The Debt Ceiling and Morality Tales of Debt
A Dismal Science Post, but with Shakespeare!
Already, the United States Treasury is having to shift money around its account at the U.S. Federal Reserve to keep government salaries, benefits payments, contractor fees and bond coupons flowing. Sometime in the summer, though nobody know precisely when, the dance will stop and the country will not have enough money to pay it’s bills, unless Congress acts to raise the “debt ceiling,” which serves as a break on how much debt the country can issue without further consent from the legislature.
The politics of this, or even the budgetary wisdom, is beyond the purview of The Middlebrow project. That argument will be played out in many forums and each conversation will have a familiar ring to anybody paying attention.
What is interesting, though, is how debt functions in our culture as something beyond legality and even beyond politics. In Hamlet, Polonius tells his son: “Neither a borrower, nor a lender be. For loan oft loses both itself and friend. And borrower dulls the edge of husbandry.” Some take this as a standalone aphorism, but it’s seems unlikely that William Shakespeare, himself both a borrower and a lender throughout his life, intended this as moral instruction for his audience. If he had, he might not have put the line into the mouth of Polonius, who is vain and foolish throughout the story.
Polonius’ advices has a nice sound to it. Debt can cause problems in life, for both lenders and borrowers. Lenders fear not being repaid and as they often lend from affection or respect for the borrower, their feelings and relationships can be permanently altered by default. The admonition against borrowing is even clearer — the borrower becomes subservient to the lender and, in very real ways, sacrifices both freedom and dignity.
Shakespeare explores this viscerally in The Merchant of Venice, where the moneylender Shylock demands the harshest terms in the contract for an unpaid debt — a pound of the borrower’s flesh. In that play, a goodly Prince steps in, playing the role of bankruptcy court, to cleverly avoid the worst — he tells Shylock he can have his pound of flesh, according to the contract, but cannot take any blood in the exchange, practically nullifying the detail without altering the contract’s bond. (To get back to the issue of the subservience of the borrower — we call a loan contract a bond, and it often takes an act of royalty or the judiciary to alter the contract’s conditions.)
Still, Shakespeare as a businessperson in a mercantile society realized that Polonius’ advice was no more practical than the letter of Shylock’s loan agreement. There are times when we have needs that the economy will not provide. In contemporary culture, the expenses of education, transportation and housing are all beyond the immediate ability of most people to pay outright. But to forego those things to avoid becoming a borrower isn’t always the wisest choice as no education might mean long-term economic stagnation and no transportation might mean an inability to get to work and not borrowing to buy a place to live means paying rent in lieu of paying off a mortgage that can function as a forced savings plan.
Similarly, a refusal to lend means giving up a return on idle capital, something that banks and individuals are loathe to do. To lend is to risk, but the terms of the loan compensate for risk. An economy without borrowers or lenders is likely a very stagnant one.
We tend to think of people who borrow too much as those trying to live for the moment and to exceed their means. We think of lenders to those people as risk takers or opportunists. Then we expand those ideas from individuals and companies to the entire society and we wonder what it means to be a citizen of a country like the U.S., that owes $31 trillion (and counting) to its own citizens and to people all over the world.
In A Super Sad True Love Story author Gary Shteyngart imagines a dystopia future where China, as major lender to the U.S., loses faith in the country’s ability to repay and imposes its own order and discipline on citizens. Many people concerned about the absolute levels of U.S. debt believe that something like this can happen, perhaps with the drama that Shteyngart renders for us. The value of the U.S. dollar might collapse, they say. People might refuse to keep lending to the country, forcing the government to make hard decisions about where to spend and what to cut. The U.S. could be shut out from global markets, deprived of products that its people need and left vulnerable to takeover by internal or external forces.
Many of these things have happened to other countries. During the eurozone crisis in the last decade, Greece found itself bullied by the stalwarts of the European Union as its government was forced to cut payments to pensioners and to raise taxes. The government of Argentina has been forced into multiple collapses and capitulations by its creditors. There is, for sure, danger in borrowing too much.
The Middlebrow once worked for a money manager, the late Martin J. Whitman, who said that nobody could deny a bondholder a cash payment due without some other compensation, negotiated in front of a court bound by law. Another money manager I worked with pointed out that this was for corporate bonds and loans to individuals. Bonds issued by countries and sovereigns were different, he said because a bondholder cannot take control of the assets or people of a nation. One thing to always keep in mind is what a borrower does with the money they receive. If it’s frittered away, that creates serious problems. If it’s used to purchase a house that appreciates in value, maybe there’s no problem. What if the borrowings are used to build the world’s largest military and to maintain a global system of trade? No agenda here, just asking.
There’s a lot of shorthand in culture to say that borrowing is bad and lending is neutral to scummy. That’s tied up in a lot of religious, cultural and political baggage. Borrowing and lending are sources of conflict in both life and fiction, but also a way, to misquote Hamlet, to explore that “There are more things in Heaven and Earth, Horatio, than are dreamt of in your economy.”
As John Connolly said in the context of sovereign finance: "It's our currency, but it's your problem." The one fact about leverage in every other context is too much of it will kill you dead.