Page 1 of
2 The twilight of irredeemable
debt By Antal E Fekete
The most powerful of the latter-day pagan
gods that have guided the destinies of humanity
for the past two-score years is irredeemable debt.
Before August 14, 1971, debts were obligations,
and the word "bond" was to mean literally what it
said: the opposite of freedom. The privilege of
issuing debt had a countervailing responsibility:
that of repayment.
On that fateful day all
that was changed by a stroke of the pen. President
Richard Nixon embraced the woolly theory of Milton
Friedman and declared the irredeemable dollar a
monad, that is, a thing that exists in and of
According to this theory the
government has the power to create
irredeemable debt - debt
that never needs to be repaid yet will not lose
its value - subject only to a "quantity rule", for
example, it must not be increased by more than 3%
annually. This idea is so preposterously silly
that "only very learned men could have thought of
If the thief is thieving modestly,
then he will not be detected. It never occurred to
the professors of economics and financial
journalists that a modest thief is an oxymoron, a
contradiction in terms. How did they get to
believing in irredeemable debt? The explanation is
most likely found in Schiller's dictum: "Anyone
taken as an individual is tolerably sensible and
reasonable. But taken as a member of a crowd - he
at once becomes a blockhead." Economics professors
and financial journalists are no exception.
For a time it appeared that Friedman was
right. The world has become dedicated to the
proposition that it is possible, even desirable,
to expand irredeemable debt in order to make the
economy prosper. Never mind the default of the US
government on its bonded debt held by foreigners.
Never mind people victimized by theft. Thanks to
the quantity rule, they will never notice the
For all its seductive
attractiveness, Friedmanite economics is ignoring
the effect of irredeemable debt on productivity.
It watches debt per GDP and is happy as long as
this ratio stays below 100% by a fair amount.
However, what should be watched is the ratio of
additional debt to additional GDP. By that
indicator the patient's condition could be
diagnosed as that of pernicious anemia. It set in
immediately after the US dollar debt in the world
was converted into irredeemable debt.
increase in GDP brought about by the addition of
$1 of new debt to the economy is called the
marginal productivity of debt. That ratio is the
only one that matters in judging the quality of
debt. After all, the purpose of contracting debt
is to increase productivity. If debt volume rises
faster than national income, there is big trouble
is brewing, but only the marginal productivity of
debt is capable of revealing it.
Precipitous decline Before 1971,
the introduction of $1 new debt used to increase
the GDP by as much as $3 or more. Since 1971, this
ratio started its precipitous decline that has
continued to this day without interruption. It
went negative in 2006, forecasting the financial
crisis that broke a year later. The reason for the
decline is that irredeemable debt causes capital
destruction. It adds nothing to the per capita
quota of capital invested in aid of production.
Indeed, it may take away from it. As it displaces
real capital, which represents the deployment of
more and better tools, productivity declines. The
laws of physics, unlike human beings, cannot be
conned. Irredeemable debt may only create
By confusing capital
and credit, Friedmanite economics obliterates
truth. It makes the cost of running the
merry-go-round of debt-breeding disappear. It
makes capital destruction invisible. The stock of
accumulated capital supporting world production,
large as it may be, is not inexhaustible. When it
is exhausted, the music stops and the
merry-go-round comes to a screechy halt. It does
not happen everywhere all at the same time, but it
will happen everywhere sooner or later. When it
does, Swissair falls out of the sky, Enron goes
belly-up, and Bear Stearns caves in.
marginal productivity of debt is an unimaginative
taskmaster. It insists that new debt be justified
by a minimum increase in the GDP. Otherwise
capital destruction follows, a most vicious
process. At first, there are no signs of trouble.
If anything the picture looks rosier than ever.
But the seeds of destruction inevitably, if
invisibly, have sprouted and will at one point
paralyze further growth and production. To deny
this is tantamount to denying the most fundamental
law of the universe: the Law of Conservation of
Energy and Matter.
The captains of the
banking system in effect deny and defy that basic
law. They are leading a blind crowd of mesmerized
people to the brink where momentum may sweep most
of them into the abyss to their financial
destruction. Yet not one university in the world
has issued a warning, and not one court of justice
allowed indictments to be heard from individuals
and institutions charging that the issuance of
irredeemable debt is a crude form of fraud,
calling for the punishment of the swindlers
issuing it, whether they are in the Treasury or in
the central bank. The behavior of universities and
courts in this regard could not be more
reprehensible. Rather than acting to protect the
weak, they act to cover up plundering by the
The inconspicuous beginnings of
irredeemable debt have blossomed into a colossal
edifice, a fantastic debt tower that is bound to
topple upon the prevailing complacency and apathy.
Actually "tower" is a misnomer. Rather, what we
have is an inverted pyramid, a vast and expanding
superstructure precariously balanced on a tiny and
ever-shrinking gold foundation - the only asset in
existence with power to reduce gross debt.
The construction has no precedent in
history, and no place in theory, whether
Ricardian, Walrasian, Marxian, Keynesian or
Austrian. As a matter of fact, no one is analyzing
the process. Research has been placed under taboo
by the powers that be, lest diagnosis reveal the
presence of cancer caused by irredeemability.
There is no known pattern or model that would
apply to its mechanism in terms of equilibrium
Two negative conclusions emerge.
One is that the edifice of irredeemable debt must
grow at an accelerating pace as markets for
derivatives providing "insurance" to holders of
debt proliferate. The insurer of debt must also be
insured, as must the insurer of the insurers, and
so on, ad infinitum. This is due to the fact that
the risk of collapsing bond values has been
created by man. In contrast, the risk of price
changes of agricultural commodities are created by
nature, and the futures market provides insurance,
with no need to re-insure. The other conclusion is
that the unwieldy size of the debt structure
excludes the possibility of a normal correction: a
major liquidation would dwarf the calamities of
the Great Depression.
delusion It is a delusion to think that the
government can splatter debt all over the economic
landscape to cover up its warts, and reap
everlasting prosperity as a result. The
stimulation and leverage of debt has always caused
stock markets to boom, so that the impact of debt
was aided and magnified by the added paper wealth
which, in turn, increased the propensity to spend
and borrow still more.
supposed to be more realistic in contracting debt.
Yet the pattern of increase in corporate debt has