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Guest Post: The Great Global Debt Prison | zero hedge

http://www.zerohedge.com/article/guest-post-great-global-debt-prison February 09, 2011

Submitted by Giordano Bruno of Neithercorp Press

The Great Global Debt Prison

By Giordano Bruno

Neithercorp Press – 2/4/2011

Tense and terrible times inevitably summon an odd coupling of two very different and difficult
human conditions; honesty, and brutality. Certain painful truths are revealed, and often, a
palpable fury erupts. Being that times today are particularly tense, and on the verge of being
spectacularly terrible, perhaps we should embrace both conditions in a constructive manner,
and become brutally honest with ourselves. This begins by admitting to that which most ails us.
It begins by admitting how far we have fallen…

Our economy, our culture, our entire world, is built upon debt. No one ever asked us if that’s
how we wanted it, it is simply how the system was designed when we came into it. Many of us
have lived our entire lives under the assumption that debt is a necessary function of daily
commerce and a valuable driver of successful society. Most households in America operate at
a steep loss, trapped in constantly building cycles of liability and interest. There are even
widely held schools of economic thought that are centered completely on the production and
utilization of nothing but debt. Only recently have many people begun to ask themselves what
the tangible benefits are (if any) in being dependent on debt based finance.

After careful examination, it becomes evident that debt does not fuel economy, it suffocates it.
It does not nurture growth, it stunts and poisons it. Extreme debt is not a fundamental organ in
a body of commerce; it is an aberration, a spreading cancer which disrupts the circulation of
healthy trade. Debt is, in large part, unnecessary.

Of course, debt can be very useful if you are the controller or determining overseer of a
system, especially if you wish to centralize and maintain power over that system. The tactical
wielding of debt has been used by elites for centuries as a means to imprison the masses, or
to create an atmosphere of endless dependency. Let’s take a look at what debt really is, and
how it is being used against the average American today…

Understanding Debt

The Charles Dickens classic ‘Little Dorrit’ is commonly misinterpreted as a “love story”,
however, the primary character in the book is not Little Dorrit, or the kindly Arthur Clennam, but
the debt system of Britain itself, and its effects on every social class from the street beggar to
the elitist socialite. Dickens despised the idea of debt and debtors prisons, being that his father
was thrown into one for a good portion of his life, forcing young Charles to work just to support
his parents. Dickens understood well the evil intent behind the debt system, and railed against
it often in his writings.

One figure in ‘Little Dorrit’ which fascinated me was the character of Mr. Merdle, a national
banking superstar who dominates the investment world with the help of British treasury officials

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and various political deviants. Merdle is referred to by merchant circles as “the man of the
age”, a financial marvel who seems to make fortunes in every endeavor he touches. Little does
anyone realize that Merdle is a fraud, a Ponzi scheme artist who takes money from unwary
speculators and sinks it into increasingly more tenuous investments. In order to continue hiding
the fact that all his financial ventures are ending in ruin, he lures more and more depositors to
pay off previous debts. The problem is that Merdle is creating debt to chase debt. Eventually,
his insolvency, and that of all those who trusted him, will catch up and overtake the lie he has
carefully projected. All economic instability is invariably revealed, no matter how expertly it is
hidden.

Mr. Merdle, in my mind, is an almost perfect literary representation of today’s private Federal
Reserve and the global banking syndicates of JP Morgan, Goldman Sachs, Citigroup, etc. The
Federal Reserve, with the help of politicians on both sides of the aisle, created a series of
illusory incentives (through interest rate cuts) which allowed banks to begin lending almost
unlimited fiat at rock bottom prices. America was awash in credit, to the point that it was nearly
impossible for the average person to avoid the temptation of borrowing. What we didn’t
understand then, but are beginning to grasp now, is that credit derived from fiat is not “capital”,
it is NOT wealth. Credit is the creation of an obligation, to be paid at a later date, if it is paid at
all, and because there are no rules to tie the debt to any legitimate collateral (at least for
banks), there is nothing to back the obligation if it falters. Therefore, fiat induced credit is not
the creation of wealth (as Keynesians seem to believe), but the destruction of wealth!

Because of its lack of tangibility, debt can be packaged and repackaged into whatever form
banks like. Derivatives are a perfect example of the phantom nature of debt; securities which
have no real value whatsoever yet are rated and traded as if they are a solid commodity. This
brand of commerce is, at its very root, a kind of fiscal time bomb. Just as in the literary world of
‘Little Dorrit’, the Ponzi scheme in our very literal world had to reach a tipping point, and in
2008, it did.

One glaring difference between our troubles and those of Dickens’ fiction is that Merdle
actually feels guilt over what he has done (or he at least fears the justice that will be dealt him),
causing him to commit suicide towards the end of the novel. In the real world, the Merdles of
our era appear fully content to watch this country crumble due to their intrigues, and rarely
suffer any consequences for what they pursue. In fact, the modern banking elite are more
liable to revel in the searing shockwave of a credit detonation, rather than feel any “remorse”.
The point is, Dickens saw clearly over 150 years ago what many Americans today still do not;
debt is an abstract idea, an absurd game which confuses and ensnares innocent people. Debt
based systems con the citizenry into trading away their tangible wealth and labor for the
promise of future settlements that will never come. Debt serves only to weaken the masses,
and empower creditors.

The Consequences Of Debt

How has debt based economics served us so far?

The credit card debt of the average American household ranges from $8000 to $15,000. Total
household debt including mortgage and home equity loans has hit an average of 136% of
annual household income:

http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-
1276.php

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http://blogs.forbes.com/moneybuilder/2010/06/24/one-big-difference-between-chinese-and-
american-households-debt/

Approximately 80% of mortgage loans issued to subprime borrowers over the past decade
were Adjustable Rate Mortgages (ARM), meaning 80% of mortgages in the U.S. have reset or
are ready to reset at much higher interest rates. There were approximately 1.4 million
bankruptcy filings in 2009, and 1.5 million in 2010. One in every 45 homes in America received
a foreclosure filing in 2010:

http://www.marketwatch.com/story/top-10-cities-where-foreclosure-rates-are-highest-2011-01-
27

http://www.uscourts.gov/Statistics/BankruptcyStatistics.aspx

Keep in mind that in 2005, new government regulations were implemented making filing for
bankruptcy much more difficult. In 2006, filings collapsed. Now, despite stringent obstacles,
filings are up again over 100%.

The “official” national debt now stands at over $14 trillion, which is around 100% of U.S. GDP
(with entitlement programs like social security included, this number is probably closer to 400%
of GDP) . The 100% mark is often cited as the breaking point for most countries struggling to
sustain liabilities. Greece’s national debt stood at 108% – 113% of GDP when it collapsed into
austerity. From 2004, to 2010 (a span of only six years) our national debt has doubled. To put
this in perspective, it took the U.S. over 200 years to reach its first trillion dollars of debt. Now,
we are looking at the accumulation of at least a trillion every year. This is unsustainable.

The much talked about debt ceiling has been raised six times in the past three years. This
frequency is unprecedented. International ratings agencies are now openly suggesting an end
to America’s AAA credit rating:

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http://www.bloomberg.com/news/2011-01-
28/moody-s-says-time-shortens-for-u-s-rating-
outlook-as-s-p-downgrades-japan.html

A credit rating downgrade would be

devastating to what little foreign interest is left
in the U.S. Treasury bond investment.

On the local front, cities and states are on the

verge of folding due to the evaporation of
municipal bond markets. Cities depend greatly
on two sources of revenue in order to continue
operations; property taxes, and municipal
investment. Property taxes, obviously, are
disappearing as property values continue to
spiral downwards. This leaves only
municipals, which have also unfortunately
fallen off the map:

Wall Street analyst, Meredith Witney, recently stated in an interview with 60 Minutes that she
believed 50 to 100 American cities would default in the midst of a municipal crisis in 2011. She
was promptly lambasted by the rest of the MSM for her prediction. In my opinion, she was

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rather minimalist in her estimates, especially if the Federal Reserve does not commit to
another round of quantitative easing (QE3) for the states (Bernanke denies this policy would
be enacted by the Fed, though, which means there is a good chance it will be).

To summarize, the U.S. is swimming in debt. Absolutely nothing has been changed for the
better in terms of wealth destruction and liabilities since the credit crisis began, and the
situation only looks more precarious with each passing quarter.

Where Is The Debt Roller Coaster Taking Us?

What is the most likely outcome of the conditions described above? The vital factor will be the
continued Federal Reserve policy of fiat bailouts as a “counterbalance” to the evolving debt
crisis.

As is clearly explored in the Dickens novel we discussed earlier, staving off the effects of debt
by creating more debt is a temporary solution that only leads to greater calamity down the
road. Anyone who believes that fiat inflation actually “cancels out” debt instability is going to
find themselves sorely disappointed. At bottom, government created stimulus is not a solution
to corporate engineered debt burdens, but a reallocation of debt away from banks and into the
laps of the American taxpayer. The Federal Reserve and our own Treasury have not paid off
anything. They merely shifted the responsibility of payment away from the banks that created
the problem, and handed that responsibility to us. On top of this, they have also set the dollar
up for a crushing blow of devaluation. Here is where the prison bars enclose…

If our historic debt is not being diminished, but only moved around while it expands, then this
means that eventually our credit worthiness will come into question. In fact, it already has.
Foreign investment in long term Treasuries has dwindled. Our own central bank is now the
largest holder of U.S. debt, surpassing even China (Note: this news has so far been ignored by
almost all mainstream outlets):

http://www.ft.com/cms/s/120372fc-2e48-…

So, the question of debt default turns from theoretical to quite imperative. If the Federal
Reserve continues buying our debt with fiat, it means that the effects of the debt will only be
delayed, the dollar will be dropped as the world reserve currency, and hyperinflation is a
certainty. If they do not continue buying, then our government defaults, the country’s financial
infrastructure ceases to exist, the dollar loses its world reserve status, and hyperinflation is a
certainty. The banking elites haven’t just erected a prison, they’ve tossed us in Alcatraz!

The battle over yet another increase of the debt ceiling has obscured the fact that the debt has
already done all the damage it needs to do. Freezing the ceiling in place becomes a battle of
principle, and an important one, but it would in no way stop the dysfunction and chaos to
come. At best, it might shorten the duration of the disaster by a few years. The important thing
to remember is that government intervention will only incur greater loss. There is no easy way
out, no magic shortcut, no last minute brilliant idea that will wrap up this mess. Years of hard
work, determination, honesty, and sacrifice are ahead of us.

Inflation will be the buzzword of 2011. Endless debt facilitates endless Keynesian liquidity.
Expect to see commodities double once again this year.

Household debt will probably level off through 2011, as more Americans abandon their credit
habits and make more concerted efforts to save. In 2009, Visa lost 11% of its credit use, while

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MasterCard lost 22%. Over 8 million consumers have stopped using credit cards altogether
since the end of 2009:

http://abcnews.go.com/Business/holiday-shopping-americans-cut-back-credit-card/story?
id=12367547

Bank lending is still tight as creditors raise the requirements necessary to receive FHA
(Federal Housing Administration) mortgages:

http://www.bloomberg.com/news/2010-11-17/home-ownership-gets-harder-for-americans-as-
lenders-restrict-fha-mortgages.html

Will credit use and debt based consumption ever return to levels similar to 2006? Not a
chance. One might predict then that savings will rise dramatically as credit use falls, but this
too is unlikely. Why? Because over the next year Americans will be spending far more on
essential goods due to inflation than they ever have before. Whatever savings they would have
accrued will be eaten up by the relentless spike in commodity prices. The term used for the
combination of chronic debt, low job growth, and burgeoning inflation, is “stagflation”. I
honestly can’t think of a worse situation than being subject to exploding costs in light of a
dilapidated standard of living. As Dickens points out plainly in ‘Little Dorrit’, how can a man be
expected to settle his obligations when he is imprisoned for them?

Breaking The Cycle In The Midst Of Global Strife

Why after thirty years under the despotic rule of the Hosni Mubarak regime did the Egyptian
people suddenly decide to revolt? Why now? The MSM will field a number of political tales, but
the key to most popular uprisings, especially in the Middle East, has been the lack of
necessities. The last time Egypt saw an uprising of this magnitude was during the Bread Riots
of 1977, when the IMF terminated state subsidies of basic foodstuffs. Is it any wonder that
turmoil has developed so quickly in the region as grain prices double? This is the devastating
power of debt, and the so called “solutions” which merely perpetuate debt.

Tunisia, Egypt, and Yemen, are only the beginning. The sting of inflation will be unbearable as
austerity measures take hold in Europe, and the potential for riots in Greece, Spain, Portugal,
and Italy looms large. The most volatile environment on the planet to date, however, is the
United States, which, as we have shown in previous articles, is being dismantled deliberately
and viciously in preparation for IMF regulation and centralization. Today, the IMF is stalking
Egypt, ready to pounce as the nation goes mad. Tomorrow, it will be us. I will be very surprised
if we are not hearing about IMF intervention in the U.S. economy and the dollar by the end of
this year, offering more debt, and more unaccountable governance.

The secret to breaking the circle of debt is to adopt a policy of decentralization, and self
sufficiency. To take back control of our local commerce and to establish micro-economies with
self contained methods of trade. Debt must be removed from the equation altogether, and
systems protected by flexibility and redundancy must be applied. Savings and meaningful
production would have to take the place of endless spending and outsourcing. The
claustrophobic nurse-maid philosophies of globalism would have to be cast aside and replaced
with goals of independence and self reliance. By cutting our dependency on the corrupt
establishment, we sever its ability to feed off of us. By building a better system, we make the
faulty one obsolete. Whether or not we throw off the trappings of the debt machine is entirely
up to us.

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Two very important steps are required; the realization that debt is not the only way, and, the
realization that debt is the worst way. Prosperity is not achieved at the expense of the future.
The society that finally takes this fact to heart will accomplish incredible things indeed…

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