Debt is an
inescapable concept. It is never a question of debt or no debt.
It is always a question of which kind of debt, owed to whom, when.
We enter this
world helpless. Our parents owe a debt to us when we are born. They
have obligations to us. Every society operates in terms of this
principle. Parents who refuse to care for their children are placed
under social sanctions. They are encouraged to provide care for
their children: positive sanctions. If they refuse, they are punished
in one way or another: negative sanctions.
slow learners. It takes longer for humans to reach maturity as a
percentage of their lifetimes than any other species. So, parenthood
is a long-term commitment.
Prior to the
longer lifespans produced under capitalism, one or more parents
died of old age before all of their children reached maturity. Other
family members would then step in and care for younger children,
usually older siblings. Again, this was a debt relationship.
who reached old age and became incapacitated, their hope lay in
their children, usually their sons. The sons were expected to care
for their aged parents. This was a form of debt repayment. The parents
had honored their debt obligations while the children were young.
But once the children reached maturity, they became debtors to their
Families stick together. The nature of this bond rests on debt.
is impossible without debt. We can learn a great deal about a society
by examining its most pervasive forms of debt: who owes whom, for
how long, under what terms, at what interest rate.
the West begins with a public exchange of vows.
This is the
familiar pre-nuptial agreement.
I take you
to be my (wife/husband), to have and to hold from this day forward,
for better or for worse, for richer, for poorer, in sickness and
in health, to love and to cherish; from this day forward until
death do us part.
It is specific
in its details, yet very broad. It is permanent. It is public. It
is administered under the authority of an institution, either church
or state or both. It would be difficult to devise a legally enforceable
contract that is broader in scope in so short a form.
We live in
an era in which the rich party in a marriage agreement insists on
a longer pre-nuptial agreement, drawn up by a lawyer, signed in
private, which limits the scope of the public vow. The marriage
ceremony never refers to this debt-limitation contract, let alone
requires both parties to recite it. If one of the parties is a celebrity,
a tabloid newspaper may reprint brief sections of a leaked copy.
throughout history have been by far the most important form of social
insurance. The vows establish legal responsibility for dealing with
the vast majority of all crises that threaten individuals. These
vows are an application of a foundational principle of production:
the division of labor.
Two are better
than one; because they have a good reward for their labour. For
if they fall, the one will lift up his fellow: but woe to him
that is alone when he falleth; for he hath not another to help
him up. Again, if two lie together, then they have heat: but how
can one be warm alone? (Ecclesiastes 4:9—11)
vows, society could not exist. People are too ready to break contracts.
But this contract goes beyond conventional business relationships.
It is universal. A violation calls forth social pressures to see
that the victim receives protection.
Until the twentieth
century, most health insurance was provided by families. Home health
care was family-provided health care. There have been hospitals
for centuries in the West. The hospital was an invention of the
West in the late medieval era. But hospitals have always served
very few people.
health care to families, and by investing the family with socially
enforceable responsibility for performance of this socially crucial
service, every society has maintained broad-based health care programs.
These services have not been administered by impersonal bureaucrats
doing things by the book. They have been administered by close relatives
who care deeply about the outcome of the treatment.
We can say
the same about life insurance, fire insurance, and all other forms
of insurance. Before mathematicians in the West discovered the law
of large numbers and then built profit-seeking insurance companies
by means of statistical formulas of risk, societies used families
as the means of benefitting from the as-yet undiscovered science
is a form of debt. People enter into voluntary agreements by which
they make present payments, or agree to make future payments under
specific conditions. They in turn become beneficiaries of others
at a later date under specific conditions. Without debt, society
could not exist.
SUPPLEMENTS TO SUBSTITUTES
of insurance is one of the most important inventions of all time.
It began in the late medieval era in the shipping industry. Investors
guaranteed the outcome of individual voyages by receiving a fixed
percentage of the profits of multiple voyages. By spreading the
risk of a sunk or captured ship among many voyages, investors extended
began in the late 1600’s in England. Life insurance began in the
same era. Families could pay a small premium to a company in order
to receive a large settlement in the case of an unexpected catastrophic
individual event. Insurance policies supplemented the care offered
In the late
nineteenth century, Otto von Bismarck, the chancellor of Prussia,
was successful in promoting a state-subsidized old age retirement
system. That model spread to the West. In 1935, the Social Security
Act became law. The U.S. government became the insurer of workers’
old age. Initially, it was promoted as an old age supplemental program,
but it soon became the public’s expectation for primary care.
We see here
a shift from family responsibility to state responsibility. What
every society had always seen as a responsibility of families, based
on personal loyalty and mutual benefits, became a responsibility
of taxpayers, based on loyalty to the state and impersonal administration
by salaried bureaucrats. Old age care became depersonalized and
bureaucratized. The element of personal responsibility began to
recede in importance.
It is not random
that the divorce rate in the West rose alongside the spread of state-funded
insurance. When the benefits of an arrangement fall, commitment
to the arrangement declines. The economic benefits associated with
marriage were removed from the family and handed to the state. Dependence
on the state replaces dependence on the family. The state allows
individuals to "divorce" the state only by leaving its
jurisdiction, which is expensive. In contrast, price-competitive
no-fault family divorce is universal.
The debt relationship
has been shifted from the family to the state. This has made old-age
payments a matter of pressure group politics. The same process of
depersonalization and bureaucratization began with Medicare in 1965.
not done away with debt. It has merely shifted the locus of responsibility.
The vast extension
of private debt in the United States has paralleled the extension
of state-insured debt. State-insured debt, unlike family debt and
private debt, is unfunded. No capital has been created that can
pay off debt through productivity. There is no unfunded debt on
earth larger than Social Security/Medicare, which is now in the
range of $70 trillion.
The state has
substituted promises to pay for capital to pay. "Let them eat
promises" is the underlying lie of all state-funded insurance
contracts. The state extracts present purchasing power — which could
have funded capital creation — and issues IOU’s based on future
state revenues. These future revenues are not guaranteed, for there
is no agency capable of guaranteeing them. They must be collected:
through (1) taxes, (2) issuing IOU’s, and (3) money created by the
We have therefore
witnessed a massive creation of unfunded debt in the West. The magnitude
of this unfunded liability is so large that the end is sure: default.
The only question is the form this default will take.
I began with
a statement: "Debt is an inescapable concept." To this,
I now add a corollary: "Default is an inescapable concept."
the inescapable debt obligations of families to the state, voters
have undermined their safety in the name of increasing their safety.
They sought supplemental protection from the burdens of old age.
They imagined that by voting themselves safety through coercion,
they could increase their safety. But the opposite is now inescapable:
increased risk because of inescapable default. This default will
come in people’s old age, when they are least able to defend themselves.
It has come at the expense of family-owned capital or insurance
company-owned capital that could have supported oldsters through
For those taxpayers
who understand the low discounted present value of a long-term government
promise, the cost of purchasing safety has risen. They must find
ways to purchase future security with after-tax income.
public does not understand that a great default is coming. This
is why the American household savings rate has fallen to zero in
recent years and has even gone negative in some periods: the sale
of assets to fund consumption. What had been promised in 1935 as
a supplemental program for old age security has become the primary
source of most Americans’ security. But the system is statistically
On March 4,
Comptroller General of the United States government, David Walker,
appeared on "60 Minutes." He is the government’s senior
accountant. His message is grim.
we have promised almost unlimited health care to senior citizens
who never see the bills, and the government already is borrowing
money to pay them. He says the system is unsustainable.
the number one fiscal challenge for the federal government, it’s
the number one fiscal challenge for state governments and it’s
the number one competitive challenge for American business. We’re
gonna have to dramatically and fundamentally reform our health
care system in installments over the next 20 years," Walker
And if we
if we don’t, it could bankrupt America. . . ."
We are watching
a slow-motion train crash. Most voters know nothing of this. A minority
nod their heads: "We understand." But they don’t understand.
Their thrift habits reveal the degree to which they don’t understand.
way for any national government to conceal the looming default is
through inflation. It will sell its debt to its central bank, which
will create money out of nothing to purchase these debt certificates.
Then the government will spend the newly created money. Prices will
This will raise
the cost-of-living escalator in the Social Security payments. This
will in turn raise payments. But the budget-killing program is Medicare,
says Walker: five times the burden of Social Security. With inflation,
hospitals will feel the pinch. They will face rising prices. They
will not receive comparable rising payments from the government.
The result will be rationed medical care, just as we find in every
system of socialized medicine.
I look at the
future and see a falling dollar. What can you buy with a falling
I have adopted to defend myself is to buy a home with a fixed-rate
mortgage. I will pay off this debt with depreciating dollars.
I will begin
drawing Social Security in a few months. I will buy a larger home
when the payments begin. I want the income from Social Security
to pay off my mortgage. Because the mortgage is fixed-rate, I lock
in the monthly payment. This lets me find something useful to do
with the depreciating value of the dollars I will receive from the
government. I can deduct the mortgage interest payment from my gross
income. Given the fact that I am still in the labor market, I can
use this deduction.
promise of Social Security income, it would not make financial sense
for a man age 65 to buy a home with a 30-year mortgage. But it does
make sense in a nation in which the Federal government’s bankruptcy
is statistically guaranteed, and in which the easiest way to default
is through inflation.
inflation will affect all forms of long-term fixed interest debt.
Thus default will not be confined to the United States government
and its bonds.
If you believe
that my analysis of social debt is accurate, you should take active
and costly steps to reduce your dependence on political promises.
take steps to generate a stream of future income that will increase
with the fall in the dollar’s value.
take steps to increase your health, because health-care rationing
is a sure thing. You don’t want to wait at age 75 or 80 for a life-changing
operation in a world of health-care rationing. The rationers will
say, "Too old." You will not get to the front of the line.
is inescapable. The question is this: Who owes you what, under which
conditions? Find out now, before the debt comes due. Default is