Modern America is by far the wealthiest nation on Earth. We can afford to shut down the economy for a few months and keep meeting our physical needs. But we can’t keep paying our debts, and in our system, the average person is required to be deeply in debt.
Yesterday,
601 Italians died of the Coronavirus. The day before, the death toll was 651,
and the day before that, it was 793. It appears that Italy has pulled off what
China did a month earlier, and reversed the growth of the virus by means of a
very strict shutdown, with all shops closed except for grocery stores and
pharmacies.
Right
now, the United States is in a similar situation to Italy. Our death rate
hasn’t peaked yet, but if we keep doing what Italy’s doing, we can expect the
same overall result.
But
now, Donald Trump is talking about how he wants the shutdown to end after 15
days. Trump can’t end it himself – at least not nationwide, because the
“shutdown” is really a patchwork of emergency measures imposed by states,
cities, and counties – but if enough people followed his lead and lifted said measures,
we could expect the virus to start spreading again just as if a red traffic light
had changed back to green.
Everyone
knows we can’t keep the shutdown going forever, but when it was first imposed,
the idea was to slow down the virus until somebody developed a vaccine or cure,
or until it evolved into a less deadly form, or at least until America’s
hospitals had the resources to properly treat millions of cases so that the
fatality rate would only be one percent instead or two or three percent. A 15-day shutdown,
followed by business as usual, is actually pretty useless.
And
yet with the need for a $6 trillion (!) bailout looming on the horizon, letting
the virus have free reign is looking more and more appealing to the President
and his advisers. The alternative – having to come up with a way to recover from
the loss of a third of our annual GDP – is something that politicians in both parties would much rather not do.
And
yet, it shouldn’t really be a problem if our economic output in 2020 turns out to be only two-thirds of what it was last year. After all, the per-capita GDPs of both Britain
and France are a little less than two-thirds of ours, and those nations aren’t
living in poverty.
But
the problem isn’t that we can’t shut down the economy for a few months and
still meet our needs. It’s that we can't shut it down and still pay our
debts.
Most
Americans are living on the edge of insolvency. They have little savings and
lots of debt. If their paychecks don’t come in each fortnight, they will soon
have no food and no place to live.
Businesses
are the same way. The reason that the government can’t respond to the rent
crunch in the obvious way – by suspending the obligation to pay rent until the
crisis is past – is that landlords usually have to pay the mortgage every
month. Other kinds of businesses also have obligations that aren’t going away.
The
easy thing to do, when looking at a situation like this, is to blame ordinary
Americans. “If they weren’t so lazy and irresponsible,” you could say, “they
wouldn’t be in so much debt.”
But
that isn’t really accurate. Americans in the 1950s and 1960s were much
thriftier than they are today, but most were still in debt. In fact, since
1933, our country’s monetary system has been set up to make it impossible
for the average person to not be in debt.
This
is a fact which even many critics of the present regime fail to grasp. It is
common, in libertarian circles, to hear that the economy is in trouble because our
money is made of paper and backed by nothing. But that isn’t quite true. The economy is in
trouble because our money is backed by debt.
To
get a grasp of the concept of the debt economy, consider the following scenario:
Suppose
that one hundred people are living at peace in a simple, agrarian village. Some
of them are farmers, some are shepherds, some grow grapes and olives, some make
and mend clothing, and so forth. One day, a one-hundred-and-first man arrives
in the village, and introduces the other villagers to the concept of money.
They all decide that they like the idea, and would be happy to give up
bartering and instead have a single resource that can be traded for anything
else. Thus, they agree to make this man their banker, with sole authority to
issue money in their village.
The
newest villager fashions a wood-block press, brews a pot of ink, skins some sheep
to make parchment, and prints 10,000 paper marks. But he doesn’t just give them
away; instead, like any good banker, he lends them out on credit. Each villager
borrows 100 marks at ten percent interest. They begin using them in commerce
with one another, and everyone is pleased with the new invention.
Most
of the villagers feel like it would be a good idea to get out of debt. Some, by
a combination of hard work, skilful trading, and luck, finish the year with
more than 110 marks to their name, and pay off both the principal and the
interest. Most don’t, and they only pay the 10 marks of accrued interest.
Now,
there is a problem in the village: the amount of money that the villagers owe
to the banker is greater than the amount that exists. The whole village can
never pay its way out of debt. Some individuals may win back their freedom, but
only by selling their goods and services to others who remain indebted. If the
majority of the people are lazy, then an individual can get out of debt by
working hard. But if the majority works hard, then hard work alone won’t be
enough; one will also need superior talent or luck. Most people will never
escape.
From
time to time, the banker lends more money to the struggling villagers. This
allows them to get by without the economy grinding to a halt, but it doesn’t bring
them any closer to freedom.
Is
the money that these villagers use worthless, because it is made of paper? Not
at all. In fact, the villagers always want more money than they have, and many
of them, who were once scrupulously honest, have found that they are now
willing to lie and steal in order to get the stuff. After all, even the
villagers who don’t care about living luxuriously still need increasingly large
sums of money just to service their debt.
In
the real world, simple, agrarian societies don’t do this kind of thing. They
use commodity money: gold, silver, wampum, cocoa beans, or some other physical
good that doesn’t have to be borrowed into existence.
That
doesn’t mean that some people won’t choose to borrow money anyway. Indeed, many
societies with commodity money, such as the United States prior to 1933, have
had banks and even central banking. But the ultimate creators of money were
gold and silver miners, not banks, and banks had to pay interest on their specie
reserves as well as collecting interest on their loans. Participation in the
debt economy was optional.
Then,
in 1933, the New Deal government made Federal Reserve notes the only kind of
money that common citizens could legally own, and participation in the debt
economy became mandatory.
In modern America, the Federal Reserve fills the role of the banker in my story. It doesn’t lend to you and me directly (two percent interest rates, after all, are not for the Plebs) but it lends to other banks, and those banks lend to you and me. There is always more debt in the economy than there is money, and most people, just like most businesses, will never pay off their debts.
We Americans don’t really need to consume nearly as many resources as we are used to consuming. Temporary losing the ability to produce most goods and services won’t hurt us. But our economy isn’t based on goods and services, it’s based on debt, and losing the ability to pay our debts is quite a different matter.
