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The Insider’s Economic Dictionary: D Is for Debt

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Posted on Sep 15, 2013
*Sally M* (CC BY-SA 2.0)

By Michael Hudson

This piece first appeared at University of Missouri, Kansas City economist Michael Hudson’s website. See the rest of the Insider’s Economic Dictionary here.

Debt: Only pure assets and equity ownership exist without corresponding debt. For financial saving, one party’s saving deposit, loan or credit appears as another party’s debt on the opposite side of the balance sheet. (Even net worth appears on the liabilities side of the balance sheet.)

Debt bondage: The obligation of debtors to provide their own labor and/or that of family members to creditors to carry the interest and principal charges on loans or other financial claims. In today’s postindustrial economy this obligation takes the form of homeowners and employees spending their working lives paying off their mortgages and other personal debts in an attempt to improve or merely to maintain their economic position.

Debt drag: Like fiscal drag, the rate at which leakage from the production-and-consumption sector to the FIRE sector.

Debt deflation: A diversion of the circular flow of spending between producers and consumers to pay creditors. Revenue diverted in this way is channeled into yet more lending, imposing yet higher debt-servicing charges which aggravate the debt deflation. Debt deflation and asset-price inflation usually go together in a symbiotic financial relationship as creditors use their receipt of debt service to make new loans that tend to further inflate asset prices. (See Compound Interest.)

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Debt overhead: The cost of carrying debts (and hence, savings), including interest and dividends, amortization and other financial charges (late fees and overdraft penalties, which now absorb nearly as much as interest charges for U.S. credit-card companies). This overhead, which creditors euphemize as wealth creation, grows exponentially at compound interest. (See Fragility.)

Debt peonage: Ambrose Bierce observed: “Debt is an ingenious substitute for the chain and whip of the slave driver.”

Debt pollution: Much as environmental pollutants such as DDT distort nature’s environmental balance and block the reproduction of life, so the buildup of debt halts economic expansion by absorbing income otherwise available for new investment and living. Debt pollution in the form of interest and amortization charges absorbs the economy’s surplus, preventing it from being used to replace capital, to say nothing of expanding the means of production and raising living standards. (See Conditionalities, Environment, IMF and Parasitism.)

Debt, public: The alternative to money and credit creation by the national Treasury, resulting in the need to tax the economy to pay carrying charges on the debt.

Decline of the West: This decline first occurred with the collapse of the Roman Empire under the debt burden that ended up stripping its capital and reducing economic life to the Dark Ages of local self-sufficiency (see feudalism). It threatens to recur today as a result of the postindustrial economy’s debt deflation and asset stripping.

Decontextualization: The tendency for Chicago School, Austrian and neoclassical economists to take markets and business behavior out of their social, institutional and historical context so as to exclude the effect of finance and property on production, consumption and general economic welfare. This methodological shortcoming results in Junk Science. (Contrast with Externality and Systems Analysis.)

Democracy: The political stage preceding oligarchy, according to Aristotle. It is now a term applied to any pro-American regime that supports the Washington Consensus, regardless of its political stripe but typically run by a client oligarchy, often using the slogans of free choice and self-determination. When Russia’s Vladimir Putin is called anti-democratic, for instance, what really is meant is anti-oligarch. This would seem to confirm the association between democracy and oligarchy. A safely democratic economy is one where big business moguls rather than the State own the TV stations, magazines and the popular press. Thus in Russia the Yeltsin junta spoke of its critics as “undermining democracy” during the election period, when the oligarchs’ TV steered voters away from any critical response.

Depreciation: The theory of depreciation as an element of value was developed by none other than Karl Marx in his critique of Quesnay’s Tableau Économique. He likened depreciation of capital equipment to that portion of the agricultural crop that had to be set aside as seed-grain for the next year’s crop. It follows that for buildings and other capital improvements, real-estate investors are allowed to recapture their original outlay in the form of depreciation allowances without having to pay income taxes, because depreciation is a return of capital, not a return on capital (profit).

The depreciation rate is supposed to reflect the rate at which machinery, buildings or other capital goods wear out or become technologically obsolescent as a result of being less productive than new higher-productivity equipment or other capital. However, the lifetime of buildings tends to be infinite, while their reproduction costs increase and their site value rises even more rapidly as a result of asset-price inflation. (See Over-depreciation.)

Dependency: The loss of choice. Establishing a world system based on foreign dependency is the aim of the Washington Consensus. This is achieved by indebting foreign countries, making them dependent on meeting IMF conditionalities to obtain the resources to avoid defaulting on their loans and seeing the market price of their currency fall (and with it the price of their labor and the domestic-currency cost of servicing dollar-denominated debts). The essence of dollar hegemony is to maximize U.S. choice by minimizing the choice of foreign economies to pursue policies not deemed in the interest of the United States, obliging them to depend on the United States for new dollar credit, food and technology.

Deregulation: A dismantling of anti-monopoly rules and safeguards so as to shift planning into the corporate sector run primarily by its financial managers for their benefit, not to maximize long-term growth and new investment as is so often portrayed. Inasmuch as the essence of rulers and government is rule-setting, deregulation represents an undoing of public power in society’s broad interests, on the ground that public power is inherently corrupt and run in the bureaucracy’s narrowly self-serving interest.


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