One of the most debated topics today concerns the level of debt as it affects consumers, corporations and governments. Government debt has commanded a particularly large share of the limelight in recent weeks. Among those who are concerned that debt levels have reached "crisis" proportions, there seems to be a consensus that the debt balloon has reached virtually the bursting point, and further, we have reached the point of no return when it comes to the servicing of the debt.
In this installment we'll examine the issue of debt and will address the particular issue of whether in fact we've reached the "point of no return" in terms of being able to pay off the debt.
From the standpoint of arithmetic, one could easily construct a one-sided case against today's high levels ever being paid off. The mathematical approach, however, is too narrowly hyper-literal to be admitted to any reasonable assessment of the debt situation. For a true picture of how the present debt problem is likely to end, we must consult the history books.
One would be hard pressed in surveying history to find a single instance of an empire or great nation that ever completely extinguished its debt in the honest sense of the word. Indeed, most debt is ultimately serviced through either one of two ways. Regardless of the chosen path, debt is always eventually "serviced," as we shall see.
The mainstream media has had an extended field day in stoking the public's fear over the debt "crisis." At some point a few years ago, the media gatekeepers decided that debt levels were "too high" and that something must be done to combat this problem before it carried everyone away to economic perdition. Specifically, we're told that existing debt must be completely amortized before America can see anything in the way of economic recovery. Like most of the ideas propagated by the mainstream press, this is a fallacy.
Another fallacy that enjoys currency is that today's debt must be extinguished, or else the burden upon posterity will prove to be crushing. In his classic treatment of the pathological aspects of debt, Freeman Tilden astutely answered the question, "Does posterity pay for our debts?" Presenting the question as a syllogism, he wrote:
- We are posterity.
- We do not pay.
- Posterity does not pay.
"It is obvious that we, the present generation, are somebody's posterity. Our progenitors left us a rather burdensome debt, a public debt composed of national, state, country and municipal obligations," wrote Tilden in "A World in Debt." "And it is interesting to note that those who create great public debts, on the grounds that posterity will enjoy the fruits of the expenditure, never think it necessary to wait until posterity can exercise its own choice as to what benefits it prefers to enjoy."
As Tilden said, we are posterity and while we do pay in an extremely limited way, we clearly don't bear most of the previous generation's burdens. "What we do," says Tilden, "is to keep the service upon the debts from default -- and this, most fortunately, we are sometimes able to do by reason of the constantly increasing facilities of modern production, and by modern deftness in the use of credit in commerce. But, further than that, we are naturally intent upon spending a little money ourselves.
We borrow against the payment by our posterity. You may be utterly certain that if our posterity is not stopped in some singular way, they will rely upon their posterity to settle. And so it goes."
Much lip service is given to the "day of reckoning" which looms over the debt-plagued U.S. like the Sword of Damocles. What most debt alarmists seem not to realize, though, is that the day of reckoning never arrives. Debt has a peculiar way of being extinguished without the due fulfillment of the obligations on the part of debtors. As the French writer Maurice Vion wrote in 1932, "The State, a debtor of private individuals...is always armed with the prerogatives of public power. It can, whatever its creditor, call upon the limits of its capacity of payment, or simply choose not to pay. In the final analysis, the execution of force [in calling upon the State to pay] has little effectiveness against the State." [Source: Dettes Politiques et Dettes Commerciales, translation mine]
As Freeman Tilden wrote in commenting on the government's prerogative of debt cancellation, "Every government borrowing, therefore, carries with it the political germ from which a repudiation may more easily develop than in loans to individuals." This is an extremely important point that seems to be overlooked by debt crisis commentators.
In his book, "Jubilee on Wall Street," David Knox Barker details the Roman debt crisis of A.D. 33 as chronicled by Lightner. The crisis began by a series of money panics attended by a number of runs on Roman banking houses. The crisis was solved by the emperor Tiberius, who "suspended temporarily the process of debt and distributed 100 million sesterces from the imperial treasury to the solvent bankers to be loaned without interest for three years. Following this action, the panic in Alexandria, Carthage and Corinth quieted." Indeed, history is rife with instances of the "temporary" suspension of the process of debt. Debt suspension is in fact one of the primary tools by which debt crises are alleviated.
Citing the experience of the Roman Empire in attempting to outlaw usury, Tilden comes to the conclusion that "if a man could have the longevity of Methuselah, it would pay him to be never out of debt, for he could count on a political upheaval which would relieve him of his burden every so many years." In the final analysis, as Tilden concluded, debt will likely never be prohibited and there will always be "credit crises" followed by debt cancellations in which the creditor class is mulcted.
If history teaches us any lesson it is that debt levels at any given epoch are always "too high." The contraction of debts on the part of individuals, corporations and governments beyond their ability to pay them is an unfortunate tendency of human nature and will most likely always continue to plague the human race until the end of time. Even more unfortunate, there will always be a tendency for the creditor class to continue to loan their capital to unworthy borrowers (including governments) under the fallacious assumption that others know best how to return a profit on money that they themselves accumulated through their superior efforts. In consequence of this, there will always be the established tendency for debtors of all classes to find ways of not paying their debts due their creditors.
As Tilden would say, "And so it goes."
Gold Price Trend
Turning our attention to the yellow metal, the gold ETF price was down for three straight trading sessions this past week before finally bouncing higher on Friday, June 11. The lack of buying interest was attributed to a diminution of fear and safe haven buying on the part of investors, particularly as the euro currency has been rallying of its recent lows. But the trend for the euro remains down as defined by the relationship of the price to the 15-day moving average; conversely, the gold price trend remains up. The SPDR Gold Trust ETF (GLD, 120.01), our proxy for the gold price, remains above its 15-day and 30-day moving averages (which correspond to the 6-week cycle) and successfully tested these important trend lines as you can see in the chart here. The uptrend remains intact for the gold price.
