mardi, octobre 18, 2005

Debt : our new babel tower

You can find here the story of the Babel tower in the Bible.


As all stories in the Bible, this one has to be interpreted. The story is of course not a (failed) historical attempt at explaining how different languages came on earth. The story tells humans that if humans seek ultimate power, they will fail. Why they will fail is not explicitly said but can be infered, they will fail because of the cycle of optimism to pessimism, from attachment to suffering. This cycle is best explained in the buddhist or indhu texts, but the christian religion agrees with it. When humans care for material belongings, when they expect the future to be a certain way (better than the present especially, or at least the same as in the past), then they becomment attached to these expectations. 100% of the time, reality is bound to be unable to meet these expectations. And this causes suffering. This is why all religions ask for a detachment from the material world and from expectations on the future.
The babel tower is the highest expectations that humans can form. And it is an expectation possible only if it is shared collectively. Humans dreamed back then, and still dream at times, that if united, they could master the universe, they dreamed of ultimate power. unstable. It does not matter if there was any attempt in reality at building such a tower. It’s easy to figure how such a tower could be built, it would unite many people in a common project, they would come to speak the same language. It’s also easy to understand what would happen. When the tower reaches a certain height it becomes unstable, it falls. Better engineering help the project to restart and the new tower goes higher. But then fore whatever reason (insufficient technology, funding, energy, storm, termites ...) a limit is reached. The expectation of ultimate power is being disproven. Pessimism follow. Then each man for himself, chooses to take care of his own projects. End of the common project, of the common language, birth of thousands of new local projects and local languages.

What does this say about the present debt accumulation ?

A loan just as a debt is a bet on the ability to repay in the future with future revenues (or assets but assets themselves are worth the revenues they are expected to generate). So when the debt rise within a country or in a global economy, it means increased expectations on the level of future revenues, it means increased optimism on this future level. An infinite debt is probably the modern equivalent of the babel power. Infinite debt means infite spending power, someone with an infinite credit line would be the modern equivalent of a God. A country with an infinite credit line would be the absolute super power. Humanity getting an infinite credit line could fund all projects and allow all humans to get their desires. Of course, just as the babel tower was not possible to build, infinite debt accumulation is not possible.

As all of you probably know, the global debt level has been rising faster than the global revenue for more than 40 years now. In all western countries consumer debt is sky rocketing, much faster than consumer revenues. In most countries of the world, government debt is growing much faster than tax revenues. Besides the public debt is highly understated because of the difference between private and public accounting standards. And the tax level of many european countries are already quite high. The debt level of financial institutions is sky rocketing world wide as they engage in ever complicated financial schemes. The debt level of companies is stable in most western countries but sky rocketing in asia. All in all the debt growth is unsustainable, humanity is presently building a new babel tower. And it is already very high and pretty unstable.

How this will finaly unwind is unclear.
If history is any guide, panic will finally hit the markets, asset prices will fall, battered consumers will save more, battered banks will lend less, thus battered companies will go bankrupt more often, bankrupcies will create unemployment ... A classic deflation by debt scheme, with a higher magnitude than in the 30’s because the debt level is now higher, and more countries took part in the game. To use the tower of babel metaphor : the tower will crash to the ground.

Governments may also proactively create tons of new central bank money, they may force hyperinflation to erase debts, hand out cash to consumers, create new programs to provide work. Hopefully they will act so, especially if the situation goes out of control.
To use the tower of babel metaphor, central bankers would raise the ground higher and burry the tower before it crashes.
Alas, they have many friends among the rich people and the general mood of central bankers presently is not at monetising debts.

Whatever the way, the global accumulation of debt will stop and this will mark the end of a 50 years era. The allegory of the bable tower tells us that the end of any common projects ends up in participants caring about their own business. This means in our situation probably the end of the dollar as the hegemonic currency, the end of the globalisation process as we know it.

NB :
Some people would like a third solution : debt accumulation sould gently slow worldwide, while revenue would keep on growing. To use the tower of babel metaphor, people would progressively stop to care about this tower and and slowly the construction rythm would fall, while the ground level would slowly rise.
This is not going to happen.
The story of the tower of babel does not say that slowly people got tired of building the tower, and slowly they started to quit the project.
And indeed things rarely work this way once a threshhold of speculation has been reached. Once there are people living on the 50th floor, and people hoping to go higher, the process is selfsustaining, until the crash. Too many people now get their revenues from the increase in debt. No action has been taken so far despite rising unbalances caused by the pro debt and assets policies of the 1980’s (reagan thatcher). The longer we wait, the harder the action will need to be, the most probable it becomes that any action will disrupt the financial markets in a significant way, push the tower to the ground.
If any of you has ever build castles with game cards, you know exactly what I mean. Construction often ends with a final crash.

2 commentaires:

Jerome Jackson a dit…

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