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Monday, October 24, 2011

David Graber on CNN - Money is TRANSFERABLE DEBT

=== CNN ====

David Graeber studied 5,000 years of debt: real dirty
secret is that if the deficit ever completely went
away, it would cause a major catastrophe

Posted by:  Jay Kernis - Senior Producer CNN

ONLY ON THE BLOG: Answering today's OFF-SET questions
is David Graeber, who teaches anthropology at
Goldsmiths College, University of London. He is the
author of "Towards an Anthropological Theory of
Value," "Lost People," and "Possibilities: Essays on
Hierarchy, Rebellion and Desire."

His new book is entitled "Debt: The First 5,000
Years," and in it, Graeber indeed examines the
historical significance of debt, the struggle between
rich and poor, and the moral implications inherent in
our ideas about credit and debt.

CNN: The U.S. Treasury Department last Friday
reiterated its Aug. 2 deadline for raising the debt
ceiling, and urged Congress "to avoid the catastrophic
economic and market consequences of a default crisis
by raising the statutory debt limit in a timely
manner."  The White House wants a deal by July 22. If
the debt ceiling isn't raised, the Treasury would not
be able to pay nearly half of the 80 million payments
it needs to make every month, according to an estimate
by budget experts at the Bipartisan Policy Center. How
did the United States get into this situation?

Graeber: Because the Republicans are engaged in one of
the most extraordinary campaigns of political
recklessness in recent memory.

One has to presume that Republicans are perfectly well
aware that the US debt is not really a crisis, and
that they're not really going to force into default
just to be able to hack further away at social
programs. That's what they seem to be telling Wall
Street, anyway. But it's almost unimaginably
irresponsible. If you play chicken, there is always
the chance that you'll go off a cliff.

CNN: So if Congress doesn't raise the $14.3 trillion
debt ceiling in a few weeks, and the U.S. defaults on
its debt for the first time in history, what level of
confusion, calamity and crisis might this country

Graeber:  It's really hard to say. Probably in the
short run, not that much -- there are always
expedients the federal government can use to stop the
gap temporarily, and the business community will put
enormous pressure on the Republicans to cut it out.

The danger would be the effects overseas -- would it
accelerate movements to abandon the use of US treasury
bonds as international reserve currency. Since 1971,
when Nixon went off the gold standard, the dollar has
essentially played the role gold used to play as the
bedrock of the world banking system.

Russia has been arguing the world should move away
from the system for years, China occasionally at least
pretends to toy with it, and Dominique Strauss-Kahn
was apparently working on an alternative system as
well before.... well, you know.

If that changes, the effects might well be epochal,
because the structure of the current world economy,
where the US military basically plays the role of
police, and is effectively rewarded by being allowed
to maintain a global monetary system which gives us
huge economic advantages (notably, the ability to
import much more than we export), will be seriously

CNN: At a recent news conference, the president once
again compared government spending to what American
households face. "Our first starter home was a
$180,000 condo," Obama said. "That was still a good
investment, and we were able to make the payments."
Are the bills that average Americans face a good
analogy to explain the complexities of government

Graeber: To be honest it's hard to imagine a more
ridiculous analogy. It's hard to even count the ways.
Sure, households have to bring in revenues, and they
have to pay some of it out, or borrow the difference.
But there the resemblance ends.

First of all, the US government is like a household
where the breadwinner gets to charge his employer
anything he likes. Second of all, if you or I borrow
money, we borrow it from somebody else -- a bank,
usually, which can call in the repo man, and
eventually, if you don't cooperate, the police.

The US owes most of that money to itself. Four dollars
in five are owed internally, and about half of that is
actually owed by the government to other branches of
the government—especially, to the Federal reserve.

And of course insofar as cops are involved, the
government is the cops -- nobody can force it to do
anything it doesn't want to. Certainly the Fed can't
-- if the government really wanted to, it could take
over the Federal Reserve entirely, or abolish it, or
rewrite its rules pretty much any way it wanted to.

Then finally there's the overseas debt. Even that
isn't much different. If you look at what actually
happens with all those Treasury bonds floating around
in foreign banks -- well, the vast majority never get
called in. The banks holding them just roll them over
every five or ten years, as soon as they mature.

Why? Because, as I say, T-bonds have come to replace
gold as the world's reserve currency. So there's the
final reason the analogy is so silly. When you or a
member of your household writes a check, the recipient
tends to cash it. When the US government writes a
check, and gives a foreign bank or government an IOU,
the recipient almost never does.

But that's just a very superficial explanation. On a
deeper level, the analogy is even more absurd,
because, the US needs to maintain a deficit, or
catastrophe would ensue. The real secret of the system
is that these IOUs basically are money. Modern money
mainly consists of government debt.

The current financial system -- based on central banks
-- really goes back to 1694 when a group of London
merchants made a loan to the King of England to fight
some war in France, and he gave  them the right to
call themselves "the Bank of England" and loan the
money he owed to them to other people in the form of
bank notes. That's what British money actually is  -
an IOU from the king, an uncashed check.

US dollars are exactly the same. They're government
debt circulating through the Federal Reserve, which
just makes up money, loans it to the government, and
then circulates the debt. They try to make the system
as complicated as possible so ordinary people won't
understand what's going on, but it means that the real
dirty secret of the system is that if the deficit ever
completely went away, it would cause a complete

Just as the King can never repay his debt to the Bank
of England, or else the British currency system would
collapse, the US has to maintain a national debt -- as
indeed, it always has, we've always been in arrears
since independence -- or there'd be no money. (Or if
you want to be technical, private banks would have to
make up all the money by making loans, but of course,
at the moment, our big problem is that they aren't
doing that.)

The system might seem crazy -- and in a way it is --
since it seems like the government is writing checks
that never get cashed -- why would anyone go along
with that?

But that's where taxes come in. The government
effectively says "well, these dollars are circulating
US debt, and we're not going to give you anything for
them, exactly, but we will let you use it to cancel
out the debt that we've decided you owe to us" -- your
income tax, etc. US taxes can only be paid in dollars.
So to keep the system running, the government has to
demand taxes, but they also have to make sure they
spend more than they get, to keep the IOUs all
circulating around.

So you see why I say it's a ridiculous analogy?

CNN: China is the largest foreign creditor to the
U.S., holding more than $1 trillion in Treasury debt
as of this past March. Reuters reported last week that
an adviser to the People's Bank of China said a
default could undermine the U.S. dollar. "I think
there is a risk that the U.S. debt default may
happen."  I mean, we all grow up believing that paying
your debts is the right thing to do. Is it always?

Graeber: Well, a lot of what "growing up" seems to
really mean is figuring out that in the real world,
those moral rules they teach you as a child don't
always apply. Business owners certainly don't feel
that debts are sacred -- I can't remember the last
time I did freelance work and my employer didn't at
least try pretending he just forgot to pay me!

If the study of history shows us anything, it's that
it all comes down to power. The people on the top know
that everything is negotiable. If there's a real
problem, you can always work something out -- which is
what we saw in 2008, when the financial establishment
effectively convinced the both political parties to
step in and take care of several trillion dollars of
their gambling debts.

The rich have always been capable of extraordinary
acts of generosity and forgiveness when dealing with
each other. The absolute morality of debt is meant for
us lesser mortals -- since it's the best means ever
discovered to take a situation of massive inequality
and make it seem like the victims are to blame.

The same thing goes for international relations. If
Mozambique owes the US 10 billion dollars, Mozambique
has a big problem. If the US owes Japan10 billion
dollars, then Japan has a problem, because there's no
way it can force the US to do anything it doesn't want

Or even France: in 1971 when Charles de Gaulle tried
to call in his US debt in gold, which he was legally
entitled to do, Nixon just shrugged his shoulders said
"fine, then I'll go off the gold standard." What was
France going to do? Nuke us?

Actually, most of those countries that own all those
T-bonds know they are losing money by sitting on them
(the yields are less than inflation), and they'll
never get all their money back. But most of them --
Japan, South Korea, the Gulf States -- are regimes
under US military protection, in fact, with huge US
military bases sitting right on top of them,  so
really we're talking about protection money—in
whatever sense of the term.

Obviously, China is a different story. Their behavior
is a little harder to explain, since they are
effectively shipping enormous amounts of consumer
goods to us on credit and must know they're never
going to get paid back. But here I think you have to
remember two things. First, China has two thousand
years of experience flooding potential rival powers
with riches, so as to make them spoiled and dependent.
If it worked on the steppe nomads, why not the US-
which they probably see as just as scary, violent

Second, the Chinese leadership might be running a
quasi-capitalist state but these guys were all trained
as Marxists. They probably still see all this high
finance as so much mumbo jumbo -- "ideological
superstructure" as the Marxists like to put it -- it
isn't really real.

What's real is highways, factories, and technology.
And they are getting more and more of that, and we're
getting less. So they're perfectly happy with
arrangements as they stand.

I suspect there's a kind of tacit deal, here, whether
explicitly stated or not: the Chinese government
periodically pretends to get all worked up over the US
debt, even though they don't care, and in exchange,
the US only pretends to get worked up over their
constant pirating of intellectual property rights and
technology transfers, but in fact, lets them get away
with it. The result: we get Walmart, and they get
nanotechnology, superfast trains, and a space program.
So what do they care if we never "pay the debt?"

CNN: You examined 5000 years of economic and cultural
behavior. Would you ever suggest that capitalism as we
know it needs to change?

Graeber: The most remarkable thing I discovered in my
historical researches is that virtual money is nothing
new. Actually, it's the original form of money.

Back in ancient Mesopotamia, people didn't go to the
bar or market with tiny bits of silver; they put
things on the tab. Merchants used expense accounts.
Commerce meant trust. What we now think of as cash, in
contrast -- gold and silver coinage, and with them,
impersonal, cash markets -- was basically invented
much later, mostly to pay soldiers, and as a
side-effect of military operations.

If you look at the last five thousand years of
history, what you find is an alternation of periods
where money basically means credit, periods of mostly
virtual money, and periods where it's assumed to be a
physical thing. It starts as credit.

Then around the 7th century BC, you see,
simultaneously in Greece, India, and China, the
invention of coinage -- and for maybe a thousand years
after that, vast empires, with huge standing armies
paid in cash, cash markets, where they're among other
things selling all the slaves conquered in the wars,
most of whom end up working in the mines producing
more gold and silver to pay the troops with.

In the Middle Ages it all shifts back again -- the
great religions, which really started as anti-war
movements, take over, the armies are disbanded, cash
disappears, people go back to virtual money (both
checks and paper money for instance were Medieval

Then, after 1492 it swings the other way, again --
we're back to gold and silver money, vast empires,
slavery comes back (and some might argue its still
here -- if Plato or Aristotle were alive today I doubt
they'd see much distinction between selling yourself
and renting yourself, so they'd probably see most
Americans as, effectively slaves). That's the period
of history that's just ending now.

This is epochal. Changes on this scale only happen
once every 500 or even 1000 years.

What will it mean? Well obviously it's impossible to
say for sure. And to a large degree it's really up to
us how it all turns out.

But one thing I have noticed is that in periods
dominated by virtual money, it becomes impossible to
deny that money is just a promise, that it's just a
set of understandings we have with one another—and
therefore, that you need some kind of watchdog
institution in place to make sure things don't get
completely out of hand.

In the ancient Near East, they used to simply declare
periodic debt cancellations. The Medieval religious
authorities tended to ban interest payments outright.
Always there was some kind of overarching institution,
usually bigger than any government, to protect
debtors, to prevent the bulk of the population from
simply being reduced to slaves (which, of course, is
how most indebted Americans feel most of the time.)

Of course this time around, the first thing we did was
create the IMF, a vast overarching institution
designed basically to protect creditors. But (most
people don't know this) that didn't work out too well.
The IMF has been effectively kicked out of Asia and
Latin America for some time now, and now, most
recently, from Egypt. So that model has definitely

I think it's significant that growing opposition to
the "debt crises" being inflicted on people in Europe,
in places like Greece and Spain, is a call for "real

What they're effectively saying is, "In 2008, the
financial elites let the cat out of the bag when they
refused to let their banks fail like the textbooks say
they were supposed to. As a result, we learned that
the story about capitalism we'd been hearing for all
these years wasn't really true. Markets don't really
run themselves, and debts can be finagled out of
existence if you really want them to be.

"But if that's true, if debt is just a promise and
promises can be renegotiated, then if democracy is
going to mean anything, it has to mean that it's us,
the public, that gets the ultimate say over how that
happens -- not some hedge fund manager."

If they win, then we're going to be talking about a
very different economic system.

more here

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