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Debt Crisis- What Crisis?

A.J. Deus, October 25, 2011
The economic downturn since 2008, the debt crisis and its related austerity measures have prompted unrest across the world. The global economist community stood by the unfolding events, surprised and without clues as to what happened or how to fix it. The current economic herd instinct is driving worldwide governments to cut their expenses in order to fix a debt crisis that bears no relation to the unfolding humanitarian disasters, even in the land of the free. In America, the discussion about debt and deficits takes precedent over an unemployment rate of 9 %, or over 45 million citizens in poverty, or two million morbid obese.
Have we lost sight of what matters?
Granted, American debt is too high. There should be no public debt over and above emergency financing and a basic policy should rest on balanced budgets, or rather balanced results. However, as a measure of GDP, the American debt load today is lower than during the post war years. There is one major difference: In 1945, the interest rate did not sit at 0.25%; in the late 70s, it sat as high as 19%. Quite obviously, the magic debt limit does not sit at some imaginary trillion dollar amount but rather on the interest expense and the repayments that come along with it. In other words, while Carter’s $1 trillion came in at a hefty 190 billion in interest, Obama could refinance the total of the $14 trillion burden at less than 40.
Even the debt of the lame dogs, the Greeks, Italians, Spaniards, Portuguese, Icelanders, British, and Irish are not as astronomical as one might think given the imaginary severity that the laity is presented with. At around 150% of GDP, we can hardly talk of a debt crisis but rather of the need to refinance at favorable terms. Plenty of American companies are leveraged at high debt levels with far greater risks associated to their outstanding liabilities than governments. Homeowners are indebted by multiples of this threshold. How much (respectively how little) is the cash infusion that the Europeans need in order to get their operations back to working? America or China can afford to bail them out, if they cannot internally bandage the issue or when the problem will return, and help restructure the debt and extinguish a lingering crisis that would turn out to be far more expensive.
The true nature of the “sovereign debt crisis” is threefold: firstly, an uncontrolled derivative market that washes under the financial and societal fabric of modern civilizations. As debt (repayments) can always be restructured, it is not the initial debt that threatens banks but the 1000+-fold derivative risks that are attached to them, usually combined with collateral calls when underlying factors change. These complex financial derivatives include interest swaps, credit default swaps, and other “securities” that may or may not be attached to the original asset. Restructuring the debt (or merely downgrading it) triggers massive collateral calls across the financial system with unpredictable consequences. In other words, bailing out mixed banks enables profoundly greedy business practices that have nothing to do with sound or prudent banking but everything with unchecked gambling for the sake of cutting an extra buck.
There must be three emergency conditions before a European debt restructuring can take place:
a) immediately isolate the risks that lie in the casino style derivative speculation by firmly (re-)separating traditional banking from investment banking,
b) by bringing the past, present, and future transactions of the secret pseudo business of derivative speculation into a mandatory electronic market for the public and governments to see, and
c) by limiting derivatives to be directly tied with the underlying asset with limits on the rate of leverage. This is to prevent credit default swaps from continuing to pose systemic risks to the global financial system and to send betting on just about anything to where it belongs: to Las Vegas.
The second part in the nature of the “crisis is that traditional economic theory would have preached that government deficits should be run in downturns and surpluses during times of growth. This fundamental lesson has been lost in tandem with the weakening of the regulatory framework for the financial system during the last thirty years, creating a new generation of greed. Spending and debt all of a sudden no longer mattered all that much, because it, too, could be securitized with casino style bets. It is a fundamental mistake committed by an entire civilization in favor of instant gratification. Thirdly, as a consequence of the second point, individuals have indebted themselves on the promise of ever rising real estate values (fully securitized, of course), creating three decades of living beyond means while disposable incomes were squeezed. Popping the mortgage bubble has led to millions to be maxed out, literally disabling consumers from spending, leading banks to abandon zero down policies and re-introducing healthier equity requirements. It also led to the paradoxical situation where those with sinking disposable incomes ended up bailing those out with ever fattening wallets. As a consequence of all this, millions of potential homeowners are now in a decade long process of either driving down debt or building equity. Meanwhile, an entire class of the home-poor has emerged that is, as Alan Greenspan called it, "replenishing depleted assets."
Certainly, debt matters. However, an acceptable debt level is a function of expected growth. During a period of little or negative growth, our addiction to growth is exposed. While a debt crisis is only a symptom of it, living on the assumption of a perpetual recession is as faulty as the assumption of perpetually rising home prices. The certainties are these: restructuring Europe’s debt is cheaper than a collapse of the global financial system; bailing banks out without putting the real risks into quarantine only postpones and magnifies a collapse.
The debt restructuring is a matter of the imagination for economic technocrats. However, the crisis exposes disturbing weaknesses of the Western socio-economic systems: unable to respond to the unfolding humanitarian disasters by the nouveaux poor within our borders; unable to sustain social services that used to be paid for with other people’s money; a pipe dream of peace; governments in bed with big business; three decades of labor wage stagnation; instant gratification on credit; millions of home owners under water; a higher tax burden than during the Roman Empire; education in limbo; youth unemployment at pre-war levels; internally staged terrorist plots; Wall Street occupied. The list goes on. It is the result of amateurs guiding amateurs in democratic systems that sign off on wish lists, rather than focus on real needs and society’s long-term interests (e.g. our children’s children).
One could always claim that things are not as bad as they seem and, indeed, living in a Western world of recurring crisis is better than living in one with a perpetual disaster of intellectual and economic mass poverty. However, too many are disadvantaged, millions enslaved in low paying jobs that do not provide for a living; 26% are mentally ill in one way or another (the U.S. can take pride in being the leading nation of nut-heads); millions are physically ill; 46 million in America are downright poor; millions are without basic health care; two million are imprisoned; substance abuse is rampant (millions of alcoholics, 100 million smokers, millions that abuse soft and hard drugs, millions that leisurely pop prescription drugs); 2 million are morbid obese; food has become empty of nutrients; oil is still relentlessly gobbled down. This can neither be what the American Dream was about nor what democracy was meant to be. Instead, the debt crisis is the symptom of a world that is being strangulated by financial greed that hovers above the better goals of a society as a whole.
Having said all that: we have become what we have chosen to be, each one of us individually, and combined as nations or civilizations.
Capitalism, for how I wanted to understand it, was a patriarchal system where business and property is privately owned while the patriarchs would be responsible for societal health of the workers and their families. There should be no problem to understand that latter point in a Jewish, Christian, or Muslim context. Capitalism is not anti-social; irresponsible Capitalism is. Responsibility is what has been lost along the way by delegating more and more to a public hypertrophy, and I am not talking about governments but about those that vote for a mirror of their own reckless self to representing them high up in the social picking order. Fixing the problems would otherwise be as easy as that: vote for someone else. Accustomed to the fine smell of our own soup on credit cards, we seem to be unable to imagine how we can fix the mess and come out on top as well. We continue to be excited by Teleprompter speeches that paint over the fact that the speaker is a literal greenhorn in economics let alone in “managing” an economic crisis, rendering him/her dependent on old school advisors with vested interests in the financial system. In a vicious circle, by the time disappointment sets in, the next rounds of motivational but amateurish speakers are uttering their new promises, and academia helps to feed the ignorance. Meanwhile, we keep on waving our flags unaware that the promise of blue is only marginally different from red: one promises to keep the soup a little warmer than the other.
I challenge the community of economists and political scientists to put red-blue political economics aside for a moment and think practical as a business rather than an accountant. The Occupy Wall Street movement will not tell us what they want other than whining about corporate greed and social injustice. They are not going to run for office as the office itself has become anathema. As in the Middle East, the protesters may tell us what they do not want but coming up with a new vision is outside of their intellectual league altogether. However, the latest New York Times/CBS News poll speaks a clear language of the magnitude: almost half the population is disenchanted and almost 90% distrusts government.
As a responsible Capitalist, I have invested my business benefits into almost two decades of research on social economics of poverty. I have come to the conclusion that we need to fundamentally rethink our approach for the seven billion people on board the planet without spilling the baby with the bath. A new approach must lead to responsibility, first and foremost by the citizen, then by the business communities, and last by the representatives of the people who form the “government,” if that word should even fit twenty-first century administrations.
The following are talking points to reclaiming freedom through responsibility:
1) Base politics on fewer core principles:
Without dramatic changes to politics, democracies will go down in history as the single biggest failed experiment in social organization. Do we need to rethink the role that governments should play in 21st century societies? The current political systems in all democracies trample their core principles with contempt. A new vision of politics should prevent commanding entities from forming that are able to impose decisions unacceptable to others. Obviously, less will be “achieved,” but what is achieved will be important enough to find a consensus.
Talking Points:
Rethink government responsibilities to protecting nation, democratic freedoms, human rights and also mega-disaster preparedness; get the noses of governments out of affairs that are not mission critical; delegate responsibilities back to states, industries, businesses, and citizens; restore political pluralism with multiple parties; prohibit political alliances; introduce antitrust splitting of parties that exceed 25% of votes; no lobbying; new or renewed laws only with 2/3 qualified majority; no earmarks; no discretionary spending; no big business subsidies, foster new businesses; introduce voting (for laws) and electing by registered personal communication devices (cell phone); campaigning for public offices with limited, state funded budgets; ban Teleprompters or similar technologies; introduce standard “test” for candidates that are made available for public scrutiny; government builds equity, not debt; no deficit rule, except for emergencies (offset structural austerity measures with temporary stimulus programs); government refinancing is historically cheap, sustain debt and deficit for now to not further harm the economy and jobs; foreign policy in the name of peace and relief missions (listen to Jimmy Carter); put the superpower in the name of poverty relief and nation building (in places where people chose to ask and accept the help and its Western conditions that come along); invest in safety net for food production outside of Western nations for preparedness; invest in global mega-disaster relief infrastructure; de-criminalize prostitution and soft drugs (regulate, control , and use tax feedback for industry related social programs); use alternatives to imprisonment for non-violent offenders; strictly subordinate religious organizations to secular laws and enforcement; eliminate all entry barriers to legal industry and other industries; set overarching framework for self-administered industry regulations (prohibit barriers of entry, mandate minimum labor standards, define environmental care, minimum product liability, etc.); delegate industry frameworks to self-administering associations.
With his veto power the president of the United States could impose changes immediately. Anything that violates core democratic values should be vetoed.

2) Re-introduce strong regulation for the financial industry:
Since its deregulation three decades ago, the financial industry has turned into a greed machine that exploits every conceivable loophole to corner markets for the sake of outdoing its competitors in making an extra buck. In doing so, the financial industry has turned into a casino style laundry machine. It is often run by hyenas and sharks that no longer rely on sound credit practices but instead on Ponzi schemes that involve not only complex financial instruments (derivatives) to leverage debt indefinitely but also rely on the certainty of a paradoxical fail-safe mechanism?the taxpayer. It is the nature of these instruments that a failure cascades through the modern financial system. Banks need to be brought back to responsibility: safe havens for savings and a reliable partner for mortgages. They pay little for savings and take a little more for mortgages that are within the responsible means of the borrower. Speculation and casinos have their own place in investment banking. Investment banks can go bankrupt without threatening the entire global financial system.
Talking Points:
Quarantine financial risks, split savings banks completely from investment banks; introduce electronic market for all past, present and future derivatives; outlaw high speed trading (a modern form of insider trading, only acting faster upon information that others do not yet have, in the worst cases sneaking in before a marginally delayed trade); introduce interest rate spread cap on new and existing loans, mortgages and credit card debt (for example max 4-8%); introduce leverage limitations on mortgages and firm due diligence rules; introduce subsidized savings plans for retirement and housing; integrate the Federal Reserve into a national agency; introduce a stable fixed interest rate regime; rethink a global currency (dry up arbitrage?speculation with currency).
3) The world’s most competitive tax system:
Taxing or not taxing the rich (punishing the successful) and closing corporate tax loopholes are the big discussions. However, they are focusing on details of a complex and corrupt system rather than the bigger picture. Replacing income taxes altogether with a (variable) consumption tax can address multiple issues. A consumption based tax can wean the public off from an addiction to excessive stuff. Consumption is good; irresponsible consumption is not. Shifting from income to a consumption tax comes along with a fundamental decrease in cost of conducting business. Far less money would be spent on tax advisors, accountants, auditors, lawyers, and other scam artists that are busy to minimize tax impacts on corporations and citizens.
Talking Points:
Shift income tax to consumption tax (replacing income tax altogether, not adding to it; this eliminates all loopholes for the rich and corporations and raises the disposable income of the people); exempt basic needs; tax luxury items higher; the average rate at current spending levels would need to be about 20% consumption tax (VAT); include religious organizations for taxation.
4) Jumpstart domestic economy in a long-term restructuring effort:
Three decades of stagnant wages can only mean that the salary backlog needs to be corrected. We may want to accelerate the implementation of a clean industry for the sake of healthier children. Markets do not sort themselves out during times of crises because self-interest and greed have become destructive to the economy as a whole. Citizens need to be given a better future where the individual can get out of debt traps and be able to achieve a higher level of living quality.
Talking Points:
Achieve energy independence; restructure economy and help investments in clean base-load infrastructure, EGS/hydrogen combo (EGS = Enhanced Geothermal System for hydrogen fuel production); use low-load excess capacities in hydro and nuclear energy for hydrogen fuel production; accelerate hydrogen economy through hydrogen investments in public transportation, trains, buses, taxis, etc.; steer clear from political pet projects such as unreliable wind power; create jobs through promoting innovation in small businesses; raise the minimum wage substantially (this will cascade through the economy for higher salaries across the board and trigger inflation, which will adjust debt levels but will slightly increase unemployment); introduce minimum of 3 weeks of paid holidays for starters, minimum of 4 weeks after 5 years employment; propose cost split (this creates 2 million jobs at fictional cost); replace unemployment programs with pay-for-work programs at the level of states and armed forces that can be accelerated or slowed down (deplete some of the excess workforce by manipulating the supply side in order to keep upward pressure on salaries); provide interest free re-education loans.
5) Promote intrinsical values through global trade:
Globalization has led to an increased paradox for advanced societies. Their social fabric is undermined by cheap imports or services with low intrinsical values that violate every achievement over decades, if not centuries.
Talking Points:
Level global playing field of trade; introduce environmental and labor fees for “dirty” imports and products that derive from countries with low labor standards (force “dirty” importers to invest in a cleanup and to improve labor standards, which will drive import inflation and keep manufacturing jobs at home); open up the markets for those that work hard on advancing their living standards and rules of doing business.
6) Introduce universal healthcare:
Healthcare is a contagious topic. Some fear socialization of America, others are outraged that millions of Americans are not covered. In general, health rests on three pillars, food, mobility, and brains. It seems conceivable that the responsibility for healthy foods starts with the producer. Can a system of responsibility be envisioned that rewards healthy living of the individual rather than treating the ill?
Talking Points:
Re-introduce healthy food and reduce empty foods through industry mandate; promote and reward exercise through insurance feedback; introduce system of responsibility where industry pays for its related health costs (ex. professional sports, cigarette, alcohol, car industries, etc.) through private insurers; affordable basic services (at $100/month per family) provided by public, paid for by businesses; move self-inflicted medical needs to extended private health insurers.
7) Introduce environmental insurance:
The writing is on the wall that many businesses choose to go bankrupt over cleaning up their legacy damages to the environment. The logging industry is a particularly notorious example in that respect.
Talking Points:
Mandatory insurance for “dirty” industries for repairing environmental damages. Insurers are regulated private businesses.
8) Introduce an approach to education that is centred on competitive business principles:
The idea of universal education was to provide equal opportunities. The outcome turned out to be a far different concept: universal conformation to mediocrity without society being able to progress to elevated reasoning. Do we have to question the validity of universal education? It seems clear that up until high school, basic education helps to form a literate population. However, a return on investment is not obvious. Can it be that the push to higher education has been driven too far and that it is ultimately responsible for mediocre outcomes and inflation in grading? Should we think of introducing a numerus clausus that reduces rather than expands the participation in higher education and makes it more competitive?
Talking Points:
Introduce musical chair for each successive school year after primary level; government pays upfront for all (including living allowance for re-educating the unemployed); individual with higher income repays with bearable % from income, interest free for restricted time (higher education leads to higher income; under the current system, the poor subsidize the education of their bankers); prohibit teaching of religion to minors in all schools; rethink early childhood education in order to prevent a mediocre education system to expand.
During a table talk with BCC on October 5, 2011, former U.S. President Jimmy Carter responded to a floor question with a truly inspiring note:
“I think that the main thing for the United States is to strive once more to be a genuine super power; and this is a presumptuous thing for me. I am not saying that I know more than others. I am just trying to answer the question as best as I can. The United States now has the greatest military power. Our military budget equals almost the entire budget of all the counties combined on earth; six times more than the second budget as China’s. And I would like to see our country become an entity that mirrored the highest ideals of an individual human being and collectively a nation. I would hope that someday in the future, that if a person or leaders in any country on earth that was faced with a potential conflict, their natural thought would be ‘let’s go to Washington,’ because America is a champion of peace.”[1]
Today, America is viewed as probably the most warlike country in the grip of corporate greed and social injustice. If a former president of the United States can think that way and the American people demand changes with relentless pressure on the streets, then there may indeed be hope for a world that works better for all. A structural change may be painful, not unlike the sacrifices that our fathers and grandfathers had endured for a better life of their offspring. Modern societies need to put their priorities straight and refocus on the interest of the next generations and social justice for the betterment of all. If we do not radically reposition our priorities, change will be forced upon us in most disruptive ways.
October 25, 2011
A.J. Deus
Author of the Great Leap-Fraud – Social Economics of Religious Terrorism

[1] Jimmy Carter, Intelligence Squared Debates with Jon Snow, BBC, October 5 2011.

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