Everything you’ve been told about debt is wrong
That’s the title of the lead article in the current issue of Yes! magazine (see www.yesmagazine.org) by Charles Eisenstein, one of my favorite writers about economics and spirituality – and one of the opportunities we have for a wedge into the current inequitable system.
“The legitimacy of a social order rests on the legitimacy of its debts,” Eisenstein says. This was okay in traditional cultures functioning on the principle of a gift economy in which “repayment of debt [not usually monetary] was inseparable from the meeting of social obligations,” but we shouldn’t assume that the “moral associations of making good on one’s debts” should apply in the current predatory capitalist economy, as its legal code and “logic of austerity” attempt to dictate. According to this “logic,” if a country like Jamaica or Greece, or a municipality like Baltimore or Detroit, has insufficient revenue to make its debt payments, it’s morally compelled to privatize public assets, slash pensions and salaries, liquidate natural resources, and cut public services in order to pay creditors. Such a prescription,” Eisenstein says, “takes for granted the legitimacy of its debts.
Today a burgeoning debt resistance movement draws from the realization that many of these debts aren’t fair. Most obviously unfair are loans involving illegal or deceptive practices – the kind that were rampant in the lead-up to the 2008 financial crisis. From sneaky balloon interest hikes on mortgages, to loans deliberately made to unqualified borrowers, to incomprehensible financial products peddled to local governments kept ignorant about their risks, these practices resulted in billions of dollars of extra costs for citizens and public institutions.
A movement is arising to challenge these debts. In Europe, the International Citizen debt Audit Network (ICAN) promotes ‘citizen debt audits,’ in which activists examine the books of municipalities and other public institutions to determine which debts were incurred through fraudulent, unjust, or illegal means. They then try to persuade the government or institution to contest or renegotiate those debts.”
Going even further, Eisenstein suggests that “at a time when the law itself is so subject to manipulation by financial interests, why should resistance be limited to debts that involved lawbreaking? After all, the 2008 crash resulted from a deep systemic corruption in which risky derivative products turned out to be risk-free – not on their own merits, but because of government and Federal Reserve bailouts that rewarded the perpetrators of these ‘financial instruments of mass destruction’ (as Warren Buffett labeled them) while homeowners, other borrowers, and taxpayers were left with collapsed asset values and significantly higher debts.
This is part of a context of unjust economic, political, or social conditions that compels the debtor to go into debt. When that injustice is pervasive, all or most debts are illegitimate. In many countries, declining real wages and reduced public services virtually compel citizens to go into debt…African and Latin American nations, southern and Eastern Europe, communities of color, students, homeowners with mortgages, municipalities, the unemployed – the list of those who strain under enormous debt through no fault of their own is endless. They share the perception that their debts are somehow unfair, illegitimate, even if there is no legal basis for that perception. Hence the slogan spreading among debt activists and resisters everywhere: ‘Don’t owe. Won’t pay.’
Challenges to these debts can’t be based on appeals to the letter of the law when the laws are biased in favor of creditors. There is, however, a legal principle for challenging otherwise legal debts: the principle of ‘odious debt.’ Originally signifying debt incurred on behalf of a nation by its leaders that doesn’t benefit the nation, the concept can be extended into a powerful tool for systemic change. Odious debt was a key concept in recent debt audits on the national level, most notably in Ecuador in 2008 that led to its defaulting on billions of dollars of its foreign debt. Nothing terrible happened to it, setting a dangerous precedent (from the creditors’ point of view). Greece’s Truth Commission on Public Debt is auditing all of that nation’s sovereign debt with the same possibility in mind. Other nations are likely taking notice because their debts, which are unpayable, condemn them to an eternity of austerity, wage cuts, natural resource liquidation, and privatization for the privilege remaining part of the global financial system” that created their suffering in the first place.
“According to a report by the Jubilee Debt Campaign, since 1970 Jamaica has borrowed $18.5 billion and paid back $19.8 billion, yet still owes $7.8 billion. In the same period, the Philippines borrowed $110 billion, paid back $125 billion, and owes $45 billion. These aren’t isolated examples. What’s happening here is that money in the form of labor power and natural resources is being extracted from these countries. More goes out than comes in, thanks to the exigencies of interest.”
Eisenstein believes “that most debt owed by the ‘developing’ world is odious, born of colonial and imperial relationships,” and says “the same might be said for municipal, household, and personal debt. Tax laws, financial deregulation, and economic globalization have siphoned money into the hands of corporations and the very rich, forcing everyone else to borrow in order to meet basic needs. Municipalities and regional governments now must borrow to provide the services that tax revenues once funded before industry fled to the places of least regulation and lowest wages.
The rising tide of debt can’t be explained by laziness or irresponsibility,” Eisenstein says. It’s systemic, unfair, and inescapable. “As the concept of illegitimate debts spreads, the moral compulsion to repay them will wane, and new forms of debt resistance will emerge. They already are in places most affected by the economic crisis, such as Spain, where a strong anti-eviction movement challenges the legitimacy of mortgage debt and has just gotten an activist elected mayor of Barcelona.
As the recent drama in Greece has shown us, though, isolated acts of resistance are easily crushed. Standing alone, Greece faced a stark choice: capitulate to the European institutions and enact austerity measures even more punishing than those its people rejected in the referendum or suffer the sudden destruction of its banks. Since the latter would entail a humanitarian catastrophe, the Syriza government chose to capitulate. Nonetheless, Greece rendered the world an important service by making the fact of debt slavery plain, as well as revealing the power of undemocratic institutions such as the European Central Bank to dictate domestic economic policy.
Besides direct resistance, people are finding ways to live outside the conventional financial system and, in the process, prefigure what might replace it. Complementary currencies, time banks, direct-to-consumer farm cooperatives, legal aid cooperatives, gift economy networks, tool libraries, medical cooperatives, child care cooperatives, and other forms of economic cooperation are proliferating in Greece and Spain, recalling traditional forms of communalism still present in societies not fully ‘modernized.’
Three-quarters of Americans carry some form of debt. Student debt stands at more than $1.3 trillion in the United States and averages more than $33,000 per graduating student. Municipalities around the country are cutting services to the bone, laying off employees, and slashing pensions to make payments on their debts. The same is true of entire nations, as creditors – and the financial markets that drive them – tighten their death grip on southern Europe, Latin America, Africa, and the rest of the world.
If one debt can be nullified, maybe all of them can – not only for nations but for municipalities, school districts, hospitals, and individuals. That’s why the European authorities made such a humiliating example of Greece – they needed to maintain the principle of inviolability of debt. That’s also why hundreds of billions of dollars were used to bail out the creditors who made bad loans in the run-up to the 2008 financial crisis, but not a penny was spent bailing out the debtors.
Mass debt resistance would be catastrophic for the financial system, which is so highly leveraged and tightly interconnected that even a small disruption can result in systemic crisis. Let’s organize and spread awareness. We needn’t confront the banks, the bond markets, or the financial system alone.”
Eisenstein goes on to point out the limitations of marginal reform of the system (à la New Deal), saying that “reducing rates on student loans, offering mortgage relief, reining in payday lending, or reducing debt in the Global South might be politically feasible, but by mitigating the worst abuses of the system, they make that system slightly more tolerable and imply that the problem isn’t the system,” which it is.
“Conventional redistributive strategies, such as higher marginal income tax rates, also face limitations, mostly because they don’t address the deep root of the debt crisis: the slowdown of economic growth worldwide, or, as a Marxist would put it, the falling return on capital. More and more economists are joining a distinguished lineage that includes Herman Daly, E.F. Schumacher, and even (though this is little known) John Maynard Keynes to argue that we are nearing the end of growth – primarily, but not only, for ecological reasons. When growth stalls, lending opportunities disappear. Since money is essentially lent into existence, debt levels increase faster than the supply of money required to service them. The result, as Thomas Piketty has described, is rising indebtedness and concentration of wealth.
The aforementioned policy proposals have a further defect as well: They’re so moderate they have little potential to inspire a mass popular movement, as, for example, pushing for the cancellation of all student debt would – or a jubilee, a fresh start for mortgage debtors, student debtors, and debtor nations.
The problem is that canceling the debts means erasing the assets upon which our entire financial system depends. These assets are at the basis of your pension fund, the solvency of your bank, and grandma’s savings account. To prevent chaos, some entity has to buy the debts for cash, and then cancel those them (in full or in part, or reduce their interest rate to zero). Fortunately, there are deeper and more elegant alternatives to conventional redistributive strategies. I’ll mention two of the most promising: ‘positive money’ and negative-interest currency, both of which entail a fundamental change in the way money is created. Positive money refers to money created directly without debt by the government, which can be given directly to debtors for debt repayment or used to purchase debts from creditors and then cancel them. Negative-interest currency (which I describe in depth in Sacred Economics) entails a liquidity fee on bank reserves, essentially taxing wealth at its source. It enables zero-interest lending, reduces wealth concentration, and allows a financial system to function in the absence of growth.
Radical proposals such as these bear in common a recognition that money, like property and debt, is a sociopolitical construct. It’s a social agreement mediated by symbols: numbers on slips of paper, bits in computers – not an immutable feature of reality to which we have to adapt. The agreements that we call money and debt can be changed. To do so, however, will require a movement that contests the immutability of the current system and explores alternatives to it.”
Eisenstein is the author of Sacred Economics and The More Beautiful World Our Hearts Know Is Possible. Search this website for detailed notes on these books.