[wordup] Payback: Debt and the Shadow Side of Wealth

[Adam Shand]

This article has more to say then most of the things I've been  
reading, and I like what it has to say.  It's a long review of  
Margaret Atwood's latest (maybe not anymore?) book.  Worth the time to  
read.

Via: "Brett Shand" <brett at shand...>
Source: http://www.nybooks.com/articles/22556

The Way of All Debt
By John Gray

Payback: Debt and the Shadow Side of Wealth
by Margaret Atwood
Toronto: House of Anansi, 230 pp., $15.95 (paper)
A perturbation arising from the American market in subprime mortgages  
has spread through the banking system to disrupt economic activity  
throughout the world. The pattern of cause and effect will be debated  
for many years, with historians asking when and how the global economy  
was set on the path that led to its current condition. Already there  
are some who trace the crisis to decisions of Alan Greenspan, chairman  
of the board of governors of the Federal Reserve from 1987 to 2006,  
when he responded to events such as the collapse in the late 1990s of  
a hedge fund, Long Term Capital Management, and the subsequent  
bursting of the dot-com bubble by creating a climate of easy  
borrowing, which in turn inflated another bubble in the housing market.

Others suggest that a change in the legal system of banking brought  
about by the repeal in 1999 of the Glass-Steagall Act of 1933, which  
had aimed to limit speculation by separating commercial and investment  
banking, created an environment that allowed reckless lending. Yet  
others explain the turmoil in world markets as a symptom of an endemic  
instability in the type of finance capitalism that has developed in  
America, Britain, and some other Western countries.

These accounts are not mutually exclusive, nor are they in any way  
exhaustive. Like most of the narratives that offer to tell us how the  
world arrived at its present pass, they are primarily economic in  
focus. To be sure, this is an economic crisis; it might therefore seem  
to follow that it is best explained in economic terms. But economics  
may not give a satisfactory understanding of the events of the past  
year. The changes that have occurred are not only in the world  
economy. They include shifts in geopolitics, involving aspects of the  
rise and fall of nations that go beyond their economic performance,  
and an erosion of values.

The dislocation that is being produced by the financial crisis affects  
political and moral beliefs that have supported capitalism in the  
past. Market economies are not underpinned chiefly by economic  
theories. They rely for their legitimacy and continued functioning on  
ideas about right and wrong, fairness in society, and orderliness in  
the world. In the boom years many of these ideas were discarded as  
erroneous or redundant. Now that the boom has been followed by bust it  
may be useful to reexamine ideas about debt, and consider how they may  
fare as governments use all the instruments at their disposal to avert  
a slide into depression.

One of the many impressive features of Margaret Atwood's new book is  
its almost eerie timeliness. Consisting of five chapters that were  
broadcast in November 2008 by the Canadian Broadcasting Corporation as  
the Massey Lectures, a series intended to provide a radio venue for  
the exploration of important issues, Payback appeared in print last  
October. The book must have been written some months earlier, but  
there is no sign that it was composed in haste. Atwood examines the  
role of ideas of debt in religion, literature, and society; she  
discusses the nature of sin, the structure of plot in fiction, the  
practice of revenge, and the ecological payback that occurs when human  
beings take from the planet more than they return. A celebrated  
novelist, poet, and critic, Atwood has combined rigorous analysis,  
wide-ranging erudition, and a beguilingly playful imagination to  
produce the most probing and thought-stirring commentary on the  
financial crisis to date.

Atwood's project is to show how human thought has been deeply shaped  
by notions of debt. It will be objected that she is merely spinning  
out an extended metaphor suggesting analogies between debt and  
noneconomic phenomena that are only vaguely analogous. In fact she is  
advancing the contrary and more interesting claim that economic  
activities involving borrowing and lending are metaphorical extensions  
of an underlying human sense of indebtedness. Beliefs about debt are  
not shadows cast by processes of market exchange. They are presupposed  
throughout much of human activity. Economic life invokes a sense of  
order in human affairs, widely dispersed throughout society.

A sense of what one is owed does not seem to be confined to humans.  
Atwood cites the primatologist Frans de Waal, who found in a series of  
experiments that capuchin monkeys that had been trained to trade  
pebbles for slices of cucumber threw their pebbles out of the cage and  
refused any further cooperation with the experimenters when one monkey  
was given the more valuable prize of a grape in return for a pebble.  
If an ability to assess what one is due seems to be present in some of  
humankind's closer evolutionary kin, among humans it is universal. The  
ancient Egyptian notion of ma'at, Atwood writes,

> meant truth, justice, balance, the governing principles of nature  
> and the universe, the stately progression of time—days, months,  
> seasons, years. It also meant the proper comportment of individuals  
> toward others, the right social order, the relationship between the  
> living and the dead, the true, just, and moral standards of  
> behaviour, the way things are supposed to be—all of those notions  
> rolled up into one short word. Its opposite was physical chaos,  
> selfishness, falsehood, evil behaviour—any sort of upset in the  
> divinely ordained pattern of things.
In this ancient Egyptian conception, balance in human affairs is  
linked with order in the natural world.

In Christianity the relationship between humankind and the divine is  
represented in terms of borrowing and lending:

> Christ is called the Redeemer, a term drawn directly from the  
> language of debt and pawning or pledging.... In fact, the whole  
> theology of Christianity rests on the notion of spiritual debts and  
> what must be done to repay them, and how you might get out of paying  
> by having someone else pay instead.
Sociologists have observed how capitalism developed using ideas  
borrowed from religion, with Max Weber and others observing how the  
belief that wealth creation is virtuous invoked Protestant ideas about  
an elect, divinely privileged section of humanity. As Atwood astutely  
comments, the conceptual traffic is not just one-way. If economic life  
trades on religious belief, religion has in turn been shaped by market  
practices. Religious beliefs about sin and redemption draw on patterns  
of thinking that partly derive from the practices of borrowing and  
lending.

Concepts of debt figure centrally in Western religion, while the  
notion that debt is something to be avoided, or incurred with caution,  
has long been important in Western capitalism. Without institutions  
facilitating borrowing, capitalism would not have developed to the  
degree that it has; but the belief that debt could be dangerous was  
until recently also an important part of capitalism. It is only  
lately, Atwood notes, that debt has been celebrated as positively  
benign, "a thing we've come to feel is indispensable to our collective  
buoyancy." From being a necessary tool in productive enterprise, debt  
came to be viewed as an instrument of wealth creation. Using cheap  
credit, hedge funds and investment banks were able to multiply their  
profits, while society at large—including some in its poorest groups— 
came to see taking on large amounts of debt as a way of building up  
capital. Now that this structure of debt is unwinding, older ideas may  
be on their way back: "We seem to be entering a period in which debt  
has passed through its most recent harmless and fashionable period,  
and is reverting to being sinful."

 From one angle Payback can be read as a defense of traditional  
beliefs about the hazards of debt. Atwood recalls the cautionary  
lessons she was taught at Sunday school in the 1940s and recounts how  
her mother kept an account book for fifty years, which records that  
"debts were always paid back within a few weeks, or a few months at  
the latest." What she describes as "snake-oil debt" undermined these  
practices. Being in debt came to be seen as an entirely normal  
condition. It was debt rather than current income or past savings that  
sustained consumption and enabled people—here Atwood is talking mainly  
of Americans, though the same is true in Britain—to enjoy the standard  
of living to which they had grown accustomed. The credit crunch began  
when some among them were persuaded to incur debts they had no  
prospect of repaying, debts that were packaged and sold on in complex  
financial instruments that few of those involved in the transactions  
fully understood.

Implicit in Payback is the notion that we may now be returning to  
older and simpler practices of thrift and saving, and there seems  
little doubt that Atwood would welcome such a shift. Yet it looks  
unlikely that these old-world virtues will be rewarded in the  
foreseeable future. In the US, Britain, and countries throughout much  
of the world, the drift of policy is to stimulate borrowing by  
reducing its cost to as close to zero as is practicable, while  
expanding debt-financed government spending on a large scale. At the  
same time central banks are moving toward policies of "quantitative  
easing"—buying government bonds and other assets in order to increase  
the supply of money and reenergize economic activity, so that society  
can in effect borrow itself out of debt.

Policies of this sort resemble the proposals advanced in the 1930s by  
John Maynard Keynes to deal with the Great Depression. Keynes argued  
that whereas paying off debt in hard times may be reasonable for  
individuals, it may be irrational for governments, further depressing  
the economy and increasing the burden of borrowing. Whether Keynes, an  
extremely subtle and many-sided thinker, would approve of the policies  
that are being applied today cannot be known. What is clear is that  
these policies render traditional attitudes toward debt and saving by  
individuals imprudent. Their goal is to encourage people to borrow  
more and spend more, and so return the economy to the debt-financed  
consumption of recent years. Underlying this objective is another—to  
avoid the danger of debt deflation, the lethal combination of falling  
asset prices with high borrowing that helped bring about the Great  
Depression.

Critics often argue that these policies risk sparking inflation at  
some point in the future. In fact they can hardly be expected to work  
unless they have this result. Inflation is a sure-fire way of  
lightening the debt burden, and much of the debt that was contracted  
in the boom years can probably be paid off only in devalued dollars.  
But this involves a transfer of wealth from savers to borrowers: those  
who have borrowed unwisely will benefit, while those who have saved  
prudently will see their wealth dwindle in value. "Keynesian" policies  
can succeed only insofar as they have this effect; their impact will  
be reduced to the extent that people revert to traditional practices  
of thrift and saving.

 From one point of view this is an illustration of a familiar  
divergence between general welfare and distributive justice. A measure  
of unfairness is often the price of achieving important objectives.  
European countries such as the UK that have systems of socialized  
medicine routinely use cost-benefit analysis to ration scarce and  
expensive medical resources—MRI scans, for example—a procedure that  
can involve denying these resources to some who might wish to have  
them, but that is commonly accepted as justified. The difficulty in  
the present case is that the unfairness is likely to be far-reaching  
and intensely felt.

Large sections of the population could find their wealth—already  
depleted by the decline of the housing and stock markets—shrinking  
further as the value of money is reduced, while much of the baby boom  
generation may discover that the comfortable retirement they expected  
has become an unrealizable dream. In present circumstances there may  
be no alternative to current policies. But a necessary condition of  
their effectiveness is a disappointment in reasonable expectations  
that could be socially disruptive.

In a fascinating chapter, Atwood discusses the role of debt "as a  
governing leitmotif of Western fiction." Particularly in nineteenth- 
century novels, but also in Christopher Marlowe's Doctor Faustus,  
incurring debts of one kind or another formed a major plot line. Debt  
meant more than having an obligation to discharge; it was central to  
the stories people told of their own and others' lives. It has a  
similar role today. When it becomes clear that debts cannot be paid  
off, it is not just that people may walk away from them—as many who  
were induced to take on subprime mortgages have been doing. Their  
trust in the society that encouraged them to incur the debts is also  
destroyed. Again, the shock that is felt when a major part of a  
lifetime's savings vanishes, seemingly overnight, does not come only  
from the prospect of a diminished standard of living. It comes also  
from the collapse of the narrative according to which people have  
hitherto understood their lives.

These dangers may not materialize if economic growth is quickly  
resumed. But there are formidable obstacles in the way. The world's  
largest debtor country, the US, is heavily reliant on China purchasing  
its government securities. Without the influx of Chinese capital  
American debt would not have reached its current level, while American  
living standards would have been lower. In effect China has helped  
fund the federal deficit, and thereby reduce the cost of credit, in  
return for an assurance of open markets for its goods in the US. Since  
this arrangement has been mutually beneficial in the past and the  
costs of abruptly terminating it could be severe for China as well as  
the US, most economists have assumed that it will continue in the  
future. This may underestimate noneconomic factors in Chinese  
policymaking. If the global downturn is severe, China's rulers, moved  
by fear of popular unrest and political instability, may divert their  
surplus to domestic use regardless of the impact on US finances.

Again, economic self-interest may be less significant in shaping  
Chinese policies than the geopolitical opportunity that is presented  
by fast-waning American hegemony. Not only America's standard of  
living but also its high level of military expenditure relies on China  
allowing the US to live beyond its means. There is no reason to  
suppose that China will always be so willing. In any case it will not  
be the US that decides whether the relationship it has enjoyed with  
China continues. It is China that is the rising power, and borrowers  
on the scale of America in recent years cannot expect to be choosers.

There is another, larger obstacle to restoration of the American  
economy. The level of consumption achieved in America in recent  
decades did not depend only on a high level of borrowing from China.  
It also involved running up a large debt to the planet. In the last  
chapter ofPayback, Atwood imagines an amusing and enlightening  
dialogue between a latter-day Scrooge—"Scrooge Nouveau," a self- 
centered hedonist who believes he owes nothing to anyone else—and "the  
Spirit of Earth Day Past." The Spirit's message to Scrooge is that  
there are limits to the expansion of production, consumption, and  
human numbers:

> Mankind made a Faustian bargain as soon as he invented his first  
> technologies, including the bow and arrow. It was then that human  
> beings, instead of limiting their birth rate to keep their  
> population in step with natural resources, decided instead to  
> multiply unchecked. Then they increased the food supply to support  
> this growth by manipulating those resources, inventing ever newer  
> and more complex technologies to do so.... The end result of a  
> totally efficient technological exploitation of Nature would be a  
> lifeless desert: all natural capital would be exhausted, having been  
> devoured by the mills of production, and the resulting debt to  
> Nature would be infinite. But long before then, payback time will  
> come for Mankind.
At the end of the conversation, which is also the end of the book,  
Scrooge Nouveau embraces the Spirit's message:

> I don't really own anything, Scrooge thinks. Not even my body.  
> Everything I have is only borrowed. I'm not really rich at all, I'm  
> heavily in debt. How do I even begin to pay back what I owe? Where  
> should I start?
Atwood puts into the mouth of the Spirit a "limits-to-growth" argument  
of a sort that is nowadays highly unfashionable. Contemporary  
evangelists of the free market, Marxian social critics, many religious  
fundamentalists, and most development economists are at one in  
believing that neo-Malthusian claims about the scarcity of resources  
are groundless; and that a mix of moral regeneration, institutional  
reform, and technological innovation can overcome natural limits to  
growth.

Yet Atwood seems to me to have the truth of the matter. Global warming  
as we observe it today is a byproduct of the industrial expansion of  
the past two centuries. A rapid resumption of the rate of economic  
growth of the last few decades—which is the aim of policymakers in the  
US and elsewhere—would increase the emissions of the greenhouse gases  
that are altering the climate. Along with political leaders in some  
other countries, President Obama speaks of "green growth"—promoting  
economic expansion by investing in environment-friendly technologies.  
But developing these technologies, putting them to use on a large  
scale, and reaping their benefits will take many years, while the need  
to avert depression is immediate and urgent. The likelihood must be  
that restarting economic growth by any available means will take  
priority over environmental concerns.

The effect of policies designed to lift the economy out of debt will  
be to increase the human debt to the planet. As demand recovers and  
growth resumes, the scarcities of resources that were becoming visible  
before the crash will return along with higher energy and commodity  
prices. Concern about the peaking of global oil supplies, which was  
widespread only months ago, has not become less well founded because  
speculators have been forced to unwind their bets on rising energy  
prices.

Most importantly, supporting a human population that, according to a  
consensus of estimates, will expand by around 50 percent over the next  
forty years will be an extremely daunting task in which it would be  
unwise to count on high levels of international cooperation. More  
likely, geopolitical competition for the control of the planet's  
dwindling patrimony of natural wealth will intensify. At the same time  
the destruction of the biosphere, which along with rising levels of  
greenhouse gas emissions is an important cause of climate change, will  
accelerate. The result will be a hotter world that is less hospitable  
to humans.

If Atwood's Payback contains a lesson it is that debts must be repaid.  
The type of political economy that operated in the US over the past  
twenty years, which some imagined would spread throughout the world,  
was based on the belief that this old-fashioned maxim no longer  
applied. A new era had arrived, in which sophisticated techniques of  
financial management could transform debt into a means of wealth  
creation from which even the poor could benefit.

The new era turned out to be short-lived, or else nonexistent. America  
was able to live on credit only by borrowing from other countries,  
above all China. With the bursting of the bubble it has become less  
clear whether America's creditors will continue to commit funds on the  
required scale, while the claim of American finance capitalism to be a  
universal economic model has collapsed. Along with other governments,  
the Obama administration is faced with the task of dealing with the  
danger of recession turning into something worse. A large-scale  
monetary and fiscal stimulus will be administered in order to stave  
off depression. We must hope the stimulus has the desired effect.  
Whether or not it succeeds, it involves a redistribution from savers  
to borrowers that does not square with traditional values regarding  
the payment of debt. In order to resume economic growth, past debts  
will be devalued and new debts incurred.

That does not mean payback will be avoided. Returning to the levels of  
consumption of the recent past means running up an ever-larger  
environmental bill. As Atwood argues, there must eventually be a  
reckoning; the ancient conception of a link between human society and  
the natural world has not been rendered obsolete. If humanity is  
unwilling or unable to pay back its debts, the planet will surely  
collect.