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The Primitive Theory Of National Debt

Economics / Global Debt Crisis 2014 Jun 04, 2014 - 04:25 PM GMT

By: Andrew_McKillop


Blasphemy Against the Holy Ghost
Marx thundered that “...with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost, which cannot be forgiven”.  Not being able to speak for the Holy Ghost, we can state that dark and primitive magic was certainly in play when national debts were invented – literally ex nihilo. But that was small beer compared to what was coming.

Proving this assertion, Wikipedia is forced to tell us that British national debt, for example, is no longer definable: “National debt refers to a specific measure which is arguably outdated in the United Kingdom”. It was national or public debt, until perhaps 2000-2002 in the 'reign' of Tony Blair. From at latest that period, its size, rate of growth, interplay of private and public holders and issuers, range of issuers and holders, international holdings of British debt often in counterparty for British holdings of foreign debt – and other factors like currency exchange rates and interest rates – made it a waste of time talking about the subject. Persons such as Mr David Cameron show they either have no interest in the subject, or are completely ignorant of it, by claiming they are “paying down the national debt”. They mean attempting to reduce annual budget deficits. Not the debt.

The history of US national or public debt shows the same morph from somewhat comprehensible to the opposite, that is totally incomprehensible. Created during the American Revolutionary War of 1775-1783, to fight the British whose own national debt was expanded to fight the Americans, it reached a peak of around 33% of the GDP of the 13 ex-colonies of the time, but soon tapered away to almost nothing. It reached its so-far-historic peak at above 120% of US GDP during the 1941-1945 World War II, for the US, and the nation's immediate postwar “economic recovery”.  It then tapered away and down to well below 35% of GDP in the mid-1960s. 

This was the “history of real US public debt”. Outright blasphemy against the Holy Ghost only started for the US, like the UK, Japan, Germany, France, Italy, Spain, Canada (and most other countries you would care to name) in the late 1990s, or around Y2K. National or public debt morphed into an unknown but menacing thing. It literally has no end in view. It can only grow, “sine die”.

Ex Nihilo and the Opposite
The opposite of an ex nihilo process is one that permits return to some initial state, for example Mircea Eliade's “Eternal Return”, a mythologizing process also present in, for example, the Dreamtime of Australian Aborigenes. The return can be delayed “almost forever”. But not quite. Like paying down the (now undefined) national debt.

If we want, we can blame Adam Smith. He made the fantastic claim, which became an article of faith for all kinds of economists (whether marxist or not), that society is made up of those who can be bothered to work, and those who can't. The lazy sell their labour, which is all they have, while the Busy Bees accumulate capital. This was “primeval or primitive accumulation”. Not satisfied with having to work hard (in their opinion) to accumulate capital, the Busy Bees exploited the lazy rascals around them – but were themselves parasitically exploited by the ultimate free riders - Pure Capital.

Adam Smith did not have much to say about the subject (not like Marx) but one point of agreement between them was that some form or type of “original accumulation” had to have happened. For example gold bullion and silver finds, fishing and farming bumper catches and crops, or colonial pillage, the slave trade, or scientific and industrial innovation, development and whatever.

Why Invent Public Debt?
There is no single explanation or single theory for this. The consensus claim among economists and historians is the public debt was created “under conditions of national emergency”. National survival was threatened – and by “nation” we can include the Monarch or Emperor and their hangers-on. The three cases of early national debt creation - in 18th century France, Britain and the future USA - were all under national emergency conditions. Mostly wars that needed financing, but in the French and British cases, saving the King was equally important.

This was totally unrelated to the actual economic (or financial) conditions in those three countries at the time, or to the situation in nearly all countries today, whether developed or emerging.  Concerning the situation from about 1995 or 2000, this is now The Long Emergency. Officially, the economy's survival is threatened. Only national debt can save it. It is a permanent long emergency.

In the 18th century, in France and the future US or Britain, there was no “real  emergency” at the time their national debts were created. It was fictional. Today's emergency is real.

Taking the case of 18th century West European countries which soon copied France and Britain – whether they had wartime emergencies or not – economic historians including Nikolai Kondratiev estimate that only concerning these countries, through about 200 years from 1550-1750, they received uber-massive inflows of gold and silver from Central and South America.

In simple round-number terms, this was possibly or probably about 40 000 tons of gold and 400 000 tons of silver. Using World Gold Council data, the entire gold reserves of the 100-largest world central banks, today, is around 31 300 tons. In the 1550-1750 period the total economic output of GNP of West Europe, insofar as it can be compared with today's figures, was minuscule - possibly 1.5% to 2.5% of present world GNP.

Yet it was necessary and urgent to create public debt! The banking system was supposedly unable to provide the loans to build a few wooden fighting ships with their cast-iron cannons and recruit and pay the sailors and soldiers. So special means were needed – public debt.

The consensus claim of economic historians ignores the “colonial windfall wealth factor”.  Their argument, when marxist flavored goes on to claim that the early experience of issuing national debt, which made central banks either obligatory or desirable, racked up the system and process of parasitic financial capitalism. This system had a supposed lack of collateral in 18th century Europe and the early USA (insufficient gold for example!), so fictive or fictional capital had to be invented.

Fictional Capital and the Real Economy
The 18th century paradigm is reproduced and multiplied 100-fold today, if not 1000-fold. Parasitic capital is notoriously inefficient, always needs new and larger credits, and must invent or “discover” new collateral. For further loans, if only to pay down past and existing loans.

Whether marxist or not, economists are forced to agree there is no possibility of permanent and rapid debt creation – either public or private – unless new collateral can be “discovered or created” and this needs economic growth. When economic growth is missing presumed dead in combat, collateral creation or “discovery” will be ultra important for Saving The System.

We mean destroying the system.

No sane economist believes it is possible to pay down accumulated public debt in – for example – the G7 countries today, more especially if economic growth never returns. Even if it did, the pay down process would be difficult, painful and long. “Blood, sweat and tears”. Otherwise it will be totally impossible. There is an ever-widening “credibility gap”, sometimes called the Growth Gap.

So, using this liberal interpretation or reading of the tea leaves, collateral creation through “value discovery” will have to be permanent. This means that real estate values and house prices must always rise. Equity indices must always rise. Commodity prices ditto. The paper money chips used for paying down debt – we mean “servicing debt” - must always depreciate in value. Interest rates must be maintained at near zero, or negative. And so on.

The real economy is therefore fictionalized to mimic and support the financial economy. The only question is how long the process continues – and how it ends. Which it will.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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