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Tuesday, May 8, 2012
Debt and the .001%
Read this article from Paul Krugman (or any article by Krugman).
Paul Krugman is a thoughtful fellow (I know he won the Nobel and therefore can say and do no wrong... so did Milton Friedman... and those 2 would never have agreed on anything... if you catch my drift), but he does not address the multiplication of credit within the financial system over the past 40 years and that input's effect on wealth distribution.
I would assert that the credit system is THE point, if not the only point. I intend to write Krugman an open letter here... I find him brilliant and interesting... but not infallible.
I would also assert that Krugman simply CANNOT make the credit/wealth distribution connection... the implications are too damning to much of the Left's agenda.
(BTW... a number of polls show Americans defining themselves as" Independent nearly 40%. Democrat, roughly 1/3; and Republican between 25 and 30%. The Left and Right are at each other's throats... and as soon as the Independents organize, those other 2 won't even matter.)
In 1970, total credit (debt) was $1T, today it is over $64T. Look at how much of that debt is sovereign. During that time World GDP increase 5X. Hmmm.... 5x and 64X?
For every debtor (sovereign nation) there is a creditor. It is the .001% that “own” all that debt (total debt is nearly half of ALL wealth. By creating this "debt", "wealth" is also created)… And why did these nations need to issue all of that Sovereign debt? Hint. It wasn't their military. But to acknowledge this is anathema to social justice folks... even though it is an absolute mathematical necessity… so... since the system will absolutely positively require "capital" to fund that debt... the question becomes how is that capital created? And who benefits? And WHY?
And that comes back to our Fractional Reserve Banking System and the Federal Reserve Act. Yet the Left, while accurately assessing the risks and political consequences of this outrageously unfair and unreasonable outcome, has the wrong Bad Guy in the Dock… and I would further assert that that is because the Left is the REAL establishment... the Harvard/Princeton/Penn alumni running the financial system… They see what they have wrought... but are not really serious about giving up their prerogatives.
The .001% leverage their control of this debt in a credit inflation environment (Iike the one we have had from 1970 or so until 2008) to capture other assets... which is why the Central Banks did what they did - the credit system was contracting... and that would have killed the .001%... so the Fed and Treasury bailed out the big banks and Wall Street (which bailed out the .001).
In order explain this to the Average Joe he will need to understand a few concepts first: Fractional Reserve Banking and Money Creation.
So... money is created by being lent into existence. How does money cease to exist? By having the debt either repaid OR defaulted upon... So... for the financial system to keep growing... money supply must increase (not talking about GDP growth directly, which is really a measure of the money supply X the velocity of money... but having increasing volumes lubricates things to help velocity for the most part... though that is very questionable at the moment).
To increase the money supply... new lending must be larger than debt repayments and defaults.
Diversifying does not help the .001%… so what if the .001% keep their money all over the world... we are talking about the value of assets... (and how do you define "money"?).... if the entire credit system contracts, debt contracts, and the .001% wealth goes down by that amount.... and by mathematical necessity, the net worth of the 99.99% goes up (they are in less debt.
Wrap your mind around that for a moment... Its the deficit spending that is causing most of the disparity in Wealth Distribution. Look where the debt's are largest on that wiki link to sovereign debt... he U.S. and Eurozone... and they do not even include the future payments to their social programs... without running up that debt (most of it on social programs for the Eurozone, and in the U.S. it is social spending, regulatory spending and military spending) you don't have a .001% nearly so "wealthy" and a 99.99% in nearly so much debt.
For the moment, please leave out the Keynesian arguments... just focus on the balance sheets of the various sovereigns and the various central banks... and what defines "wealth".
Every time a sovereign issues more debt, that asset seems to wind up on the books of .001% (and the sovereign wealth funds, but that is another story and another segment of the .001%) and the liability on the books of the 99.99%. I assert and submit that we will only correct this by ending or limiting that debt issuance... but then how would money be created? We would have to scrap fractional reserve lending and the Federal Reserve Bank and System.
Irrespective of how many marches or sit-ins the Occupy folks do... they are less than nothing in the way of change until the system is reconstructed. Now... here you are an establishment guy that doesn't actually KNOW HOW to do ANYTHING. He can't invent the I-Phone, or Windows, or develop medicines, or engineer dams, or build airplanes, or raise cattle or crops... he has a Liberal Arts degree (or MBA, same thing) from THE establishment institution granting him entrance to The Club. Under no circumstances is he going to knock this system... he has no talent; no training... only POWER. The power vested in Fractional Reserve Banking and the Federal Reserve system.
But since he benefits mightily from this Keynesian created dream (for him)/nightmare (for everybody else)... he pretends to be an enlightened Liberal, when he is really and truly a f***ing child molester.
The incentive to create more and control more and more debt/credit has all manner of nasty unintended consequences... wars and the battle for control of Oil come immediately to mind... and the do-gooders on the Left know all of this full well... and justify this in their own minds with "without this debt there would be no medicare/social security/medicaid/foot stamps/no child left behind/blahblahblah... and he is right... these things would not exist in the absence of that debt, and they WILL NOT EXIST when the Keynesian end game comes to pass. However, all that debt absolutely, positively requires US$ hegemony, which in turn requires that the U.S. has a massive military to enforce that US$ hegemony... which in turn has, again, all manner of unintended consequences.
AND! that debt creates the out of control and unreasonable distribution of wealth now harming our societies irreparably... under no circumstance can you or any well intentioned individual correct that imbalance until you correct all of the above.
Now... what would happen if the debt/credit issuance was overwhelmed by defaults and repayments? That is what happened in 2008 till now, which led the various sovereigns to enact these "stimulus" programs... the sovereigns issued MUCH MORE DEBT (and you can see it in the Deficits) to overcome the debt that was defaulted upon, that was not applied for, or was repaid within the private sector.
Now Krugman rightly argues that if the austerity folks get their way, it will make matters "worse" (I am talking the U.S. situation here… Europe is a different breed of cat altogether). Yep. Infinitely worse for the .001% in percentage terms... the Keynesian argument is simple: "Private credit is contracting (fact). If we don't offset this with deficit spending (stimulus) the economy will contract (recession). He is absolutely correct. And? In order to correct all of the excesses from the municipal employee pension that have permanently destroyed housing (via excessive property taxes) to outrageous military spending to obesity... I could go on and on... ALL of these things are directly linked to the economic policies that concentrate the "wealth" (and with it political power) in the hands of a very, very few... undoing that is going to be BRUTAL... and it is going to get brutally undone one way or another... I respectfully submit that no American politician is going to tackle this... they are going to try to get thru the next election cycle... not to worry... "things that can't go on forever, won't."
Krugman is the ULTIMATE establishment Liberal. He knows ALL of this. He is simply too brilliant not to see the interconnectivity of this... but he can't see it out loud. He would lose his position within the establishment.
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Posted by The Short Story Man at 9:14 AM