There are two kinds of debt. One that’s relatively harmless. And one that can destroy us all.
There’s public sector debt – or government debt – which is over $16 trillion. This is the sort of debt that politicians scream and holler about when they demand austerity.
And then there’s private sector debt – the debt owned by you and me and millions of Americans across the nation in the form of credit cards, home and auto loans, along with America's corporate debt. This sort of debt doesn’t seem to bother politicians at all, even though total private sector debt is $38 trillion, more than double government debt.
Now here’s what you need to know. Public sector debt is not a problem at all. Our national debt, despite the big number, is not a threat to the nation.
Currently, our national debt is roughly 100% of GDP. After World War 2, it was much higher – over 120% of GDP. But, rather than freaking out in the 1950’s and demanding austerity spending cuts, both Republican and Democratic Presidents and lawmakers grew our nation out of this so-called debt problem with government spending.
There were massive government investments to build the Interstate Highway System, send returning GIs to college, and to grow the social safety net.
And it worked. With more government investments, more Americans were put to work, which meant they had more money to spend, which meant more businesses hired more people to keep up with the higher demand, which meant Americans all around were earning more money and paying more revenue into the government through taxes. Our debt-to-GDP ratio plummeted from its peak of over 120% in the 1950’s to around 20% in the 1970’s.
Then Reagan came in, gave billionaires a massive tax cut, increased defense spending, and our national debt exploded again. But, two Presidents later, Bill Clinton had the budget balanced and the nation on track to completely eliminate the national debt within ten years.
George W. Bush blew up that plan with his tax cuts, wars, corporate giveaways, and his economic crash, so now we have a pretty massive debt, although not as big as the one Truman and Eisenhower faced and beat.
Our nation has a long history, from the Revolutionary War to the Civil War to World War II of dealing with our national debt, and reducing debt levels that are much higher than we see today. That’s why government debt is not a problem right now. With just a small amount of political will, it can be solved pretty easily: more government investments to put people to work and more taxes on the rich so that they pay their fair share again have always solved it in the past.
On the other hand, private sector debt is a huge problem. Not only is it devastating the livelihoods of millions of Americans around the nation, but it’s also pushing our economy toward collapse.
After World War 2, total private debt was below 50% of GDP. Today, it’s more than 250% of GDP, which is even higher than it was during the Great Depression.
There are several reasons for this.
The first is that when Reagan stopped enforcing the Sherman Anti-Trust Act, businesses started merging and acquiring each other like crazy. Because of changes in the rules on how that could be done, Private Equity or LBO firms came into existence, driving the monopolistic merger process with trillions in debt. Today virtually every corporate merger involves the company taking on huge debt, while the executives and the Pirate Equity boys take home billions. The result is that most of this private sector debt is corporate debt, and it's dangerously high, a teetering, towering house of cards.
And then there's household debt.
Since Reagan, Americans have not been paid more for their increased productivity, so wages have failed to keep up with the rising costs of housing, energy, education, and healthcare. To make ends meet, Americans had to extend their credit lines and home mortgages, thus sinking further into debt.
Also, there was the housing bubble, which was caused by banksters pushing mortgages – or debt – on millions of Americans, knowing that those same Americans were unlikely to be able to pay down those mortgages and debt.
But the banks made a ton of money selling off that bad debt to other investors before the market went bust, and skimming fees off the top of every single transaction.
And, of course, all of the losses that the banksters did incur during the crisis were promptly repaid by our government thanks to the bailout.
But nobody seemed to care about the debt that everyone else who wasn’t a bankster still had. Nobody except the banks, which are still trying to suck more and more money out of their indebted customers, and are now bringing back debtor’s prisons to help in this effort.
In Arkansas, a breast cancer survivor, Lisa Lindsay, was thrown in jail because she didn’t pay a $280 medical bill, which was charged to her by mistake.
Debtors’ prisons haven’t officially been used in America since before the Civil War. But today, a third of the states in the country allow debt collectors to use the public court system to go after people who owe them money. So, rather than being thrown in jail for specifically owing money, Americans are thrown in jail for not showing up to court hearings or not paying legal fines stemming from their debts.
There’s even a law in Arkansas that allows landlords to throw tenants in jail if they're late on their rent. According to a recent report by Human Rights Watch, hundreds of tenants in Arkansas who’ve fallen on hard times and can’t pay their rent are taken to court and sometimes jailed.
So, in a roundabout way, the debtors prisons have returned to America.
This is a huge problem because economies depend on consumers – people like you and me – spending money. But, if we’re in debt up to our eye-balls, and being thrown in prison for that debt, then we can’t spend money to stimulate the economy.
As economist Steve Keen told me, “That’s why we’re in a crisis.”
He added that it wasn't the government deficit we have to worry about. Instead, he said, “It’s the dynamics of private debt that have determined the crunch we’re in now.”
While debt can be useful and free up more spending in the economy, we’ve reached a point where businesses and individual Americans can no longer afford to go deeper into debt.
And a major reason why the economy continues to stagnate after the collapse is because Americans are paying down their debt rather than spending money in the economy. And the more Americans continue to pay down their debt instead of spending, the worse the economy will get.
When this happens, Keen told me, “You plunge off the cliff.”
Even government stimulus can’t help at this point. Whether it was Bush’s stimulus at the end of 2008 that gave everyone a couple hundred bucks, or Obama’s stimulus in 2009, any extra money Americans get from the government is diverted away from the economy and put instead toward paying down their huge individual debts, which has no stimulative effect on the economy at all.
If private debt was 50% of GDP like in the 1950’s, then Americans could afford to both buy things and pay down their own debt. And ditto for businesses. But at 250% of GDP, that private sector debt strangles the economy and sets the stage for a looming economic collapse.
So then, what’s to be done?
We should wipe the worst and most destructive of the private sector debt, the debt that prevents people from spending.
Keen calls for a debt jubilee. That means using the government to simply pay off much of the individual debt across America, from mortgages to student loans to credit cards.
This is also the approach Occupy Wall Street is taking with its “Strike Debt” campaign, though the organization is also relying on private donations to help buy people’s overdue debt at a cheap price and then completely wipe it out.
A debt jubilee isn’t a radical idea. In fact, it’s promoted in the Bible in the Book of Leviticus, which calls for a debt jubilee every 49 years. As Leviticus 25:10 reads, "This fiftieth year is sacred—it is a time of freedom and of celebration when everyone will receive back their original property, and slaves will return home to their families."
Debt cancellation is supported in the Koran, too. And it was used in Ancient Athens and many Native American societies.
Wiping out private debt would unleash enormous spending in our economy in ways we haven’t seen since the boom years of the 1950’s and 1960’s. The only reason it’s not seriously being considered by our lawmakers today is because a debt jubilee would diminish the profits of the banksters who thrive – and prey – on an indebted nation.
But, in the not-to-distant future, as our economy continues to collapse under the weight of tens of trillions of dollars in private sector debt, our nation will be faced with an ultimate choice: Strike Debt or watch our economy completely collapse in a way that will make 1929 look like a picnic.
Let’s make the right choice now!