Saturday Youtube – Jubilee Edition

I have right around 450K in debt with minimum payments of about $5,000/month.  I also have an income of approximately 0$/month.  You don’t need to be Aristotle to figure out that the payments are not being made and the debt will never be paid back.   My example is perhaps extreme, but the level of household debt relative to income in the United States is completely out of whack.  I posted this chart a few days ago, but it shows a steady increase in the amount of household debt relative to income since the end of WWII, with an almost apocalyptic acceleration starting around 2000.With that as background, and with this post from libertarian and tea party member WC Varones discussing a debt jubilee favorably, here are a few youtube videos making the case for a biblical style debt jubilee by probably the only economist I know that argues for it:
Six Minutes with the Renegade Economist – Michael Hudson Special…

Banks Want Control of Society Via Debt Slavery

Michael Hudson 1-2 Iceland Under Attack

Nine Inch Nails – Head Like a Hole

Well, Maybe, Or Maybe The Underlying Trend is the Problem

Over at the Big Picture, Invictus threw up a few charts from the Fed’s Flow of Funds report.  What really jumped out at me was this one:

Invictus draws the following conclusion from the chart:

The trendline for Debt-to-Income is at about 114% which, absent rising Personal Disposable Income, implies a need to shed an additional $1.5 trillion in liabilities.

Hmmm, well ok, assuming that the trend of the last 50 years of ever increasing amounts of household debt relative to income was actually a sustainable trend.  Michael Hudson, an economist and debt cancellation proponent (which is why I like him), notes that increasing net worth at the household level is largely illusory (From Saving, Asset-Price Inflation, and Debt-Induced Deflation):

This view of the saving function – the propensity to save out of wages and profits – saw saving break the chain of payments simply by not being spent. The modern dynamics of saving – and the debts in which savings are invested – are more complex. Most savings are lent out. Nearly all new investment in capital goods and buildings comes from retained business earnings, not from savings that pass through financial intermediaries. Under these conditions, higher personal saving rates are reflected in higher indebtedness.

Since World War II, in fact, each new business upswing has started with a higher set of debt ratios. A rising proportion of savings find their counterpart more in other peoples’ debts rather than being used to finance new direct investment. The net savings rate has fallen, even though debt ratios and gross savings have increased.

The essential point that Hudson makes is that interest payments on debt, unless wiped out through bankruptcy or other means, quickly grow out of proportion to the real economy’s ability to support them:

The financial system exists in a symbiosis with the “real” economy. Each system has its own set of growth dynamics. Financial systems tend to grow exponentially at compound interest. The cumulative value of savings grows through a dynamic that Keynes had little reason to analyze in the 1930s – what Richard Price described as the “geometric” growth of a penny invested at 5 percent at the time of Jesus’s birth, growing to a solid sphere of gold extending from the Sun out beyond the orbit of Jupiter by his day (1776). He contrasted this “geometric” growth of savings invested at compound interest to the merely “arithmetic” growth of a similar sum invested at simple interest. This was the metaphor that Malthus adopted to describe the growth of human populations in contrast to the means of subsistence.[2]

Many people saved money back in the time of Jesus. But nobody has obtained savings amounting to anywhere near a solid sphere of gold. The reason is that savings that are invested in debt tend to stifle economies, causing downturns that wipe out the debts and savings together in a convulsion of bankruptcy. This was what happened to the Roman Empire, and on a smaller scale it has characterized business cycles for the past two centuries. Yet this dynamic rarely has been related to the bankruptcy phenomenon although it is a key factor countering the growth of savings.

Economies do grow faster than “arithmetically,” but not “geometrically.” Their typical growth pattern is that of an S-curve, tapering off over the course of the business cycle. The exponential growth of savings and debts thus tends chronically to exceed that of the “real” economy. Unless interest rates decline, the debt burden will divert income away from spending on goods and services, turning the economy downward (Fig. 5 & Fig. 6).

Simply returning to a “trend” of ever increasing debt relative to income is a fool’s errand.  Kind of like rehab for swearing m’kay!

Government Guarantees of Securitized Debt “Assets”: A Fucking Retarded Way of Accomplishing, Well, Anything

U.S. government guarantees of securities backed by mortgages, credit cards, student loans, car loans, and just about every other fucking thing run into the trillions, perhaps even the 10s of trillions of dollars.  Now, not all of what’s set out there are guarantees, but a significant percentage of what’s covered in these costs are cases in which the stream of interest an principal payments are due to a private entity, and the government steps in to make up the difference when the individual or company that is to make the payment falls behind or defaults.  That’s the way it has worked with most student loans and many mortgages for years, and now, thanks to the government’s bailout efforts (see e.g. TALF – nonrecourse loans against such securities which is virtually identical to a guarantee), it includes corporate debt, credit cards, car loans, and other types of consumer debt.  Even worse the government has provided a perpetual funding advantage to firms like…wait for it…Goldman Sachs with their direct and implicit backing of their debt (.pdf).

Now, riddle me this.  What incentive does a creditor have to negotiate a lowered payoff amount to a debt that is guaranteed by the government?  Anyone, anyone, Bueller, Bueller?

That’s right, they don’t have one.  The incentive is for the creditor to carry the debt on their books at full value and to harass the debtor for, well, forever, trying to bleed whatever they can out of the turnip.  It’s an absolutely-fucking-ridiculous give away to the creditor and a complete disaster for the debtor.  Debts that can’t be paid back won’t be, so of course the best solution is to pay the creditor in full and ruin the life of the debtor!  Yup, that makes perfect sense, especially in an era of declining wages.  Take a look at this graph, focus on 2002-2007, and imagine what the 2008 and 2009 numbers look like (click for the full size image).

This guy, Michael Hudson, gets to the root of the problem.  Either you can have a free market solution, i.e. the writedown happens and a workable payoff is negotiated between the debtor and creditor, or the government lets BOTH the creditor AND the debtor off the hook.  But what is happening now is a complete joke – the government protects the creditor, leaves the debtor stuck with the full amount of the debt, and provides no incentive whatsoever for the creditor to work out a payable solution.  It is a humanitarian disaster, and the worst possible way to handle the debt crisis.

Stop paying.  Either the government will come around to the wisdom of actually assisting debtors, or, do what I’ll be doing soon enough, leave the country.