Debt addiction: a systemic problem?

With the current financialization wave, “born” in the 1970s and 1980s, debt mutate in the economic aggregate most important in the world economy. German economist Moritz Schularick, from the John-F. Kennedy Institute, Free University of Berlin, showed in a working paper published by the National Bureau of Economic Research (“Credit booms gone bust”, WP 15512, Nov. 2009) co-authored with Alan Taylor, that credit and money are no more two faces of the same coin. We assisted to a decoupling of money and credit aggregates in the last 30 years, particularly in the OECD countries. This was a structural shift. The stable relationship between money and credit broke down. The credit system delinked from monetary aggregates. A new “systemic” problem just comes from the “shadows” of macroeconomics surprising the academy, regulators and the politicians.

That’s why economist Gary Dymski wrote recently (at the Cambridge Journal of Economics, 2010, 34, pp.239-255) that this Great Recession from 2007 was different from past crises, including the big one, the Great Depression of the 1930s. Today three countries (US, UK and Germany) have the lion’s part of the world debt. Only 7 European countries have 50% of the global debt. In the 1980s, the award went for the small un-famous gallery of the “gang of four” from Latin America: Argentina, Brazil, Mexico and Venezuela.

Nathan Martin, editor of Nathan’s Economic Edge blog, adds a new dimension to this problem of OECD economies addicted to debt – debt saturation due to a diminishing marginal productivity of debt, total debt, private and public. Something he showed for the US economy, studying the ratio from GDP growth to debt growth in the last 40 years. But we can extrapolate the pattern for the other OECD countries. The chart of debt saturation, based on data from financial expert Chris Rupe, can be followed through this link. (See at the end of the interview comments about the chart).

PROFILE

Nathan A. Martin is the author of the book Flight to Financial Freedom – Fasten Your Finances. The principal author of Freedom’s Vision, he writes daily on the Economic Edge, founded the American Party PAC and www.SwarmUSA.com.  An advocate for monetary reform his articles on the economy and monetary system have been published globally.  A life-long entrepreneur and current business owner, his message is clear: “become financially literate or become a victim of the external forces that are impacting everyone.”

INTERVIEW by Jorge Nascimento Rodrigues, © 2010

Q: We were used with Richard Kahn’s «Keynesian» multiplier to evaluate investment, particularly public investment related with the fiscal policies. The «Keynesian» multiplier does not function anymore in the developed economies?

A: During the time of Kahn’s education in Keynesian economics (1927-28), most economic theories were based upon linear economic concepts applied to non debt saturated constructs.  The problem is that the real world is not linear because our money systems are now based entirely upon debt – interest produces exponential growth over long periods of time, a non linear function.  Later, Kahn’s work on multipliers still did not consider the cumulative effects of adding debt to the bottom of economic cycles and failing to ever repay it at the top of economic cycles.  Today there is far more debt than “money,” something I don’t think any economic theory is equipped to deal with.

Q: That’s something most economists and governments do not understand quite well…

A: Yes, they still don’t understand how the growth mandate is created by the process of covering deficits with borrowing from the bond market.  This method of producing national debt is not a natural economic process, it is a process designed by central bankers for the benefit of central bankers.  It is insidious and builds up over the years during which time the central banks are skimming the productivity from the workers.  As the interest begins to build over time it takes more productive effort to service the interest and that becomes an anchor to economic growth.

Q: Some political economists blame Keynes…

A: Keynes advocated deficit spending during down cycles – it’s true, but he ALSO advocated saving during up cycles to pay for it.  This has been distorted to today’s spend more than you take in during bad times and still spend more than you have during good times.  This “stimulus” spending, or using debt to cure a debt problem leads to an exponential function that underlies both our debt and our money.  Thus the function of the multiplier is not linear, it is exponential.  The equations used to model our economy do not account for these phenomena.  Their models appear to work relatively well when debt levels are low in an economy, but as you move closer to debt saturation they begin to break down. If deficits were instead covered with the creation of sovereign money, an asset, versus debt backed money, a liability, then the relationship would be closer to what they described and it would have a linear function instead of an exponential one.

Q: Debt saturation seems to be a recent “black swan” event. The evolution from the 1960s is clear, the diminishing marginal productivity of debt in the US is a trend, although until recently in the positive side. Recently it went down in negative field. This happened because of the context of this Great Recession?

A: Indeed, the marginal productivity of debt recently went below zero in quarter three of 2009 inside the U.S.  It has been negative before, but not to this degree.  You’ll note that each new high with each cycle is lower than the previous high.  That reflects the weight of carrying debt loads.  In the early stages of monetary development debt works to add to productivity, but is less effective the more debt there is.  Once the point of debt saturation is reached, adding more debt leads to negative output and to higher unemployment.  This is why each recent up cycle has produced a “jobless” recovery.  The real economy is languishing, but the paper economy gets fluffed higher and higher. It’s only a “black swan” if you didn’t see it coming, no?  This was relatively easy to see coming, one only has to look at the escalating levels of debt and see the transition of budgetary numbers that go from millions to billions, and now on to trillions.  The exponential function is at work all through the US economy, this is why there is never any solution that works for the unfunded liabilities of Social Security, Medicare, and for huge deficits.  When the underlying numbers have constant growth, they very quickly get away from you when looking over long time spans.

Q: How we sort out from this mess?

A: The root problem is that the entire world is living in a debt backed money box.  You cannot find solutions that work inside of that box, that’s because the math of never ending debt does not work.  The only real solutions will be found by changing WHO controls the money and by nations producing their own sovereign money that is produced as an asset, not a liability.  I contend that the original designers of the Federal Reserve ACT (1913) knew what they were creating; they use debt to obtain power and control.  This is what the IMF and BIS are doing now, trying to create ever larger quantities of debt by going world-wide with it into failing economies and by beginning to saturate emerging economies.  This is the modern version of what was slavery that turned into share cropping, and now has morphed into control by generating pieces of paper – debt obligations.

Q: Can we “link” this “behavior” of the productivity of debt in the US with the declining trend of the real growth annual average, from more than 4% in the 50s to less than 2% in the most recent decades?

A: Absolutely.  But it is far worse than those statistics show.  The statistics coming from the U.S. have been so massaged that they simply do not reflect reality.  The inflation numbers are so badly massaged that any “real” statistic (corrected for inflation) is not real at all.  Our GDP numbers vastly overstate the productive output of our economy.  If we want to get serious about understanding economics we must ensure that we are using good data, and I can assure that we are not.

Q: In a saturation phase transition what can happened?

A: It depends on the reaction of those in control.  If they continue to pour debt into a debt crisis then eventually confidence will be lost and there will be a currency crisis and/ or crisis in government.  Should they attempt to institute “austerity” measures, then the economy will suffer.  Either way the final destination is the same, failure.  The system has forced us into a corner of the box were we are darned if we do and darned if we don’t.  There is a clear escape route that can only be found by jumping outside the walls of the debt money box.  History shows that failures of this nature can lead to extreme events such as world wars, revolution, terrorism, etc.  Are we smart enough to simply change our construct and understand what we are doing to ourselves, or do we push ourselves into those other events?  History says that we are not proactive, rather we are reactive, but in the end we tend to advance over time.  I would like to think that we could be proactive and advance first, before complete breakdown occurs.  There is hope as global communication definitely makes people more aware.  You will not find actual solutions, however, emanating from central bankers or governments who are beholden to them. There will be no escaping the failure of our current monetary system until we escape from the paradigm of the debt backed money box in which we have all been placed.   It could very well be that failure must occur first in order for people to understand that they must take action to break out of that box, to change WHO controls the production of their money.

Q: Can we extrapolate this pattern for other developed countries?

A: Absolutely.  We have yet to do so for other countries just because of the difficulties in comparing numbers.  It’s a straightforward calculation, but we need solid total debt and GDP figures in order to do it.

Q: Are the emergent countries far away from this trend?

A: Certain countries that have stayed away from debt are much farther away from debt saturation.  Central bankers are well aware of this and are working to press debt into countries that are currently not saturated.  Their idea of developed means creating a government that is in debt and where the workers work to pay taxes that funnel up to the bankers.  It doesn’t have to be like that; a government can produce their own sovereign non debt-backed money and thus can avoid the long term ills of debt.  The trick to doing so, however, is creating methods to keep the quantity of money under control so that confidence is never lost.  I have spelled out how to accomplish that at www.swarmusa.com and believe that all countries of the world should progress towards such a system.  This puts control of humanity back into the hands of the people and their elected representatives instead of the central bankers who are at the top of a long list of special interests who are currently controlling the direction of the planet.

TECHNICAL INFORMATION

Q: When you refer to debt, you mean total debt, public and private?

A: Yes, the diminishing productivity chart is based upon total debt.  But even that number is difficult to pin down now with derivatives distorting the view.  The private sector became completely debt saturated and the debt began to collapse so the government stepped in to compensate.  By doing so they transferred the private risk into sovereign risk.  The governments of the world are now also debt saturated.  The U.S. could not sell all the debt we produce and have thus resorted to tricks to mask that fact.  On this cycle interest rates hit zero and we had to take extreme measures.  The next low point will be far worse and may lead to a crisis of confidence in the public sector.  This loss of confidence is already occurring throughout the world.

Q: When you refer to debt, you mean external debt or domestic debt?

A: Both.  There are a couple of rules to keep in mind about debt.  All debts get repaid in one way or the other.  There are only two ways to discharge it; pay it back or default.  There is no such thing as “inflating away debt,” that is a myth.  Any attempt to do so will result in less purchasing power by the people who hold the currency and thus their productive efforts will get fewer goods in return and thus those productive efforts are used to repay it.  The loan always gets repaid with interest unless defaulted.

COMMENTS ABOUT THE CHART OF DEBT SATURATION BY NATHAN MARTIN

1-     Note that since the 1960s that each high on the chart is progressively lower than the previous which produces the overall downslope.  This is despite the fact that interest rates were in a rising trend going into 1980 and were in a falling trend from 1980 until 2008.

2-     What can be expected is that the line will rise again, but produce another lower high, probably significantly lower as the amount of debt in the system is much higher.  This means that a much larger percentage of productive effort goes to paying interest on the debt and to servicing existing principal.  That’s what drags down the productivity over time; it is a function of the interest and of having to service the debt.

3-     If it were possible to keep adding debt into the system, eventually all income would go directly to servicing the debt and interest.  There would thus be no velocity in the monetary system, as all money would simply circle immediately back to the bank.  This is why our process of bringing all money into being as a debt creates an impossible math situation that guarantees the eventual demise of the monetary system.  The only way to keep such a system going is by allowing the debt to get cleared out via default.

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