We don’t live in a capitalist society any more. In fact, we haven’t for a good few years. We live in an age of debt. This is the age of debtism.
The casual observer might hope the current economic malaise is just a temporary blip. After all, the basic capitalist mechanisms are still in place. A closer look, however, will reveal that they are functioning differently and that the rules of engagement have changed.
Essentially, capital has been replaced by debt as the Western economies’ pre-eminent driving force. Indeed, thanks to quantitative easing (QE), debt’s 30-year rise to pre-eminence over capital is now enshrined in government policy across much of the developed world. Anyone with cash savings, take note!
In a healthy capitalist economy, capital, labour, technology and innovative ideas are widely distributed to provide for vibrant competition over the trade in products and services. Now, we have a small group of major players – banks, mainly – which have consolidated their immensely dominant economic and political power over capital through the financialisation of society.
Debt has superseded capital because financialisation has superseded production, a process facilitated by a neo-liberal ideology and the abject timidity and collusion of governments and regulators. This is a new economic age. I call it debtism.
An Englishman’s home…
What this all means is that we, the general populace, increasingly resemble an army of debt slaves – or ‘debt fodder’. Deregulation of financial services, started by Ronald Reagan and Margaret Thatcher in the early eighties, has made it much easier for individuals to get unsecured loans and release the equity in their homes. This has helped create the illusion of a property-owning democracy when, in truth, the deal is you own a small piece of property and an awful lot of debt.
The equity-release binge has also created the illusion of growth and prosperity by increasing the overall demand for property – which, in turn, increases the value of property and, therefore, fuels further equity release. With interest rates on a secular, downward trend, property has been the popular target for DIY investors over the last 30 years – and spawned a plethora of property lifestyle gurus. Mortgage porn was all the rage.
Indebtedness in the UK, as in the US, is at historically high levels and has fuelled high property prices that are unaffordable to an increasing proportion of the population. In the process, we are speculating the biggest amount of equity most of us will ever have on the vagaries of a market, tying it up in a static asset rather than investing it in something productive. Production has been put at a comparative disadvantage, further increasing our reliance on property values as an economic motor.
Provided overall asset values keep rising, then the debt binge is self-sustaining. However, once the inevitable happens and the debt ceiling is reached, asset values come under pressure. Given the high (though falling) ‘home-ownership’ levels in the UK, and that loan-to-value ratios are so tight for so many people, the property market’s critical importance to the UK’s real economy is plain to see.
In 2007, it was estimated that UK house prices were overvalued on average by around a third. QE helps to maintain property values as expressed in cash terms through increased liquidity (there’s more money about) while, at the same time, it invisibly reduces their actual value through currency devaluation. The UK government is obviously hoping this combo with avoid a crash both in the property market and in their own political support.
But the current implementation of QE comes with costs because not only is it grossly unfair and boosts the financial sector at the expense of the real economy, but it is also storing up inflationary pressures. The risks of a full property market correction are rising, with the nightmare scenario being that asset values will collapse while the debts remain unchanged.
QE has made us more dependent on the forces of financialisation than ever before. For instance, the popular solution to weak, debt-curtailed consumer spending is to offer yet more debt – except that, today, only the state is able to facilitate this. So, for instance, the UK’s debtist-in-chief, chancellor George Osborne, is using taxpayers’ money to stimulate the housing market through the Help to Buy scheme. This has been roundly condemned by a wide range of economists as the fuel for just another housing bubble, which many believe he’s stoking merely to buy a Conservative majority at the next election. What happens after 2015 is anyone’s guess.
But so dependant are Western nations on the banks – the UK and US, in particular – that they have been effectively given carte blanche to do whatever they want. The result is a society characterised by an economic apartheid, in which the ranks of debt fodder (that’s most of us) are at the mercy of a small cabal of fabulously rich creditors.
Having mortgaged ourselves senseless for years, the ranks of debt fodder are saddled with comparatively high interest rates, while the creditors sit back and, like parasites sucking the blood from the host, watch their revenues pour in. This apartheid has been made more stark by the billions of QE pounds, dollars and euros given them by the Bank of England, the Federal Reserve and the European Central Bank – all virtually interest free – to do with as they wish.
And that’s exactly what they do: in this age of debtism, it makes more sense to use that money – when it’s not paid as bonuses – to inflate bond and equity bubbles, as well as attempt to spread the net of debt-dependancy further across the globe. Investing in the real economy pales by comparison. Whichever economist first coined the phrase “trickle-down effect” should be repeatedly slapped with a wet kipper until they are truly sorry.
The creditors act with impunity knowing they will never have to pick up the tab for their mistakes, financially or politically. They can be as corrupt and fraudulent as they like but, regardless of the economies, jobs and lives their actions destroy, they will be indemnified by the debt fodder via their tax bills. They don’t have to worry about criminal charges, prison, regulation or, indeed, having to account for their actions in any meaningful sense. Their bets are risk-free. So, despite the lessons of the 2007 crash, it’s still business as usual.
The ranks of debt fodder, meanwhile, carry all the risks and costs, including lost or falling real-terms earnings as the real economy withers, while the price of food, fuel, water, healthcare, transport and other services rise – and that’s on top of the QE-inspired currency devaluation and the bankers’ tax premium. Stray from your role as debt fodderee and you’ll face the full force of the law.
If you’ve not risen to the dizzy heights of debt fodderdom, then you’ll have your welfare benefits and services cut, and consigned to a life of grinding poverty and hunger.
Our current political elites justify this through the promotion of debtist perspectives – or ‘infinitely optimistic unrealities’ (IOU), as I like to call them. George Osborne’s IOU tells us that we must fight ‘benefit scroungers’. George more than implies that disabled people, the long-term unemployed and the underemployed who live in areas without jobs will, once freed from the yoke of state support, suddenly thrive and become prosperous.
The evidence suggests the opposite, of course, but that’s what IOUs are all about: they are just a sop to keep the debt fodderati quiet. Any resemblance his IOUs have to reality is purely coincidental. This is how hopelessly indebted the Coalition government is to the culture of financialisation.
The consequence of this is that while the real economy – the bit that still counts as capitalist – fights for the scraps and bumps along with little sign of recovery, the financial elite can ring-fence their lives from the rest of us as it extracts the life-force from its host. This relationship between the unaccountable, beyond-the-law creditors and the quietly resentful mass of debt fodder is the very definition of debtism.
Illusion of free trade
It’s ironic that the people who have espoused capitalism the most – Reagan and Thatcher, and their ‘free enterprise’ successors – are the ones who are primarily responsible for its demise. For ‘capitalism’ in this context, read ‘neo-liberalism’. In many ways, debtism is the logical outcome of the neo-liberal agenda, as defined by the likes of Milton Friedman.
The problem with neo-liberalism is it doesn’t bear any relation to the reality of a capitalist economy. Fundamentally, it completely fails to grasp the human behaviour and motivation of the actors and, therefore, the function and operation of markets, of buying and selling patterns, or the efficacy of governments or laws.
Value isn’t the result of naturally-occurring mathematical principles derived from supply and demand. Indeed, perhaps Friedman’s greatest intellectual crime is that he completely fails to recognise the social dimension of value – or, indeed, that of the entire business enterprise – at all.
That’s why his perspective cannot comprehend how a company’s pursuit of profit to the exclusion of everything else can be so destructive, both for the company itself and the wider economy. Our continuing failure to address climate change, despite the ranks of corporate social responsibility professionals pushing the sustainability agenda, is a case in point. How can brand value survive when it’s dependant on exhausting finite levels of natural capital?
The fact, also, is that the neoliberal model of government is a weak one, and is unable to prevent the winners in the capitalist bargain from loading the dice in their favour – and, by doing so, preventing new, vibrant competitors from emerging. Indeed, those on the Conservative political spectrum generally like to leave big business to its own devices, oblivious to the fact that doing so is ultimately anti-capitalist.
These Conservatives should, in fact, be the ones manning the barricades at G8 protests as they have proved themselves far more effective than any anarchist movement at destroying the economic fabric of capitalism.
Friedman’s perspective still shapes the views of many in business and politics. Despite overwhelming evidence that the whole theory is a load of intellectual tosh, neo-liberal ideas have shown admirable resilience, ensuring we are fed a diet of pseudo-capitalist fantasies – more IOUs – to justify how the world works … or doesn’t.
Age of debtism
So, for the record, here are a few truths about life in the age of debtism:
Free markets don’t exist: Shorn of their price discovery function, markets are merely exchange forums in which the cost of goods and interest rates are fixed or manipulated by one or more governments, banks and other financial institutions. Markets have been captured by and are the pawns of powerful interests which use them, to a greater or lesser degree, to extract wealth from the majority under the cloak of free exchange.
Competition is not free or fair: Thanks to favourable tax and regulatory regimes for large corporations, along with corporate welfare, unbalanced or inadequate access to legal redress and manipulated and/or fixed markets, individuals and smaller enterprises face an ever tougher struggle to gain a sustainable foothold in today’s economy. What this means is that the vast majority of us in the real world will see little or no improvement in our standard of living. The already-low levels of social mobility in the US and UK will continue falling as a result.
A minimal state is a powerless state: The neo-liberal agenda completely underestimates the value of sound government in a mixed economy. The state can do many things much better and more cost-effectively than the private sector, but the ideology tells us differently. The Coalition government has pruned state services, selling them off where possible, even though doing so increases the eventual cost to the taxpayer. Corporations are so large and powerful, spanning many continents, that the minimal state is simply not strong enough to withstand the barrage of the corporate IOU.
QE is a treadmill that the West cannot easily step off without precipitating another crash. And the longer its current implementation continues, the starker the economic apartheid will become. Feeding such vast quantities of new money – debts that the central banks are unlikely to ever be able to repay – through the banks that brought us the crisis in the first place is making the West’s economic system highly unstable.
But even without another crash, or a property value crisis, debtism could unite unlikely friends in common interest. They just don’t necessarily know it yet. Those at the bottom of the pile, those who have been reliant on welfare support and have nowhere else to go now their benefits have been cut, are undoubtedly feeling very angry and resentful at the way they have been cut adrift.
As will those people with cash savings, including those who have saved all their working lives via a pension scheme – people who have accumulated capital, in other words – are seeing the value of their assets cut by the states’ preoccupation with paying the costs of financialisation.
However, another characteristic of debtism is how lots of people will be blamed for the mess we’re in – except, of course, for the real culprits. We can hope that, one day, the various, disillusioned groups of debt fodderati will unite in pressing for change. If this happens, it could easily spark levels of social unrest not seen for generations. Until that day arrives, we will always be in the banksters’ debt. Welcome to debtism.