Decent Democracy
About | Acknowledgements | Contact | | Follow site activity RSS 2.0

Ethics of Default

First published June-2010
last update 24-April-2011

In the coming years much debate will surround the ethics of default on debt.

Though individual cases may differ, on the whole we must conclude that defaulting on debt to the banking establishment is justified. We can show this in two ways.

First, we must note that everything that is necessary is ethical. It would be absurd to say that something that must happen, such as the sun setting, is unethical. Ethics is clearly concerned with those matters in which a choice is involved. The majority of debt default that will occur cannot be avoided, is necessary, and thus ethical. This is shown in more detail below, but it is .

The second way to justify, at least essentially all government default, is that the majority of these debts in the world were carried under previous and/or non-democratic governments, and there is no metaphysical way to somehow bind these debts to the population. There is no ethical, theory known to me, that makes people responsible for the debts of a criminal organization that declares itself a government.

Fractional Reserve Lending

In modern banking, when a bank makes a loan the money does not come from a previous deposit at the bank, but is simply made up on the spot. Though this may seem strange at first, it is only poses a conundrum if we assume the bank is lending out value (which is difficult to be understood as something that can be invented from nothing in infinite quantity). Rather, what occurs is a "reverse investment" where the perceived "borrower from the bank" is actually the one lending to the bank their own in time and/or material (in some enterprise along with everyone who accepts the notes for further reverse investments of time and material), directly or indirectly, in return for a bank note. The system works if all these reverse-investments are profitable in terms of real things, and thus all the reverse investments can unwind.

The only room for confusion is if the "lender to the bank" thinks they have actually been lent something of value from the bank in the here and now. A simply example can quickly show how this confusion can come about.

Take for instance the beginning of fractional reserve lending. If we use the perspective that a bank would write bank notes representing gold they have that doesn’t exist, it’s difficult to see how this system works. Rather, if we use the perspective that the bank writes "promises to pay gold at a future date" and then gives these pieces of paper to a captain who then invests his ship and time to travel to the new world to plunder and/or mine gold, and returns to share the loot with the bank, we become closer to the truth. As long as the bank receives more gold from these reverse investments (time and material lent to the bank) than the bank owes in outstanding bank notes they’ve written, the system can continue. How this can be assured is that when the ship captain lends his time and material to the bank in some endeavour, he also agrees to return all the bank notes, or corresponding gold, with interest. The advantage to bank is clear: the bank receives labour and material (activity carried out on its behalf), and on top of this the promise to repay value in gold corresponding to this reverse investment.

The real confusion is not the operation of the bank but why the captain would accept such a deal. Why would the ship’s captain accept future promises to pay gold (bank notes) and simultaneously promise to pay the same sum of gold with interest in the future (bank debt)? The reason is the bank notes (debt from the bank) is presented as promised at any given moment whereas the loan (debt to the bank) is promised at a specific date farther into the future.

The captain’s problem is that he cannot sail alone, and so by distributing these "reverse investment notes" around to a crew and everyone that equips the ship, they may be convinced to take part in the venture. We are now in a position to understand what is going on. 1) The captain wants to voyage to the new world to find gold, but doesn’t enough gold presently to pay for the required crew and equipment. 2) Ideally, the captain could convince the crew and suppliers to lend him (invest) their time and material in his project for a share of the profits, but 3) Not enough people trust the captain enough to invest; so 4) The ship’s captain displaces the burden of debt in this affair from himself and hit project to the bank, and distributes bank notes that people trust more; and 5) for this service of debt displacement the captain agrees to pay the equivalent sum with interest. All that happens is instead of the captain owing directly everyone that has contributed to his enterprise, the bank owes these people and the captain owes the bank.

Why I keep calling it a "reverse investment" is that the people accepting the bank notes tend to think these notes are "money" and that they have been paid in the here and now with real value, rather than perceive the truth that they have accepted bank debt.

The main function of this form of lending, is to trick people into lending their time and material into things that they wouldn’t otherwise have done, either from being unconvinced or for ethical concerns (e.i. pillaging gold).

This first phase of fractional reserve lending works as long as the enterprises that owe the bank in exchange for debt displacement (reverse investment) bring in more gold or other real things than bank-notes redeemed at any given moment.

The justification of this system of banking is that the bankers are more intelligent than the common person (at least at investment), and must trick the common person into investing their time and material in the bank’s projects or proxi-projects (carried out on behalf of the bank: e.i. the projects of those that borrow from the bank). After all, if the crew, outfitters and suppliers saw the opportunity the captain is after was solid and invested their time and material directly, the captain would have no need of the bank.

There are two views we can hold. 1) the banker has a comparative advantage in investment and can spot the good ones, as well as diversify over the long term to cover any short term potential losses 2) the common person requires also a moral reason to act and plundering the new world and creating social and material structures that rob the common person of autonomy and dignity transferring leverage to the central government, does not seem moral to the average person, and therefore the common man is reluctant to invest directly in the schemes of the bank or the banks proxi-organizations, but due to the habit of money can be easily tricked into doing so in exchange for pieces of paper.

Phase II: Central Banking

The problem with the first phase of fractional reserve lending, is that banks can easily fail. If more people ask to have their bank notes redeemed for gold (or other assets) than the bank possesses, all confidence is lost in the bank and the paper previously perceived as money becomes suddenly perceived as simple paper. Not only can this happen due to the banks error in distributing reverse investments, but another bank A can collect bank notes of bank B and redeem them all at once provoking a bank failure. Or bank A can simply spread a rumour that bank B is bankrupt. This is typically the case when there is not an overstock of plundering to be done (a shortage of time and labour compared to the available resources) and so the banks enter into direct competition against each other.

This risk of bank failure under phase I also does not diminish with the size of the bank, as a bigger bank simply has a bigger amount of outstanding bank notes. In fact, a bigger bank may have more inherent risk as it becomes far harder to see, much less control, where the bank notes are going, and so a secret plan to collapse the bank through collecting notes and redeeming them at once may have an easier time. And big or small, the law of averages states that all phase I banks will fail eventually, since an anomaly in bank note redemption or incoming reverse-investment repayments is bound to occur at one time or another.

So, big banks A, B and C go to government D, and ask for the burden of debt to be transferred from individual banks to the government. The government prints the notes, lends them to the banks at a low interest (or no interest), who then the banks lend to their clients at a higher interest. This system is more stable in the short term since a government can simply outlaw all other forms of money, and can accept these bank notes in the form of taxes.

Though interesting to note that taxes under central banking taxes don’t actually provide income for the government (the government can simply print more money whenever it wants, either directly or through loans to itself), but rather maintains the value of the government notes since only these notes are accepted to settle taxes, and therefore a large number of people are obliged to collect these government notes to pay their taxes. This near obligation to hold government paper under central banking (compared to the previous choice between holding bank paper or gold and/or silver directly) guarantees a minimum demand for bank paper and thus it’s perceived value. However, some value is also lent by a simple cultural momentum to perceive money as real value.

Central banking protects the larger banks form when the central bank is put into place (and history shows us that the large banks in a banking industry undergo essentially no change after central banking is put into place), however, it also makes fractional reserve lending impossible to "unwind" without a collapse of the entire financial system.

The same inherent problem still exists, except when a bank lends money it is the government which is ultimately liable to pay it back, the only difference is that the "reverse investments" are called "economic activity" and the value of the loss of value of the notes does not happen all at once, called a bank run, but happens gradually and is called inflation. However, again, if all the economic activity does not bring in new real wealth into the system, the system crashes, which is why all governments with central banks must grow the economy or their financial system collapses.

The world is of course finite and the indefinite exponential growth highly implausible. Whether hypothetically indefinite exponential growth is even hypothetically possible, it would necessary require a sustainable system, which our current economic model is far from. A sustainable social system could be created, but it would necessitate de-growing the current economy, thus provoking, in any case, the collapse of the financial system.

Thus, debt default, on the whole, is necessary, and so, on the whole, ethical.

Central governments will have little or no way to deal with this mass defaulting, but communities will continue to exist and can continue to survive with creative comparative autonomy.

This ongoing financial collapse is actually a good thing, as it creates serious problems in the global exploitation system before all resources are extracted and nature can no longer support human life.

Written by Eerik Wissenz.

Table of Contents

*Chapters in grey are in progress.

About | Acknowledgements | Contact |
Built with | template | | Follow site activity RSS 2.0