America Cannot Recover from Recession Until It Writes Down Debt to What Can Be Paid

Wealth created by productivity diverged from wage growth in the Carter administration, but separated for good under Reagan and all subsequent presidents. Wages have been essentially flat since 1972. For almost all working people, increase in purchasing power has been achieved by increasing personal debt.

by Gaius Publius

We live in a predatory capitalist world, one in which those with money compete ruthlessly with each other to acquire the most added money they can. Achieving this goal includes, among other things, impoverishing their customers, converting the personal wealth of their customers to personal debt, then making more money selling and collecting interest on that debt.

After 45 years of this behavior, and especially in the wake of the devasting 2007-2008 crash, most Americans live with a burden of debt they can never recover from, can never earn their way out of. Since 2008 especially, as a direct consequence of this situation, debt growth has continued to skyrocket while GDP growth has limped along.

This started in the 1980s, in which almost all of the fruits of increased productivity were harvested by the owning class and not the workers who generated it. You can see that process in the chart above.

This is a very perverse economy, but it's unfortunately the one we're trapped in. During a crisis, major bond holders in particular and creditors in general are protected and reimbursed at 100 cents on each dollar owed — bond holders via various bailouts, and creditors via increasingly harsh and punitive bankruptcy laws that apply to those who owe them money. Thanks to a relatively recent change, for example, promoted by Joe Biden and others, student debt, now totally over $1 trillion dollars, is almost impossible to discharge by declaring bankruptcy.

Total U.S. student debt as of March 2015 (source). Note that student debt growth was unaffected by the 2007–2008 economic crash.

Keep in mind, this discussion is entirely about personal debt, debt held by citizens, like mortgage debt, credit card debt, student debt, car loans, and the like.

Bottom line: No U.S. economic recovery is possible until the government stops protecting creditors at all costs and starts making it possible (or mandatory) for personal debt to be forgiven. During the last crisis, for example, Obama's government could have bailed out the mortgage holders themselves, regular citizens, but chose instead to bail out banks and institutional creditors that held those mortgages, leaving mortgage debt held by individuals almost entirely in place (and largely unrepayable).

In fact, the insurance company AIG was given federal money to pay its derivatives debt to major banks at 100 cents on the dollar, specifically so that AIG creditors like Goldman Sachs would not see or suffer any loss at all. In other words, Obama's government bailed out AIG as a backdoor bailout of Goldman Sachs and other banks.

Not so the suffering mortgage holders, whose personal pain was infinitely greater. They saw, and still see, next to nothing in relief.

You may call this recommendation, that debt be forgiven, morally problematical — after all, "everyone knows" you have to pay your debts — even while U.S. corporations and the elites who run them declare bankruptcy all the time as "simple business decisions," and the bailout of Wall Street was by definition debt forgiveness with government money.

Nevertheless, if the current overhang of personal debt isn't erased — wiped off the books — there will never be an economic recovery in the U.S., at least not for the lower 90% of the population unserved by either political party. And if people in the lower 90% never see a recovery, the national economy will never see one either. There's just no such thing as a recovery in which only the rich are spending.

Michael Hudson: "We're in a Permanent Debt Deflation"

Here to explain all this much better than I can do is economist and professor Michael Hudson, a man who understands the relationship between debt and the economy as well or better than anyone like him writing today (h/t Naked Capitalism).

This is an excellent and clear explanation, and a fascinating listen. Please give it an opportunity to engage you. If you do, there are several surprises near that end you're likely to enjoy.

It doesn't matter who is in office, or which party. The economic condition of the lower 90% will not change — will in fact worsen until there is a revolution of some kind — unless the mountain of U.S. personal debt is forced to be forgiven.

It's just a fact. Please consider that fact during the next economic crisis, with its inevitable calls for new banking and creditor bailouts. Or during the next eruption of revolt against our governing elites.

You may also want to hope that the next eruption of revolt is expressed electorally like the last one was, and not expressed in some other way. Desperate people who can't find electoral relief often seek relief through non-electoral means. Not a recommendation from me, or something I wish for, but a fact I often fear these days.

GP