Two things have happened in recent months that have made me think seriously — and somewhat pessimistically I might add— about the future prospects of the next generation (for want of a better word). They also led me to question the recent Global May Manifesto launched as part of the Occupy movement — which I will return to at the end of this piece.

First, I’ve just paid off my student loan, which I incurred back in 1995-1999 while I was studying at the University of Edinburgh. I was lucky. I managed (just) to get into university before the British student loan system was changed and before tuition fees were introduced. My student loan debt is the last debt I have and then I’ll be debt-free, not beholden to anyone to pay them interest for the privilege of borrowing ‘their’ money. I am deliberately putting ‘their’ in scare quotes for a very specific reason; namely that lending nowadays doesn’t involve the actual borrowing of someone else’s money but rather the creation of money (and specifically debt) from thin air — see the guide Where Does Money Come From? by the New Economics Foundation for a gentle introduction to these issues. As this implies, all that is solid does not melt into air. The reverse is much closer to reality; thin air can now be turned into something solid. We’ll come back to this in a bit….

Second, I moved to Canada last year to teach at York University and I’ve come to appreciate how indebted North American students get in their pursuit of higher education. This seems to be an increasingly important mainstream issue as well, illustrated by a recent series of articles in the New York Times. It is likely that the problems with student indebtedness will spread quickly to other countries like the UK as a result of the introduction of tuition fees by austerity governments focused on reducing government debt at the expense of individuals and their own private indebtedness. All of this might not be such an issue if a university or higher education degree meant what it did 30, 20 or even 10 years ago — that is, the gateway to a secure job or even career which enabled you to pay back the debt you took on to get there in the first place. This, it is probably unnecessary to say, is no longer the case.

It is apparent now that student loans are a mechanism for creating indentured servitude or modern-day serfs in which students, once they graduate, are forced to work to pay back loans that they cannot shake unless they sell themselves to the highest payers — most likely businesses and corporations in the private sector. Working for the public, voluntary or social sectors becomes a privilege affordable to only a few, while entry to certain professions that still place weight on interning (eg. media) are pretty much closed to anyone without wealthy parents. In the USA this results from extortionate tuition fees and government legislation such as the Bush-era Bankruptcy Abuse Prevention and Consumer Protection Act (2005), which means that students are unable to discharge their student loan debt even if they declare bankruptcy. It is no wonder that student loans have become such a profitable business and have just passed the $1 trillion mark, representing more than total credit card debt. We are witnessing the state-enforced insurance of private financial institutions against the risk of default, all on the backs of future generations. There is a very real possibility that student loans have become the next sub-prime mortgage crisis waiting to happen, but without any possibility of simply walking away.

The question to ask is “can we explain why and how this outcome happened?” The answer to that question is yes we can, if we look closely enough. And, then, what can the next generation do about it?

The Top 1% vs. The World!

Let’s start with the outcomes and origins of the current and ongoing financial crisis. Debt, bailout, austerity, inequality…is it déjà vu, or have we have seen this all before?

History repeats itself, farce or no farce. We don’t even need to go that far back in time to see this. In 1982, for example, much of Latin America faced a debilitating debt crisis brought on by lax, unregulated lending designed to recycle the excessive capital built up — or simply created — by banks and investors in the USA. The Federal Reserve’s subsequent raising of interest rates to curb inflation — part of the broader Volcker Shock — led to spiraling debt repayments in Central and South America. A lost decade followed in which IMF-sponsored restructuring programs decimated national economies and significantly curtailed government investment, ultimately impacting the poorest most while handsomely rewarding the reckless American banks many times over and above the original value of their lending. All ably assisted, of course, by a pliant state — in the 1980s this was the US government and Federal Reserve. Today with the sovereign debt crisis ricocheting around Europe, it is the European Central Bank, Bank of England and other monetary policy institutions. It would seem that “nothing ever changes, except the shoes,” to quote an obscure British rock band.

Now, imagine what would happen to all those graduates in the USA who collectively owe $1 trillion if the Federal Reserve decided to increase interest rates in the near future. It would create a financial catastrophe for them as they would have to pay off their spiralling loan interest and principal, and all without recourse to bankruptcy.

How did we get to this situation? Well, a strange thing happened to the world’s economy in the 1970s…

During the 1960s and 1970s there was a massive buildup of surplus capital (ie. money) from obscure sources (eg. Eurodollar markets) and not-so-obscure sources (eg. oil-producing countries). This surplus could not be recycled in the usual Fordist way by investing in new factories, machines and technology (ie. capital stock) as demand for these things was falling, especially in countries like the USA. Instead the ever-expanding surplus was recycled as loans to the Global South or anyone else, foreign or domestic, who wanted to borrow money. In the USA this led to an inversion of the economy as private business found that they could increasingly reinvest their surpluses in interest-generating financial assets (eg. loans to people) that would replace their need to invest in new capital stock to produce actual things to sell and for which there was dwindling demand. Moreover, these financial assets would increase in value even as demand for them increased, in contrast to the usual limits imposed by supply and demand dynamics on the sale of things. As a result, non-financial corporations in the USA found it increasingly profitable to shift their operations away from producing physical products towards developing new revenue streams from the interest payments on financial assets (e.g. hire-purchase loans) and intangible assets (e.g. intellectual property like patents). According to Greta Krippner, these interest payments came to represent nearly 70 percent of their total portfolio income (eg. interest, dividends and capital gains) by the late 1990s and early 2000s. An increasing proportion of this interest revenue also started coming into the USA from overseas.

This new relationship between private business and new income and profit sources from interest revenue represents the key characteristic of what has been termed the ‘financialization’ of the economy. It can be more simply characterized as the shift in the economic system towards interest payments as the key source of business revenues rather than any growth in productivity or sales. Financial considerations have therefore come to dominate economic decision-making; they’ve driven the expansion of particular sectors (e.g. finance, insurance, and retail estate) and led to rising asset values and, as a result, asset bubbles in the stock market, housing, and so on. Financialization has been deeply problematic, for most people at least. For one, it depends on the idea of limitless and risk-free debt; this not only leads to inflated risk-taking (greed) but also to a consumption-driven economic growth paradigm in which the average person is dependent upon taking out more and more debt to finance their lives and livelihoods. The people who benefit from this expansion of interest payments and debt-financed living are those with the most money invested in financial assets; primarily the top 1% and top 10% who have seen their incomes return to levels last seen in the Gilded Age of the 1920s – see this website for a useful resource to plot the incomes of these top earners over time and the chart below for these changes in Canada, UK and USA.

It is important to note, however, that everyone has become tied to the continuing financialization of the economy. This happens through our pensions, our savings and insurance premiums, all of which are dependent upon the returns from these interest-paying financial assets (e.g. government bonds). This raises the spectre of generational clashes when it comes to changing the economic system – for example, and in the spirit of disclosure, any attempt to halt the financialization of the economy would directly impact on my own pension (although my pension is threatened by government and corporate narratives of austerity as well). In this sense, older generations – our grandparents, parents, even siblings – are actively or tacitly complicit in the continuing financialization of the economy and the indenture of the next generation. Whether older generations have been tricked into joining a massive Ponzi scheme is beside the point; they need others to succumb to the same illusion so that they can actually retire in 10, 20 or 30 years. That $1 trillion student debt serves many people very well as revenue for their savings funds, pension funds and so on.

Generational Politics and the Global May Manifesto

So, there is an important generational issue here in that the next generation is tied to a particular financial system that benefits not only the top 1% but also their elders who are unlikely to rise up in solidarity. Hence why the Global May Manifesto, which represents a laudable attempt to formulate an egalitarian, progressive and ultimately optimistic vision of future politics and economic structures, inevitably raises hackles and engenders criticism for its idealism even in supposedly liberal circles — see the comments section in The Guardian for example. It poses a very real threat to a wide array of people, not just the top 1%. There is nothing like a threat to the status quo to bring out the cynical in denigrating visions of alternative possibilities.

However, these critics have a point of sorts. The manifesto is full of “wants” and “demands” for different things — a seeming mish-mash of policies and changes. The manifesto’s narrative is about asking that someone else gives in or gives up what they already have. My perspective is that a manifesto of this sort should not be premised on getting others to do what you want them to do; it should be about telling the world what you will no longer do to sustain the collective delusions that have brought the world to the precipice, left it teetering there on the ledge, and then gone for an all-expenses-paid lunch at some swanky restaurant in the financial district. A manifesto should say, ‘we will not buy into your unnecessary illusions, we will not pick up your mess, we will not pay for your meal.’ More simply, it should say ‘we will not pay the interest you need to maintain your economic system.’

So this is my suggestion for future generations; opt out of debt-bondage and servitude. A manifesto that threatened to stop servicing and serving the financial system by withdrawing the necessary consumer labour to borrow, to spend and to pay interest could do more to shake the world than any demands ever will. Stop borrowing money, stop getting into debt, stop paying interest on those loans, and then see what happens.

Just say no to paying interest!

This work by Kean Birch is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.