Odious debt, Jubilee, and the cost of ignoring history

It seems like all commentary on the situation of America today is put into the context of post-WWII. That's like studying the history of Rome, but ignoring the 500 years of history that happened before Ceasar's armies crossed the Rubicon. If you intentionally limit your vision of the world then you will eventually be caught off-guard by larger trends.
This problem is especially true in the field of economics.

The fact is that the financial system, as it was structured in 1944, was an experiment. No one knew if it was sustainable, and it certainly wasn't intended to last forever.
That world has been slowly, and increasingly, breaking down for the last several decades, but because no one looks more than 65 years into the past no one can imagine a different world. Everyone is terrified of the "unknown", when in fact is isn't unknown at all. It's just different.

If we took off our blinders and looked at the history that existed before 1944 we would not only stop fearing the past so much, but we would actually learn valuable lessons that we could apply to the economic crisis of today.

"Although capitalism is not a Ponzi scheme, credit-based economies, sic capitalism, and Ponzi schemes share the same fatal flaw. Both must constantly expand or they are in danger of collapse."
- Darryl Robert Schoon

British Prime Minister Gordon Brown warned the world today.

"Unless we come together to address these problems in a coordinated way, the world is at risk of a damaging spiral of de-globalizing. It is fueled by a combination of deleveraging and national-only policy solutions," Brown said.

That sounds pretty darn scary, doesn't it? Except that globalization isn't either a good or bad thing, so it retreating isn't necessarily something to be afraid of.
Historically the world goes through cycles, and it being more or less globalized is based on factors unrelated to trade itself. For instance, world trade as a percentage of global GDP hit a peak in 1913 that wasn't reached again until the 1970's, but the 1950's and 1960's aren't considered some sort of Dark Ages.

Sometimes people's timeframes get so small that they are largely useless. For instance, today EU Economic and Monetary Affairs Joaquin Almunia had this to say about rumors of a break-up in the Eurozone.

"I am not worried at all by those who have announced for 10 years in a row that the euro area will split. Honestly, I don't think that this is a real hypothesis," he told reporters in Brussels.

This is called " the official denial". The reason why this is being discussed is because the sovereign debts of Spain and Greece just got downgraded, with Italy, Ireland, and Portugal in the queue.
What Mr. Almunia is ignoring is that the Euro currency was an untested concept currency and it is only now getting its first real test. It will probably survive, but not in its current form.

Another problem with ignoring the facts of history is that people tend to invent "history" to fill in the blanks. The best example of this is the free trade fundamentalists. To them all trade is good, and the fewer the barriers to trade the better off everyone will be.
The reality, OTOH, is that trade is largely unrelated to the overall welfare and health of an economy. There are just as many example of lower trade barriers hurting a nation as helping it.
The free trade fundamentalist like to point to Smoot-Hawley as some sort of biblical decree against all trade barriers, in the same way that neocons look at Chamberlain's Munich Agreement as a sign of how all foreign policy should be conducted.
Choosing to focus on only one example and ignore all contrary data is called dogmatic, and it will always get you into trouble.

Debt and forgiveness through the ages

Speaking of biblical decrees, I was surprised to read this today.

There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital. Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets.

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Jubilee is an interesting tradition that hasn't really been practiced for centuries, but for thousands of years it was an accepted part of middle east tradition. In today's world the idea of a periodic wholesale canceling of debts and the restoration of land to the poor seems utopian and anachronistic.
Unlike today's world, the ideas of morality and religion wasn't excluded from economics. In fact, unlike today, morality and religion was infinitely more important than profit and personal property.

What was radically disturbing in archaic times was the idea of unrestrained wealth-seeking. It took thousands of years for the idea of progress to become inverted, to connote freedom for the wealthy to deprive the peasantry of their lands and personal liberty.

"Land must not be sold in perpetuity, for the land belongs to me and you are only strangers and guests. You will allow a right of redemption on all your landed property."
- Lev. 25:23-28

I first got interested in the concept of Jubilee, not for religious reasons, but for economic reasons. The person who introduced me to the idea was my favorite economic historian, Michael Hudson.

“First they ignore you, then they denounce you, and then they say that they knew what you were saying all the time,” said Gandhi. The same might be said of today’s overhang of debts in excess of the economy’s ability to pay. First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that of course students have been taught for four thousand years now how the “magic of compound interest” keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.

What has ended is the idea that “the magic of compound interest” can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formula seeking to make money by playing in a zero-sum game. A debt overhang always ends either in foreclosure of the debtor’s property, or in a debt annulment to preserve the economy’s overall freedom and equity.

This means that the postmodern economy as we know it must end – either in financial polarization and debt peonage to a new oligarchic elite, or in a debt cancellation, a Jubilee Year to rescue society. But when the government says that it is reviewing “all” the options, this reality is not one of them.

The Federal Reserve has attacked the current financial crisis as if it were a problem of liquidity (not enough money is available to borrow and loan). In fact the problem is the levels of debt in the world today.
To put it another way, it's not the financial system is illiquid. It's that the world's banks are insolvent. Some officials recognize this to be the case.

"This biggest worldwide economic crisis arose by getting into debt," Josef Proell, Austria's new finance minister, said. "You can't fight a debt crisis by getting into more debt."

Which brings us to the root of our problem today - debt.

Understanding peonage

"The rich rule over the poor, and the borrower is servant to the lender."
- Proverbs 22:7

"Owe no man any thing, but to love one another."
- Romans 13:8

In my personal opinion the average American's attitude towards debt is probably the most bizarre disconnect from reality in society today.
I find myself amazed and incredulous every election when the voters will consistently turn down a one-cent sales tax to fund their schools, but approve each and every school bond measure that makes it to the ballot. Do people not understand that they end up paying more than twice as much for the same services by doing it this way?

It's the same irrationality people have over their credit cards. With all the problems of privacy, usery interest rates and charges, and the immoral business practices of the credit card companies themselves, shouldn't people be more concerned with learning to live without their plastic?
What it basically comes down to is a widespread ignorance of how debt works.

Let's start with Michael Hudson explaining compound interest.

The eighteenth-century philosopher Richard Price identified this miracle of compound interest and observed, somewhat ruefully, that had he been able to go back to the day Jesus was born and save a single penny—at 5 percent interest, compounded annually—he would have earned himself a solid gold sphere 150 million times bigger than Earth.

This should demonstrate in no uncertain terms that a debt-based economy, with the compounding interest that comes with it, cannot exist permanently. The world simply doesn't have the resources to cope. Something has to break.
Either the debt is defaulted on, the debt is forgiven, or the most popular method in recent years is for the debt to be inflated away through monetary inflation. Inflation generally acts as an instrument to transfer wealth from those removed from the source of money creation to those close to it. Banks are always close to the source of money creation, while the working class is always removed from the source.

Yet the world exists on a debt-based currency right now. Every dollar created was loaned into existence and has no value other than the ability to pay off that debt. This is not a situation that existed in world history before this past century. We pay interest on those dollars by creating more dollars, which also must be loaned into existence.

In theory its possible to grow an economy faster than the debts accumulate. However, in practice this doesn't work. Any significant recession will push an economy behind the curve, and with the magic of compounding the economy can never catch up. Once the interest rate curve goes parabolic the debts become unpayable.
We have passed that point.

Odious debt

Another concept of debt that I recently discovered is the concept of Odious Debt.

In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that [are] incurred [by]them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

While odious debt is not as widely found in industrialized nations, it is widespread and almost universal in the developing nations of the world. Throughout modern history those debts are almost always held by 1st world banks, and enforced by the armies of 1st world nations. This is particularly true for British and American history, where the poor of the 1st world are used against the poor of the 3rd world for the benefit of the ruling class.




I've been waiting for somebody, anybody, to link morality and ethics to economics on this board. I only disagree in one point: It is my belief that among the last three generations of Americans, odious debt is the norm.

The reason for this is the demographic bubble of the baby boom- we're headed into a time where investors will outnumber workers. Any time that happens, you'll see the workers going into debt and the investors getting rich off of that debt. And we now expect the investors to get rich enough to pay their own way, without entitlements? How much is that going to take away from the workers?

Maximum jobs, not maximum profits.

Developed world debt and morality

I had considered the current debt load in America and odious debt, and there are certainly some parallels. But compared to the developing world, its a whole 'nuther ball game.

While in America today the debt load is drawn from the middle class to the ruling class, in the developing world the debt load is drawn from everyone to a very small number of ruling elite.
So instead of getting bogged down in qualifications and definitions, I decided to stick with the most obvious.

I could have also gone down the road of "Dollar Imperialism" and how America used its military against Latin America in the name of our eastern bankers for over 100 years, but I decided that was a tangent.

Any time a study decides that morality is not part of the equation, then that study is bankrupt.

See if you like this

and I would appreciate any thoughts.

Conservatism, and Evil as the Absence of Good

Has the U.S. economy reached a state of perfection? Only an answer of "yes" justifies the conservative argument that there should be less government intrusion in the economy.

St. Augustine wrote that evil is merely the absence of good. We are imperfect beings, but have a perfect ideal to emulate. Therefore, change is the natural order of things as we attempt to become less imperfect. Since the imperfect is, by St. Augustine’s definition, evil; since it is not good enough to be imperfect, we see that conservatives prefer to accept evil rather than accept a constant struggle to become less imperfect and more God-like.


I'm bothered by it somewhat

Not so much your reasoning, which is quite sound and well within my understanding of both Orthodoxy and St. Augustine. I'm more bothered by your use of the term conservativism instead of neo-conservativism in describing the current state of captialism and corporatism.

For one, Capitalism is NOT a conservative philosophy to begin with- the Communist Party in Russia was considered to be extremely conservative and risk-adverse. My previous tagline on slashdot read "it's time to put the word CONSERVE back into Conservative"- Conservativism, in it's original pre-libertarian, pre-Reagan form was merely working hard to preserve the good that already existed in the status quo. Governor Tom McCall of Oregon is my big Conservative hero- he ushered in such changes as the bottle bill, strong land-use laws, a network of bicycle pathways, and a public parks program that is still quite strong- and he was a Republican.

So while I agree that to a large extent, evil is "merely" the absence of good, I can't entirely agree with linking Conservativism to it; despite what the neo-conservatives (who in a previous era would have been termed neo-liberals or libertarians for their emphasis on personal profit and liberty above *all* other concerns) have done to the movement, I'm beginning to think on purpose.

If our dear blog master RO will grant me a bit of leave for the moment, a good case in point is what has happened to the pro-life, "anti-choice" movement. It's been downright abused to elect three different presidents in five different elections, and given them same-party control over congress in 17 of the past 35 years, for what? The Right to Life Amendment died in committee, the Supreme Court is afraid to overturn RoeV.Wade because of the primacy of control it places over state law, and the downright bad legislation that does not take into account the right to life for people who have been born, especially women, that they've proposed since then has left pro-lifers without *anybody* to vote for, especially now that the Republican Party has signed their own death warrant with letting the economy go bust. And now we've got FOCA threatening to destroy all of the conscience laws in the nation.

That's what mistaking neoconservativism for conservativism has gotten us. A pact with the devil, a pact with evil, and a lot of "economic fiction".

Maximum jobs, not maximum profits.


I read a wonderful article on free market ecnomics by an Australian economist. While I personally believe that economics is not a science because it fundamentally doesn't reflect a good understanding of money as a FORCE (see Black Swan), I did like this article. It explains that Adam Smith was a philosopher deeply involved in the study of ethics as well as economics. Smith knew and explained many times that a "free market" could never work without a strong foundation of ethics to keep it in proper check. You can be sure that Smith would never have approved of PREDATORY CAPITALISM because it was the anti-thesis of the world that he wanted to live in.

Right now, we have trillions of dollars of debt built by wars and other activities that have nothing to do with the lives, liberties or happiness of the American people. If they were asked about things like MK Ultra, they would have vetoed these programs. IF they were asked about killing heads of state to accomplish business deals that amounted to ROBBING other countries, they would have vetoed these things.

The things that I just mentioned are Odious debt created by Predatory Capitalism. The debts attributed to these things should be repudiated by the American people, but I am not so sure that they should not be billed to the Shadowy banksters who pushed for their creation.

Yes great post...

....you cannot separate ethics, politics and the social system from economics. They are intertwined in too complex a way for current theory although big efforts are being made in Universities around the world.

As to the idea of unlimited growth it is clearly impossible and we are now bumping up against the constraints, resources both physical and intellectual, which will require a change in course.

Check out 'Steady State Economics by Herman Daly for starters. People, even economists, are starting to think about this.

And that's a good thing.

'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

intellectual limits?

You know there are thousands of patents that the pentagon has suppressed and all kinds of technology that has been hidden from us right? Do you really think schools are about educating us?

Bumping up against intellectual constraints? No.

Being constrained by design? Yes.

Fantastic piece

This place never ceases to amaze me.

Bravo !

Thank you for a great article.

I may have missed it, but I did not see any link to Hudson's The Lost Tradition of Biblical Debt Cancellations. I posted a DailyKos diary with many excerpts in March 2008, in which I wrote,

In my humble opinion, this document has the potential to undo centuries of damage done to Christianity and Judaism by oligarchs and usurers.

Especially in the context of the ongoing economic and financial crises, in which it is clear that we the people are being sacrificed to save a rotten and useless financial system – bailouts for Bear Stearns and Wall Street, but not foreclosed homeowners - Hudson’s study is very powerful.