Debt Taken On By Fools
Never a Zero Sum Game
It is often touted that total debt carried by a government
or total debt in general does not matter because debt is one person’s liability
and another's asset thus a zero sum game. This is plugged most loudly by Paul Krugman in
an attempt to explain why the enormous debts of nations such as the United
States and Japan do not matter. Nothing
could be further from the truth.
For example consider a productive farmer and an adjacent
town full of people. The townspeople
accept the farmers’ food but do not repay the farmer using money earned by
providing production and services; they pay him back with IOU’s also known as
debt.
The farmer is happy to accept this debt because he has big
plans for his future. He has been
working hard and accepting these IOU’s for 35 years and is nearing
retirement. He and his son love to hunt
on his land and after retiring he is planning on letting his land grow over,
all the better for hunting he concludes.
He never teaches his son to farm, he would rather his son spend time
doing what he loves and hunt with his father in his old age. The farmer believes he has plenty of IOU’s to
maintain his family’s lifestyle in retirement.
Unfortunately the townspeople have never had to grow their
own food and have not taken the time to consider how they are going to pay back
the farmer. When the farmer attempts to
collect on the debt it is possible they could then take the time to learn how
work the land and try to pay the old man back but there is no incentive to work
hard if they are not going to enjoy the fruits of their labor. In addition, farming skills would take time
to develop, not to mention they don’t have any land to work even if they wanted
to.
In this light we can understand that looking at debt as a
zero sum game without considering the ability of the debtor to pay that debt in
what the creditor will need in the future is a fallacy. In our example above someone is going to lose. The farmer will either realize he does not
have an asset in those IOU’s or the townspeople will have to work without
present compensation.
Many may think the answer to this problem is for the townspeople
to figure out how to farm and properly repay their debt. This sounds fair to me as well, until you
consider that the townspeople that wrote the IOU’s are old like the farmer and could
not be productive on a farm anyway. The
burden would have to fall to their children who didn’t even know the IOU’s were
being written.
In this example it is clear that the town’s ability to
create money to pay the debt back will not provide the services the farmer
needs in retirement, thus is no solution.
This is the situation that has come about in most developed
economies, particularly Japan, but since most readers will be from the United
States I will stick with using the US as an example since we are not far behind
the Japanese. There are plenty of
creditors and debtors in our system but to draw parallels to our above example,
the baby boom generation is similar to the old farmer, the government is the
older townspeople and their children are Gen Xers and Millennials.
As with the farmer the baby boomers collected IOU’s in the
form of government bonds in their pensions, 401k’s and the SS trust fund, as
well as promises made such as Medicare. The
benefit for the government came in the form of paychecks to government
employees or entitlements paid for using borrowed money as well as wars and
putting a man on the moon. Elected
officials also gained power by distributing those payments. The younger generations, X and Millennials,
are the ones who will be expected to make good on those incurred debts.
The tug of war over the next 15 years will be between who
will lose in how these debts will be rectified. There are two choices; the baby boom
generation will have to accept default on the IOU’s they own and live a life at
a much lower (possibly dangerous) standard of living, or the younger
generations will have to work without compensation in the form of goods and
services. This is truly a battle between
juggernauts, the baby boom generation is the largest voting block and controls
the majority of the wealth, and capitalism does not function without proper
compensation for production. It will be
fought in the financial markets, particularly the debt markets, around the
table of the Federal Reserve, and in the ballot box. The outcome of this battle cannot be known,
but it is fair to say there will be pain on both sides and the turmoil in
financial markets will be immense.
This pain and turmoil brings us back to why large debt loads
will not end up being a zero sum game. The
reason is the debts create an illusion that warps the participant’s preparation. In the above examples the debtors or those
who depend on the debtors, the townspeople, government employees, or entitlement
recipients believe they will be always be maintained by the creditor, and this
is all they know. The creditor, the farmer
or the baby boom generation is under the illusion that the loans they have made
throughout their life will support them just when they will need the support
the most.
These debt illusions dictate how both groups prepare for the
future; this causes misallocation of resources/piss poor planning, and
emotional pain when the illusion disappears.
The disruptions triggered to a
complex society take years or decades to repair.
Another misconception used by Krugman to bolster his zero
sum game theory is the idea that we owe the money to ourselves. Much of this concept is dispelled in the arguments
above but it also assumes ‘ourselves’ is one entity. Thinking of ‘ourselves’ as one entity allows
the thought that if one portion of that entity is benefiting and one is suffering
it all equals out. But in the case of debt
this is not the case. If nonproductive retirees
benefit to the detriment of the productive working generations the disincentive
to produce eventually negatively affects the whole society.
The inevitable enormous debts that occur with any debt based
monetary system are far from a zero sum game due to the fact that one person’s
asset is another’s liability. How the
likes of Paul Krugman can spout such nonsense is beyond comprehension.
Quote from the Movie
Dumb and Dumber (1995)
Nicholas Andre What is this? What is this?
Where's all the money?
Lloyd Christmas: That's as good as money, sir. Those are I.O.U.'s. Go ahead and add it up, every cent's accounted for. Look, see this? That's a car. 275 thou. Might wanna hang onto that one.
Confused? I suggest reading my first post History and Introduction to understand where we started. http://debtcrash.blogspot.com/2015/02/history-and-introduction.html
Lloyd Christmas: That's as good as money, sir. Those are I.O.U.'s. Go ahead and add it up, every cent's accounted for. Look, see this? That's a car. 275 thou. Might wanna hang onto that one.
Confused? I suggest reading my first post History and Introduction to understand where we started. http://debtcrash.blogspot.com/2015/02/history-and-introduction.html
I've been telling my family for years the stock market only provides them with paper assets that "tell" them they have so much value in some account, somewhere. They are literally banking on using those accounts in later years to support themselves. In fact, some of my relatives are retired and have gone out and purchased larges homes based upon their retirement savings, which of course are tied up in the Stock Market. When said Market takes a dump, and they have nothing left to pay the note on the house....what will they do? The bank that loaned them the money to purchase the house will certainly want their I.O.U in some form or fashion, but since the market ate up their retirement savings, and they have no job prospects..... Seems like diversification of skills and hard tangible assets may be the way to get through this coming crises...... Maybe.
ReplyDelete@Hunt4Steve. I'm going to be making another post you may want to show to you family in a few days. Thanks for the reply.
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