Michael Hudson, President of The Institute for the Study of Long-Term Economic Trends and Distinguished Research Professor of Economics at the University of Missouri, Kansas City, has written a remarkably perceptive essay on the history of debtor-creditor relationships and forms of government, applying them to what is happening here in the U.S. and in Europe. His conclusion:

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The entire article is well worth reading: Debt and Democracy: Has the Link been Broken?

Also, you can read on Hudson’s web site the full version of the article, which appeared in the Frankfurter Allgemeine Zeitung on December 6, 2011
The article recalls Thomas Cahill’s recounting of the last years of the Roman Empire in How the Irish Saved Civilization (Hinges of History). The nobility of the empire—the 1% of that time—acquired larger and larger landholdings and personal wealth, but were able by their political power to exempt themselves from paying any taxes, the burden of which increasingly fell upon a diminishing middle class and growing underclass. Things became so bad that for the first time the emperor promulgated laws forbidding infanticide, as parents became increasingly unwilling to subject their children to such a miserable life. In the early Fifth Century, when the barbarians broke through the Roman legions guarding the Rhine, they experienced little resistance from a population that simply didn’t care, that couldn’t imagine that the Germans could possibly be any more oppressive than their Roman masters.

Hudson’s analysis uncovers a cyclic process:

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

It appears that we are experiencing the same process, and probably have passed the tipping point economically and politically. What will happen, however, when the almost inevitable natural disasters caused by global warming come upon us? There will be a mind-boggling disruption of what we call the economy that could sweep everything away, especially the house of cards built with obscene levels of debt. Get ready for a bumpy ride.

Tags: Debt, banking, democracy, Peonage, Roman Empire, tyrants, Aristotle