In the 1980s we had the epidemic of AIDS; today its debt. There were lots of speculations or conspiracy theories regarding the origins of the AIDS virus being man-made, but for sure, there are no doubts regarding the current debt being synthetic. It is not just the UK, Ireland, Portugal, Spain, Italy and Greece - the disease of debt has gripped most of the Western world including the US, which is also the largest economy in the world.
With the exception of the US, one may ask, how can a nation fall into debt, when it is not involved in any major wars or experienced natural calamity? It can be put down to one thing, living beyond ones means; the government budget is no different to a household budget, when expenditure exceeds revenue, debt arises, it is as logical as one plus one equals two. The immediate remedy seems to be – borrow and reduce government expenditure which results in the poorer section of society suffering most.
Before the cure, one should at least examine the causes of the debt. The government books should be audited by the public, detailing out the expenditure and revenue, so that one can determine how the debt has arisen. This should be an inherent process, given that Western nations brag about their democratic credentials that state governments are accountable to the masses.
One of the reasons given for the decline in tax revenue is the aging population. They are economically unproductive and place a burden on government expenditure; the more productive younger generation is becoming scarce as people are having less children. This can be attributed to fanatical liberal values replacing traditional family values; women are encouraged to pursue a career before motherhood, and men are encouraged to lead a bachelor’s life of fun or become homosexuals. Marriage and children are viewed as economic liability that constrains the ‘freedom’ of the younger partying generation. A booming economy needs a plentiful labour force that generates wealth and creates the demand for goods and services. Indeed, countries with a steady growing population like India, China, and Brazil are emerging economic powers. Chinese capital is now flooding into Europe; there is talk of China bailing out Greece. It sounds like the East India Company has finally arrived from the East!
Another major factor hitting the government purse is waging wars in distant lands and keeping military bases around the world; such activities are economically unproductive and expensive, especially for countries like the US. Agreed, some of the expenditure of keeping those bases is covered by some of the docile Arab regimes and their like, but still that is not enough to balance the books. As for the wars, there might have been some financial gain in oil-rich Iraq, but for sure barren and oil-less Afghanistan was a loss in terms of the war booty. Hence, the US is cutting back, it is withdrawing gradually from Iraq and Afghanistan, and has taken a backseat over Libya. The expensive space project that is rooted in the cold war conflict, which has cost billions, has been brought to an end. If the masses are suffering at home, why seek aliens?
Apart from an aging population and war, you can add government mismanagement, which the political parties love to debate over and over. However, there is a greater cause for debt: that is the system of credit creation through printing money that is not backed by gold or silver; fiat money functions on the basis of mass conviction, as it has no intrinsic value.
Going back to basics, debt should match actual wealth in society, this is the natural equilibrium. How can anyone lend me money if they do not possess it in the first place? If one party can create wealth simply by printing money or lending actual money backed by gold and silver that it does not own, then one is also creating debt out of thin air, this is an unnatural process and to be frank dishonest. If I had three friends who asked me to keep £1000 pounds of gold for safekeeping for a year, would it be right for me to lend that money to another party with interest without their consent, thereby making myself richer by £3000 without doing any work? This is what the Banks do, its theft legalised. If the society collectively is creating wealth out of nothing, then it is also creating debt out of nothing as that money is lent.
The injustice here is: due to the money lent by the banks which are not theirs in the first place, the debtor has to generate real wealth by employing real effort to repay that loan. The Greeks for example will borrow paper money and then have to graft hard to repay that loan with interest. Of course, they too can print money, but then the money will depreciate in value enhancing the debt problem. Even if the Greeks were loaned that money with zero interest rates, it is still inequitable and a source of instability, because the banks as creditors are not the owner. If the money was lent in the form of real assets, in gold or silver by the real owners, that would limit the scale of loan and the debt; the system would be in equilibrium.
Therefore, when governments know money can be printed by the banks, as if they have Aladdin’s lamp with a genie, the appetite for borrowing increases. In contrast, if the money was intrinsically linked to tangible wealth like gold and silver, it would limit the capacity for borrowing and in turn it would limit the growth of debt; gold and silver cannot be printed unlike money. Hence, debt would not arise, unless there are exceptional circumstances like war or natural calamity. This can be corroborated from history, the Ottoman State as an example had its currency on the basis of gold and silver, and it never went into debt until the very late stages suffering from war, corruption and decay.
Yamin Zakaria (yamin@radicalviews.org)
London, UK
Published on 19th July 2011
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