Turning Debt Into Equity

Liquidity crises turn equity into debt. When the economy deflates, asset values, middle and lower-class incomes and their net worth fall because that value has been accumulated into the upper class. The lower classes must then borrow the money from the upper class to prevent a depression.

As the lower classes (the lower 98 percent) liquidate their assets, providing liquidity to resist the deflationary trend, a benefit is accumulated in the top 2 percent. The accumulated benefit trickles down in the form of debt, turning equity into debt.

Turning equity into debt is a deliberate extension of the risk (the risk of default). The risk is so high that risk-transfer instruments like CDS's are a sure bet which, of course, means it is not a bet at all. The risk of loss fully discounted is not gambling--it presents no risk to the principle party, but shifts it all to the counterparty who is leveraged into accepting the terms of the extension by default (just like the "deal" recently struck between President Obama and Republicans).

With the old majority being lame, the new deal struck between the President and the new Republican majority advocates turning debt into equity by means of austerity--by forcing the needy to pay the debt. Keep in mind that wealthy beneficiaries of the budget process are well represented in Congress, the needy are not; and keep in mind that providing for the wealthy in priority is supposed to be better for the needy than direct income transfers. According to conservatives looking to reduce debt-to-equity, it is better for income (equity) to trickle down (austerity) than be turned into debt.

Since people are more likely to choose debt over starvation, it is the noble obligation of the power elite to force the austerity by the democratic means of compromise, rendering the process dialectical rather than empirical. We have to make the same mistake over and over again before we have a realpolitique that turns debt into equity.

There is a long and short cycle, or wave, that occurs to unwind the accumulation of risk. A short dialectic occurs, like the recent tax-policy compromise, and a long wave in which the business cycle distributes and consolidates equity into debt. All you have to do to affect the cycle both long and short is to horde cash, effectively deflating prices, which is a predatory model. The Walmart model, for example, is intended to consolidate pricing power (and horde the cash), benefiting from the deflationary trend induced, rendering a firm that is too big to fail.

Remember that too-big-to-fail firms do not operate to pluralize and expand the marketplace, but to reduce it, causing inflation AND unemployment (increasing pricing power while reducing costs), with the result being deflation. Walmart is our nation's largest employer because it successfully exploits the deflationary model into marginal profit (inflation and unemployment). It successfully causes harm with the impression of doing good (causing deflation while pretending to fight it with disinflation).

Deflation prices average incomes out of the market while disinflation prices them in with low prices and high employment. Retailers like Walmart gain market share and put small retailers out of business with the result being more deflation (unemployment with falling incomes and net worth), forcing even more customers through their doors and even more deflation. Yes, prices are lower, but incomes are deflating (supporting the marginal profit at low prices) while debt, including the tax burden, is inflating along with commodity prices (the horded cash being hedged against the declining rate of profit), resulting in general inflation. The result is accumulation of gamma risk that must be dialectically unwound through recursive, political-economic processes both long and short.

While the problem of extensive debt is presented to be dialectically determined (as Marx and Hegel described it, and our binomial system presents it), it is not, however, a hard determinism. Rather than cyclically liquidating equity into debt, we can choose to transform the debt into equity and avoid liquidity crises.

This is very simple. Wherever debt is being provided to resist deflationary crises (a detriment to all parties, including the upper class), provide equity instead.

Providing equity instead of accumulating debt, the current crisis will quickly abate and we can all get on with living life instead of just trying to survive it (the accumulated risk).

Instead of the choice being reduced to debt or austerity, it is more imperatively logical to reduce austerity with equity, producing an empirical benefit for everyone, categorically reducing the gamma risk for all income classes. Sustainable economic growth does not have to occur only with extensive debt and the probable risk of default. Extending equity instead of debt provides social security for both rich and poor. Instead of sacrificing the ability to get rich, it will maximize the probability of it.

Tax cuts for the rich maximizes debt and austerity, not economic growth and the probability of realizing the American dream.

Conservatives looking to reduce debt-to-equity are right, it is better for equity to trickle down than be turned into austerity.