• Debt: An Inescapable Concept Part 1: Social Debt

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    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.

    Humans are
    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.

    For parents
    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.

    Human society
    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.


    Marriage in
    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.

    Marriage vows
    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)

    Without marriage
    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.

    By decentralizing
    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
    of risk-management.

    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.


    The invention
    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
    foreign trade.

    Fire insurance
    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
    by families.

    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.

    Society has
    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
    central bank.

    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."

    By shifting
    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.

    The general
    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,
    2007, the
    Comptroller General of the United States government, David Walker,
    appeared on "60 Minutes."
    He is the government’s senior
    accountant. His message is grim.

    Walker says
    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
    tells Kroft.

    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.


    The easiest
    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
    dollar? Less.

    One strategy
    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.

    Without the
    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.

    Default through
    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.

    You should
    take steps to generate a stream of future income that will increase
    with the fall in the dollar’s value.

    You should
    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
    your enemy.

    14, 2007

    North [send him mail] is the
    author of Mises
    on Money
    . Visit http://www.garynorth.com.
    He is also the author of a free 19-volume series, An
    Economic Commentary on the Bible

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