How massive debt confuses our monkey-brains
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The world economy is built on debt, backed by credit – backed by even more debt. When will all this end? Don’t ask me. My brain was built for hunting…
Monday was Budget Day in the US. The Bush administration revealed itself – once again – to be the biggest-spending regime of all time. No government ever spent so much. Nor did any government ever redistribute so much wealth – from the taxpayers to the defence contractors; from the middle classes to the financial classes; and (most importantly) from future generations to those living right here and right now.
The whole spectacle is breathtaking – and like all public spectacles, absurd. Nearly half a trillion in debt will be added over the next two years, according to the Bush plan. Americans have neither the will nor the money ever to repay it. They cannot even keep up with the interest payments. So now the debt feeds on itself and just keeps getting bigger and bigger. There are bubbles everywhere, a whole cluster of mega-bubbles – in property, in art, in stocks (especially Chinese stocks) – and a Hyper Bubble in worldwide liquidity!
How big can this credit bubble get – and how dumb can people be? The questions keep coming up, intertwined like a hemp rope – when we watch TV or hear the news, when we listen to financial reports, when we read about the new US budget. The views, the prices, the numbers – they are enough to make an imbecile blush and a sober man gasp for air. The people we meet all seem responsible and intelligent. They drive cars, they have jobs, they manage their own cheque books. So how is it possible that they can read about the US budget without shock and alarm, or lend to the world’s biggest debtor for less than 5% yield?
We think we have an answer – or at least a theory. Every great thinker stands on the shoulders of the giants who have preceded him. We don’t claim to stand on Darwin’s shoulders, or on Newton’s, but at least we have stepped on their toes.
Newton’s “Inverse Square Law” holds that gravity – and other things – decreases by the square of the distance from the source. According to our theory, this is true for useful intelligence too. The further you get from the facts, the less you know what’s really going on.
If a person issues too many IOUs, lenders catch on and cut him off. When a bank issues too many notes, word gets around. Depositors get jumpy – they take out their money and the bank fails. This happened all the time before central banks cornered the banking business. Likewise, if a country spent more than it could afford, people holding its currency would get worse. They would sell it or demand gold. Interest rates would rise, the currency would fall. Gracefully or calamitously, the problem would correct itself.
But now we live in a world of globalised, faith-based, denatured currencies. The US emits dollars, a form of IOU. No one knows exactly what a dollar is worth, but that doesn’t stop other central banks from trying to keep up with it. They issue more money too. And then, financial whizzes in London and New York issue their own credits. IOUs on the IOUs. Credit, backed by debt, backed by more credit, backed by more debt. And now, the poor investor – professional or amateur – is light-years from the facts; he doesn’t know what to think. Could the US go broke? If it could, how come it hasn’t already? None of us has any idea.
The Japanese banker, the hotel owner in Paris, the City speculator – all take up the currencies – dollars, yen, euros, sterling – as if they are as good as gold. Billion-dollar bets are placed. Trillions of dollars float on a sea of liquidity. And nobody knows what anything is worth or when it might stop being worth anything at all.
How could this be? Here, we turn to Darwin. If we believe in evolution, we must believe the human brain evolved to suit the conditions in which it evolved – that is, during the many years when mankind lived in small groups, rather than the few when he occupied air-conditioned offices in the Gherkin.
We have no more brain today than we needed to bring down big game and collect huckleberries. Any more brainpower would have been counter-productive, leading the poor savage to wallow in existential angst when he should have been enjoying the mud.
But in the modern world, he no longer had the particular, precise information he needed to make a decision. The facts were all too far away, too blurry and too vague to grab hold of. They had become abstract generalities – like the dollar and the pound – things he could not really see or understand. Civilisation, central banking and derivatives came along and made a monkey of him; his brain was not ready. He showed up for work ill-equipped – like a hairdresser with a wrench in his hands. No wonder he made such a mess of it.
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