Sunday, August 21, 2011

Debt is Always an Asset

"So what happens if all debt is dissolved, all at once, all over the world?"

There is an important concept we need to understand about debt. To the one in debt, it is a liability. But that liability is someone else's asset. If I owe you a thousand dollars, for me that's a liability. For you, that thousand dollars is an asset.

The opposite is also true. If I have a thousand dollars in the bank, to me that's an asset. To the bank, it is a liability. In effect, the bank is in debt to me for a thousand dollars. (Off the subject, it is strange that if I borrow from the bank they charge 10% or more to loan me money. If I loan money to the bank, they charge me monthly service charges and fees. Hmmm.)

So, if I file bankruptcy, default on debt, die without paying it back or for any other reason cannot repay my debt, the asset that someone else owns becomes worthless.

Remember that the definition of a recession is that all assets lose value. What if only one asset, namely debt, looses its value. All of a sudden, nobody owes anybody any money. The liability that is dragging our economy into recession, for individuals and governments alike, is suddenly and arbitrarily erased across the board.

Who would lose? China. And they would be mad as hell, but what can they do? They still need to sell us stuff to keep up their income stream. If they get too mad, they would lose both the asset and the income. They would hate it (and I would too if I were them), but remember the medicine that tastes bad? It will be good for everyone in the end - even China.

What about the banks? They would lose, but not too much. They don't loan their own money, they don't even loan their customers' money. They loan borrowed money. They make their money on the spread between their cost to borrow money vs. their revenue from loaning it out. If all debt is erased, their asset is worthless, but so is their liability.

And where do banks borrow money? From the government, specifically from the Federal Reserve. So the government loses its debt asset. But it also looses its debt liability. The government wins there, hands down. So does the American (European, Japanese, etc.) taxpayer.

Debt is such an entrenched part of our culture that everyone borrows from everyone, and everyone owes everyone. If we stop the game, nobody wins. But nobody really loses either. And we would have to commit, as part of the deal, to never playing that game again.

There you have it. The solution to all of the economic woes of our generation. Forgive all debt for all people everywhere, and never allow debt to happen again. It's coming anyway. The U.S. government can't pay its debt on a long term basis and handle current expenses. Neither can the average American. If we allow evolution to accomplish this simple plan, a whole lot of people get eaten by the process. If we do it on purpose, across the board, all at once, it will be much easier.

And then we can live again as a free people. Hell, we might even be able to afford healthcare.