We Live in Grim Times — Why?

To find a solution, we must first understand the problem.

There’s no shortage of big problems: Russia; inflation; energy prices; political instability; the far-right; the far-woke; the wobbly gilt market; rising knife crime; crumbling health systems; Brexit; and thousands more. We’re busy, whack-a-mole style, trying to solve them all, but our efforts are doomed to fail.

Why?

Because they’re all symptoms, not the underlying condition. They’re all sub-problems of an uberproblem. And you won’t solve an uberproblem, or any of its sub-problems, until you’ve first identified what the uberproblem is.

So what is it?

Put simply, it’s debt: Too much is owed by too many.

By “too much” I mean there’s no way all the debts can be paid back. This puts stress on those who lent the money — they’re worried about getting their money back, or receiving their interest payments. (If you have cash in the bank, or own bonds in a pension fund, you’re a lender. You might well be depending on the interest as your day-to-day income).

It also stresses the borrowers. If you have a mortgage*, a student loan; an overdraft or any other type of credit agreement, you’re a borrower**.

Borrowing can be useful. Used sparingly, it greases the wheels of personal, corporate and national finances. But beyond a certain point it stops being useful and turns the borrower into a debt slave.

A debt slave is one step up from being an actual, old-school slave. Debt slaves are not literally owned by someone else, but they owe so much that they must devote their working life to paying it back. So they’re as good as owned by someone else (they just don’t necessarily know who that someone is).

There are too many debt slaves today. They feel oppressed. And when lots of people feel oppressed, it creates tension in society. This causes problems: Always has, always will. Hitler and the Second World War? All came from a too-many-debt-slaves situation.

So, if that is *the* problem, what are the possible solutions?

Let’s break them down into good and bad options:

Too Much Debt: the good solutions

There aren’t any. We should have avoided getting into this mess in the first place.

Too Much Debt: the bad solutions

One: Try to keep everything as it is. If we can engineer good economic conditions, then indebted governments, companies and people can work to pay their debts off.

OK, that doesn’t sound so bad. Why is it in the ‘bad’ section?

It was a good solution while there *wasn’t* too much debt. It’s a terrible solution when there *is* too much debt: To pay off their debt, governments, companies and people must cut their spending to devote more of their income (from, tax, profit or work) to paying it off. If they all do this simultaneously, their decreased spending will cause the economy to crash. Jobs will be lost, companies will go bust, governments’ tax revenues will dive.

To get by on the resulting lower incomes, they’ll need to take on more debt. So this makes the too-much-debt problem worse. This is the debt trap, and in systems speak it’s a negative reinforcing feedback loop. That is a nasty thing.

So you should know that when sensible, conservative-sounding people suggest sensible, conservative-sounding things like cutting the deficit, or paying back the national debt, it may calm things down for a while, but it will ultimately create more debt slaves. Which, obviously, makes the too-many-debt-slaves problem (and all its many sub-problems) worse.

Two: We could cancel the debts. There are at least two ways of doing this.

2A) One is to fix the level of the debt, then keep interest rates low while running inflation high. Doing this, over a period of, say, twenty years, would dramatically cut debt levels***.

Whether that’s a good thing or not depends on whether you’re the borrower or the lender: It shrinks mortgages, loans, credit cards etc, but it also shrinks the spending power of savings, pension pots held in gilts etc.

It’s also messy and painful while it’s happening. It permanently damages the spending power of stored wealth, and it temporarily damages the spending power of income (temporarily because employment incomes aren’t necessarily fixed in the way that a pot of savings is). But “temporarily” might be long enough for someone on the breadline to be pushed terminally beneath it.

So while inflation in money terms causes more damage to the cash-rich, in real-life terms it’s harder to bear for the poor while it’s happening. So if this is your economic plan, and you’re a reasonable human being (other human beings are available), you’d need to account for that.

2B) The second way to free the debt slaves is to do it hard and fast, like pulling off a sticking plaster. Some variation of saying “right, if you had £100,000 in your bank account, now you’ve got £10,000” and ”if you owned a gilt worth £100 paying you £5 interest a year, now it’s worth £10 paying you 50p a year”. You can play with the levels, but that’s the basic principle.

This is a grim prospect too. Anyone with savings or a pension would, along with their money, totally lose their shit. Uproar! And those are some powerful, influential people — they’re the ones with the money, remember? This is just one reason why this isn’t about to happen.

You’ll never find an exact historic example to show the impact of following these paths, but there are some that rhyme:

For Option 1, see Germany after WW1. The German people were forced into debt slavery to pay back the country’s war debts (in earlier history, the victors didn’t have to bother with the debt, they just old-school enslaved the losers. Progress!).

It resulted in rolling economic crises, including the Weimar hyperinflation, and widespread misery. And the debt didn’t get paid back. To free themselves from debt slavery, the Germans eventually voted in a politician, Hitler, who promised to do just that (and did — for a while. But then it didn’t go so well).

Also for Option 1, see the austerity drive in the UK (and elsewhere) from 2010 onwards (more sporadically lately, but half the Conservative Party — for whom Rishi Sunak is the poster child — still want austerity, they just know better than to call it that today). It’s resulted in rolling economic crises, Brexit, and increasingly unhinged politics. And, oh yes, the debt hasn’t been paid off.

For Option 2B — the quick haircut — see the Currency Reform in Germany after WW2. Having seen the disastrous results of creating a nation of debt slaves after WW1, authorities did the opposite after WW2; they freed the debt slaves: 90% of private and national debts were cancelled, along with private savings too. All done over one weekend in 1948 (through the mechanism of replacing the worthless currency, the Reichsmark, with a new one; the Deutschemark.)

This was great for young people and debtors, but painful for savers and lenders. But that pain was bearable compared to the fresh memories of the War, which is why it could be done (that and doing it quickly and without notice, to prevent it being stopped).

It caused short-term shockwaves. But if you’ve ever wondered how, after being destroyed in the War, West Germany became a flourishing global industrial titan again by the 1980s, the debt cancellation, allied with “The Marshall Plan”, may well be the answer (similar for Japan).

For Option 2A — the slow, secret haircut — see the UK between WW2 and 1980. With no ripped sticking plaster, Britain slowly recovered from the War as rolling periods of inflation and growth shrank the national debt (more slowly than debt-cancelled West Germany, take note).

With the debt reduced, and markets deregulated, the debt-slave-free baby-boom generation then grew fast in the 1980s; like seedlings after a forest fire.

What’s the best option then?

I’ll hold the opinion. But it’s still useful to look at what’s *currently* happening in markets and the wider world.

We are, basically, being swung between the above two ways of dealing with the uberproblem of too much debt. Even the UK’s Conservative Party is split in half on this.

The Orthodoxy (who, through Jeremy Hunt, are back in charge in the UK) represent the interests of the debt-slave owners. They need the slaves’ income to pay for their retirement, so they’re dead set against seeing them released — through inflation or any other means. They prefer Option 1: Raise taxes, cut spending and work a lifetime to pay back the debt.

The other half, let’s call them the MMT’ers**** prefer Option 2A: Cut taxes; raise spending; and burn off debt with high growth, high inflation and lower interest rates*****.

Central banks are, for now, part of the orthodoxy; they are pursuing Option 1. Their interest rate rises are the weapons used to resist those politicians trying to implement Option 2A. The bond market is, in the short term at least, also on the side of the Orthodoxy. Bond markets are dictated by the actions of bond/debt-slave owners, so they have a fit (understandably) when steps are taken to release those debt slaves, as it reduces their economic value.

If I have one prediction to make, it’s that this will be a long and nasty battle. Markets will swing wildly on each side’s victory or defeat. This will keep happening until the uberproblem of too much debt is solved.

And if I had to guess who will win this war (whenever that may be)? Well, bond markets can be silenced by central bankers through QE. Central bankers are hired and fired by politicians. Politicians are hired and fired by electorates. A large, growing part of the electorate is feeling oppressed by some form of debt slavery. They will, if allowed, vote for the politician that offers to free them from that oppression.

Let’s hope they’re nice.

Epilogue:

OK: If the whole “we’ve borrowed it so we surely must pay it back” thing is playing on your mind, this piece on The Money Mindf**k might help. Also, this piece, from someone more intelligent, experienced, and fullsome of beard than me is a great read too.

*Or even a renter: you’re just paying off someone else’s debt.

**If you’re a British taxpayer, you’re effectively in the borrower camp. Even if you’re an 18 year-old who’s just entered the job market: You didn’t benefit from the borrowing, or not much of it, anyway. But now, through higher taxes and reduced government spending, you’re paying off the accumulated debts of generations before you.

***If your income is inflating faster than your debt, your debt is shrinking in real terms, even if the size of the debt measured in pounds/dollars isn’t.

****Depending on your beliefs, MMT stands for either Modern Monetary Theory or the Magic Money Tree.

*****And then there’s Liz Truss, who tried to be in both clans by cutting taxes and raising spending, but feeding most of it back to those who had it in the first place (in the hope they would trickle it back down to poorer people, in exactly the way they haven’t for the last 40 years of trying “trickle-down” economics). She’s basically been removed from the wheel now. (Update: Forget “basically”, she literally has now — the orthodox austerity clan are in charge again).