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The Global Economy: Capitalism and Schizophrenia

The fundamental problem of political philosophy is still precisely the one that Spinoza saw so clearly and that Wilhelm Reich rediscovered: Why do men fight for their servitude as stubbornly as though it were their salvation?”

Deleuze and Guattari, Anti-Oedipus (1984)


The aim of the blog is to provide comparative economic analysis and breakdown the structure of the global economy. The blog is based on the perspective of an investment analyst. All the opinions are my own.

The purpose of the blog is to compile several arguments into one space and provide my perspective on the current dynamics in the financial markets regarding wealth inequality, global imbalance, trade war and debt cycle. In the process, I will provide some future contingents and alternative possibilities.

I have borrowed several arguments from Michael Pettis, Ray Dalio, Bridgewater Associates, Friedrich Nietzsche, Vladimir Lenin, Jerome Roos and David Graeber.

Let us start with the first major issue regarding the current economy: Global Imbalances.

A. Global Imbalances, Global Savings Glut and Global Slowdown

Recently, the US president imposed 10% tariffs on the the final Chinese goods. The common narrative revolves around the following presumptions:

1. It will hurt China and bring prosperity back to the US.

2. It will hurt the global supply chain, will disturb the current structure of economy, hurt the US in the form of higher input costs and eventually, it will spike up the inflation.

3. China will stop buying US treasuries and will impact US bond yields.

In Europe, countries such as Greece, Portugal and Spain are suffering from higher public debt, higher unemployment, rising deficits and political crises. Britain's prime minister is determined to exit European Union with or without the deal. On the other hand, Germany and Netherlands is running on trade surplus of about 7-8% of its GDP and ~10% of GDP respectively. Germany has imposed austerity measures in the former countries to reduce their deficit.

The common narrative revolves around the following presumptions:

1. Populism and euro-skepticism will rise in European countries.

2. Brexit will be detrimental for Britain, European Union and Global finance.

3. Europe will slowdown massively in the next few years.

No matter how many articles I read on, Wall Street Journal or browse on regarding these topics. I realized that I would not be able to understand the real causes and solutions by reading few articles. So, I decided to go back to the basics and understand the structure of the economy rather than reading articles on these topics. I hope this space will be helpful to you.

Rethink, Subvert, and Reinvent

I will borrow the popular GDP equation from economics 101:

GDP = Consumption + Investments + Government Spending + (Exports - Imports).

Let us assume that, in the contemporary economy, consumption as % of GDP, is not growing and is decreasing. I will discuss about it in more details in some time. In a brief statement, this could happen due to transfer of wealth from 'spenders' to 'savers'.

GDP = Consumption + Investments + Government Spending + (Exports - Imports).

Now, let us assume that government spending is very low due to high public debt and rising budget deficits. So, government spending as % of GDP is reducing too. In this situation, the only way to grow GDP is through -

GDP = Consumption + Investments + Government Spending + (Exports - Imports).

1. Investments.

2. Exporting more than importing.

In general, during this type of situation, investments are of three types:

1. Productive Investments:

The increase in savings rate is met by productive investments, which would increase goods/services and also increases household and government income. This will drive the future growth as households and government will be able to spend more.

Post-war period (1950's and 1960's) could be described as the era of productive investments.

The probability of this happening in the current environment is very low. This is due to low capital formation (savings) in advanced economies for productive investments, such as in the U.S.

Example 1. Due to high government debt and political gridlock, investments in infrastructure, education and health care is very low.

Also, if the income inequality is expected to be permanent, productive investments will decline because savings will not be reinvested in such projects.

Example 2. Due to hopeless situation of lower middle class, corporations would stop re-investing (building capacity) for them due to negligent demand from such groups in the future.

2. Unproductive Investments:

If there are no possibilities for productive investments, the economy will find itself producing more and more and forming unwanted inventory. Manufacturers and capitalists are unwilling to pile up infinite inventory levels, in other words, can only be a temporary counterbalance to rising income inequality.

The 2001 to 2006 period could be described as the era of unproductive investments. Think of housing inventory, automobile inventory, junk bonds inventory, etc. In 2008, there was an actual counterbalance to income inequality. Pension plans lost wealth by 20 - 30% due to not re-balancing their portfolio after the financial market crash.

3. Other form of unproductive investments could rise.

Due to increase in savings and not able to find productive investments, the interest rate decreases and there will be sudden rise of cheap capital leading to speculative investments.

Charles Arthue Conant, described such capital as congested capital. These investments will end up in speculative assets such as empty airports, share buybacks, empty apartment buildings, dot-com companies, high yielding speculative assets, bitcoins, gold, Martian projects, etc.

In my opinion, 2009 to 2019 was era of unproductive investments.

For example, the role of share buybacks in the last decade in generating higher equity returns:

Paradigm-Shifts, Ray Dalio

There is a possibility, that this could continue until everybody realizes that the music has indeed stopped playing.

Imperialism, Protectionism and Monopolies.

So, we are left with the final part, invest at home and export products or export capital to consumerist economies with low capital formation (imperialism). This is the last stage of GDP growth for any rich country.

For a poor country with growing demand, improving capital formation and restricting foreign capital would be the tool (protectionism) for GDP growth.

GDP = Consumption + Investments + Government Spending + (Exports - Imports).

Vladimir Ilyich Lenin, in one of his popular book: 'Imperialism, the Highest Stage of Capitalism', provided definition of imperialism with the following five features:

1. "The concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life;". Think of big tech, big pharma, too big to fail banks, big food, etc.

2. "The merging of bank capital with industrial capital, and the creation, on the basis of this “finance capital”, of a financial oligarchy;". Think of big private equity tycoon firms and too big to fail banks.

3. "The export of capital as distinguished from the export of commodities acquires exceptional importance".

4. "The formation of international monopolist capitalist associations which share the world among themselves". Think of IMF restructuring Greece's debt.

5. "The territorial division of the whole world among the biggest capitalist powers is completed".


"Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed."

Vladimir Ilyich Lenin


Global Supply/Demand and Capital Formation:

In the contemporary economy, the following chart is important for understanding who is running on excess demand and who is running on excess capacity.

On the x-axis, we have gross national savings (%) or capital formation and on the y-axis, we have excess demand/supply as % of GDP.

Excess demand/supply is determined by subtracting {domestic demand as % GDP} from 100%. If, excess demand/supply as % of GDP is higher than 0, it means the country is exporting more than it is importing and vice-verse.

Out of the major economies, US is running on excess demand. The common narrative in the media is that spenders are sinners ('bad folks') and producers/investors have strong work ethic and are hard working people ('good folks'). They also assume that 'bad folks' cannot work and they need products to consume and capital to refinance their debt from 'good folks'.


But their narrative lacks the point that you need both - consumers as well as producers/savers/investors.

World GDP = World Consumers + World Savers/Producers/Investors

I will tweak the last chart, by changing y-axis in from 'excess demand/supply as % of GDP' to 'excess demand/supply in $ terms'.

Now I will borrow conclusions of the book 'The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy' by Michael Pettis. I would definitively recommend this book to everyone who is still reading this post and interested in these topics.

1. Savings rate is not primarily a function of cultural or personal preferences, savings rate is determined mainly by institutional policies regarding consumption & GDP. Example of such policies would be transferring wealth from high spender households to high savers households & corporations. Another example, would be introducing high consumption tax like in Japan in 2015.

2. For relatively open economies (US), national savings are not just dependent on domestic policies but is also heavily dependent on foreign policies.The low savings at home is as likely to be caused by increase in consumption due to rise in savings in foreign countries. This is less true for closed economy (China).

3. Policies that cause household income or household wealth to grow faster than GDP, it will tend to bring down savings rate by forcing consumption relative to GDP.

4. Anything that affects the gap between domestic investment and domestic savings will automatically have a trade impact. It does not matter whether the policy was intended to affect trade.

5. Through the trade impact, it must also automatically impact in an equal but opposite way, the gap between foreign investments & foreign savings.

6. For these reasons, attempts to adjust large savings, consumption, or investment imbalances levels in one country without equivalent & opposite adjustment abroad, can force undue stress on the global economy and could lead to poor outcomes. Especially at first for deficit countries but ultimately more for surplus countries (ex. US in 1930's).

7. Exporting capital is same as importing demand.

8. Large scale net capital imports can be positive for recipient countries under certain very specific conditions, but otherwise they are usually harmful.

Countries with growing capital inflows have no choice but to respond to growing net capital with: higher investments, higher unemployment or higher consumption.

9. For rich, credible countries with diversified economies, foreign capital inflows do not lower government borrowing costs. The US government, in other words, does not benefit from lower interest rates by foreign reserve accumulation, although, nature of net capital flows might impact yield curve.

10. Although, there are huge advantages to the world having a liquid & easily traded common currency, there are also huge risks, if there no mechanisms place that prevent excessive accumulation, or other forms of capital exports from becoming excessive and so destabilizing.

11. The role of US dollar as the global currency does not create for the United States an exorbitant privilege, it is more likely to suffer from exorbitant burden.

This will explain why the IMF published a report few months ago saying that US Dollar is over valued by 10 - 15%. The argument is based on mercantile economics. Some folks say that it is because of the influence of the US president. I guess it is a typical way by shallow folks to negate what they don't understand and what doesn't feed their delusions.

Consumption and Government Spending:

In the beginning, I provided two assumptions:

I. Assumption 1. Consumption as % of GDP is reducing.

II. Assumption 2. Government Spending as % GDP is slowing due to higher public debt and increasing budget deficit.

I. The world consumption as % of GDP is slowing due to two important dynamics:

1. The Rise of Wealth and Income Inequality: In the past two decades, wealth and income have been transferred to high net savers such as wealthy individuals and cash-rich corporations due to easing of regulation, Chicago school of economics, Reagan and Thatcher's neo-liberalism, Bill Clinton and Obama era's corporate friendly policies, etc. I believe that some policies were necessary for taming inflation after the post-inflation years of 1970's.

Populism: The Phenomenon, Bridgewater Research Associates

2. The rise of Asian Model of GDP Growth: In the last two decades, GDP growth in Asian countries have been higher than developed countries and consumerist countries. The Asian model of growth has the following features:

  • Systematically undervalued currencies.

  • Relatively low wage growth vs GDP growth and productivity growth.

  • Financial repression by keeping deposit rate lower than normal level ~ increasing savings rate and decreasing cost of capital.

  • Allocation of the credit to unproductive investments due to state intervention and cheap cost of capital.

Due to these dynamics, savings of corporations/net-savers have increased relative to other households.

Source: Chicago School

Of course, someone could rationalize these imbalances by providing good and bad morality theory. But, I refuse to nullify these issues with simple and intuitive delusions.

II. Government Spending as % GDP is slowing due to higher public debt and increasing budget deficit.

Government could spend to stimulate economy. The spending could be done through two mechanisms:

1. Taxing households & corporations more.

2. Increasing Public debt as % of GDP.

The economies with high consumption as % GDP are running on high public debt and rising budget deficit. The only way, World GDP could grow through this mechanism is if countries with low public debt and positive budget balance decide to spend fiscally. The economies would be Germany, Netherlands, South Korea and Switzerland.

Contingent Future: Linear Thinking and Non Linear Thinking:

From a linear perspective, in the future following things could happen:

1. US could keep the consumption as % of GDP at the current level and expand government spending as % of GDP to grow GDP. This would take US public debt as % of GDP from 100% to 150% in the next few years.

2. Germany could stay strongest economy in EU zone. They could keep exporting more than importing in the European Union. As well as, refinance debt of the high public deficit countries in Europe.

3. Either Britain will decide to not leave EU or Europe will provide a decent deal to Britain to avoid economic slowdown. The fear of economic slowdown and disruption in the global finance would be the reason for soft landing.

4. China will take the path of Japan in 1980's. Keep hiding their debt levels and government bailing out corporations. In Japan, since 1980's government debt increased by more than 200%. This is due to not letting credit collapse and taking the exposure in their balance sheet. You could expect the same if the Chinese government decide to do just that.

5. Japan's new efforts to reduce public debt as % of GDP by instilling policies that would transfer wealth from households to high savers and government, would help them keep their public debt from not growing.

6. The global economy will slow down for a very long time if the future follow the linear model.

7. This is due to decreasing demand from households, increase in savings in all the economies, deterioration of countries with high consumerism and resistance to imperialism and protectionism.

From a non-linear perspective, in the future following things could happen:


1. US could introduce trade tariffs and taxing foreign capital flows to decrease trade deficit. The trade deficit's largest problem is not exporting less goods/services but the main issue is foreign flows. Unless and until, the reliance on cheap capital is not subsided, trade deficit will not shrink. This could happen by USD intervention. Devaluing currency by 10 - 15% within next few years.

2. US policies aim at reducing income and wealth in-equality. This could happen by introducing progressive tax system. Elizabeth Warren's wealth tax is one example of such progressive tax system. This would help the US to rely less on foreign capital flows. The rise in bond yields from restricting foreign flows will be offset by introducing progressive tax system.

3. US could increase public debt to re-build broken infrastructure, improve productivity of its population, move towards green investments for keeping unemployment rate low for a long period of time.

II. Germany and Euro

1. One possibility, Germany, Netherland and Nordic countries decide to increase government spending as % of GDP. Germany will have to boost consumption from with-in the country rather than relying on external demand.

2. Another extreme possibility, Europe decides to have a fiscal union to keep the group together. Unless and until, Germany does not run on trade deficit or balanced account, countries with high debt such as Greece and Spain, will not be able to pay down its debt.

3. If Germany is stubborn about its policies and do not give in, they will be hit hardest regarding unemployment in the world. Germany is reliant on international trade due to its trade surplus and the reliance on trade is more than any other country.

4. Countries such as Spain, Portugal and Greece runs on high unemployment and high debt to reduce the wages of its work-force. This would help these countries gain comparative advantage against high wage countries such Germany and Netherlands.

5. But this would be detrimental socially, these countries will force its productive population to move out and there will be political unrest.

6. There is a good possibility that European Union could collapse. Spain, Greece and Portugal would devalue their currency, restructure its debt and make production in these countries more competitive.

7. Germany in this case, will have high non-performing loans and its banks will be hit hardest.


1. China decides to rely on its own population for consumption rather than relying on US, Europe or other countries to buy their products.

2. They transfer wealth from corporate to households through higher wages.

3. Liberalize its banking system to make credit underwriting more competitive and reduce the future possibility of credit crunch. They will also have to get rid of deposit rate freeze.

4. China eventually slows down to 3-4%. If the household's wealth will grow higher than, they will not have political issues with the slowdown.

5. Of course, they will have resistance from the vested interests, and will force China to take the Japan's route (1980's). Transfer the credit from corporate's balance sheet to public balance sheet and keep the linearity of economic policies.


1. Japan is moving back to its initial economic model. Keep currency undervalued, transfer wealth from spenders to savers and financial repression. They expect to bring wealth from the foreign countries.

2. The world has changed since 1960's. There is already very high capacity in the world. The issue is with consumption. If they reduce it's population income and reduce final consumption as % of GDP, they are moving towards uncharted territory.

B. Bourgeoisie fucks the Proletariat: Globalization, De-unionization, Financial Repression, Concentration and the Rise of Intangibles.

In the first essay of 'On Genealogy of Morality' by Friedrich Nietzsche, "'Good and Evil','Good and Bad'" contrasts 'master morality' and 'slave morality'.

  • He mentioned that, master morality was developed by the strong, healthy and free, who saw their own happiness as good. By contrast, they saw those who were weak unhealthy and enslaved as 'bad', since their weakness is undesirable.

  • By contrast, slave morality, was formed by slaves feeling oppressed by these masters called the masters "evil" and called themselves "good" by contrast (Judeo-Christianity philosophy).

  • He argued that the Europeans in the 19th century inherited the latter. But the former view of morality was primitive.

On the a side note, Marx viewed the unfolding process of history as follows:

  • First in ancient and medieval society the landed and wealthy had oppressed the slaves and the poorest plebeians and labourers.

  • Then, as new technologies were invented and market forces grew stronger, everything changed. The middle classes - gaining wealth and power from trade and manufacture - challenged the power and authority of the old rulers.

  • But at this stage a new struggle was formed between the bourgeoisie (the property owning class) and the proletariat (the industrial working class).

In the contemporary years, 'slave morality's' relevance has been reduced. We could argue that these could be because of the post-war golden years of growth, rise in ownership economics, rise of scientific & technological influence and fall of religion.

Master morality has slowly but gradually gained its relevance among the 'Modern Bourgeoisie'.

According to one report by Credit Suisse, 9.5% population controls 84% wealth.

Of course, Modern Bourgeoisie could argue that it's not their fault that they were not born in a small village in DRC. So let's see the data for G-7 countries. There is no doubt that the wealth & income for the top 10% has increased significantly. Most of the gains in the last 2 decades have gone to 'haves' and very less to 'have nots'.

Yes, it would be intuitive to use Nietzsche's master morality and conclude that the winners are stronger, healthier and free. And the weaker, poorer and debt-ridden folks, deserve their misfortune. But, again it all goes back to economic policies and market dynamics.

After the great inflation years of 1970's, policy makers decided to give more power to corporations over the state & households; in other words, they promoted transfer of income to 'high savers' from 'spenders'. There were many policies that were introduced and the most important changes that took place are as follows:

1. Globalization: Out-sourcing of manufacturing and servicing to low-wage countries and countries with loose environment and labor policies.

Bridgewater Research Associates

2. De-unionization in advanced countries: Unions were blamed for inflation and rise in input costs. Due to the fear of inflation, policies were conducive to reduction of participation rates.

Bridgewater Research Associates

3. Financial repression: Low wage growth relative to productivity and corporate profits:

Bridgewater Research Associates

4. Role of Anti-Trust & Chicago School of Economics in concentration of firms:

Chicago school of Economics's main assumption is that if the concentration/merger of two firms is going to help reduction in consumer prices, then it will be well accepted.

In the process, it reduced entrepreneurship, reduced competition of the firms not only from the perspective of consumers or entrepreneurs but also workers.

Bridgewater Research Associates

5. Rise of intangible economics and extreme concentration of intangible property:

Since, 1980's the role of intangible investments have increased vs tangible investments. I would highly recommend reading, 'Capitalism without Capital' by Jonathan Haskel and Stian Westlake.

Intangible investments has occurred mostly at Frontier firms since last two decades. This has created productivity inequality among firms.

Based on linear perspective, wealth concentration could increase due to the following reasons:

1. Globalization could continue and expand the supply chain even further, extracting labor and resources from the poorest countries and out-sourcing jobs from high wage countries.

2. De-Unionization could continue and some jobs to be replaced by machines to keep the wages from growing.

3. Concentration of firms could continue until we have the universal superstar firms in each industry.

Based on the non- linear perspective, the middle class could gain some share from the the top 1% or top 10%, if the following things could happen:

1. Regulated Globalization

2. Countries follow the Nordic-model of corporate and labor relations.

3. Anti-trust moves from price-based competition theory to structure-based competition. Example, Standard Oil and AT&T breakup in the history.

4. Government could upgrade its intangible investments, upgrade regulation regarding intangibles and revise outdated policies.

5. Government's fiscal spending moves to high productivity sectors such as education, health care and green infrastructure.

C. "Why not Default?": Sovereign Debt Burden, the Rise of Zombie Companies and Debt Morality.

I. Sovereign Debt and Planned Obsolescence

Greece has official debt of about 240 billion euros. This is about 180% of GDP. European Union insists that the debt is bearable. EU have reduced interest payments and extended maturities out as far as 2060. Based on their estimates, the debt should be able to reduce to 100% of GDP by 2060.

EU's assumption are based on Greece running on budget surplus (excluding interest payments) of about 3.4% of the GDP for the decade and 2.2% until 2060 - "something that no euro-area country with such a precarious economic history has ever done."

Based on this wishful assumptions, Greece's future debt % of GDP would look like this:

If we change the assumption to 2% of GDP budget surplus for the next decade and 1% after that until 2060, the picture would look different:

The story doesn't end and start with Greece, many fiscal states have the same issues as Greece.

The most interesting phenomenon is that the countries with highest debt are running on budget deficit (see quadrant II in the next chart) and countries with lower debt are running on budget surplus (see quadrant IV in the next chart).

It would be intuitive to ask, why not default? According to Jerome Roos, here are three major arguments for the sovereigns not deciding to default and creditors keep on lending to indebted countries (piling up their unpayable debt):

1. Concentration of Finance / Lenders’ Cartel

"If the loans come from a small number of sources, If these sources are in a position to coordinate with one another, if these sources exhaust the borrower’s ability to borrow, if the borrower does not have other means to generate income (for example strong exports or high currency reserves or liquid assets) then the buck stops with the lenders. Conversely, if a bunch of anonymous, dispersed lenders cannot coordinate to put the screws on the borrower, he might be able to play them off against one another. Similarly, if a new lender materializes or if the world economy jumps in to save the lender (like the Chinese boom did for resource-rich Argentina and the Arab spring did for Greece as a vacation destination), then the borrower can successfully play for time or refuse to pay outright."

2. Large, sophisticated Lender of Last Resort

"Over the past century, technocratic supranational lending institutions have come to the fore (IMF, World Bank, the “Troika”) which have developed the know-how to impose and monitor remedies that will help troubled borrowers meet their obligations to their lenders in the long term, in exchange for the very loans that will allow those obligations to be met in the short term. These loans are disbursed in a drip-feed, with each tranche conditional on periodic reviews of the borrower’s compliance to the conditions set by the technocrats.

Involvement of such an institution, provided it can count on the full support of the lenders and provided it has the financial firepower to credibly keep supplying the necessary loans to prevent a suspension of payments, can make the difference between a borrower honoring its obligations or defaulting on them. The key here is that these institutions bring both the expertise in drafting and monitoring a regime for the borrower to follow and the funds to reward a compliant borrower.

In short, an organized institution that can always dangle in front of a government the means to kick the can down the road and pass on the default bomb to the next administration has a big role to play here, but its interests and motivations lie with those of the lenders. Twice in the examples set here the role of such institutions has been to postpone a default until the time when it causes less damage to the banking sector in the lending countries."

3. The interests of the elites in the debtor nation

"The interests of the governing elites in the debtor nation may be better aligned with those of the lenders than they are to the majority of the citizens they are meant to represent.

In particular, a messy default may spell disaster for the setup under which these elites operate: the banks that support the businesses they own might go bust. The convertibility of the currency, which allows them to ship their wealth to the rich world could suffer. The elites face the prospect of immediate ruin in the event of a default. Finally, the country’s very narrow banking elite itself often takes the entire process over when bankruptcy looms.

This is often in sharp contrast with the majority of the people, who might temporarily face the very real threat of unemployment or worse (for example the supply of corn to Mexico or drugs to Greece), but would benefit from the speedy recover that would follow. This is potentially more attractive than the “lost decades” entire economies have faced from the bloodletting that has often been necessary to service the debt of the state, often odious debt accumulated by greedy dictators.

Often, then, the decision on whether to default has come from the politics of the debtor nation itself. If the poor are destitute enough and desperate enough, the elites find themselves unable to contain the anger of the people, as happened in Argentina in 2001. Compare and contrast with the kolotoumba in Greece, when the people was happy to vent in the 2015 referendum, only to subsequently fall behind Tsipras’ acceptance of a very tough deal."

There you have it.

II. The rise of Zombie Companies

On the other hand, "Zombie Companies are on the rise. When is a company a zombie? Lack of profitability over an extended period is obviously an important criterion, especially if the company cannot service its debts. A second criterion is age: young companies may need more time for investment projects to deliver returns. Finally, low expected profitability should be important. Profitability today could be low because of a corporate restructuring or new investments that may eventually increase profitability."

BIS defined two definition for Zombie companies:

1. Broad Definition: "The first, broader measure follows and identifies a firm as a zombie if its interest coverage ratio (ICR) has been less than one for at least three consecutive years and if it is at least 10 years old."

2. Narrow Definition: Broad Definition + Zombies should have comparatively low expected future growth potential.

Zombie companies market share and probability of remaining a Zombie:

Sources: Banerjee and Hofmann (2018); Datastream Worldscope; authors’ calculations.

Zombie companies have economic consequences. The labor and total factor productivity of these companies are lower than other companies. This suggests that capital is employed into lower productivity companies. This is one example of congested capital.

Sources: Banerjee and Hofmann (2018); Datastream Worldscope; authors’ calculations.

According to the same study, the cause for the rise of Zombie companies are as follows:

1. Banks health have been deteriorated, they are rolling over the debt rather than writing them off from their balance sheet.

2. Interest rates have been very low due to large debt in the world of households , corporate and fiscal states. This has created cheap capital and is employed in unproductive sectors.

Sources: Banerjee and Hofmann (2018); Datastream Worldscope; authors’ calculations.

Conclusion: Central banks, policy-makers, creditors, debtors, employers, employees, managers and people are making decisions based on fear rather than confidence.

III. History of Debt and Debt Morality:

a. History of Debt

In "Debt: The First 5000 Years", David Graeber contrasts the popular belief of barter system: that money had to be invented, because otherwise (before the "invention" of money), people were left to barter (double coincidence).

According to Graeber (who also cites other anthropologists), this image is based on no evidence at all: no society using only barter has ever been recorded or found. in fact, humans have always used some kind of money, be it precious metals or clay tablets or tally sticks (sticks broken in half, one half goes to the debtor, one to the creditor). In later chapters, Graeber notes that “some of the earliest works of moral philosophy (…) are reflections on what it means to imagine morality as debt - that is, in terms of money.”

"In fact, Graeber thinks that this purely imaginary exercise of economists (how money came to be) serves simply to make the argument that our current monetary systems are without alternative. In particular, it can serve as an argument against the notion that money is created by and belongs to the government. This argument, e.g. by Smith, has mostly been made in times when coinage (money directly valued in precious metals) was on the rise or already prevalent and the author wanted to make a case for money (coins) being an emergent feature of civilization. In fact, Graeber makes clear later in the book that governments are actually always crucial in markets that use coinage."

He further elaborates, Societies have had to deal with overbearing of debt for thousands of years - and the evidence tells us that most of the time, they cancelled most of the debt at some point, be it through revolution or to avert a revolution. Often, it was a newly installed king (e.g. one of the early Jewish ones) who preferred to start with a blank slate and could afford to clean the table.

Graeber notes how 5000 years of human economic history seems to be cyclic, to some extent. Two types of economic age interchange. the first type are ages with money defined strictly to the value of precious metals, with much cruelty and slavery in huge power regimes (e.g. Rome, or The East India Company). The second type are ages of paper (virtual credit) money, with smaller empires, less production and slower innovation, where religious preachers try to tame economic effects on humans (e.g. slavery became often outlawed in these ages).

He only shortly visits the First Agrarian Empires (Mesopotamia, Egypt, China - which had virtual credit money) of which we don't know much and then explains the next four great ages: The Axial Age (800 BC- 600 AD), The Middle Ages (600AD - 1450AD), The Age of the great capitalistic empires (1450 - 1971) and The beginning of something yet to be determined (1971 - ?) where the last one (again one of virtual credit money) is only 48 years old.

Paradigm-Shifts, Ray Dalio

b. Morality of Debt

In the second essay of 'On Genealogy of Morality' by Friedrich Nietzsche, '"'Guilt', 'Bad Conscience', and Related Matters', he opens his thesis "that the origin of the institution of punishment is in a straightforward creditor/debtor relationship."

"Man relies on the apparatus of forgetfulness [which has been "bred" into him] in order not to become bogged down in the past. This forgetfulness is, according to Nietzsche, an active "faculty of repression", not mere inertia or absentmindedness. Man needs to develop an active faculty to work in opposition to this, so promises necessary for exercising control over the future can be made: this is memory. This control over the future allows a "morality of custom" to establish. (Such morality is sharply differentiated from Christian or other "ascetic" moralities.)

The product of this morality, the autonomous individual, comes to see that he may inflict harm on those who break their promises to him. Punishment, then, is a transaction in which the injury to the autonomous individual is compensated for by the pain inflicted on the culprit. Such punishment is meted out without regard for moral considerations about the free will of the culprit, his accountability for his actions, and the like: it is simply an expression of anger. The creditor is compensated for the injury done by the pleasure he derives from the infliction of cruelty on the debtor. Hence the concept of guilt (Schuld) derives from the concept of debt (Schulden)."

"Nietzsche remarks that making others suffer was considered a great joy--Nietzsche calls it a "festival"--that would balance out an unpaid debt. We find the origins of conscience, guilt, and duty in the festiveness of cruelty: their origins were "like the beginnings of everything great on earth, soaked in blood thoroughly and for a long time."

Nietzsche notes that with the cruelty of older cultures, there was also a great deal more cheerfulness. We have come to see suffering as a great argument against life, though creating suffering was once the greatest celebration of life. Nietzsche suggests that our revulsion against suffering is, on the one hand, a revulsion against all our instincts, and, on the other hand, a revulsion against the senselessness of suffering. For neither the ancients nor the Christians was suffering senseless: there was always joy or justification in suffering. Nietzsche suggests that we invented gods so that there was some all-witnessing presence to insure that no suffering ever went unnoticed."

In 21st century, either the wealth transfer and forgiveness of debt could take a violent turn like in the old days of animal instincts or could force us to create gods who would help debtors and sufferers find meaning in their suffering. The debate in the next few years would not be about how to manage debt burden and interest burden but about dominance and mercifulness of creditors.

I would like to conclude with one remark: feel safe.


“Life can only be understood backwards; but it must be lived forwards.”

Søren Kierkegaard


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