From the 1994 book by John Ralston Saul called The Doubter's Companion. (Re-presented by Jonathan Schwarz in Money's Not Real.)
DEBT, UNSUSTAINABLE LEVELS OF
National debts are treated today as if they were unforgiving gods with the power to control, alter and if necessary destroy a country. This financial trap is usually presented as if it were peculiar to our time, as well as being a profound comment on the profligate habits of the population. The reality may be less disturbing.
1. The building up of unsustainable debt loads is a commonplace in history. There are several standard means of resolving the problem: execute the lenders, exile them, default outright or simply renegotiate to achieve partial default and low interest rates.
2. There is no example of a nation become rich by paying its debts.
3. There are dozens of examples of nations becoming rich by defaulting or renegotiating. This begins formally in the sixth century BC with Solon taking power in debt-crippled Athens. His organization of general default – “the shaking off of the burdens” – set the city-state on its road to democracy and prosperity. The Athens which is still remembered as the central inspiration of WESTERN CIVILIZATION was the direct product of a national default. One way or another most Western countries, including the United States, have done the same thing at some point. Most national defaults lead to sustained periods of prosperity.
4. The non-payment of debts carried no moral weight. The only moral standards recognized in Western society as being relevant to lending are those which identify profit made from loans as a sin. Loans themselves are mere contracts and therefore cannot carry moral value.
5. As all businessmen know, contracts are to be respected whenever possible. When not possible, regulations exist to aid default or renegotiation. Businessmen regularly do both and happily walk away.
The collapse of the Reichmann financial empire – larger than most countries – is a recent example. The family was able to turn around, walk away and almost immediately begin a new life, promoting the biggest property development in the history of Mexico.
6. There are no general regulations dealing with the financial problems of nations simply because they are themselves the regulatory authority. There is however well-established historical precedent. Mexico effectively defaulted in 1982-83, thus regenerating its economy. The reaction of Western lenders has been to treat these crises as special cases. The sort of thing that only happens to Third World countries. That’s nonsense.
7. The one major difference between private and public debt is that the public sore cannot be based upon real collateral. This makes default a more natural solution to unviable situations.
The question of national collateral was fully addressed in the eighteenth century when it became clear that an indebted people could not owe their national rights (their land and property) to a lender. The citizen’s natural and concrete rights took precedence over the lender’s abstract rights.
One of the most peculiar and insidious aspects of twentieth-century CORPORATISM has been an attempt to reverse this precedence. The managerial imperative suggests that national debts can be indirectly collateralized in several ways. Governments can be forced to sell national property to pay debts (PRIVATIZATION). They can also be pressed to transfer ownership of national property to lenders, as has been done in the Third World.
There is also the threat that defaulting nations will be treated as international pariahs. This is a strange argument since it doesn’t apply in the private sector (see 5). It is also an idle threat, as Mexico has demonstrated (see 6).
8. Debts – both public and private – become unsustainable when the borrower’s cash flow no longer handily carries the interest payments. Once a national economy has lost that rate of cash flow, it is unlikely to get it back. The weight of the debt on the economy makes it impossible.
9. A nation cannot make debts sustainable by cutting costs. Cuts may produce marginal savings, but savings are not cash flow. This is another example of the alchemist’s temptation.
Mrs. Thatcher spent a decade trying to slash the British national debt. She had the advantage of being able to use North Sea oil income for this purpose. The result was a damaged industrial sector, economic stagnation and endemic unemployment.
The payment of debts is a negative process which can only be a drain on investment and growth. The more successful major repayment programs are, the more the economy will be damaged.
10. Strong nations weaken their own economies by forcing weaker ones to maintain unsustainable debt-levels. For example, in spite of enormous efforts on all sides, the Third World debt has continued to grow. In 1993 it was $1.6 trillion. This costs them far more in interest payments sent to the West than the West sends in aid. The practical effect is to make economic growth impossible. The Third World thus constitutes a dead weight in our ongoing DEPRESSION; a barrier to renewed cash flow
11. Civilizations which become obsessed by sustaining unsustainable debt-loads have forgotten the basic nature of money. Money is not real. It is a conscious agreement on measuring abstract value. Unhealthy societies often become mesmerized by money and treat it as if it were something concrete. The effect is to destroy the currency’s practical value.
12. An obsession with such false realities and with debt repayment indicates a liner, narrow managerial approach to economics. The management of an economy is the profession of finance-department technocrats, economists and bankers. Their approach is quite naturally one of continuity. This is a means of denying failure.
To treat money or debt as a contractual matter – therefore open to non-payment or to renegotiation – would mean treating the managerial profession as of secondary importance and unrelated to fundamental truths. What sensible people might see as originality or practicality, fiancnial expers see as a threat to their professional self-pride.
13. Does all of this mean that governments should default on their national debt? Not exactly.
What it does mean is that we are imprisoned in a linear and managerial approach which denies reality, to say nothing of experience. Money is first a matter of imagination and second of fixed agreements on the willing suspension of disbelief.
In other words, it is possible to approach the debt problem in quite different ways.
14. There have been changes which limit our actions in comparison to those of Solon or Henry IV, who negotiated his way out of an impossible debt situation in the early seventeenth century and re-established prosperity. First we have to recognize and protect the investment made by citizens directly (government bonds) and indirectly (bank deposits) in the financing of national debts. Second, there is the new and unregulated complexity of the international MONEY MARKETS, which now constitutes an important corporatist element.
15. Our central problem is one of approach. For two decades governments have been instructing economists and finance officials to come up with ways in which the debt can be paid down and interest payments maintained.
No one has instructed them to propose methods for not paying the debt and not maintaining interest payments. No one has asked them to use their creativity in place of a priori logic.
16. Were the members of the Group of Seven (G7) each to pool their economists and give them a month to come up with modern versions of default, we might be surprised by the ease with which practical proposals would appear.
17. There are two simple guiding points:
A. The appearance of continuity is easily achieved in default scenarios through paper mechanisms which can be categorized as “debt retirement.”
B. What is difficult for a single country in contemporary circumstances is easy for a group, particularly if that group speak for the developed world. See: ETHICS.
