This chapter is from the book
This chapter is from the book
This chapter is from the book
Debt Clock
Paper money represents a claim on itself. Debt or credit money is a future claim against a person or entity that can be used today for the purchase of goods. Credit is a world of sweet nothings, mere promises. The word credit is from the Latin credere, to trust. Keynes recognized this aspect of debt: “The importance of money flows from it being a link between the present and the future.”26
Debt enables borrowers to consume in excess of their earnings or available resources. Credit also provides the essential mechanism for making money from money. The lenders charge for the money borrowed, enabling them to become rentiers—people who live from income derived from interest, rent, or gains from trading. The German poet Heinrich Heine understood the significance: “Men can choose whatever place of residence they like; they can live anywhere, without working, from the interest on their bonds, their portable property, and so they gather together and constitute the true power.”27 To Karl Marx, the author of Das Kapital and father of communism, this was another “ism”—parasitism.
Debt introduces new risks. The person on whom your claim is may be unable to pay. If the interest rate on the borrowing is too low, then the lender will lose, as the money received back will be insufficient to compensate for the effects of the rising prices (inflation). But the ultimate risk of debt is subtler still.
Charles Ponzi, an Italian immigrant, created an eponymous fraudulent scheme that paid very high returns to investors—not from actual profits, but from their own money or money paid by subsequent investors. Originally, Ponzi had the idea of arbitraging international reply coupons (IRCs). Postal reply coupons can be sent from one country to a correspondent in a foreign country to be used to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase but were eligible for exchange into stamps to cover the cost of postage in the country where redeemed. After the First World War, the fall in the value of the lira decreased the cost of postage in Italy in U.S. dollar terms. This allowed an IRC bought cheaply in Italy to be exchanged for U.S. stamps of a higher value. Ponzi’s company—the Securities Exchange Company—raised money to exploit this difference in prices by offering a 50 percent return on investment in 45 days. About 40,000 people invested $15 million in the scheme.
On July 26, 1920, the Boston Post and Clarence Barron, a financial analyst who published the Barron’s financial paper, revealed that there were only about 27,000 coupons actually circulating, whereas the investments made with the Securities Exchange Company required 160,000,000 postal reply coupons. The U.S. Post Office confirmed that postal reply coupons were not being bought in any great quantity at home or abroad. Ponzi had diverted the investors’ money to support payments to earlier investors and to support his extravagant personal lifestyle. Ponzi was indicted for fraud and ultimately deported. He reportedly said, “I went looking for trouble, and I found it.”
Debt can be a monetized Ponzi or pyramid scheme. To be self-sustaining, the modern monetary system—printing money, reserve banking, and debt—requires a Darwinian scheme in which the only ones who survive are those who can induce others into even greater debt.
Borrowers have to pay interest and ultimately repay the amount borrowed. But the interest and the amount borrowed may not be paid back, therefore requiring more borrowing that continues until the borrower collapses under the weight of debt. The only way out is for borrowers to induce new borrowers into larger amounts of debt to allow them to pay off their own debts. The system works, like any Ponzi scheme, as long as everyone believes the debt can be paid back and the market value of assets bought with that debt keeps rising. The economy inexorably gravitates toward debt-fueled consumerism, inflation, and increasing debt. This leads to a constant cycle of credit booms and bust.
In the second half of the twentieth century, credit money gradually became the primary form of money, leading to an explosion of debt.
In 1947 the directors of the Bulletin of Atomic Scientists at the University of Chicago created the doomsday clock. The minutes to midnight represent the time remaining to catastrophic destruction (midnight) of the human race from global nuclear war. In 1989 Seymour Darst, a New York real estate developer, created the financial equivalent. He installed the national debt clock—a billboard-size digital display on Sixth Avenue (Avenue of the Americas) in Manhattan, New York, that constantly updates to show the current U.S. public debt and each American family’s share of it.
When this clock was originally erected, the U.S. national debt was under $3 trillion. The clock was switched off from 2000 to 2002 when the national debt briefly fell. Subsequently, as the debt started to rise, the clock was restarted. By 2009, the debt exceeded $10 trillion, requiring Douglas Darst, Seymour’s son, to arrange for a new clock with extra capacity.
In the 1950s, Herman Kahn, a strategist at the RAND Corporation, and Ian Harold Brown, a risk analyst, proposed a doomsday machine. It consisted of a computer linked to a stockpile of hydrogen bombs, programmed to detonate them and bathe the planet in nuclear fallout at the signal of an impending nuclear attack from another nation. In Stanley Kubrick’s film Dr Strangelove or: How I Learned to Stop Worrying and Love the Bomb, there is speculation about whether the Russians possess this technology.
Currently, the doomsday clock reads around 5 minutes to midnight. In 2008, as the global financial crisis gripped the world, the financial equivalent of the doomsday machine—an unstable system of money and unsustainable levels of debt—reached midnight and imploded.