5 July 2012
Do not condemn the good burghers of Stockton, to quote Paul Krugman, a Nobel prizewinner for economics: ‘”my spending pays my neighbours wages, and his spending pays my wages”. A statement of mind-bending flat-earth nonsense. Whether a home, a town, a state or a nation, the laws of debt are immutable: debt can only be repaid out of future prosperity. Stockton had cash pouring in in the 90s, and assumed that it would go on, so kept borrowing against ‘future prosperity’, forgetting that the money being stirred in the cashpot was all borrowed in the first place. They were advised by flat earth economists of Nobel prizewinning status that endless money circulation created endless wealth; the city looked rich, at least on the balance sheets.
Everybody’s wages were being paid with borrowed money, in economic terms everybody was working for everybody else.
Money can only be created in one way: I work, and get paid for my labour with colored bits of paper which are tokens of my muscle or brain output. I then take those tokens, and buy the results of someone else’s labour, whose work output I need: Food, fuel, medical care, whatever. Money is only a token of energy exchange, it has no intrinsic value of its own; passing it around doesn’t create more of it unless there is that constant input of effort. No matter how big the amounts spent, money has value only if it is supported by primary energy. That’s why job creation schemes always fizzle out. Stockton used to have heavy industries providing lots of ‘incoming energy’, just as the nation did. Now those industries have drastically diminished, and there are millions of unemployed; we have lost the link between energy input and money output.
Our economic system really is that simple, and has worked that way through the entire history of civilization.
Move up from Stockton, through California state finances to the USA itself; the same series of events is repeating: keep borrowing money to sustain ‘the American dream’ and hope nobody finds out that the dream has turned into a nightmare. The nation is $15 trillion in debt, sustained by outside investors just like Stockton, with no hope of paying it back but must borrow more at an ever faster rate. The end result is inevitable
Stockton bankruptcy, is this the future of cities?