Saturday, November 08, 2008

Another Paradigm for the Debt Economy

This post dove-tails nicely into the following one I just posted about a typical couple being washed out of the middle class by a tsunami of debt...

charles hugh smith in of two

The Company Store, Debt and Serfdom

Way back in May 2006 I wrote about Michael Hudson's work on The New Road to Serfdom: A Negative-Equity Mortgage.

I am now thinking there's another analog to our entire economy: the company store. I actually lived in one of the last plantation "company towns" in Hawaii, and though Dole Pineapple didn't operate a "company store" in 1969, earlier plantations (and coal mining towns, etc.) did--and the set-up was sweet indeed.

Much like a serf renting/sharecropping land owned by a manor-house or nobility, the plantation worker needed to borrow money to buy food and other necessities at the company store, which just happened to operate as a monopoly and just happened to charge skyhigh prices. (The serf needed to borrow seed for the next planting, and money to buy food for the family in between harvests.) The rate of interest paid by the serf/worker was always much higher than market rates--another monopoly capital (and highly profitable) feature of the set-up.

The system's most pernicious feature: the worker/serf never escaped debt. Indeed, the system was constructed to increase the debt to the point it could never be paid off, insuring a lifetime of profitable servitude to the nobility/corporation.

Now the Powers That Be, as embodied in this Republican Administration and its lackeys/minions in both parties, have perfected an entire economy based on this "Company Store"/manor-house model.

As Jesse over at Jesse's Cafe Americain noted in The Safety and Immediacy of Liquid Assets in a Deleveraging Panic:

This is a critical point, and little debated or understood as it is emotionally charged with words like 'socialism.' Most do not understand the fractional reserve banking system, but it seems more official, more palatable, to give them billions, enormous sums, and to give the public as little as possible for fear of debasing the value of work and the currency.

Paulson and Bernanke both view the economy as an adjunct to the financial system so from their perspective the choice is obvious.

The power of the serf/company store model is only truly revealed by examining not just negative-equity home mortgages but negative-equity auto loans, credit card debt, etc. How about the serf who bought an SUV with no money/low money down? How much is his auto loan, and how much is the gashog SUV worth now? Far less than what he owes; he has hugely negative equity in not just his house but in his vehicles and indeed, in everything he "owns" which was purchased on credit.

And how about the clothing and TVs and other toys purchased on a zero-interest "teaser rate" credit card? How much is all that used stuff worth? Ten cents on the dollar? And what happens when the debt serf--who bless his naive little heart, actually believes the illusion that he is "middle class"--har har har--is late one payment? Bam! That zero-interest balance is suddenly being charged 23% interest.

Oh, and the late fee is $50. And one other thing--all the other credit cards he "owns" will also pop to 23% interest because, well, they can raise the rates whenever they want--but the official excuse is he's now a "credit risk."

As if he was ever not a credit risk?

Just like the worker and the company store, the credit card debt actually rises regardless of how much the worker pays. It's a beautiful lifetime system for serfdom/poverty and endless rentier profits for banks. Thus we read story after story in which a credit card balance of $1,500 balloons toover $5,000 as interest rates are jacked to 24% and huge late fees and overdraft fees are levied.

As Merle Travis wrote about the company store:

You load sixteen tons . . . what do you get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

Exactly what is the difference between the serf or the plantation/mine worker and today's debt-enslaved "middle-class" peasant?

A key con of the Company Store model circa 2001-2007 was that extracting money from your home equity was essentially identical to withdrawing savings. This conceit was enabled by absurdly low interest rates and essentially qualification-free money; if equity is like savings, then withdrawing it--at almost no extra increase in monthly mortgage payments!--was just like taking money out of a savings account.

Except for one little tiny feature of the equity extraction--it was debt, not savings.

Another key con was the illusion that this debt was essentially risk-free. With house prices rising, and loans getting ever cheaper, then only a fool would forego the chance to extract and spend the "savings" of rising equity.

As often noted here, real wages (as measured by purchasing power or adjusted for inflation) has been stagnant since the mid-1970s. Like the indentured serf, the average "middle class" (sounds so much better than debt-serf, doesn't it?) wage earner saw a seemingly golden path out of stagnating purchasing power: borrow more for a lower monthly payment.

But alas, the teaser rates on the adjustable-rate mortgage and the credit cards expired, and now the real costs are being levied.

Many readers write to remind me that "nobody forced anyone to take out the loan," and that is true. We all have so-called free will. But it is naive to focus on free will (which does not operate in a vacuum but in a cultural and historical context) and ignore the incredibly concentrated power of the Ministry of Propaganda. I have illustrated the rough inter-connected structure of the Ministry in this helpful little diagram:

Most astonishingly, the Ministry has succeeded in diverting the nation's attention from the Company store/debt-serf realities to a bogus "debate" over "socialism" and "capitalism." As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.

It simply indebts the serfs, convinces them via doublespeak, propagands and phony statistics that they are still gloriously "middle class" (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.

Nice set-up. No criminal extortion scheme could be more effective or venal.

We should note that the Democratic members of the Powers That Be all voted for the banker-bailout, knowing full well that the bankers/company store could have been allowed to go bankrupt and the $700 billion could have spent--if it was to be spent at all--on education, rebuilding bridges, transmission lines, and other desperately needed infrastructure projects.

But this could not be allowed to happen. Why? Because money spent on infrastructure flows directly into workers' pockets, removing the intermediary debt which is the entire key to the Company Store model. The Paulson bailout's key feature is that it does not put a single dollar in the pocket of a mere serf/worker--every dollar goes to save the current system, which is based on the serf borrowing money constantly at ever higher interest rates.

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