Debt Primacy

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As the European situation looks ever the worse for wear—and it is official—Spain is going the way of Greece with no prospects for any turn around on the horizon…

And US GDP stalls and falls backward from even very modest goals…

The prospect of more debt buying by the Federal Reserve--known as quantitative easing--is enough to make world’s stock markets go higher.

And that is where we are today.

But where, exactly, are we today?

From market capitalism to welfare state

We are in a place that values debt over economic productivity, and that‘s a strange place indeed. There is, of course, good reason for this debt primacy in the economy and that reason is simple: productivity has taken a back seat to the welfare state.

I know that it sounds just a bit like bumper sticker logic, but in essence, it is true. The shift between market capitalism (both at the individual and big corporate levels) and state-sponsored welfare has been a long time in coming; we saw it’s first breath of life in FDR’s administration, if not in Woodrow Wilson’s.

And true, the shift took a long time to take place; but today we see that shift in its final stages.

What do I mean by this?

Typically, when debt is created, there is also a means or structure set up by which it is repaid over time. This has been true for individuals, small businesses, large corporations, municipalities, and national governments.

In the past, the carrying of debt was made possible--and managed--by the productivity levels of the borrower. So as a business owner, for example, for every dollar of debt I take on, I know that my return on investment will be one dollar plus X, where X is large enough to cover not only all my expenses, but also the debt service, too. That way, I can pay the debt off over time.

But at the federal level, this is no longer the case. Federal debt is no longer based upon simple productivity, but rather, by global primacy in a system created by and for the US dollar. But I’m not just talking about global economic primacy, which the US still has, but also, global military primacy and control over the global financial system. The fact is, the US can only continue to borrow money, create it out of nothing, and fund its growing welfare state as long as it is the dominant global leader on all fronts.

The audacity of this is stunning. You see, the welfare state now not only feeds and cares for more Americans than ever before…

But it also feeds and cares for more corporations and banks than ever before.

That’s right; individual responsibility, productivity and economic viability—the pillars of the American economy for two centuries—have been replaced with the idea of “too big to fail.” Banks, giant, multi-national firms, and even the consumer economy were deemed too big to fail, but fail they have. But no worries; the welfare state will step in to save them. It’s the same thing with the American consumer. Corporate and consumer consumption have replaced productivity in the US, and that consumption is fueled by ever more debt.

Old economic rules no longer apply

About 100 years ago, a German sociologist named Max Weber described the success of capitalism as being a product of “the Protestant work ethic.” This included values such as thrift, deferred gratification, and individual responsibility. Those values have long since been replaced with others, such social justice, social responsibility, and the rise of the welfare state.

The welfare state has since trumped all rules of economics because its existence is not based in economics as you and I understand them, but on power. In the case of the US, that power includes the power to create and carry vast sums of debt without any regard to our ability to repay it and without international consequences.

In fact, international reaction is quite the opposite. Stock markets around the world react favorably—as they did yesterday—at the idea of more Federal Reserve money being injected into the economy. Think about that; trillions of new debt is created, the markets rise, and no one is worried about where the debt came from, or how it will ever be repaid.

Why not?

Because, as I noted above, the old economic rules no longer apply. The primacy of the US dollar is a function of the primacy of American global power. That power includes the lack of a serious global competitor…so far.

Ah, but what about China?

Many view China’s holding of so much US debt (which drops in value every day) as a sign of its strength; but in reality, it is a sign of China’s weak domestic economy and reliance upon foreign markets and foreign investment.

This will remain the case until China can develop its domestic market--if it can--and enforce its will upon the global stage much more than it is able to today. In the meantime, US domination will continue, and its welfare state will continue on…until it can’t.

And those are…The Gorrie Details.

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