The Religion of Debt

Seduction. Photo by Kelly Cowan.
Seduction. Photo by Kelly Cowan.

Editor’s Note: This article grew out of an ongoing email correspondence on banking and economics between me and it’s author, Kelly Cowan. Kelly is an artist, investor and observer of the economy and capital markets. Although she left the professional investment world behind long ago, she is a close watcher of economic and market trends. She maintains close contacts with a number of individuals in the investment world. –efc

FROM THE TEMPLE OF DEBT a prayer rings out. It is the busiest time of year for the Cathedral of Commerce. ‘Tis the season of Debt.

A critical issue facing this nation is our debt problem. Excessive levels of both private and government debt exist today. There are two ways to deal with debt: service the debt or default on the debt. With default can come deliberate debt reductions or bankruptcy. Current debt levels are unsustainable and there is no way to service all this debt. The debt cannot and will not be repaid. The wealth just isn’t there. We are living in an era of negative equity.

All this debt was accumulated for consumption and speculation on asset prices. It was not used to expand production. This increased debt burden did nothing to add to productive capacity. So where did the money go? The debt was secured by asset values that were never really there (no, your two bedroom house that hadn’t been remodeled since the 50’s was never worth $1 million; it was an arbitrary number created in speculative ecstasy). The choir of lenders sang borrow, borrow, borrow. The money borrowed against these assets was used to purchase stuff, and useless stuff at that. Much of that stuff came from China; we shipped dollars to China and China shipped stuff to us. US consumers consumed more than they produced, using borrowed money (much of it from China) to pay the difference. Chinese consumers produced more than they consumed and saved the difference. America borrows China’s savings.

The solution is to unwind the debt and allow the necessary hits, however painful. Pain management will require a lot of emotional resources. The adjustment period is underway. The dynamic is in play and we need to decide how this will occur. Instead, we are pushing the problems down the road and expecting a miracle

The Federal Reserve Bank (the Fed) is the temple where this miracle is being preached, and Ben Bernanke, its chairman, is the High Priest. The stated mission of the Fed is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Perhaps Bernanke and friends didn’t receive the memo.

The dollar is being nailed to the cross, sacrificed for our belief in debt. The desecration of the dollar will not save us. It will lead to inflation (perhaps, hyperinflation) down the road. Inflation is a hidden tax; it is a transfer of funds from the poor and middle class to the wealthy.

Have you heard the “good suit” story?

The cost of a good suit in 1920 was about an ounce of gold, or around $20. Today, the value of an ounce of gold is $1,125, more than enough to buy a good suit. In 1920 the purchasing power that allowed an American consumer to purchase a good suit, in today’s dollars, would be $216.18. Hardly enough to purchase a good suit. the real price difference between a suit then and a suit now is inflation. This is a link to calculate inflation and purchasing power. Feel free to play with it.

We can see from the suit story that the suit costs more in today’s dollars. That $20 in 1920 would put $216.18 in your hands today. While your great-grandfather could purchase a good suit for $20, today with the $216.18 you would not be able to purchase a good suit. Up and down the line, businesses take more of a profit. The price increase certainly isn’t due to the cost of production. Labor cots are not higher-adjusted for inflation.

Technology and overseas production (often at slave wages) have decreased the costs of manufacturing. Inflation hides these manufacturing cost decreases. Today, a smaller proportion of the population can afford suits; suits have become a luxury. But the profit on each suit is higher for a long string of business owners, from the industrial fabric weaver in Italy to your local department store (which is probably not owned locally, and as part of a chain has much greater economy of scale than if it were owned locally). We think of inflation like air — that it is a necessary part of life: but it is not. Yet it’s not just inflation. Those on the purchasing end are hurt both by the value of the dollar going down, and by manufacturers taking higher profit.

High Priest Bernanke is in basement of the Temple. He is furiously printing money. Inflation is caused through the increase in the money supply. It dilutes the value of existing dollars. This is a way to avoid addressing the excessive debt problem. Bernanke has chosen the tool of inflation to hide and shift the debt burden on to the consumer. He is a conjurer.

Meanwhile, as wages and incomes fell and inflation and prices increased, credit was pushed to fill the gap. Consumers didn’t notice, as they could still purchase their car.

We need to address our debt problem: to face it head on. Delaying and praying are not viable solutions to the mess we have made by living beyond our means over the last few decades. Americans have worshipped at the altar of debt and leverage for far too long. The tipping point has arrived. We must learn how to share the Earth’s resources with the rest of the world. But as someone once said, “It is not necessary to change. Your survival is not mandatory.” History is filled with believers who have sacrificed themselves for their beliefs. It is not a new story.

Just this past week, President Obama, in a speech outlining his new stimulus proposal, said that the nation must continue to “spend our way out of this recession.” We all remember President Bush in the days following 9/11 encouraging Americans to go shopping. This is the gospel preached by our leaders: shop and spend. Jim Rogers, a noted global investor and an expatriate American, recently commented, “The idea you can solve a problem of too much debt and too much consumption with more consumption and more debt defies belief. I cannot believe that grown-ups would stand there and say that.”

Here some numbers to think about:

Household consumption in the US is 70-72% of the economy. In Europe it is 55-65% and in China it is 35% of its economy. America is the orthodox branch of the debt religion. We have practiced faithfully. Individuals and businesses have started to delever. A closer look at the numbers, however, might point to something different: a transfer of leverage rather than a deleveraging.

Households have reduced borrowing by $351.3 billion, businesses have reduced borrowing by $238.9 billion and the financial sector has reduced borrowing by $1,532.6 billion in the past year. Over the same time the federal government has increased borrowing by $1,484.9 billion and the state governments have increased borrowing by $115.9 billion (these figures are from the Federal Reserve, Flow of Funds Accounts, for the third quarter 2009).

The gospel of “spend” lives on.


Who is accountable for this debt trap?

Let’s step into the confessional box, shall we.

The definition of the word ac·count (ǝ-kount) is a narrative or record of events. To “call to account” is to hold answerable for.

A narrative is a story. The debt crisis, it is a collective story. It is our story. We are all involved. Each of us has a part in the story. Our roles are based on the individual choices we have made. The altar of debt seems to have been quite seductive. The 19th century Danish philosopher and theologian, Kierkegaard, once depicted seduction as a sacred and religious practice, but he also wrote that the seduction requires the permission of the seducee. All of us are accountable for the debt world we have created.

So what is the debt story? What do we tell ourselves? What do we tell each other? What story should we tell? We need to have one narrative based on the record of events. This takes emotional honesty. Building a story requires time and reflection. It demands awareness and decisions.

To do this we need to begin to “call to account” those who were the key architects of the debt world. We need a public forum to hold them answerable for their decisions. But it can’t stop with the CEOs, members of Congress or the regulators. The discussion must include everyone who has taken on debt. This has been a collaborative series of events and we are all stakeholders, even if we feel that our stake is diminishing.

The process would eventually create a healthy boundary and allow for a way forward. We certainly need a boundary as we are currently on the slippery slope of moral hazard. Neither path is easy, but the path of moral hazard never gets any easier. In fact, it often gets worse. Both paths have economic and emotional prices to pay, but the path of moral hazard has spiritual consequences. The path forward will eventually have spiritual rewards.

14 thoughts on “The Religion of Debt”

  1. A very old Vonnegut novel, Player Piano, comes to mind. The only ones who still had jobs in these United States were the engineers. Everybody else just consumed.

    Bernanke has shined a little light on the Fed, not a lot but a little.

    It has become so incredibly difficult to accomplish positive things on a large scale. Always, always it is easier to knock down than to build up.

    One of my personal core beliefs is that the planet will recover from what humans have done to it and will not miss us when we are gone. As many of us as can will do what we can to delay that reality.

  2. I think the thing that I never hear in articles like this one is the fact that in our “every-man for himeself” extreme independence ideology, we seem to forget just how many people got into debt because of catastrophic health care bills or job losses…or both. Oh sure, many, many people lived above their means, but like the proverbial Black welfare mother with five kids from five different fathers, I have to wonder just how high the overconsumptive percentages are. I have read about (in obscure media) or talked to so many people that were living within their means in modest homes (not the huge 2000 square feet plus homes) who lost their jobs or had costly health issues bring them to their knees and they HAD to live on credit to survive and feed their kids. In America today, I read somewhere, the biggest single indicator that a married couple will end up in poverty is if they have kids. We are not a kid-or family friendly country and workers here have so few protections or no protections.

    Right now, several people (my husband and I included) went back to school not to get a better degree (though that will be a bonus) but to get the student loans to support their families because they couldn’t find jobs…not even low paying ones. How is getting into debt for us (and these people) our fault? We rent, don’t have new and bigger things, live in a small house for all of us and recycle by buying used all the time. How are the thousands and thousands of people like us at fault?

    I am so tired of hearing that it is our fault. I think ginblossom hit it on the head…we live in fear and the greedy folks that control things live in fear and promote OUR fear by controlling us; keep the masses downtrodden so much that they are too busy just trying to survive to rise up and fight to really change things.

    My mother is a prime example of the other kind of person. She is 72, lives with a friend and they are wanting to buy a townhouse together that is (including the basement) 2880 square feet…for just the two of them. Imagine the carbon footpring THAT is to heat and cool! There ARE too many people like that and yes, they do need to change.

    I think the buy-nothing folks have the right of it….if we all stop consuming so much, the corporate pigs at the trough will just have to learn to live with less profit. So buy nothing but what you MUST and buy used at that (if you can) so they feel the pinch and learn to downsize THEIR expectations. Sure, people will lose their jobs first because those at the top are unwilling to sacrifice their wants but in the end it will bite them in the ass because the very people they are laying off are their consumer base so they are causing their own worst trouble. The higher the joblessness, the less consumption. Eventually they would get the message and realize their greed has done this to them….but it means we have to stop spending. WE…ALL of us.


    Coalition of groups on left and right want delay on Bernanke vote

    By Michael O’Brien – 12/15/09 02:21 PM ET

    A bipartisan coalition of groups opposed to Federal Reserve Chairman Ben Bernanke’s second term asked Tuesday for a delay in a committee vote on his nomination.

    The coalition, made up of both prominent liberal and conservative organizations, asked members of the Senate Banking Committee to put off a vote scheduled for Thursday morning on Bernanke.

    “We strongly urge the Senate Banking Committee to delay its vote on the nomination of Ben Bernanke to a second term as Chairman of the Federal Reserve,” wrote the coalition, whose members include the directors of groups from the Campaign for America’s Future and Center for Economic and Policy Research to Americans for Tax Reform president and the Campaign for Liberty.

    “Before deciding to reappoint him to the country’s most important economic policy-making position, the Senate should thoroughly review the conduct of the Federal Reserve under his leadership,” they added.

    The Banking committee announced Thursday that members would vote Thursday at 9:30 a.m. on Bernanke, who was first appointed by President George W. Bush, and reappointed to a second term by President Barack Obama in August.

    The coalition’s letter is just another example of the strange bedfellows Bernanke’s nomination has made. For instance, Sen. Jim Bunning (R-Ky.) has joined liberal Sen. Bernie Sanders (I-Vt.) in placing a hold on the floor debate for the Fed chairman.

    And although Bernanke is still seen as likely to win Senate approval to a second term, the coalition said that lawmakers should take more time to investigate the chairman, and delay action on the Senate’s financial reform bill, as well.

    “Congress regularly scrutinizes spending sums that are less than one thousandth of the amount that the Fed made available during the crisis,” they wrote. “It is inconceivable that the Senate can offer its advice and consent on Mr. Bernanke’s nomination without some greater knowledge of his actions.”

    View the full letter, including the liberal and conservative groups asking for a delay on the Bernanke nomination, after the jump.

    December 15, 2009

    Dear Members of the U.S. Senate Banking Committee:

    We strongly urge the Senate Banking Committee to delay its vote on the nomination of Ben Bernanke to a second term as Chairman of the Federal Reserve. The Federal Reserve played a central role in the events leading up to the economic crisis and the subsequent response to it. Before deciding to reappoint him to the country’s most important economic policy-making position, the Senate should thoroughly review the conduct of the Federal Reserve under his leadership. Specifically, the Senate should have a more thorough knowledge of the actions that Mr. Bernanke took as Chairman during this economic crisis that involved actual or potential commitments of literally trillions of dollars to private financial institutions and foreign central banks.

    These actions have remained secret. Congress needs to know who received the benefit of the Fed’s support as well as the terms of those deals. Who was denied support and for what reason? Congress regularly scrutinizes spending sums that are less than one thousandth of the amount that the Fed made available during the crisis. It is inconceivable that the Senate can offer its advice and consent on Mr. Bernanke’s nomination without some greater knowledge of his actions.

    During the crisis, the Federal Reserve and Treasury worked together in the emergency, making decisions on an ad hoc basis. The terms and conditions of these decisions must be probed. For example, what was the arrangement made with Citibank by the Treasury and the Federal Reserve? What negotiations actually took place in relation to Goldman Sachs and other AIG counterparties? The Senate Committee should demand a full investigation of those transactions, including an investigation of the contemporaneous documents and notes.

    During the crisis, the Federal Reserve made swap arrangements that could have led to the transfer of hundreds of billions to foreign banks. Surely taxpayers have every reason to know under what terms, what authority, and for what reasons the Federal Reserve decided to make available huge sums to foreign banks.

    These are indicative of the serious questions that should be probed before Mr. Bernanke’s nomination is voted upon by the Committee. We simply cannot go through the worst financial crisis in generations and rubber stamp the nomination of the Chairman who was at the helm when the ship hit the iceberg.

    In addition, we believe no further action should be taken on Chairman Bernanke’s nomination until S. 604 receives a stand-alone vote in the Senate.


    Dean Baker, co-director, Center for Economic and Policy Research
    Robert Borosage, co-director, Campaign for America’s Future
    Danielle Brian, executive director, Project on Government Oversight
    Tom DeWeese, president, American Policy Center
    Sandra Fabry, executive director, Center for Fiscal Accountability
    Terry Francke, general counsel, Californians Aware
    Gary Kalman, Washington Director, Public Interest Research Group
    Matt Kibbe, president, FreedomWorks
    Leland Lehrman, president, Mother’s Arms
    Chuck Muth, president, Citizen Outreach
    Grover Norquist, president, Americans for Tax Reform
    John Richard, director, Essential Information
    David Swanson, cofounder,
    John Tate, president, Campaign for Liberty
    Arthur R. Thompson, CEO, The John Birch Society
    Rob Weissman, president of Public Citizen
    John Whitehead, president of The Rutherfor

    Things must really be rough if you get Grover Norquist AND David Swanson on the same team against ya—FB

  4. For as long as I can remember, I’ve known that Money wasn’t real. You can see it in my chart; an absolute Ketuvian with severe pressure on Saturn in the second house. There was a long spell in my thirties when I tried to join the Real World; I took seminars and went to therapy, visited astrologers who told me I had low self esteem and believed I didn’t deserve money, so this was why I was poor.

    I thought very hard about this, for a very long time.

    Deserve?I finally thought. I don’t even believe it exists. I have to consciously work myself into a state of suspened disbelief in order to participate. Money is a floating value, it is tied to nothing, as far as I can see, except the imaginations of its handlers. People are given outrageous amounts of the stuff for doing absolutely nothing, or actually skillfully convincing others to give it to them, for nothing. If you follow any major financial news outlet you can see the most confounding activity going on dealing entirely with invented values; massive tsunamis of the stuff rising and falling based on the whims of people we will never meet who manage the flow.

    I think about celebrities, who have clawed their way to our attention and are terrifyingly wealthy really only with the unasked-for permission of the masses, and never pay for anything because I don’t know the reason why. It’s weird what they do with the money: they buy Palaces. Like, it’s 2010, you can’t think of anything better to do with your money than get some Palaces? Does a Palace divide you as *clearly as possible* from the rest of humanity, from the Ugandans or Malawans or whoever you claim to be so concerned about? I think about men who put on suits and have their drivers take them to their offices in Wall Street and who really knows how they got there, in that life?

    And I finally think about us. I mean you and me, the people who have no control over what happens to this value, who watch the numbers in our 401K accounts rising and falling with total wonderment.

    How can anyone take it seriously? I believe that the very rich are just as confused about how they got to be that way as the very poor. Huge events in our economic world are simply beyond our comprehension and control. Did I really borrow a bunch of money to send to China? I did that? So that’s why I have to be afraid now? I remember when my uncle got his welding job at a factory. He got a pension. He was okay with not getting a Palace. All he had to do was weld things and his company promised that they would put away some money for him in reward for twenty years of his life energy.

    Then, as you’re probably aware by now, they changed their minds, pocketed his life and waited thirty years to tell him.

    I should mention at this point that one way to make massive amounts of money very quickly is to have slaves. Slaves are handy because you can produce enormous amounts of product — cotton, Nike sweatshirts, credit card interest payments, late fees and all manner of profit producing items — without actually having to pay for what went into their manufacture. The drawback they found with this method is that the slaves eventually get mad at you and try to set fire to your family. So from what I’ve gathered the best thing to do is to enslave others and *not tell them*.

    Replacing the pension gambit is the mighty 401k. My uncle the welder and his descendants are now urged to sacrifice their life energy to a system that is rigged entirely against them, that uses their lack of sophistication and their faultless ignorance, since they are not in charge really of their paychecks and less so after they surrender it to their overseers for management. No matter what they do there is some kind of financial “meltdown” that occurs every twenty years and wipes it all away without a trace, and this works out even better because since they have been convinced they are *investing* the money there is no one to blame or sue when it disappears.

    So I finally got to this idea: our financial system: the system we use to assign value to things — the system we use to make decisions – is a fear based system. I read an article yesterday that said that tall thin attractive women who are youthful make — wait for it — 5,236.00 a year more than fat, short, unattractive old women. Obviously the solution is to never get ugly, fat or old and for that you’ve got to go see the Wizard and you’ve got to pay him almost exactly as much as you paid for your college education, which you could not, of course, survive without. Additionally I read about how people in this country will never be able to afford to retire — and! In fact! That’s a good thing because it’s better for your mental health to sit in your cubicle and contribute to your 401k until you’re entirely calcified and they have to hold a mirror up to your nose in the morning.

    So off we scurry with that information — saving up for the lipo and the superexfoliation with our paltry earnings otherwise we’ll miss out on that juicy extra five k, which we can hand over to the financial maestros who will take it and promise us that *one day* we’ll be rich like them and the fear, that horrible fear of falling out of the race will end. But…wait…how can it end if we can *never retire*? And howcome this money keeps disappearing, due to some overwhelming event you or I can’t even prove is going on?

    It’s not going to end, because it’s all driven by fear. It’s just going to keep on going, the invented money and the slavery and the palaces. As long as we buy the fear, we’re going to get on the ride. And someone who is extremely skilled at scaring us with invented stuff is going to run our lives.

    It’s obvous they’re all afraid of what will happen if the whole thing explodes into a cloud of confetti and pixie dust. This is a historical fear in my thinking: the fear of the aristocracy that makes it constantly wage war upon its subjects. Bernanke will have to look right at me eating my cashews and reading the paper on the subway and when I say how’s it goin Bernanke he’ll have to acknowledge suddenly that he and I are the same. They won’t be rich anymore, and they won’t have anything very spectacular to offer, and no one will really care so much what they think about, and the whole world as they know it will collapse.

    Goodness me, what a horrible fate.

  5. In my own financial world this year I signed up with a credit counseling service to pay off a credit card that had jumped the interest rate to almost 26%. The credit counseling people got the interest rate down to 9% and the debt will actually get paid in a reasonable amount of time. It’s sad that I had to “sic” a counseling service on the creditors to get the interest lowered, but it worked for me. The service is geared toward people NOT using credit anymore, only paying for what they can actually afford, I’ve told loads of my friends about it, maybe it’ll catch on.

  6. I come from a background where my folks paid everything down in cash. If they wanted something, they put it on layaway and went without until they had it paid off. Things like a sewing machine, a television, a chair, a sofa.

    In this century, I am working like a dog to pay off the high interest rates, and putting big payments down leaves little room for mucking about or buying useless shit. SO I am back to the basics my folks taught me: Good food, ability to pay for your lighting and heat, and necessities. The rest unnecessary.

    There’s probably little difference between my parents’ life and mine right now, and though I may live paycheck to paycheck, I feel good and think twice about what I really truly need.

  7. If I can get Europeans and Asians to buy my music I can then spend the money in the local economy and help the energy flow the other way a little bit. I have a lot to learn.

  8. and of course, thanks to Eric for creating PW; a fine example of what can be accomplished in “business” by following one’s heart.

  9. Thanks to Kelly for writing and Eric for publishing. Really enjoyed your thoughtful (full of thought) article.

    TK – ‘you go’ with the internet publishing (I too had heard about the bottom’s up economy of this newer distribution source – maybe that’s part of why BnN is selling coffee? 😉 I agree with your “go get ’em” attitude; create when and how you can; I’m right behind you. A new economic structure can rise while the big boys play old games.

  10. ..alright, I’m pissed off, and I will Show it. B.S.!!! When folks go to grab their reality, they’re showing their consciousness.. What?!? We all freakin’ see it!?! Stupid-ass mother fuckers jumpin’ Wal-mart and Target for their sustenance, while the rest of us bleed our guts out, knowing that this shit can only continue if we wanna die, and wanting to live.

    People are in the hands of people. Money is in the hands of people who know how to fuck with the matter. (and most of ’em are fuckheads!) (We’re takin’ over..)

    This World will have to come *together* before we overcome the biases of Ignorance, and Love. (Or, just Love.)

    After reflecting on the content of this matter, I didn’t want to send it.

    I mean no harm, with my opinions. But, I have opinions.

    ..I’m on the verge of realizing individuals to such a degree that “No” system, in any capacity, could have any affect upon the personal value, Love, one puts upon themself, therefore, allowing that individual to exist in Any capacity they Choose.

  11. Hey Eric– thanks to you, and your author for the most interesting article.
    And while it’s no real secret that Obama’s economic policies would appear to support the re-inflation of the bubble, and keep us all worshipping at debt’s altar,
    (or as I like to call it, The Holy Church of Target)
    If we’re talking genuine reform here, I think the hardest thing to overcome is not so much the evils of greed and the nefarious usurious practices of the Corporate giants
    As it is to overcome that collective, underlying conviction

    Money is not power
    Creativity is power
    Innovation is power
    Experience is power
    A business that thrives on real, long term relationships where the consumer is honored and respected (rather than reviled for consuming at all) is powerful.

    I’m currently in the process of starting a new independent publishing company.
    Because I have the Money? No Because I can borrow the money? No
    Because it’s a sure thing? NO
    I’m doing it because last year for the first time the published books of small and independent publishers exceeded the output of large publishing conglomerates, accounting for something like 78 percent of new books.
    It’s the ONLY area of my industry experiencing triple digit growth.
    And THAT’S empowering…

    Don’t know if you seen this floating around the inter world but I found it and thought I would pass it on.
    Happy Holidays!


  12. While they are marking down corporate debt (bailouts) and rescuing and tax sheltering the superbigboys, the citizens who are in these usurous deals — I’m in some of that, too — never have our debt marked down, bailed out, whatever. How exactly does that work? We pay the taxes that go for the bailout — but the bailout goes…up to them? And they hold paper on absurdly high priced “Visa” dollars…that make this kind of eternal debt…when historians look back and see the interest rates they are going to howl.

    Meanwhile, all that money going to pay off old debt is kept OUT of the real economy when it could be going for job-producing goods/services like um food. But instead it’s vacuumed up by these conglomerated banks that exist merely for their own sake.

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