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Drop the Debt, photo by Paul Miller at Flickr
The Tax Justice Network says that the richest people around the world have hidden between $21 and $30 trillion in tax havens, safe from the demands of their fellow citizens that they participate in funding the operations of governments by paying taxes. What do the rich do with that money? We know they play speculative games with the money, trying to profit from other rich people or pension plans, and money people are trying to save for retirement or for college expenses for their kids. But the main thing they do with money is lend it out. One of their favorite borrowers is the US government. It won’t default, and that interest check shows up when it’s due.
That’s our deal with the rich: they don’t have to pay taxes to fund the government, we just borrow from them, and pay them interest forever.
The figures for government debt growth are astounding. Thirty years ago, the world embarked on a massive tax-cutting program, led by the US. In that time, according to the Bank for International Settlements, governmental debt in 16 OECD economies (deflated by consumer prices) quadrupled. We are all paying interest on that to the people who own those sovereign obligations. If governments had raised that money by taxation, we wouldn’t be paying for the privilege of operating a government. Other non-financial sector debt has grown at similar rates.
As a side note, when trying to explain why this massive increase in debt loads, the Bank for International Settlements didn’t mention the massive tax-cutting regime in the developed nations.
The implications of this tax and borrow deal are infuriating. For one thing, billionaires like Peter Peterson can scold the government about its massive debt, while sucking out guaranteed interest payments, directly, and indirectly through their foundations and corporations. They can use their fellow travelers, like Bloomberg columnist Caroline Baum to persuade the gullible that we don’t have any money to fund Social Security and Medicare, because we have to pay the interest on that debt, and we can’t raise taxes because that would be useless, and reflective of an unattractive urge to hurt the rich for no good reason.
Since the Great Crash of 2008 we’ve been trying to muddle through and get back to some golden age of normal, like the 2000s, so the financial sector can continue its pillage. That isn’t going to work, and the ever alert Zero Hedge is, as usual, ahead of the curve. Last September, they posted a discussion of a study by Boston Consulting Group on the enormous fiscal problems facing the world. BCG isn’t impressed with the kick the can down the road approach that politicians in every nation have adopted. They think we need to restructure debt; hence the title of their paper, Back to Mesopotamia, a reference to a Debt Jubilee idea of that ancient ancestral society. An easy way to finance that restructuring is to tax existing assets. I didn’t realize polite people would say things like this in public:
Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations will be unable to meet their commitments.”
This tax isn’t some piddling thing, either. The US would need a one-time tax of 25% of wealth. The Boston Consulting Group admits the evident unfairness of this in the context of recommendations for solving the housing crisis in the US:
Such a course of action would pose a significant issue of moral hazard, benefiting those who were reckless and imposing a share of the burden on those who were careful [or lucky]. But the government could conclude that the total economic and social costs of a prolonged period of low growth and deleveraging are so huge that unconventional measures are justified. After all, inflation would have even worse side effects.
(Me in brackets). As they say, we can’t keep on with this pretend solution regime forever. Maybe we’ll inflate away the savings of millions of Americans until we have social disruption, or maybe we’ll try austerity until we have social disruption. The debt won’t get paid. The only realistic way out is to inflict that loss on the people who can bear it best, the richest among us. Thus spake Boston Consulting Group.
28 Comments
What, a house is no longer a financial asset?
A flat tax of 25%? Sure if we get 100% employment and finish off the bullshit economics.
Can we have the rich over for dinner, too? I’ll get the pit barbecue ready.
How how about imposing higher reserve requirements on banks and paying negative interest on those reserves?
Or how about minting/printing the money we need instead of borrowing it. Some (e.g., Krugman) insist that that would cause inflations; others (e.g., MMTers) insist that printing money is no more inflationary than borrowing it. (The MMT argument is that owners of Treasuries can always pawn them at banks in exchange for freshly issued money from the bank.)
Why have workers allowed themselves to be so brutally and irrevocably ****ed?
The rich march always march in ironclad solidarity and never act against their own interests.
All it takes is a few cheap, dumb lies to turn natural adversaries into unnatural allies.
Teh rich buy govts.
The rich don’t even lend to Uncle Sam anymore. They just get their whores in the Fed to print the money to buy the Treasury Bonds. (QE1 …QE2….QE3…..)
If you tax wealth you are likely to be taxing the upper middle class and not the rich. The rich have their wealth in far away places.
The MMT argument derives from the fact that the federal government is the soverign issuer of a non convertible and freely floating fiat currency. Only the feds can issue it, no one else in the world. The mere issuance of money does not cause inflation (in the absence of full capacity)despite what some like to believe.
Another thing not commonly understood is that we tie our own hands behind our backs. There is really no reason to ever issue another treasury bond. That is simple logic when you reflect on the fact noted in the preceding paragraph. Further the govt could buy up all the outstanding debt and burn it. It’s called QE. So there!!
(I am just expanding on your comment here.)
But IMO it is about fucking time we taxed the rich (especially the super rich).
IMHO, QE1, QE2, and QE3 (if it happens) are instances of the Fed paying off the Treasury’s debt with magic money (credit in accounts at the Fed, a.k.a. “reserves”). Those bonds still count toward our national debt limit, but interest paid on them is considered to be the Fed’s profit, of which there was $84 billion last year and all of which reverts to the Treasury at the end of the year.
True. Counting those bonds towards the debt seems a little odd to me. But hey, they do the accounting.
And that is what they do – - always. Romney is one of the best liars they got going for them.
It’s not quite that simple. Any time any bank makes a loan, they accept an IOU of some sort (with or without collateral) in exchange for credit (freshly issued dollars) in an account at that bank. Other banks accept that credit as real money, as does the IRS. It doesn’t get any more real than that.
Agreed. It’s a matter of supply and demand. If the supply of money exceeds the capacity to produce, prices go up, i.e., the value of the dollar declines. (But that’s saying what you said, in a slightly different way.)
The fifteen trillion dollars are all US issued debt. Private debt is offset by a a deposit and a loan that net to zero. It does not add anything to net financial assets in the private sector. A govt deficit does.
Well, maybe it’s time to default on those “loans”!
The rich are also on a quest to buy up and control all public assets, like roads, prisons and infrastructure. They can then charge fees for its use, guaranteed income. The next thing to go could be the post office.
And once you get control of prisons, well, can slave labor and debtors prisons be far behind?
I highly recommend the links to the Boston Consulting paper and the BIS paper. Both of them show the massive increases in debt in the non-financial sector. The BIS paper talks about some reasons for the increases that make some sense.
The transition from equity to debt is a big part of our problem today. It represents a scary drop in willingness of capital to accept risk, and a loss of income in other groups.
That is true. the private sector has taken on huge debt prolly from the massive housing bubble. You recall people took out second mortgages to fund their new car and boat, etc. People have been trying to deleverage for the past four years and that is likely the reason why, despite the large federal deficits over that time, the recovery is so wimpy.
That also leads to the notion that we want to continue the fed deficits and not reduce them. In fact higher taxes at this time are not the best thing but I make an exception for the super rich.
I clicked through some of that and they seem to include fed gov debt with private debt. Those are not the same, in fact I would say not even remotely the same, since we can afford the fed debt. But the private sector is obviously having trouble and that could take years to unravel. that is why we need the gov to spend even more or find ways to really deal with the housing problem. To the extent people are paying off debts they are not consuming and therefore sales are not as high as they could be nor is employment.
“That’s our deal with the rich: they don’t have to pay taxes to fund the government, we just borrow from them, and pay them interest forever.”
Nice. About as direct and simple an explanation as one is likely to find.
“Why have workers allowed themselves to be so brutally and irrevocably ****ed?”
My guess is religion and in particular monotheism, the religion of civilization, because monotheism sells authoritarianism. Indeed, it is the essence of the system: Monotheism is authoritarianism. In order to defer to those above you on the socioeconomic ladder, authoritarianism is absolutely necessary. Why do the rich stick together? Who is above them but god?
And of course the hideous irony is that the lower one’s quality of life, the more likely they are to appeal to a higher power for “help.”
Lending at near zero interest is no great thing for the lender. In fact such low rates are a disaster for all sorts of reasons I won’t get into.
The relationship between the gigantic sums of money floating around the world looking to invest and the ultra low interest rates on some sovereign debt is very close and speaks to other dysfunctions of the system. Because so much money has been swept into the hands of the very rich who cannot possibly spend it but must ‘invest’ it, at zero percent, the real economy is ever more starved for money and demand. This is actually one of the roots of all our problems.
It is supply side economics finally reaching its absurd logical conclusion. Too much money trapped in the financial economy looking for investment returns but those are disappearing because the real economy is starved for money.
Still, just yesterday, Cameron of Britain said England needed more foreign investment. There is as far as I know nobody who is anybody in the world who does not believe in this ‘investment’ stuff as the key to nirvana even after 3 decades of putting more and more money into the hands of the few who ‘invest’ it. ‘Invest’ in things like Mortgage Backed Securities and Greek debt. To ‘invest’ at a real negative interest rate. ‘Investing’ at a negative rate is the negation of investment. It is the death of capital and capitalism. Death of them as policy by central banks and governments.
I always thought of it as a reverse income tax where we pay the richest, most patriotic Americans to stay here.
Agreed. But the argument of the classical economists (if I understand it correctly) is that Treasuries are less “liquid” than currency and therefore don’t bid up the prices of goods and services as much. Therefore, they claim, borrowing money to cover the deficit is less inflationary than minting/printing it. As you point out, bank money “does not add anything to net financial assets in the private sector.” But the MMT argument (if I understand it correctly) is that bank money is every bit as “liquid” as currency and Treasuries can be pawned for bank money thereby introducing the same liquidity as money printed/minted by the Treasury.
masaccio–
Thank you for this excellent diary.
You said, “That’s our deal with the rich: they don’t have to pay taxes to fund the government, we just borrow from them, and pay them interest forever.”
The truth is that some people don’t “get this.” :-) Thanks again.
Highly recommended.
Blue
The top 001% know it’s game over and they’re basically cashing in their chips. Much of the Earth will very soon be uninhabitable, thanks to the KOCH Bros. and EXXON-MOBIL et al. So, the super rich need every dime now to build their underground and domed cities to ride out the coming Climate crunch and pop. crash. They’ll make sure they’re safe behind their new crowd control weapons and their private armies. Then when the time comes they’ll shut themselves down and throw everyone but their own under the wheels.
Excellent diary!