Costless, Limitless, Meaningless Money, Part I
Once-upon-a-time, a debt default wasn't known as "forgiveness"...
The FINANCIAL TIMES took two days to catch on. Monday's edition of the FT was printed too early to catch it; Tuesday's looked way off the mark by the time it came out.
But Richard Nixon had cut the US Dollar's link to gold - and thus everything else's link to gold too - on Sunday evening, Washington time, 15th August 1971...just like the Pink 'Un had failed to forecast. More than 40 years later, the rest of the world is still only now catching on.
"Without a limit on the quantity of cash, you've obviously got no limit on the quantity of debt," as BullionVault told the BBC on the fortieth anniversary. "And so since 1971 we've seen a succession of ever-bigger credit bubbles...
"The secondary banking crisis in the UK in the mid-1970s, the Less Developed Countries crisis in the early '80s, through to the Savings & Loan crisis in the United States, all the way through to the subprime and then the banking crisis. And they get ever bigger because there's an ever greater quantity of debt which somehow has to be met."
Oh sure, other things were also afoot - the end of "the fixed exchange rate systems, reduced capital controls in rich countries, and the beginning of 20 years of regulatory easing," as academic economists remind us. But Nixon's decision, while making official what had already happened, confirmed that money now had no peg, no controls. It slipped anchor, and began floating freely in both value and quantity. For homo significans - the upright ape that invests things with meaning - that matters. A lot.
The Greeks invented democracy, the Olympics, metaphysics and tragedy. Those last two might have come thanks to the fact they also invented money, which itself might prove just as important as it is ironic today. But we'll get back to that. Because Debt: The First 5,000 Years by anarcho-anthropologist David Graeber is clearly important. Wrong, but important. If you have any interest in money (and trust me; whether you earn it, owe it or think you own it, you do) then it's worth the cover price. Because it at least puts the money back into history, front and center. Along with debt. You can't separate the two, says Graeber. Which brings us bang up to date.
"The key to averting or curtailing a second Great Depression is to reduce the levels of private debt, through a unilateral write-off, or jubilee. The irresponsible loans the banks made should not be honoured."
So says Guardian columnist and environmental journalist George Monbiot. He is in fact quoting Steve Keen, associate professor of economics & finance at the University of Western Sydney - and "one of the few economists," according to Monbiot, "to predict the financial crisis." In our house, you can't get out of bed without tripping over one of those (even the cat saw it coming); Keen himself notes on his blog that "contrarians" including Doug Noland at PrudentBear and Eric Janszen at iTulip had "a handle on what has happened...for a decade or more railing against the stupidity of Wall Street and accommodative central banks." But let's cut Monbiot some slack, just this once. He is trying to destroy capitalism as we know it, after all. Time was, he would have needed all the help he could get. But now he's got it in spades.
"Start with student loans," says The Atlantic magazine - "one concrete answer...to the anguish of the 99%."
In fact, we need "ways to forgive the excesses of mortgage, installment and revolving credit," says Morgan Stanley's Stephen Roach, "as was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later."
Ending the deleveraging has got to end the pain of deleveraging, right? "It seems to me that we are long overdue for some kind of Biblical-style Jubilee: one that would affect both international and consumer debt," writes former Yale associate professor Graeber, self-professed anarchist, anti-globalization activist, and currently reader in anthropology at Goldsmiths, University of London. According to Bloomberg, Graeber's on-the-ground planning kicked August's Zuccotti Park protests into what's since become Occupy Wall Street. And even though the 99% don't need leaders (judging from the empty campsite outside St.Paul's Cathedral in London at 9.00am yesterday, they don't need to hang around to feel they're making their point either), his book Debt, published this summer, offers them a deep, intellectually rigorous, historical underpinning, too.
Like I said, it's important.
"You gotta have a jubilee, 'cause the principle in the mortgage is too high, not that interest rates are too high," says one of a million forum comments, this one at Matthew Yglesias' ThinkProgress. "The banks have been pretty good in the political arena at preventing or minimizing debt forgiveness policies."
Not good enough, however, to escape a 60% write-down - or worse - on Greek government bonds. This week's Eurozone summit proposed "voluntary" debt forgiveness by private bondholders. The fact that the banks are being told - and not asked - to like it or lump sets the tone nicely. Once-upon-a-time it would have marked a "credit event", otherwise known as a default, and a long way from "forgiveness" or "Jubilee" by any measure. Fitch Ratings says it will be precisely that. Yet the Greek debt decision was still a non-event for bond insurance holders. Because the body which decides whether credit-default swaps (CDS) pay up or not - the International Swaps and Derivatives Association (ISDA) - said so.
No credit event, no CDS payments, and no scramble to find out who's carrying the can. The bondholding banks are, of course - including the very same banks that might need state-aid to recapitalize their balance-sheets to meet new Eurozone standards, too! Quite whose money the banks in fact represent, no one seems too concerned just yet. For now, "This is not a pipe," as René Magritte wrote beneath his 1929 picture of a pipe. You just try smoking it. "This is [similarly] not a credit event," as hedge-fund manager David Einhorn, quoting the Belgian surrealist, predicted of Eurozone default back in July.
"Just try to collect on your credit default swaps."