The Debt Endgame: A Theory

August 1, 2007 on 5:51 pm
by Jim Guido

Four or five years ago I began to wonder how economic globalization would work out. I figured that the long term goal would be for people around the globe to earn similar pay for like work. In order for this to happen either the industrialized west would have to have a sharp decrease in pay or the far east and third world nations would have to enjoy a sharp increase in pay. My initial inclination was that it would be a combination of both, the east would rise while the west’s earning rate would decline. Likewise the middle class of the west would experience a decline in their standard of living while the east’s middle classes standard of living would rise.

At about the same time I felt that the rate of debt of the American consumer was getting out of hand. I wondered if this would somehow be used as an opportunity to defeat the American middle class. Since that initial thought much has happened which supports this intuition and has made it more feasible.

I began to believe that the American and European middle class were beginning to be viewed as an obstacle to a global economy. Since the trend has been for more and more money to go into fewer and fewer hands I began to look for mechanisms to be put in place to help accomplish this goal.

The feds reaction to the tech and stock market bust of 2001/2002 was to cut interest rates to stimulate the economy. Low interest rates encouraged everyone to borrow the cheap money, and put it to use. Many people put the money to work in the real estate market and the housing boom began to pick up steam.

As the real estate market climbed so did consumer debt. American’s level of debt skyrocketed along with the value of their homes. With interest rates so low, it was hard to save money. Money put into money markets and bank accounts did not keep up with the rise in the cost of living (inflation). This caused people to seek higher returns with their borrowed money. Not only did real estate boom, but Americans put their money back into the stock market and it too surged.

Increasing numbers of retirees dependent on the interest and dividends from safe investments such as money markets and CD’s were finding their nest eggs insufficient. This forced many older American’s to take on more risk by increasing their exposure to the stock and real estate markets. The image I use for this is that the low interest rates were like someone shaking the brush forcing the birds to take flight. In keeping with this image I viewed these older American’s as vulnerable prey for the economically ambitious.

With interest rates at historic lows American’s lost their appetite for savings and soon for the first time since the depression the US had a negative savings rate. This trend has continued and now we’ve gone nearly two years with the US having a negative savings rate.

As the US and its citizens began to pile up debt at mind boggling levels, I began to think that maybe it was getting to the point where consumers were never going to be able to pay it back. Whether this debt situation was by accident or design the question became what does a society do when its citizens carry unserviceable debt?

The lending policies of the US, the World Bank and the IMF have often put developing nations into the same scenario that the US consumer now finds itself in. What did the US do when debtor nations became overwhelmed in debt?

The short answer is that the above agencies usually found a way to cut a deal allowing a portion or all of the debt of a developing nation to be pardoned. Usually this process involved an exchange in which debt was forgiven for ownership or assets and resources. The US government or US corporations usually became the owners of resources like oil, or cash crops such as bananas or coffee in return for a release from debt. Sometimes the debt was forgiven for military favors such as US bases on their soil, or for ownership or control of state or dominant companies to be handed over to US interests.

As early as five years ago I became convinced that the true economic leaders were looking for a way to take away the assets of the American middle class in a similar fashion. I thought that they would find a way to mire consumers in unrepayable debt and then forgive the debt in exchange for ownership of middle class assets.

I have to admit that even I thought that this was a bit far fetched. But it’s sad to say that the last five years have done much to make this a real possibility. The current real estate melt down has exposed millions of American’s to the real possibility of going bankrupt from having debt which far exceeds their means of payment.

The US is printing money at an obscene pace. The buying power of the dollar shrinks with each dollar added to the economy. It matters little if the added dollar is an actual dollar bill or is just electronically created. What is important is that the dollar is quickly losing its worth and literally becoming worthless.

In a world where money is created out of thin air and in such vast quantities real wealth must be measured in something other than dollars. I feel that ownership of tangible and abstract things is a more accurate assessment of wealth.

He who owns the land, water, trees, buildings and patents for things is truly wealthy. While the banks who own the mortgages are the real owners of the homes those with the mortgages are said to be the owners.

What if the lenders and the owners of all the assets of the American middle class offered terms to forgive the debt? What if they offered to help you pay off your debt by garnering your wages? What if they said that they would allow you to stay in your home while they took 30% of your wages to pay off your mortgage and credit card debt? What if the condition were that once you payed off your debt your pay would stay cut by 30%? How many would take this deal? How quickly would that help close the wage gap between the industrialized and emerging middle class?

What if they said they would allow you to stay in your home, if it was no longer your home? What if in exchange for the title of ownership they generously offer to forgive your debt?

As I say I entertained these thoughts a few years ago. Though they seem draconian they are appearing more and more possible. Such a scenario would accomplish the two goals I saw for modern globalization, it would continue to put more and more money into fewer and fewer hands and it would close the gap between the industrialized and emerging world’s middle classes.

I’m not saying every banker, billionaire or baron of business has or had this vision. In our competitive system of free enterprise many bankers and powerful businessmen will be relative of substantial losers in this brave new global world. Yet, if I thought of this possibility I’m sure people of ambition and economic means did also.

Some will want to define this as paranoid conspiratory thinking. I prefer to view it as good old fashioned American opportunism. It shouldn’t seem odd that an economically motivated globalist would have a vision and find the means to make that vision into a reality.

Jim Guido