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Friday, April 26, 2013

Debt

"Rather go to bed without dinner than to rise in debt."

Benjamin Franklin

One of the perhaps unintended jewels in Andrew Griffith's book Lymphoma Journey is the list of books he read while he was undergoing treatment.  I finished the book and realized most of my highlights were titles that intrigued me.  So far I've not been disappointed and I just finished one that I really enjoyed called Payback:  Debt and the Shadow Side of Wealth by the Canadian author, Margaret Atwood.  Atwood is best known for her novels like The Handmaid's Tale.  Great to know that she can also write one hell of an essay.  

Payback is a collection of essays about debt, a subject that most of us know more about than we would like.  Very few of us go to bed without dinner these days but almost all of us get up in the morning in the full knowledge that we have creditors who must be appeased lest we lose everything.

More than just numbers on a balance sheet, every debt is a story.  Few things are more delicious to gossip about and there is always grist for the mill:  the neighbor who borrowed against the equity in house to buy a motorcycle or the student who took about 200,000 USD to buy an education in Fine Arts or finding out that a colleague's accounts are à découvert (overdrawn).  What were they thinking?    

In my wicked youth when I was still living in the U.S. in the mid 1980's I learned a thing or two about debt.  In spite of having worked part-time to pay my tuition and books at university I needed some extra cash to finish up and so I took out a small loan (about 2000 USD).  That would have been fine but at the same time I also responded to solicitations from credit card companies.  After foolishly accepting I found myself with three credit cards, a balance that never seemed to go down (the interest rates were outrageous) and a hefty monthly payment.  To make a long story short, I had to clear those cards before I could leave the country and join my future spouse in France.  That meant that I left the country with literally no money at all to make a new start.  In fact I had a negative balance sheet because I still had that small loan to pay back.  This is why I always laugh myself silly when people imply that I left the U.S. and took my "fortune" with me so I could live it up in Paris.  My life would have been a lot easier if that had been true.  Instead I ended up looking for work as soon as possible and took the first job offered - a secretarial position.  So much for my degree in Political Science.

I think there are many young people out there today who can relate to that story.  Only what I'm hearing is that it's not 2000 USD, it's more like 200,000 USD.  It's not just American students, I know a French family that recently borrowed to send their son to school in Canada.

Still the French cultural code around debt reminds me very much of my grandmother's attitude toward it.  It is a Bad Thing to be avoided at all costs.  It also helps that some of the credit practices in the US are absolutely forbidden here.  When I arrived in the Hexagon I was both surprised and a bit relieved to find out that the credit cards I knew in the U.S. had no equivalent here.  Instead I was given a debit card and the most they would give me is the opportunity to have my purchases debited at the end of the month.  No obscene interest rates and in 20 years I've never had a solicitation by phone or mail offering me a credit card.  Fewer temptations and I saw first hand what happened to people who abused their checking accounts.  One couple I knew had their debit cards and checkbooks taken away from them because they were overdrawn so often.  It was cash, cash, cash and direct debit for a few years until they could prove that they had learned the error of their ways.  I have another friend here on disability and one of the first things they did was to appoint a curateur (agent) to manage her money and other affairs.

To an American this may sound terribly paternalistic but given the roots of the Great Recession and the number of people I know in the U.S. who are in dire straits right now, I'd say that I prefer French methods.  I know that both the laws and the attitude toward debt made a big impression on me and after that brief walk on the financial wild side in my youth, I and my spouse stayed out of debt until just recently when we took out a loan to purchase our house.   

As I said before debt is a story, a morality tale.  Atwood says:  
Therefore, any debt involves a plot line:  how you got into debt, what you did, said and thought while you were in there, and then - depending on whether the ending is to be happy or sad - how you got out of debt, or else how you got further and further into it until you became overwhelmed by it, and sank from view.
I would add to this yet another plot line which is how some people stayed out of debt.  It is a with a great deal of glee that some of us point out that we have been Good and owe nothing to anyone.  That's something worth thinking about.  At the very least there is an enormous amount of false pride there which is always unattractive.  Puffing yourself up at other people's expense is not only cruel but are you really 100% sure that it's true?  Do you really not owe anything at all?  If you look around, you just might find people who disagree with you and say that you do indeed owe something.  A few examples:

National debt:  None of us like to "own" this and the finger-pointing is rampant just about everywhere. It's the idiot politicians, the immigrants, the cheats, the undeserving who are responsible for this state of affairs.  It's somebody's else's problem to be paid for with other people's money.  It's certainly not my fault and so by extension it should not be my responsibility.  A fine example of the argument's over this is Gordon Liddy's line, "A liberal is someone who feels a great debt to his fellow man; a debt he proposes to pay off with your money."  

Opinions vary as to how to manage the national debt and some even say that it's really not that big a problem.  Some even make the very valid point that when a debt gets too big, the creditors are in just as much trouble as the debtors.   Keynes once said,  "If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours."  All that may be true but it's also true that the countries that borrow do so in the name of all those that the country claims (subjects, citizens or residents).  Right now the American national debt is running at about 53,000 USD per person.  The French deficit is not too good either.  Pity the dual citizen who has to worry about both.

One might think that an affair between borrowing and lending nations would have a little less moral judgement and a little more clear reasoning but, alas, that is not the case.  I still remember the Frenchman on the street who, when asked to lend his support to the people of Greece, scowled and shouted, "The Greeks don't pay their taxes!"  Well, sir, looking at the figures for 2012 one could easily make the argument that you, a resident of a very nice arrondissement in Paris, aren't paying enough. 

In any case the money must come from someone, somewhere, if only to pay the interest on the debt. 

Taxation:  Atwood points out that the state and the citizen have very different ideas about taxes.  The citizen (or legal resident) expects something for his or her money.  Even the most conservative person who does not believe in the welfare state, believes that government is there to provide services even if that is only limited to the national defense.  Nobody, Left or Right, hands over their money to the state without expecting some return.  The state does not necessarily see it that way.  Atwood paraphrases Machiavelli, "What leaders or would-be leaders most want and need to do, he says, is to gain, expand and consolidate power.  To do this, they need followers and subjects - in our day, for democracies, read  'party members' and 'taxpayers.'"  

Look no further than the U.S. Embassy in Iraq for a splendid example.  It is reported that it cost three quarters of a billion dollars to build and that was about $150 million over budget.  Here's a video about it:


Impressive but it's hard to see how of what possible use this is to the American people. And yet tax money went to pay for it and will be needed to maintain it.  

The money spent on this is no longer available to maintain existing government services in the homeland or, if your point of view is a bit different, to provide tax relief and reduce the size and scope of government.  Whatever your political stripe the score looks like this:  Citizens (0), Government (1).

Atwood describes the game over taxation in this way:
What the subjects want is to have the services without paying the taxes, and what the rulers want is to have the taxes without rendering the services-these conflicting wants appear to be a constant in human history, ever since there have been food surpluses and social hierarchies, and armies and taxes-so there's always bound to be some grumbling.
I think there is a lot of truth in that statement.  Very few people are against taxes per se - the arguments are over who should pay and how much.  Allison Christians published a very nice paper recently about how to define a "taxpayer."  Even that effort to make people "legible" which is the first step to actually taxing them is not clear.  The criteria can be disputed and can change depending on where you are and to which state you ostensibly hold allegiance.

It is entirely possible for a state to claim someone through citizenship, for example, and then turn around and say that something is owed.  An "Accidental American" (someone who acquired citizenship through jus soli or jus sanguinas but who has not lived in or has almost no ties to the U.S.) is still, from the U.S. standpoint, a debtor, and has a responsibility to clear that debt by regularly filing tax returns and paying up.

Emigrants and Immigrants:  Even those countries that do not require their emigrants to pay taxes still harbor a sense that emigrants owe their home countries something.  This leads to a very perverse game of "Try and Collect" because it's mostly based on emotional or patriotic appeals.  Immigrants are in much the same boat.  What immigrant in the U.S. has not heard at least once that he or should be grateful for all the opportunities American offers?  What immigrant in France has not heard how lucky he or she is to live in a safe country with a fine social welfare system?  Genuflecting here is not necessarily required but it is usually expected on the part of the migrant.  

With both immigrants and emigrants there is a kind of moral accounting going on which is not entirely about money - though a request for money is usually in there somewhere.  "You owe us," say the natives.  

When this doesn't work (and it seldom does), punitive measures are proposed:  exit taxes, diaspora taxes and the like.  It's less about the money and more about the principle of the thing.  Whatever money is obtained, it means much less than the gleeful satisfaction the natives feel as their side of the moral ledger moves into the black.  

The Sick:  The blog, Time to Consider the Lilies, had an interesting post recently about people's reactions to hearing that someone is gravely ill.  After every diagnosis, the questioning begins:  Why didn't you get regular mammograms/pap smears/prostate exams?  Why didn't you stop eating so much/drinking/smoking?   And so on.  Another way to look at what these questions imply (other than to place the blame for the condition firmly on that individual and demonstrating how this would never ever happen to the person asking the questions) is the idea that the stricken person was writing checks her body couldn't cash.  It becomes a moral, not a health issue.  Having placed at least partial blame on the sick, people may feel exonerated from some of the responsibility for caring for them.

Where this breaks down, of course, is when those people themselves become ill or old.  Happens to all of us and we will all get there sooner or later (some sooner than others).  We will all become reliant on others at some point to care for us and when that happens we will experience some of the moral accounting that goes along with it.  Isn't that a cheery thought?

Enough said.  I highly recommend Atwood's book - it's a great read and I think Atwood's essays are a wonderful and very imaginative dive into the world of debt:
It's about debt as a human construct - thus an imaginative construct - and how this construct mirrors and magnifies voracious human desire and ferocious human fear.
In other words, whatever your skill at managing your finances, chances are that from someone's standpoint you (yes, you) are indeed in debt.  

7 comments:

Blaze said...

North Americans love debt. They and their financial institutions would not survive without it.

This was reinforced to me recently. I sold my home where I lived for 24 years. I bought a condo and planned about $20,000 of equity for renos (Of course, I exceeded that amount!)

I planned six weeeks after the condo closed before the house closed so I could do the renos.

I, of course, needed some bridge financing. My bank, where I have been a customer for 32 years and my credit union where I have been a customer for 14 years acted like I was some kind of fincial freak because I do not have a mmortgage or other debt and because I have savings.

They both demanded to know why I didn't want a long-time mortgage or line of credit on my new condo. "Because I don't need it," I said repeatedly. I didn't understand why the idea that someone 62 had been mortgage free for 10 years and had retirement and other savings was so hard to understand. "Isn't that what financial planners and Canadian government recommend?" I asked.

If I had been willing to take on a huge mortgage, there would have been no problem. Short-term credit with a guaranteed loan that would be paid the day my house sold was more difficult for them to grasp.

"It's amazing someone 62 has no debt," said the young man at the credit union. He almost fell off his chair when I said I had not had a mortgage in more than 10 years and had not had a car loan or any other debt in 25 years.

My grandparents who raised their family during the Great Depression were a large part of raising me. Perhaps I got my money management from their frugal ways.

In any case, the credit union did eventually see things my way and gave me a bridge loan. I quickly let my bank know that the equity being freed up will be invested with the credit union and not with the bank. They are now trying to make amends and offering me various investment options, but I'm sticking with the credit union for that.

Yet, two years ago, someone at my bank told me if interest rates go up 1%, 25% of all mortgaages in Canada could default.

How did we get here? I remember paying 18% when I had my first mortgage in 1981. Most of my generation had the same experience. When interest rates decreased to 12%, we thought we had been handed a huge gift. Many of us kept our mortgage payments the same, which is the reason we were debt free in our early 50s.

Tim said...

So getting off topic I never realized you were a child of the 1980s. Fortionately or unfortionately depending on how you look at it I am much younger and was not a child of the 1980s. However, one of the more interesting experiences of my life was going with a group of mostly European college classmates(I went to school in the US with a lot EU students including yes one from Neuilly Sur Seine who knew Sarkozy long before he became President)on a college fieldtrip to NYC. The first night on someone elses suggestion I found myself at Joshua Tree which is "the" 1980s bar in NYC(Also in the part of NYC represented by Carolyn Maloney). A rather weird and eye opening experience. I almost feel Joshua Tree should be type of museum to 1980s American culture. I also remember well having to drag much of the group back to our hotel extremely drunk at 3:30 AM(Bars in NYC close at 4:00AM). For some strange reasons I still remember like yesterday this strange immersion I had into 1980s music and culture.

Read the descriptions of the place on Yelp a lot of other people had the same experience.
http://www.yelp.com/biz/joshua-tree-new-york

Tim said...

One reasons I kind of spontaneously wrote my previous post is I am curious for example what places in the US people grew up in or have family ties to for example. I know for example Just Me and Victoria are from Seattle. I am very familiar with most of the Northeast US and Canada and traveled to Paris several times but I personally have NEVER been to Seattle. So while I have lived for long periods of time in the US I am personally more familiar with Paris than I am of Seattle.

I know for example many people here know Carolyn Maloney is the chair of the Americans Abroad Caucus but how many people are actually from her district or have ever even visited it. I only bring this because I once lived in her district and it is about as foreign and alien to the rest of the US in many ways as France is. That can be a good or bad thing from the standpoint of Americans Abroad.

lymphomajourney said...

Nice review and glad you are enjoying the list.

One of the things that I can't stand about arguments about paternalism and nanny statism is that it assumes people are rational individual actors, immune to advertising and other societal influences. The reality is far more complex, and just as we see in rising obesity, the majority of people will eat and borrow to excess.

Victoria FERAUGE said...

@blaze, Thank you for a great story. I agree - the concept of "no debt" seems to have pretty much disappeared from the North American cultural landscape. In Payback Atwood says that the word 'mortgage' comes from French and combines "mort" (dead) and "gage" (pledge). The latter, she says,

"like the part in medieval romances where the knight throws down his glove, thus challenging another knight to a duel - the glove or gage being the pledge that the guy will actually show up on time to get his head bashed in..."

@Tim, Yep, I am perilously close to becoming an Old Lady. The end of the Vietnam War, Nanny Noodles (hippy day care), temperate zone rain forests, community radio, Reagan, the sanctuary movement, demonstrating against nuclear weapons (Archbishop Hunthausen), virtual communities, the NW Folklife Festival.....

I was very surprised and pleased when I found out that Just Me was also from Seattle. Other places I have ties to are Sandpoint, Idaho (Palin Country) and the Nile Valley in Eastern Washington state.

To be honest the rest of the country is pretty much a blank slate. Never been to the south or the midwest. When I was growing up someone from Texas was a real oddity - incomprehensible accent and under suspicion until he proved his ability to integrate. :-)

@Andrew, I agree. I've lived both and I really prefer a system that slows me down before I can make a complete and total ass of myself. One bood I really enjoyed is Thaler and Sunstein's "Nudge." They argue for more paternalism but in sneaky ways.

Blaze said...

@Tim: To answer your question about where others grew up or have ties to in US, I was born and raised in a small village in Pennsylvania (population 300).

When I was 17, I headed off to New York City before moving to Montreal, then back to NYC.

However, my return in 1970 to US was too much culture shock for me after having spent a year in Montreal. I was soon back in Canada as what Arrow calls a "spiritual draft dodger" I applied to become a Canadian citizen two days after I was eligible(My actual eligibility date was a Saturday, so I waited until the following Monday).

Blaze said...

@Victoria: Here's an interesting perspective on the War On Savers.

http://www.cbc.ca/news/world/story/2013/04/26/f-rfa-macdonald-power-shift-savers.html

According to this, anyone who has been frugal and saved has seen their income go down while those with big debts have seen their incomes go up.

In fact, this article says: "As stupid as it might sound, older people everywhere would probably be better off if they'd abandoned prudence and borrowed more."

When I said North Americans and their financial institutions could not survive without debt, I had no idea it was actually planned on such a global scale by the "monarchs of money" through "quantitative easing."