A topic that never gets the attention it deserves is the role of credit money in the modern technological economy. More important, the role of this new money, built for a technological society, is having on the old economy, where most everyone lives and works. Outside of Silicon Valley, Washington and New York, most people exist in the late-industrial age. Their money, however, is designed for the post-industrial, technological age where information and network positioning is the basis of value.
The current setup with the dollar as the reserve currency pegged to nothing more than the hopes and dreams if the Federal Reserve is a new thing in history. In fact, it is one of the truly new things in the last thousand years. Since the Louvre Accords formalized the currency arrangements we have today, debt of all types has exploded. You see it quite clearly in this article from the Free Press about Detroit’s woes. Right in the mid to late 1980’s, Detroit went from a declining debt path to a skyrocketing debt path.
The article, of course, does not address the role of credit money and instead tries to shift the blame to its favorite bad guys. The truth is, the unfolding debt crisis has very little to do with policy decisions made by Mayors, Governors or even Congress. It is the result of the shift change in the currency arrangements of the world. The old market restraints, based on the bond issuer’s ability to pay, have been changed to a system where restraint is based on the ability of the system to absorb new debt.
Many people recognize the debt problem, but they don’t understand the underlying cause, instead falling on old chestnuts like “Fiat Currency!” Our economic elites think the answer to the debt crisis is more debt. Some of it is narrow self-interest, as debt creation offers profit opportunities. Others are just true believers who get misty eyed whenever someone mentions capitalism. Then, of course, most people struggle to understand a a shadow banking system with its trillions in complex derivatives.
Cities like Detroit certainly suffer from a collapse of human capital, but that’s not the cause of their debt problems. In the old system, where an ability to pay would have been a restraint on debt issuance, the city would have had to cut services long before the debt load became dangerous. In a system that is hungry for debt, there’s no shortage of people willing to take the Detroit paper. This has allowed the global financial system to loot American cities by offering debt these cities can never repay.
The bankruptcies of American cities are just a tremor, one that everyone will ignore, as these can be papered over by new debt from states. The looming pension problem will be a much bigger tremor, as there will be no way to pay the debt owed to baby boomers retiring from the civil service. At some point, probably in the next decade, the great credit expansion will reach some natural limit that no one currently understands and then we get the real crisis. Detroit will look like good times.
