Lydia writes, in the gratitude thread below:
I wonder sometimes if it is sufficiently appreciated: A strong free market advocacy combined with a hatred of debt (both individual and national), a tough-love, no-bailouts attitude, and praise for independence and self-reliance would, if consistently followed, entail a whole lot of belt-tightening at the level of individuals, families, corporations, and the government.
I believe the central statement to be incontrovertibly true. Combining free market principles with “hatred of debt (both individual and national),” supposing that from hatred we can derive antagonistic policy, would surely issue in a period of belt-tightening the likes of which few of us have ever seen. Moreover, I share Lydia’s suspicion that this is insufficiently appreciated, though for very different reasons than she does.
What I wonder about is whether folks grasp how radically at odds with fundamental aspects of American Capitalism is this notion of “hatred of debt.” Permit me to lay out a few facts:
(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.
(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.
(3) While government debt (“risk-free” in industry parlance) forms the basic pricing mechanism, against which all other instruments are compared, fix-income securities markets are, paradoxically, characterized above all by the intense application of private ingenuity, technological innovation, and concentrated competition.
(4) The fixed-income securities industry has for decades drawn talent from all walks of American life, from the celebrated halls of academia to the smoky backrooms where the cardsharks gather, to refine and perfect its trading activities.
(5) The fixed-income securities industry finds its largest and most reliable client base in the mass of pension, money market, 401k and suchlike funds, which are the instruments of middle class American retirement savings.
Given these facts, I contend that there is a very deep tension in the idea of a defense of Capitalism, a defense of free markets as they operate in the actually-existing world of today, being combined with hatred of debt. It is inherently problematic to talk simultaneously of free market advocacy and of hatred of debt. The tension exists because of how history has shaped the modern political economy. Free markets do not hate debt: they love, cherish and carefully cultivate it. The best free market minds, in the sense of practitioners rather than theorists, are bent over its next permutation. The competition is so intense that every advance in processing speed opens new avenues for algorithm-based high-frequency trading.
In a very real sense, one would have to posit a free market advocacy that is at odds with Capitalism (again in the sense of the actually-existing structure of the political economy) in order to open the intellectual space within which to expound such a doctrine compassing the hatred of debt. I do not say it is impossible; I do not even say it is undesirable.
But I do say that expounding such a doctrine, without acknowledging its decisive departure, by at least 30 years, from current praxis, is bound to issue in confusion and frustration. I do also say that it is very difficult to identify clear historical markers by which to trace a dismantling of the structure we have. Even the counterfactual is impotent. 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.
All of which, in my judgment, counsels against preaching schemes of radical reform, either of the Right or of the Left. It is not within our power to dismantle the fixed-income industry, or convert all debt to equity, or dispossess Wall Street. The Laissez Faire State is not held in abeyance by mere government machination; nor the Socialist State by the greed of the rich. If debt must be our enemy, the object of our principled hatred, then so must Capitalism: until the Capitalists can be persuaded to renounce their errant ways, and ground their vocation on new principles (or, conceivably, old ones).