Sacred Economics: Money, Gift, and Society in the Age of Transition (17 page)

The dual pressures I have described—toward growth of the money realm, and toward the polarization of wealth—are two aspects of the same force. Either money grows by devouring the nonmonetized realm, or it cannibalizes itself. As the former is exhausted, the pressure of the latter increases, and concentration of wealth escalates. When that happens, another pressure arises to rescue the system: redistribution of wealth. After all, ever-increasing polarization of wealth and misery is not sustainable.

Without wealth redistribution, social chaos is unavoidable in an interest-bearing, debt-based money system, especially when growth slows. Nonetheless, wealth redistribution always happens against the resistance of the wealthy, for it is their wealth that is being redistributed. Economic policy therefore reflects a balancing act
between the redistribution and preservation of wealth, tending over time toward the minimum amount of redistribution necessary to maintain social order.

Traditionally, liberal governments seek to ameliorate concentration of wealth with redistributive policies such as progressive income taxes, estate taxes, social welfare programs, high minimum wages, universal health care, free higher education, and other social programs. These policies are redistributive because while the taxes fall disproportionately on the wealthy, the expenditures and programs benefit all equally, or even favor the poor. They counteract the natural tendency toward the concentration of wealth in an interest-based system. In the short term at least, they also run counter to the interests of the wealthy, which is why, in the present conservative political climate, such policies are characterized as class warfare.

In opposing redistributive policies, conservative governments seem to see concentration of wealth as a good thing. You might too, if you are wealthy, because concentration of wealth means more you for and less for everyone else. Hired help is cheaper. Your relative wealth, power, and privilege are greater.
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Governments serving the (short-term) interests of the wealthy therefore advocate the opposite of the aforementioned distributive policies: flat-rate income taxes, reduction of estate taxes, curtailment of social programs, privatized health care, and so forth.

In the 1930s, the United States and many other countries faced a choice: either redistribute wealth gently through social spending
and taxing the rich, or let the concentration of wealth proceed to the point of revolution and violent redistribution. By the 1950s, most countries had adopted the social compromise forged in the New Deal: the rich got to stay on top, but they had to give up through taxation an amount offsetting the profits of ownership of capital. The compromise worked for a while, as long as growth stayed high as it did through the early 1970s.

However, even this gentle solution bears many undesirable consequences. High income taxes penalize those who earn a lot rather than those who merely own a lot. They also set up an unending battle between tax authorities and citizens, who usually end up finding ways to avoid paying at least some of their taxes, employing tens of thousands of lawyers and accountants in the process. Is this a good use of our human resources? Moreover, it is a system in which we are giving with one hand to the owners of money and taking away with the other.

In an interest-based system, class war is inevitable, whether in muted or explicit form. The short-term interests of the holders of wealth oppose the interests of the debtor class. At the present writing, the balance has swung to the wealthy, as their political representatives have dismantled the mosaic of redistributive social programs assembled in the 1930s in most Western countries. For a while, in the post–World War II era, high growth obscured the inherency of class warfare, but that era is over. Until the money system undergoes a fundamental change, we can expect class warfare to intensify in coming years. This book aims to change the basic ground rules and remove the basis of class warfare entirely.

As the social contract forged in the 1930s breaks down and debt levels reach crisis proportions, more radical measures may become necessary. In ancient times, some societies addressed the
polarization of wealth with a periodic nullification of debts. Examples include the Solonic
Seisachtheia
, the “shaking off of burdens,” in which debts were canceled and debt peonage abolished, and the jubilee of the ancient Hebrews. “At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the Lord’s release” (Deuteronomy 15:1–2). Both of these ancient practices were much more radical than bankruptcy because the debtor got to keep his possessions and collateral. Under Solon, lands were even restored to their original owners.

A more recent example of debt nullification has been the partial annulment of the foreign debts of impoverished, disaster-stricken nations. For example, the IMF, World Bank, and Inter-American Development Bank canceled Haiti’s foreign debt in 2008. A broader movement has existed for decades to cancel Third World debt generally but so far has gained little traction.

A related form of redistribution is bankruptcy, in which a debtor is released from obligation, usually after the forfeiture to creditors of most of his property. This is nonetheless a nominal transfer of wealth from creditor to debtor, since the amount of the property is less than the debt owed. In recent times, it has become much more difficult in the United States to declare true personal bankruptcy, as the laws (rewritten at the behest of credit card issuers) now force the debtor onto a payment plan that assigns a portion of her income to the creditor far into the future.
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Increasingly, debts become inescapable, a lifelong claim on the labor of the debtor, who occupies a state
of peonage. Unlike the
Seisachtheia
and Jubilee, bankruptcy transfers assets to the creditor, who then controls both physical and financial capital. The former debtor has little choice but to go into debt again. Bankruptcies are a mere hiccup in the concentration of wealth.

More extreme is outright debt repudiation—refusal to pay a debt or transfer collateral to the creditor. Ordinarily, of course, the creditor can sue and employ the force of the state to seize the debtor’s property. Only when the legal system and the legitimacy of the state begin to fall apart is personal debt repudiation possible.
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Such unraveling reveals money and property as the social conventions that they are. Stripped of all that is based on the conventional interpretation of symbols, Warren Buffett is no wealthier than I am, except maybe his house is bigger. To the extent that it is his because of a deed, even that is a matter of convention.

At the present writing, debt repudiation is not much of an option for private citizens. For sovereign nations it would seem to be a different matter entirely. In theory, countries with a resilient domestic economy and resources to barter with neighbors can simply default on their sovereign debts. In practice, they rarely do. Rulers, democratic or otherwise, usually ally themselves with the global financial establishment and receive rich rewards for doing so. If they defy it, they face all kinds of hostility. The press turns against them; the bond markets turn against them; they get labeled as “irresponsible,” “leftist,” or “undemocratic”; their political opposition receives support from the global powers that
be; they might even find themselves the target of a coup or invasion. Any government that resists the conversion of its social and natural capital into money is pressured and punished. That is what happened in Haiti when Aristide resisted neoliberal policies and was overthrown in a coup in 1991 and again in 2004; it happened in Honduras in 2009; it has happened all over the world, hundreds and hundreds of times. (It failed in Cuba and more recently in Venezuela, which has so far escaped the invasion stage.) Most recently, in October 2010 a coup barely failed in Ecuador as well—Ecuador, the country that repudiated $3.9 billion in 2008 and subsequently restructured it at 35 cents on the dollar. Such is the fate of any nation that resists the debt regime.

Ex-economist John Perkins describes the basic strategy in
Confessions of an Economic Hit Man:
first bribes to rulers, then threats, then a coup, then, if all else fails, an invasion. The goal is to get the country to accept and make payments on loans—to go into debt and stay there. Whether for individuals or nations, the debt often starts out with a megaproject—an airport or road system or skyscraper, a home renovation or college education—that promises great future rewards but actually enriches outside powers and springs the debt trap. In the old days, military power and forced tribute were the instruments of empire; today it is debt. Debt forces nations and individuals to devote their productivity toward money. Individuals compromise their dreams and work at jobs to keep up with their debts. Nations convert subsistence agriculture and local self-sufficiency, which do not generate foreign exchange, into export commodity crops and sweatshop production, which do.
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Haiti has
been in debt since 1825, when it was forced to compensate France for the property (i.e., slaves) lost in the slave revolt of 1804. When will it pay off its debt? Never.
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When will any of the Third World pay off its debt and devote its productivity to its own people? Never. When will most of you pay off your student loans, credit cards, and mortgages? Never.

Nonetheless, whether on the sovereign or personal level, the time of debt repudiation may be closer than we think. The legitimacy of the status quo is wearing thin, and when just a few debtors repudiate their debt, the rest will follow suit. There is even a sound legal basis for repudiation: the principle of odious debt, which says that fraudulently incurred debts are invalid. Nations can dispute debts incurred by dictators who colluded with lenders to enrich themselves and their cronies and built useless megaprojects that didn’t serve the nation. Individuals can dispute consumer and mortgage loans sold them through deceptive lending practices. Perhaps a time is soon coming when we will shake off our burdens.

A final way to redistribute wealth is through inflation. On the face of it, inflation is a covert, partial form of debt annulment because it allows debts to be repaid in currency that is less valuable than it was at the time of the original loan. It is an equalizing force, reducing the value of both money and debt over time. However, matters are not as simple as they might seem. For one thing, inflation is usually accompanied by rising interest rates, both because monetary
authorities raise rates to “combat inflation” and because potential lenders would rather invest in inflation-proof commodities than lend their money at interest below the inflation rate.
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Standard economics says inflation results from an increase in the money supply without a corresponding increase in the supply of goods. How, then, to increase the money supply? In 2008–2009, the Federal Reserve cut interest rates to near zero and vastly increased the monetary base without causing any appreciable inflation. That was because the banks did not increase lending, which puts money in the hands of people and businesses who would spend it. Instead, all of the new money sat as excess bank reserves or sloshed into equities markets; hence the rise in stock prices from March to August 2009.
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It is no wonder, given the lack of creditworthy borrowers and economic growth, that low interest rates have done little to spur lending. Even if the Fed bought every treasury bond on the market, increasing the monetary base tenfold, inflation still might not result. To have inflation, the money must be in the hands of people who will spend it. Is money that no one spends still money? Is money a miser buries in a hole and forgets still money?
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Our Newtonian-Cartesian intuitions see money as a thing; actually, it is a relationship. When it is concentrated in few hands, we become less related, less connected to the things that sustain and enrich life.

The Fed’s bailout programs mostly put money into the hands of
the banks, where it has remained. In times of economic recession, to get money to people who will spend it, it is necessary to bypass the private credit-creation process that says, “Thou shalt have access to money only if you will produce even more of it.” The main way to do that is through fiscal stimulus—that is, government spending. Such spending is indeed potentially inflationary. Why is inflation bad? No one likes to see rising prices, but if incomes are rising just as fast, what harm is done? The harm is done only to people who have savings; those who have debts actually benefit. What ordinary people fear is price inflation without wage inflation. If both prices and wages rise, then inflation is essentially a tax on idle money, redistributing wealth away from the wealthy and counteracting the effects of interest.
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We will return later to this beneficial aspect of inflation when we consider negative-interest money systems.

Standard theory says that government can fund inflationary spending either through taxation or deficit spending. Why would tax-funded spending be inflationary? After all, it just takes money from some people and gives it to others. It is inflationary only if it takes from the rich and gives to the poor—to those who will spend it quickly. By the same token, deficit spending is only inflationary if the money goes to those who will spend it and not, for example, to large banks. In either case, inflation is more a consequence or symptom of wealth redistribution than a means to achieve it.
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Inflation, then, cannot be seen as separate from more basic forms of wealth redistribution. It is no accident that political conservatives, traditionally guardians of the wealthy, are the keenest “deficit hawks.” They oppose deficit spending, which tends to put money in the hands of those who owe, not those who own. Failing that, once deficit spending has already happened, they argue for retrenchment, the raising of interest rates and the repayment of public debts, which is essentially wealth redistribution in reverse. Invoking the specter of inflation, they make their arguments even when there is no sign whatever of actual inflation.