What’s Wrong with the World

Free markets do not hate debt: they love, cherish and carefully cultivate it.

Well said, Paul, and absolutely true.

BS and strawmanning.

As I said in a differnt thread, "intellectual" Catholics tend to be either libertarians (insane) or socialists (even more insane).

Keynesianism is not free-market capitalism. And your "communitarianism," or whatever you want to call it, is just socialism, but with the bishops taking a shot at calling the shots (while, no doubt, carefully avoiding responsibility for the inevitable mess).

Ilion, it would behoove you, in preparation for setting down these dismissals and denunciations, to get your facts right. For instance the fact that I am neither a Catholic nor a Keynesian.

I don't see that debt is inherently a bad thing or that hatred of it is necessarily a virtue. Whether on the personal or national level, if it's kept within affordable limits and the means of steadily paying it off with interest are reasonably dependable, then debt helps to expand and lubricate an economy. (A man will refuse to love his mortgage; but having one can be a 'good thing' if it keeps house and home together.)

But these homespun reflections on debt don't even begin to address the global economic problems created by governments which have been borrowing on the monstrous scale that Paul alludes to. Principled hatred of this ocean of debt on which, apparently, we shall have to float indefinitely, is no doubt very creditable - if the principles involved are adequately understood.

I must admit that my paltry understanding of them won't do.

Did I say you were either?

However, you purposely conflating Keynesianism for free-market capitalism and then using that false equivalence to fault free-market capitalism.

Ilion, maybe the way to look at it is by understanding that capitalists love debt, crave debt, and need debt, and that it is always capitalists who make the rules in a capitalist society. Let me repeat: it is capitalists, and not free market economists, who make the rules in a capitalist society.

Did I say you were either?

If you did not, who are these nefarious "intellectual Catholics" you referred to in your first comment, and why did you refer to them if the author whose post you are commenting on is not among them?

Keynesian features are part of the Capitalism we've got, Ilion. Comparing what we've got to an abstract ideal (say, of a Kayenes-free Capitalism), which by definition is something we can only have in our minds, may be a useful exercise, but it is not the one I have undertaken here.

Jeff's point, by way of gloss on mine, is well taken. I'd add that, in our environment, when free market economists persuade policymakers to emancipate capitalists to do as the please more freely, they will perforce give fuller rein to the empire of debt. Thus we observe again the tension I spoke of.

Paul, the Skidelsky piece I posted the link for the other day was titled "The Emancipation of Avarice." It's becoming ever more clear to me that this emancipation of which Skidelsky speaks is linked to another one, that of usury, although I'm not sure precisely how or in what way. This would obviously have some connection to the "love" of debt, would it not?

Keynesian features are part of the Capitalism we've got, Ilion.

I took that to be what Ilion was cueing to. As so often, Paul, I've seen it again and again--You define "the capitalism we've got" as this huge amalgam including all manner of things that include outright Keynesian market-boosting-by-boosting-spending (for example).

I don't recall if it was you or someone else who in a thread a while back even referred to vast government welfare programs as somehow part of capitalism because capitalism (as he chose to define it) "needs" them to take care of the supposed casualties of capitalist practices. So now, suddenly, on that view, "capitalism" very nearly includes "socialism"!

All of which is, at a minimum, a bit odd.

But my basic reaction to your overall post is, "Oh, well, yeah, we're in a mess, economically." And the government has certainly "enabled" that mess. That some financiers have been happy for them to do so does not mean that I have to approve.

The thing is, I don't quite understand why a contemporary advocate of the free market should submit to being chivvied into defending "the system we've got" which is this gigantic hybrid that includes so many elements that such an advocate deplores--not only mass debt but also massive government regulation stifling small businesses, bailouts, and a whole lot more. Why do that? Why agree to do that? Why agree to be cast in that role? It makes a lot more sense to me to shrug one's shoulders and say, "Yes, this system taken as a whole isn't something I'm in favor of, and I'm not going to be said to be in favor of it just because someone else has chosen to slap the label 'capitalism' on it."

Another example of what seems to me this same sort of chivvying attempt goes like this: "Free markets are bad because, when businesses get bigger, they influence government to impose more regulations, which regulations stifle their competitors in the form of small businesses." Well, for crying out loud in a hayfield! That sort of regulation is what the free market advocate is going to be complaining about and deploring, not defending. He's going to say that when that happens, to just that extent free market principles have been violated, not affirmed! To treat entrepreneur-stifling government regulation as somehow "part of capitalism" and therefore as something "wrong with capitalism" because big businesses sometimes do this is, in my opinion, simply a perverse use of terminology.

Oh, one more thing, Paul: We went round the barn about this "pricing mechanism" claim once before, though I don't have time to look it up. At the time I issued the following challenge: Could we not reduce the national debt to something minuscule and then keep it there, never growing, while still using government securities as a pricing mechanism? As I recall, you agreed that we probably could. Which rather puts a spoke in the wheel of the argument that we have to maintain the "system we have" with anything remotely like its massive debt or else the whole world is going to crash and burn for want of a pricing mechanism.

Much of the development, under careful study, discloses an accidental nature. The building blocks of our Capitalism were haphazard. The evidence of an overarching design is minimal. Or rather (because the globetrotting financier and master of the universe will always affect to have designed his success) the evidence of efficacious design is minimal.

There was a famous episode of the science fiction radio theater, X Minus One, entitled, The Tunnel Under the World, which is a story about a man who wakes up, every day, to discover the day repeating, but only one other person is aware of it. It turns out that everyone in their town was killed in an atomic explosion, but their essences were put into synthetic bodies and wiped every night so that a large coorperation could test new methods of advertising on the unaware population.

It would be very interesting if we could run a similar simulation involving Capitalism. If we could run the experiment over and over starting from some convenient point in time, would it always converge on the system we have today, or would it evolve in different directions depending upon internal or external influences? In other words, how sensitive to initial conditions is Capitalism? How easily can it be changed? Recent studies on the psychology of mass movements indicate that as long as there is independence within the group, the group tends to converge to the optimal value, but if there is a herd effect, the group tends to suboptimal values. Going with the previous post on self-reliance, it seems that current Capitalism has become suboptimal because of a band-wagoning of the fixed-income securities driving everyone to participate. The situation could be changed if enough people were willing to break away from using them, but I think it is the path of least resistance.

By the way, if this psychological observation is correct, then things like Facebook, are not in our best interest. It tends to consolidate the Internet around a herd, instead of being the Wild West it started out to be.

The Chicken

Paul,

You may have already done this in one of your previous articles, but could you provide a source for this claim:

"(2) Fix-income securities have steadily gained in dominance, prestige and complexity over the past few decades alongside American economic dominance. As a very knowledgeable friend pointedly told me: “The public stock markets are where the smarter guys dump their garbage when they’re done with it.” It’s the various debt and derivatives markets where most of the action is."

I'm particularly interested in what you mean by "dominance". For example, 30 years ago 25% of all wealth was in equities and 5% was in fixed income securities and now the percentages are 15% and 15%.

It seems to me, Paul, that it would be more useful for you to tell us what you favor and then see what various people think about that than to try to define "capitalism" in this strange way to include whatever happen to be the present features of the American economic system (including all sorts of features that free market advocates loudly and insistently deplore) and then to try in some undefined fashion to make me (as both an opponent of debt and a defender of the free market) uncomfortable in some way. It certainly _doesn't_ make me uncomfortable in the way you seem to be aiming for. And it doesn't make me slap my forehead and say, "By golly! You're right! If I oppose debt I must really be a social democrat," or whatever other...surprising conclusion I'm supposed to draw. So why bother? Why not just say what _you_ think ought to be done about national, private, and/or other debt and go from there?

Paul,

Just curious what your position on the US debt limit is. Should the Congress raise the limit?

"Why not just say what _you_ think ought to be done about national, private, and/or other debt and go from there?"

Yeah, and perhaps we should distinguish between the "vanilla" sort of debt, without which economic systems would be reduced to barter and nations to impossibility and the casino-like accretions whose purpose is mostly to unjustly enrich the financial sector.

"Should the Congress raise the limit?"

As opposed to defaulting on our obligations?

It is inherently problematic to talk simultaneously of free market advocacy and of hatred of debt.

The problem is I don't believe the expression "hatred of debt" is a virtue without a surrounding set of fairly radical beliefs such as the Amish have. For the rest, replace it with "hatred of excessive debt" and then you have something. There isn't anything wrong with debt within limits. I used to have the idea that there was a problem with debt, but then I got over my fundamentalist phase and now use it wisely, as did my parents, as did their parents. I am glad I did.

Likewise, this statement:

Free markets do not hate debt: they love, cherish and carefully cultivate it.

This is true, but as I said, there is a huge problem with the underlying expression "hatred of debt." Now do we have a problem with excessive debt? Sure, and I also have a far more stinging criticism than most for those who thinks we can buy our way out of a recession, which I take to be a natural and healthy phenomenon. Thinking you can buy your way out of such things is a recipe of disaster, and we're headed there. But that doesn't mean debt can't be used wisely, shouldn't be, and hasn't been for a long time. There is no one here that has not used debt to their advantage, and most probably wisely, so I don't understand the point of using the term "hatred of debt" as a starting point of this post. The absolutism of the underlying expression has polluted the whole debate.

Mark, to be fair, Paul used the expression because I used it. He got it from me and is criticizing it. But I think you are probably onto something as far as types and quantities of debt. Consider that Paul wants to identify what he calls "capitalism" as the _whole system we presently have_ including the repeated Keynesian attempts to buy ourselves out of recession, the assumption of bailout, the "too big to fail" mentality, etc., etc. More or less, "whatever a lotta financiers are hoping to continue for their own ends." And then, for some reason that remains obscure to me, he apparently wants to saddle someone like me who supports free market ideas with the _defense_ of this whole system, despite the fact that I expressly deplore many aspects of it, as do many other conservatives.

As far as using debt wisely, I'm inclined to think that's a bit like using dynamite wisely. It's not that it can't ever be done but that one has to be very, very careful. Fixed-rate mortgages can be a case in point, but most consumer debt is not. And in my opinion one should try to pay off even one's mortgage as soon as one reasonably can. At the national level, it would be far better if we could balance the budget and live within our means.

Lydia says:

"As far as using debt wisely, I'm inclined to think that's a bit like using dynamite wisely. It's not that it can't ever be done but that one has to be very, very careful."

I think this is probably going to vary depending on how well one tolerates risk and/or how well one can navigate the complexity of fixed income instruments. For example, I may have mentioned on this blog that my wife and I have successfully refinanced our home a couple of times, taking advantage of dropping interest rates and the increasing value of our home to pull some equity out and do a home remodeling project. As Mark says -- debt can and has been used wisely for a long time and in my case, my family has benefitted enormously thanks to low interest rates and the robust market in mortgage products. However, those same products have been peddled to folks who were not in a good position to use them and/or could not repay their mortgages -- there are various reasons for this problem, some a result of government policy and some a result of the private sector, but there is no question the recession is in part a result of these bad motgages finally catching up to the banks that lent them out. So again, YMMV -- which probably means that a better overall regulatory and monetary structure that discouraged both the government and the private sector from taking on too much debt (and risky debt in the case of the private sector) would have done the U.S. some good these past 30 years.

But like Lydia I wonder how what I am proposing in the broadest of outline would really have somehow been incompatible with the U.S. capitalist system or if this proposal just means we might have had somewhat lower growth rates over the past 30 years coupled with a smaller federal government and therefore a smaller debt or even if growth would have eventually rebounded thanks to fiscally conservative policies? Who knows -- this is all alternate history, but it doesn't seem beyond the realm of possibilities and certainly not beyond the realm of possibilities for the future -- that is what Ryan's "Roadmap" is trying to do by bringing government expenditures back down to around 19-20% of GDP.

(1) For at least 30 years, American sovereign debt — that is, fixed-income securities issued to investors on the credit of the US Treasury — has comprised the basic pricing mechanism of capital markets worldwide.

I think it goes back even further than this to WWII and there was reason for it. US Treasuries were once and for decades, gold bonds. That is how Treasury debt established its preeminent position and they remain in this position today, in their current fiat form, because of residual memories of a prior gold-backed era and the lack of an alternative reference point. But the minute the world agrees on an alternative reserve asset (and I believe this consolidation of opinion is occurring rapidly as we speak) the value of the Treasury bond will plummet. And the political Right and Left will have very little to say about it.

All,

This is slightly off topic, but I couldn't resist sharing:

http://www.thefiscaltimes.com/Articles/2010/12/07/Down-and-Out-on-250000-a-Year.aspx

(HT: Steve Hsu)

I think what that article reveals, in addition to the fact that certain cities are very expensive indeed, is that debt can be a problem, even for well-to-do professionals. The biggest difference between my balance sheet and theirs, besides the fact that my wife and I don't make even a third of what that couple make, is that we have much less debt. Both of us were blessed with parents who paid for all of our college and grad school and we have a mortgage that is more than 80% of the value of our home. So sort of riffing off of Lydia's main point -- if you start with less debt, you don't need as much income to get by.

Lydia -- I realize, of course, that there are numerous aspects of the system we've got that you deplore, and rightly deplore. But I think with this "hatred of debt" business you are crystallizing a vital point of distinction between yourself and the run-of-the-mill free marketeer, who may occasionally deplore excessive government debt, but is either enthusiastic about or silent on private debt instruments.

like Lydia I wonder how what I am proposing in the broadest of outline would really have somehow been incompatible with the U.S. capitalist system

What I wrote was that free market advocacy and hatred of debt disclose an inherent tension, that the two principles are problematic, given the financial system we have, not that they are "incompatible." If your vision is a regulatory environment hostile to debt, in all forms save the most mundane, then despite clear agreements on Keynesianism, TBTF, and other matters, you still stand apart from the free market advocacy that has been featured on the American Right for decades.

Now, as it happens I suspect that this "standing apart," if explored with sufficient rigor, could well lead to some very fruitful discussions. It seems abundantly clear to me that Lydia's vision, with its suspicion of debt of all kinds, had it been brought more forcefully to bear on conservatives over the past 30 years, would probably have issued in a saner and more stable defense of free markets. But the fact of the matter is that throughout the last thirty years Lydia-style preachment has fallen on deaf ears. Free market advocacy has in that time forged a very strong alliance with a debt-based financial system, a system that unceasingly expands and augments the fixed-income securities industry. In a word, as Rob G. points out, the Right made its peace with usury.

Could we not reduce the national debt to something minuscule and then keep it there, never growing, while still using government securities as a pricing mechanism?

To my understanding, so long as the Treasury maintains some small-scale continuous issuance, that would work. In other words, a very small US government deficit would be enough. But the national debt itself would have to keep growing, at least in the sense of being regularly rolled over with new issuance. Getting us to that sort of arrangement is an eminently worthy goal.

Jeff S. -- Here is a famous (now a bit dated) article by the late Mark Pittman at Bloomberg on the explosion of structured finance, which was for a time the cutting edge of fixed-income assets:

http://www.bloomberg.com/apps/news?sid=a0jln3.CSS6c&pid=newsarchive

Andrew E. -- You may well be right. I suppose you would subsume the bull market in precious metals (notwithstanding the recent abrupt dip) under the heading of "Investors beginning the search for a new reserve currency"?

To my understanding, so long as the Treasury maintains some small-scale continuous issuance, that would work. In other words, a very small US government deficit would be enough. But the national debt itself would have to keep growing, at least in the sense of being regularly rolled over with new issuance. Getting us to that sort of arrangement is an eminently worthy goal.

Ah, I think this means I had misunderstood your earlier answer to my question in the previous thread, Paul. How is "rolling over" the same thing as "debt growing"? I would have thought the two could be different, but perhaps I'm wrong. In any event, in garden-variety terms, I can certainly see that always having a _deficit_, every year, never having a balanced budget in any year, means that the debt is growing each year.

Are you seriously suggesting that for the United States to balance its budget would collapse the entire world economy?

Paul, not a new currency for exchange but a new asset for saving. There are other signs besides the continuous rise in the dollar gold price since 2000. For one, I would say take a look at the asset side of the current balance sheet of the European Central Bank, released every quarter, and compare it to that of the balance sheet of the ECB from 10 years ago. When the Euro was first introduced, gold bullion made up less than one third of its reserve assets, priced in Euros. But since the ECB marks-to-market its gold assets (something the US Fed does not do) those bullion reserves now make up over two-thirds of the currency's reserves and climbing fast. Now think of what percentage of total assets that gold would represent if there were to emerge a free market in unencumbered physical gold for delivery (very different from the paper/physical hybrid mess which exists today) to allow for real price discovery of gold bullion. The Euro would have no need for additional foreign currency reserves. It seems clear to me that the Euro architecture was designed specifically for a post-Dollar Standard world.

By the way, Paul, I think your comments here are helpful and clarifying. For example, I might have thought from the main post that you think that it's crazy to have a fairly negative opinion of debt. But that would seem to put you on the side of "finance capitalism" as you want to define it, which would be very confusing, since you usually are not on that side.

Well, for instance, just about every pension or retirement fund in the country wants to buy, and to a large degree is predicated on buying, chunks of Treasury debt at every issuance. This supplies the ballast that formerly would have been supplied by gold; it provides the pricing of all other fixed-income assets. Quarterly, this is how these funds structure their capital holdings, their ratios of debt and equity, their credit risk and interest rate risk and dozens of other exposures to loss and gain. The older Treasury debt, the less liquid paper, does not perform the pricing mechanism. It mostly gets stored away.

To tell these funds that, say, next year there will no longer be new issuance at all, because there will be no federal deficit to finance, is to deliver a pretty savage blow to the whole industry's business model as such. It is a reform that must countenance the destruction of several forms of successful business, successful and valuable instances of free enterprise at work, by which middle class wealth is invested and preserved.

That is something I personally wouldn't dare sacrifice to the totem of a balance budget. Which is sometimes why I feel that I am really more business-friendly that some free marketeers.

It is a reform that must countenance the destruction of several forms of successful business, successful and valuable instances of free enterprise at work, by which middle class wealth is invested and preserved.

That is something I personally wouldn't dare sacrifice to the totem of a balance budget. Which is sometimes why I feel that I am really more business-friendly that some free marketeers.

I'm not at all sure that a balanced budget should be called a "totem." It's very surprising to me to be told that these forms of "free enterprise" would have to close up shop (and all the pensioners and retirees would be in deep hot water) if the funds managers got an inkling that the U.S. Congress was actually going to balance the federal budget this year. Doesn't this seem like a rather strong prediction? As though they would be incapable of adapting to Congress's doing such a sensible thing?

It wasn't so long ago that I seem to recall conservatives actually talking about a balanced budget amendment to the Constitution. Was every single such person really unaware that such an amendment, nay, even the _event_ of Congress's balancing the budget in some given year, would have disastrous economic consequences? And shouldn't we be pretty perturbed if this is the case and start thinking about what can be done to make it not the case?

The idea that Congress has something near to a moral obligation not to balance the federal budget is not something I'm prepared to believe at all readily.

It's very surprising to me to be told that these forms of "free enterprise" would have to close up shop

I don't know that they would have to close up shop. There would be a major reshuffling. Large and important business models would vanish or be severely diminished. The financial system would have to adapt in a pretty drastic way to a policy change.

I do know that back under Clinton when a balanced budget appeared within reach, there was some major thinking and adapting already going on. But of course (a) that was more than a dozen years back in the development of fixed-income rocket science finance, and (b) it was in the midst of a very stable and growing (at least apparently) economy.

The general feeling was that, as we've mentioned, a small continuous issuance of Treasury debt would remain ongoing. Wall Street was not fearful because Washington was pliant to its wishes. Hell, Congress and the President had only recently freed the commercial banks to join the i-banks in the exotic debt frenzy. Some arrangement would be hammered out. No reason to rock the boat, etc.

2011 is a very different climate of opinion and constellation of actors and forces.

Andrew E. -- Fascinating. I love to see some links to back all that up. Commodities and precious metals have surely been in a state of extreme flux lately.

Paul,

Thanks for the link. Like Lydia, I do think this discussion is clarifying. In particular, this is interesting coming from you:

"I don't know that they would have to close up shop. There would be a major reshuffling. Large and important business models would vanish or be severely diminished. The financial system would have to adapt in a pretty drastic way to a policy change."

To steal a phrase from the ridiculous Newt, then it's time for some right-wing social engineering! You are quite right to see a distinction between being pro-business (as it is currently practiced) and pro-market. More importantly, from my standpoint, is what is ultimately good public policy for the country? I assume that in the end these pension funds and money managers will figure out a way to invest their money (maybe they'll just all buy gold) -- in the meantime I want to wean us off of debt because I think saving and investment will be good for the long-term health of the U.S. economy and will help shrink the federal government which at its current size is slowing economic growth.

I do know that back under Clinton when a balanced budget appeared within reach, there was some major thinking and adapting already going on. But of course (a) that was more than a dozen years back in the development of fixed-income rocket science finance, and (b) it was in the midst of a very stable and growing (at least apparently) economy.

The general feeling was that, as we've mentioned, a small continuous issuance of Treasury debt would remain ongoing.

I don't understand--you mean, a balanced budget seemed within reach at that time, but even at that time the understanding was that Congress _could not_ or _must not actually_ balance the budget in any given year in order to continue issuing Treasury debt every year?

What would have happened if conservatives had actually succeeded in inducing Congress to balance the budget in some given year?

Was anyone bringing this up as an argument against a balanced budget amendment when conservatives were for it?

Wall Street did not believe the balanced budget would happen. The Clinton administration was on its way out. Both candidates in the 2000 had plans for expenditures that would maintain deficits long-term. Conservatives at the time were formulating one of those candidates' plans, the one that eventually became law: George W. Bush's tax cut.

Except for a few moments of heightened agitation (the late 90s, for instance) conservatives over the past 30 years have not cared much about the federal deficit, or really exerted much effort beyond the rhetorical toward a balanced budget. From the late 70s through the Reagan years, all the right-wing energy was with the supply-siders who either openly disdained deficit hawks, or placated them with the story that a healthy economy could grow its way out of deficits. There was a brief moment in the 90s when the agitation reappeared, but once Bush returned us to high-deficits with his tax cuts (and of course a mass of gigantic defense and war spending) budget concerns remained muted.

Jeff -- keep in mind that from the other perspective, lending is savings and investment. Fund managers for middle class savers (a sizable portion of whom now "save" via pooled investment funds) are looking to grow their funds' capital by lending it at interest. If you're saying that our regulatory regime ought to work actively against this, then maybe you're closer to my critique of usury than I thought.

As far as using debt wisely, I'm inclined to think that's a bit like using dynamite wisely. It's not that it can't ever be done but that one has to be very, very careful. Fixed-rate mortgages can be a case in point, but most consumer debt is not. And in my opinion one should try to pay off even one's mortgage as soon as one reasonably can. At the national level, it would be far better if we could balance the budget and live within our means.

Lydia, I don't agree that it is inherently good to pay off one's mortgage early. It could be, but not necessarily. I'm the son of a midwestern farmer who worked a factory job to finance the vocation he loved and intentionally maintained debt until he died because he considered it advantageous to do so. Upon which his widow merely took his life insurance and quite easily payed off the debt as he planned, which it no longer made sense to maintain. Quite frankly, I use my father as a model for my own financial decisions though my vocation is entirely different, with major and appropriate adjustments. Handling debt is about risk management. Some people are good at it, and some aren't. Banks are supposed to weed out those that aren't, and that role was entirely corrupted by federal money.

Further along those lines, I am very, very mindful of the effect of all the federal money sloshing around that distorts values and makes decisions that might ordinarily be bad into good ones, and vice-versa. I remind my Midwestern friends who are giddy with the appreciation of the last few years about farmland appreciation "and how much would it be worth without Ethanol and agribusiness subsidies?" I have a similar answer for those who believe owning real estate has always been a great investment (that's what listening to real estate agents will get you,) in spite of the historical evidence otherwise (of course it has great value as shelter.) And on and on.

So my answer is get the feds out of subsidizing farms, houses, and education and let the chips fall where they may, and it always was before. It is entirely distorting. If after that bankers think I'm too high a risk and don't want to loan me money that's their business. I won't complain and the playing field is level anyway. Besides which, I believe in collateral loans. Anyway, I'm just saying that I don't think having no debt is a virtue per se. True, debt to a certain point can be seen as motivated by a failure to trust God, but at the other extreme in certain cultures it can be an unreasonable fear. I think the parable of the talents does come into play at some point, and the fact that all of us have leveraged debt to finance what we think is important to us surely must be taken into account.

the fact that all of us have leveraged debt to finance what we think is important to us

Well, I think I've been pretty consistent. For example, the phrase "what we think is important to us." I mean, everybody has to have a place to live of some kind. The only loan I've ever taken and paid interest on is a fixed-interest home mortgage where it really was an actual monetary savings over renting during the same time period. Other than that, an emergency, no-interest car loan from a relative (after an accident) that was paid off in a year is pretty much it. I don't count _having_ a credit card purely as a convenience where the balance is always paid in full every. single. month. and always has been. Close-to-Amish. :-)

Paul,

Here is a link to a blog post which talks about the role of gold bullion on the balance sheet of the Euro. This comes from THE website which discusses the possible (likely?) emergence of physical gold as the reference point for world commerce.

http://fofoa.blogspot.com/2011/01/reference-point-gold-update-1.html

Scroll down a bit and find this paragraph:

As Randy Strauss of USAGold fame so eloquently points out here, "gold’s role has gained musculature from a mere 30.5% proportion to its current dominance now at 67.1%." That means that at the beginning, in 1999, Eurosystem reserves were made up of 69.5% foreign fiat paper and 30.5% gold. Today that has shifted qualitatively to a net foreign paper position of only 32.9% to gold's 67.1%, a virtual flip flop!

And an updated discussion of same:

http://fofoa.blogspot.com/2011/04/reference-point-gold-update-2.html

For example, the phrase "what we think is important to us." I mean, everybody has to have a place to live of some kind.

I could play devil's advocate and quibble with this, by pointing out that a renter is arguably closer to the historical form of no-debt home ownership than the home "owner" who has a mortgage, but I won't. :)

I don't count _having_ a credit card purely as a convenience where the balance is always paid in full every. single. month. and always has been. Close-to-Amish. :-)

With credit cards, I've done the same, and then not (there can actually be low interest rates with CC,) and now back again. I may change again as I see fit. It's all debt at a specified rate, and its all morally neutral as far as I'm concerned.

Look, I've spoken of how "education" is a bubble as I'm sure it is, but a buddy of mine took on a good deal of student loan debt a few years ago (120k+) to go to dental school. Savvy business mind that he has, I never doubted his calculations on the ROI would prove accurate, and they did. He paid off the loans in three or four years after graduation and makes money hand over fist. It wasn't luck at all. No investment is any better than the knowledge justifying it.

The root issue is this. Do we want an environment where there is less risk, but less reward? That is the tradeoff. On one extreme is moral hazard created by banks, and unfortuneately we've blown past that barrier many times. As I've said, we've got it with farm, housing, and education. And those who say this extreme moral hazard is fundamental to capitalism obviously don't read the WSJ, who has been screaming (rightly) that interest rates are artificially low and how it creates artificial asset bubbles and the problems with a weak dollar policy for many years. Neither of these things are good for business in the long run, and that is why those who really believe in capitalism hate such short term thinking. It just creates space for liberals to cry "capitalism has failed!" and enact static high-tax and regulatory policies when the inevitable downdraft comes.

But the other extreme of low-rist living, is to adopt stasis policies that Europe embraced long ago. America has always had more violent swings than static societies. Politically, financially, and in many other ways. And the Europeans love to sneer "that would never happen here," to which I reply "no, the government would do a bail out quietly all the while acting superior to the dumb Americans". If Joe American citizen wants to have no or little debt that's fine with me. But I guarantee you Joe's employer has taken some of these same risks, and Joe is no doubt glad they are.

So the way to eliminate risk is to reduce dynamism and adopt the policies that lead to stasis. Like it or not, it takes money to do anything and financial stasis and social stasis go hand in hand. If we want to live like Belgians then we're going to have to accept living lives like they do. Few Americans want to trade places with the Europeans on that score. And the nation simply would not be the dynamic nation it has been without entrepreneurs taking on debt and doing amazing things with it. This does not imply that crazy banking schemes born of easy money that create all kinds of moral hazard and extreme risk are anything but bad.

I think Mark's 3:58 PM comment is spot on -- the trick is getting the right policy balance so that the government is not encouraging the moral hazard that Mark and I (and I think Lydia and Paul) don't like about our current system. I actually differ from Mark a bit in that I tend to put a bit (just a bit) more blame on regulatory policy than I do on monetary policy for creating our Great Recession Housing Bubble. I also think it strange to worry about imposing more regulations on our banking system somehow reducing dynamism in America -- it's not like we weren't a dynamic economy pre-1980! But otherwise, these are wise words: "No investment is any better than the knowledge justifying it."

I actually differ from Mark a bit in that I tend to put a bit (just a bit) more blame on regulatory policy than I do on monetary policy for creating our Great Recession Housing Bubble.

Regulations had lots to do with it. First, remove capital gains on housing as was done clear back in '97. Not a good idea. Next, push regulations onto banks (and Freddie Mae and Fannie Mac) to make them stop evaluating whether someone can pay back loans on the traditional standards. Then easy money to light the fire and keep it going. Boom. Lots of stuff I don't know or remember about regs and finance I'm sure too, but that is the outlines of it and sufficient to do it I think.

I also think it strange to worry about imposing more regulations on our banking system somehow reducing dynamism in America -- it's not like we weren't a dynamic economy pre-1980!

All I was saying was that all the businesses who employ people and do the most energetic stuff do it with debt, and without it there will be fewer of those businesses.

"No investment is any better than the knowledge justifying it."

Yeah, if you look around the financial planners and advisors of the nation (large or small) are always trying to scare people into their loving arms where they'll bleed you dry while telling you you're investing "safely." Don't worry, there will be a little left over for you in the end. And anything you do yourself without their help is "risky."

J.C. "Ilion, maybe the way to look at it is by understanding that capitalists love debt, crave debt, and need debt, ..."

So, recasting the misrepresentation in a slightly different form makes it true?

Keynesianism is not capitalism. Consumerism -- Keynesianism for the Common Man -- is not capitalism.

Capitalism does not "love" debt ... it "loves" the investment of savings.

Paul J. Cella: "... who are these nefarious "intellectual Catholics" you referred to in your first comment, and why did you refer to them if the author whose post you are commenting on is not among them?"

What I said about the author of this little hit-piece is that he is mispreresenting what capitalism is; that the shoddy case he makes in it is built upon a tendentious strawman "definition" of capitalism.

Would you like me to use a blunt word to denote what you are willfully doing?

"Capitalism does not "love" debt ... it "loves" the investment of savings."

"The growth in economic activity was accompanied by a rapid expansion in the corporate bond market. For example, the number of bond issuers listed in the Commercial and Financial Chronicle was 158 in 1866, but quickly reached 421 by 1872. The Commercial and Financial Chronicle from this period is often filled with enthusiastic accounts about the promise of new technology."

http://www.scribd.com/doc/29183770/Corporate-Bond-Default-Risk-A-150-Year-Perspective

It seems that debt has always been a significant part of the capitalism we have actually experienced. Perhaps you are thinking of something else.

"Consumerism -- Keynesianism for the Common Man -- is not capitalism."

There was consumerism before there was Keynesianism, although that particular term wasn't used for it.

In brief, consumerism is what results when you combine industrial capitalism, modern advertising, and an ignorant and/or greedy public.

I think Ilion's point is that depending on how one "thinks about" debt makes a difference. Investing savings to make a profit on an exciting new business idea is what capitalism is "all about", or at least it should be.

Correct but his statement doesn't indicate that he understands that - "savings" is so compressed as to be useless as a concept. Basically one may purchase common stock, preferred stock. or bonds - each one being a certain level of risk/reward calculation filtered through ones personal comfort with the assumption of a given amount of risk.

Recall also that, unless ones saving vehicle is ones mattress and one only saves specie, one persons savings are some form of another persons borrowing. This has been the case for as long as there has been anything recognizable as capitalism.

Ilíon's main point is against the continual misrepresentation one sees here of certain very simple (and basic) facts about wealth and money and their roles in the world in which we live.

And, when that misrepresentation is deliberate, it draws not only his objection, but his scorn.

One man's savings is another man's debt.

One man's savings is another man's debt.

Contrary to the silly imaginings of some of the principals here at WWWW, debt -- nor interest -- is not intrinsically wicked.