The debt bomb, net energy and ancient Greeks

In the 6th century B.C. Athenians gave extraordinary powers to one man to make needed reforms that would deliver Athens from economic stagnation and the gradual enslavement of the lower classes. That man, Solon, is believed to have forced the forgiveness of debts, forbade the pledging of oneself or one's family members as security for loans, and freed all those Athenians who had been made slaves through such pledges. He also repealed the harsh code instituted by Draco (from which we get the term Draconian) and replaced it with more humane laws. After decreeing that his reforms remain in place for 10 years, Solon went abroad for a years-long vacation--probably so that no one could try to change his mind about what he had done.

Today, in the face of circumstances that Solon would recognize, the case for widespread debt forgiveness has only recently been made. Stephen Roach, a longtime Wall Street economist, has called for lenders to bear considerable pain for the questionable loans they made during the previous boom. The trouble, as he points out, is that such forgiveness would require federal leadership which means that members of the U.S. Congress would have to penalize one of their most lucrative sources of campaign donations--the financial industry. The Athenian assembly had similar problems which is why they chose to give Solon autocratic powers.

Roach is acknowledging that many loans, especially those made to consumers, will not be paid back. An orderly process of debt forgiveness would spread the pain more evenly, speed up the debt deleveraging process that is depressing economic activity and provide more certainty about the results than would merely letting people default. Keep in mind that under new U.S. bankruptcy laws it is much harder for consumers to discharge debts, especially student debt. Doing nothing will guarantee us a generation of student-debt-laden college graduates who will be little better off than the debt slaves of Athens which Solon had to rescue from a life of despair.

Debt forgiveness is of special interest to those like myself who are concerned that society may be approaching or may have passed peak net energy. (For a more complete discussion of this, please see my piece Is Net Energy Peaking?) To recap briefly, net energy is what is left over for the non-energy sectors of society after we subtract the energy needed to extract, transport, refine and deliver energy to where it's needed. We may continue to extract more and more energy on a gross basis from the Earth for some time to come. But since the remaining energy resources are becoming harder and harder to get, we'll be spending more and more energy just to get them, leaving less and less for the rest of society. The day when net energy starts to decline will be a crucial turning point, and that will occur long before gross extractions of energy peak.

How is this related to debt? Well, energy is the motive force in the economy. Nothing gets done without it. Cheap energy makes modern economies hum. Expensive (and therefore scarce) energy makes them sputter. When they sputter, loans made when energy was cheap and the economy growing become more difficult to pay back. In fact, those loans are premised on the idea of perpetual economic growth which is simply not possible without perpetually growing energy supplies. That's two impossibilities in one sentence. If the necessary growth doesn't arrive--and it is not arriving now--the economic activity required to produce the flow of funds to pay back every loan won't be available. In aggregate loans made by the modern banking system are simply a bet on future growth.

The sooner we can admit that a large portion of the loans now outstanding will never be paid back in full and move on, the sooner we will be able to invest in the steps we need to prepare ourselves for a future marked by limits on resources. However, if no acknowledgement is forthcoming, then we are likely to face a long-term stagnation that will starve society of the capital it needs to make important investments in a more sustainable world.

What we need now more than ever is a leader or group of leaders who can tell us honestly and without alarm what is wrong and what we must do--and not be made to bow to the all-powerful financial interests. A few voices from the monied class are now saying that people at the top will have to make sacrifices for the good of society. Will a Solon for our age or several Solons across the world emerge--preferably not dictators as Solon was asked to be? Will they be able to exploit the growing awareness that debt must be reduced and that those who lent too much must bear some responsibility and some losses? Will there be a broad public consensus behind them that will allow them to act?

Solon began his great work when Athens was on the brink of revolution. Will we too arrive at the brink before modern Solons begin their work?