Debt
Debt, Deficits, and Warranted Money
by Brian Czech
Concern over mushrooming debt is growing. Click on the image to see the casino-like tumbling of national debt “clocks.” (US Debt Clock)
If you recognize the damages done by a bloating economy, you’ll be alarmed by the global GDP meter, which hit the existentially menacing threshold of $100 trillion in 2022. If that doesn’t give you a dose of distress, try the global debt clock. Then, for a dizzying dose indeed, check the casino-like combination of debt and GDP maintained by “US Debt Clock.”
Almost all readers, bearish and bullish alike, can sense the unsustainability of skyrocketing debt. Even wild-eyed growthists, who see no problem in a perpetually growing GDP, can’t abide a perpetually growing debt. Yet very few critics of debt can articulate, with economic fundamentals, why such debt is so unsustainable.
Sadly absent from the discussion of debt is the ecological underpinnings of money. As long as these underpinnings remain overlooked, the money lenders will be overbooked. Deficit spending will rule the day, and global debt will continue rocketing into the stratosphere, heading for the sun like a pecuniary phoenix.
Let’s have a closer look at the debt problem, with a focus on global and U.S. scenarios. We’ll consider the relationship of debt to deficit spending, along with inflation. Finally, we’ll bring in the ecological basis of money, and hope our policymakers grasp and apply it, lest our money supply—not to mention the planet—turn to ashes.
Deficits and Debt: Global and U.S.
As global GDP was ramping up to the planetarily punishing $100 trillion level, global debt was already surpassing $300 trillion. It reached that dubious distinction in 2021, just one year after reaching the previous record of $226 trillion. It has since come down from the peak, but still stands around $238 billion, and the reduction is surely short-lived.
The majority of global debt is private, especially corporate but significantly household debt as well. Public debt—money owed by governments—makes up about a third.
In the USA, those proportions are roughly reversed. From the county commission to Capitol Hill, American politicians have ambitions that far exceed government coffers. When they’re not spending money to “stimulate the economy,” they’re trying to spend their way out of the social and environmental problems caused by an overstimulated economy. They spend money they don’t have; that’s deficit spending and it adds to the public debt.
Deficit spending is a way of political life in the U.S. Government. (Image snipped from 2024 Budget of the U.S. Government.)
At this point in fiscal year 2024 (October 1, 2023 through September 30, 2024), the U.S. government deficit stands at roughly $532 billion, contributing another two percent to the federal debt of $26 trillion. The deficit may lessen as taxes are collected in the coming months, but then it will shoot back up for the remainder of the year. Even the figures provided by the Administration (probably rosy figures) acknowledge that the deficit is expected to be a whopping $1.8 trillion by the end of fiscal 2024. That’s nearly seven percent of the 2023 GDP ($26 trillion).
The USA is particularly relevant to the global debt; its debt is bigger than any other. In fact, U.S. entities—government and private combined—carry a debt burden nearly the size of the global economy!
Only Japan and China have joined the USA in the club of over $10 trillion government debt. France, Italy, the UK, Germany, India, Canada, Spain, and Brazil all have debts exceeding a trillion dollars.
In terms of relative debt (ratio of debt to GDP), Japan is at the top of the list at 255 percent. Greece, Singapore, Italy, Bhutan, and the USA (123 percent) round out the top six.
Deficit Spending: Getting Dumb and Dumber?
Deficit spending has a long history in American policy. The fiscal exigencies of war have triggered deep deficits, with World War II as the classic case. But huge deficits were already incurred during the Great Depression, coinciding with the influence of the British economist John Maynard Keynes. In the General Theory of Employment, Interest, and Money, Keynes prescribed a liberal dose of deficit spending to spur the western economies out of recession.
But Keynes never said to go hog wild, much less stay that way. So, for many decades now Americans have heard the debate between fiscal conservatives and “deficit-spending liberals.” They both want growth, but conservatives think a persistent deficit and ballooning debt is more burden than boon for GDP. They typically only abide a big debt for hawkish military purposes. Otherwise they’re “budget hawks.”
Alexandria Ocasio-Cortez, are you sure about MMT? (Wikipedia)
Inveterate deficit spenders, on the other hand, think they can stimulate the economy by picking the winners and funding the right programs.
Into this old debate comes “modern monetary theory,” centered around the idea that deficit spending is generally fine, and policymakers needn’t worry too much about a growing debt, as long as the economy is also growing. Beyond that, “MMT” seems to mean many things to many people and has polarized the economics community. Even pollyannish growthists like Paul Krugman find MMT “obviously indefensible.” Another growthist (aren’t they all?) at the dark-monied Mercatus Center calls MMT “a bizarre, illogical, convoluted way of thinking.”
MMT does, however, provide some political cover for politicians hunting pork. The late King of Pork, Senator Robert Byrd, would have championed MMT all the way to the bottom line. But MMT has persuaded some presumably more fiscally innocent members of Congress, most notably Alexandria Ocasio-Cortez, Senator Bernie Sanders, and even John Yarmuth, past chair of the House Budget Committee.
In any event, it’s hard to tell what’s so “modern” about MMT. It has a few new wrinkles—it picks them up as it goes along—but basically it’s just another phase of Keynesian thought on deficit spending. And, as President Nixon said a half century ago, “We’re all Keynesians now.” He could have added, “We’re all growthists, too!”
And so, the first subheading that appears in this year’s federal budget (page 5) is: “GROWING THE ECONOMY FROM THE BOTTOM UP AND MIDDLE OUT.” We could add: “WITH A SHOT OF DEFICIT STEROIDS.”
Money Supplies: Warranted vs. Inflated
In 1939, one Sir Roy Forbes Harrod wrote “An Essay in Dynamic Theory,” published in the stately Economic Journal. Until then, little had been theorized about the process of economic growth, and rarely with such nuance. Harrod’s approach is considered a leading precedent of growth theory.
Harrod spent much of his 20-page essay contemplating three kinds of growth rates: warranted, natural, and actual. Our charge here is not to dive deeply into Harrod’s thoughts on growth rates, but to see where they take us on debt and inflation. In particular, I propose we have three levels of money supply: warranted, real, and nominal.
Economists are familiar with the latter two. The real money supply has been adjusted for inflation, typically by pegging to a particular year. The nominal supply is expressed in terms of face value in real time. For example, $1.38 trillion today—the nominal money supply of a hypothetical country—is only one trillion real dollars, if we’re pegging to 2010.
It’s the “warranted” supply I’m proposing here. The concept stems from the trophic theory of money, which is that money originates via the agricultural surplus at the base of the economy. Not agricultural surplus in the sense of grain going to waste in the fields, but surplus in the sense that one farmer can grow enough to feed many people.
It is that surplus—more broadly, a food surplus but for all practical purposes the agricultural surplus—that frees the hands for the division of labor. The division of labor, in turn, allows for the exchanging of goods and services. All this calls for an efficient means of exchange, store of value, and unit of account: money, in other words.
Money is warranted, then, by the division of labor flowing from agricultural surplus.
Money didn’t just originate historically via agricultural surplus—as it did in Mesopotamia, Lydia, and the Yellow River Basin of China—it originates each year in the breadbaskets of the world. Actually it originates twice a year as these breadbaskets are found in Northern and Southern Hemispheres. North America (prairies and California), China, Southeast Asia, Brazil, and Chile come to mind, plus of course the contested confluence of political Europe and Russia, centered in Ukraine.
You might say money gets “printed” into circulation with each perennial pulse of wheat, rice, corn, oats, barley, and soybeans. Massive harvests free billions of hands for a spectacular division of labor and the exchanging of trillions of dollars of warranted money. Lenin was right on the money (so to speak) when he referred to grain as “the currency of currencies.”
Wheat combine “printing money” in North Dakota. (Flickr)
Think about it: How would money remain relevant in a world of agricultural collapse? Everyone would be occupied with growing, gathering, catching, or commandeering their own food. No one would be producing other types of goods and services, much less bringing them to market. Money would be worthless; it wouldn’t be warranted.
Not so with the collapse of massage services, NASCAR, hip hop, or even Taylor Swift. Nor with the disappearance of boats, guns, electronics, fur coats, or perfumes. A thousand container ships of manufactured dreck could be dumped in the Panama Canal, never to be seen or sold again, and the economy would persist. Plenty of other goods and services would remain. Money would still be meaningful, relevant, and valuable.
It’s an entirely different story with the world’s soy, root crops, poultry, livestock, finfish, and, above all, grain. Burn those up like some omnipotent, omnipresent Putin, and watch the economy come tumbling down in days.
That is why, in a fundamental sense, it is agricultural surplus that “prints” money into circulation. The warranted money supply, then, is that which reflects the amount of agricultural surplus. Lots of surplus warrants lots of money; little surplus warrants little money.
The trophic theory of money doesn’t explain every possible aspect of monetary economics, at least not directly. For example, how big a role do livestock and fish play in food surplus and therefore warranted money? What’s the linkage of food surplus to energy inputs? What about other natural resources at the trophic base of the economy such as heavy fiber and timber? (It takes clothing and shelter to subsist, not just food.)
The trophic theory of money generates plenty of research questions, but it provides plenty of insight as is. Take inflation, for example. That’s when the nominal money supply exceeds the warranted supply.
Limits to Warranted Money
While it is helpful to think of money as being “printed” into circulation with agricultural surplus, it is even more helpful to think of money being “footprinted” into circulation. There’s no way to produce an agricultural surplus—or a warranted money supply—without a heavy ecological footprint. Not for a population of eight billion people.
It takes a lot of inputs to grow a lot of food, so the ecological footprint of agriculture reaches far beyond the field. (Flickr)
Each parcel on the planet has a biological capacity. So, given limits to agricultural efficiency, we know that the ecological footprint of agriculture can only reach so far (or sink so deep, if you prefer). Then it exceeds the biological capacity, agricultural surplus plunges, and the warranted money supply drops like a shot.
The pre-existing, nominal money supply remains, but to what avail? With no agricultural surplus, businesses big and small disappear—banks, too—and the government defaults. All but the most civilized (or uncivilized but ethical?) polities descend into some sort of chaos. The nominal money supply might still be in the trillions of dollars, but it’s neither warranted nor real. It’s like the gold supply of King Midas. It’s hyperinflated, not because of an “overheated” economy and the pull of demand; quite the opposite. It’s devalued by “cost-push” inflation, the relentless price increases due to diminished stocks of natural capital.
What the Fed Needs Now
The Federal Reserve, U.S. Treasury, Budget Committee(s), World Bank, and all the other fiscal, monetary, and financial institutions need a reality check in the form of basic and applied ecology. They need to learn especially about the concepts of trophic levels and carrying capacity. Otherwise they won’t be able to sufficiently connect the dots among deficits, debt, and cost-push inflation.
Right now, the Fed’s approach to curbing inflation is the ham-handed raising of interest rates. But raising interest rates only works (sometimes) for the “demand-pull” form of inflation, where prices rise due to an increasing propensity to consume, or due to an injection of nominal money (as with deficit spending). It’s no remedy for cost-push inflation stemming from limits to growth in the real economy.
The Federal Reserve needs ecological training to manage inflation. (Wikipedia)
I’m not saying these accomplished folks—geniuses in other ways—have no sense of economic capacity. They most certainly do; they monitor and talk about it all the time. Unfortunately, they have essentially no knowledge of ecological capacity, so their notions of economic capacity are flawed. They tend to think of capacity in terms of financial capital, labor, manufacturing facilities, infrastructure, and new technology. It’s reminiscent of Herman Daly’s lament about focusing on the kitchen and the cook, with little thought to the ingredients.
When is the last time you heard a Jerome Powell or a Janet Yellen utter a word like “soil” or “water” or “forest” or “fishery”? Yet those are the stocks of natural capital at the very base—the trophic base—of the economy they preside over. They should be intent upon conserving those stocks, if not for purposes of long-term human wellbeing (which would be nice), then at least for purposes of fighting inflation!
Brian Czech is CASSE’s Executive Director.
The post Debt, Deficits, and Warranted Money appeared first on Center for the Advancement of the Steady State Economy.
Debt Makes the World Go Around
RADHIKA DESAI: Hello and welcome to the 21st geopolitical economy hour, the show that examines the fast-changing political and geopolitical economy of our time. Welcome also to a new year that promises to be nothing but rocky, so let’s help rock it in the right direction. I’m Radhika Desai.
MICHAEL HUDSON: And I’m Michael Hudson.
RADHIKA DESAI: There’s an old saying, money makes the world go around. Like so many other truths, neoliberalism has subtly but decisively altered this one too. The adage of the neoliberal age can be said to be “debt makes the world go around”. Indeed, debt is not just making the world go around, it is making it spin madly. So madly that the possibility that it will spin out of control is ever present. Everywhere you look, there’s a debt crisis. There’s a student debt crisis, the mortgage crisis of 2008 never really went away, there’s the commercial real estate crisis, there’s a government debt crisis, and of course, there is the crisis of housing. I mean credit card debt, Auto debt, etc. To keep the debt cycle going, the Federal Reserve is even changing its decade-long tolerance of intolerance of inflation. For the Federal Reserve, inflation is acceptable at 3.5%. According to some reports. It would rather tolerate 3.5% inflation than sacrifice the asset markets that keep going up thanks to which have kept going up thanks to low interest rates, and it doesn’t want to take interest rates beyond a certain level. Raising interest rates at this point means making it harder for asset markets to go up and stay up, and that’s why the Federal Reserve is going to cut interest rates no matter whether it’s managed to solve the inflation problem or not.
So today, we are going to continue our closer look at more than four decades of neoliberal policy and how they’ve changed our economy by focusing on the triangle of debt, real estate, and financial instability. In short, we are going to talk about how in these decades while incomes have stagnated, debt has expanded such that households, governments, and businesses have all become indebted to the gills. Today, one of the reports shows that debt servicing itself has gone up by 50% and today accounts for almost a sixth of total government spending in the United States. How both residential and commercial real estate have become bound up in the vortex of financialization is another thing we want to talk about because it is not producers but rentiers who benefit from this type of economy, and even rent is being converted by the alchemy of financialization into interest. So at the end of the day, even land ownership and homeownership no longer matter. What matters is how much money you’ve got and how you can make your money, make more money.
So finally, we are going to talk about how even though all of this has benefited the financial sector, given its very nature, the expansion of the financial sector can only lead to crisis, and so how the mountain of debt today threatens the stability of the US financial sector and by turn of the US economy, and as Michael and I have discussed so many times, the dollar system itself. So let’s start looking at this chart. Michael, this is a chart, um, let me just find it, this is the chart of total indebtedness in the United States.
So you see here, this is simply the aggregate level of indebtedness. The kind of blue bits at the bottom are business debt, this green bit here is household debt, this purple bit here is federal debt, and then on top, you have state and local government debt which of course as people will know has been restricted by constitutional, by legal means. So what you have here is debt from the 1960s onwards, and you can see clearly that really the debt, the accumulation of debt begins to take off only out in the neoliberal era from the 1980s onwards, and it really begins to take off around the 2000s when of course the United States Federal Reserve first experimented with low-interest policies, and of course, which then resumed after the 2008 financial crisis.
MICHAEL HUDSON: Well, you can look at the basic sweep which is an up sweep, an exponential growth. Any debt is a doubling time, and there’s something very unique about this kind of slope. The economy doesn’t grow like that, the economy grows in business cycles, up and down. What you don’t see here is very much of a downswing, and that is because the growth of debt continues to mount up by compound interest. The creditors, the banks, simply reinvest all of the interest that they get in making new loans, which is exponential, and they can create their own money simply on their own computers.
So, this chart really should be juxtaposed with one of the business cycles, then you’ll see that any debt that grows this rapidly exceeds the ability to be paid, and that is the distinguishing feature of debt for the last 5,000 years. The natural tendency of debt is to exceed the ability to be paid.
Now, this chart simply shows debt by the sector that owns it, the household sector, business. What it does not indicate is what this debt is for. What is it collateralized for? Well, almost all of the household debt is for real estate, and the same thing with commercial bank debt. 80% of bank loans for this debt are real estate loans. And the blue chart of government debt really doesn’t matter that much because the government simply creates the debt. And it’s debt that doesn’t ever expect to be repaid. Households and businesses have to pay the debt. That’s what’s causing the problem. Nobody ever got into trouble running into debt. The government doesn’t run into trouble running into debt because it can simply print the money to pay. But individuals, families, and corporations have to pay. And when they can’t pay, that hurts the banks, and the banks go under. And the purpose of the Federal Reserve is to make sure that this debt keeps on growing despite the fact that it is stifling the economy and leading to depression.
The role of the central bank is to impose austerity on the whole rest of the economy to make us look like a third world country in paying the debt, because this is exactly the same kind of sweep that you have for the global south countries owing their foreign debt and for every country in the west. So the whole west, Europe, the United States, has a chart just exactly like this, and they’re all slowing down, and they’re all in what’s called a debt deflation right now.
RADHIKA DESAI: Well, you know, I’d just like to add a few more points because this chart is really kind of more interesting than might appear at first sight. Of course, there is the upsweep that you talk about, Michael, but there is also the fact that if you look at the period from essentially from about 1950 till the end of the 1970s, there is an upsweep, but it is not so pronounced. What you see now in the neoliberal era after 1980, and particularly after about 2000, that’s when you see the really exponential increase in debt. And I think that that, as I say, coincides with two very important things.
Number one, the repeal of the Glass-Steagall Act, which meant that this was essentially permission for the U.S. financial sector to simply enter into the most breakneck competition with one another in order to lend more and more, speculate more and more, and so on. So that’s what you’re looking at. And of course, the other part is the historic decision after the 2000 crash, the dot-com bubble crash, when the Federal Reserve first began experimenting with low interest rates. So you had sort of one, between one and two percent interest rates from about 2000 till about 2004-5, when because the dollar was coming under a lot of pressure, the Federal Reserve was forced to start raising interest rates. And that graduated series of interest rate increases was, of course, what eventually pricked the housing and credit bubble. So, I mean, that’s one thing.
The second thing as well is that United States government debt as well. You know, at one level you can say that, yeah, sure, the government debt doesn’t have to be paid off. But the thing is, it’s not as though the government debt does not matter. At the end of the day, even when the U.S. government, or when even the U.S. government borrows a lot, it does suffer. Because today, the U.S. government is having to pay much more money in return for its debt in order to borrow from the market than it used to have to. So, and even in the era of low interest rates, U.S. government paid a higher premium, higher interest rates on its debt than, say, a country like Germany, for example.
So in that sense, I think that what you see here, which is particularly after the increase in the debt in the neoliberal era, this initial increase here you see up to 2008, is basically created out of essentially giving tax cuts to rich people. So that expanded the federal deficit, even though you had cutbacks in Social Security and so on. And today, a very large part of U.S. debt is actually going to paying interest rates, paying interest on U.S. government debt. So in that sense, it’s important.
And then finally, of course, the expansion of household debt, which again, you see it increases, it increased a little bit in the 1980s, then it sort of slowed, but then you see it particularly increasing in the 2000s with the housing and credit bubble. Then it slows again, and then once again, it is increasing. And this increase, of course, is almost entirely because of the difficulties in which U.S. households find themselves. So on the one hand, at the top end of the borrowing, of course, you have borrowing in order to consume more, in order to spend more in one or the other way, including in order to speculate more in stock markets. But on the other hand, you also have a lot of distressed borrowing. So this is what we are looking at.
And finally, this increase in business debt is also because essentially what has been happening over the last several decades is that companies are bought by other companies. And then what these companies do is they burden every business they buy with as much debt as they can get in order to essentially use the money for other purposes, including giving fat dividends to owners and so on. But this is what you’re looking at. So we’re looking at a highly, highly indebted world.
MICHAEL HUDSON: Well, there are a number of points also in that chart. After 2000, a lot of that government debt was the war debt, the Iraq War debt. From 1950 through about 1980, almost all the growth in government debt was military spending abroad. And this debt is not only owed to the United States holders and the Federal Reserve, but the foreign government. So that is not included in the chart, but that’s much of the growth. The interesting thing also is that you see this acceleration of debt after 2008, and yet that was the period of zero interest rate policy.
When the Obama crash occurred, the Federal Reserve said, the one thing we have to make sure is that families bear the brunt of this enormous financial fraud and bad lending and junk mortgages that have taken place. We want to save the banks and we want to sacrifice homeowners for it. We want to make the public pay to the banks to make sure that homeowners lose their home and lose money. Businesses go bankrupt, but the banks continue to get richer and richer with this debt, and this debt will not get wiped out by bankruptcy. It’s going to grow and grow, just like student loan debt has grown. And you see a lot of this business debt going up, and yet this business debt was almost interest free, very low.
What the chart should be correlated with, if we really had a group of charts, was all of this debt was spent not on producing goods and services, not in building factories and means of production, not in employing labor, but in buying stocks and bonds and speculating. It was all used to buy companies, load them down with debt. And so this corporate debt that’s going up is a result of the mergers and acquisitions, the corporate raids, the corporate takeovers, and treating corporations in a way that would make money for their stockholders and their private owners, but not for the economy at large.
So a company would make money, suppose you take over Sears or Toys R Us, the private capital that would take over, they would borrow the money, hardly any interest from a bank, 100%, buy out Sears or another company. The first thing they’d do is say, okay, now we’ve taken over the company, could be the Chicago Tribune, let’s take the pension funds that’s invested in stocks and let’s borrow against that. Let’s let the pension funds lend the money to the company, and let’s borrow more money from the banks to the company. And the money that we borrow, we will then pay out a special dividend to ourselves. So the money goes from the banks to the owners without having any positive effect at all, but having a very negative effect. It leaves the company so deeply in debt that it goes bankrupt, like Sears or Toys R Us or all of the other companies that have been essentially going bankrupt. And when they go bankrupt, they’re sold to larger and larger companies. And so this debt has the effect of concentrating ownership within the sector.
And the household debt has gone up because as you increase the amount of money that banks will lend against housing, banks have competed. Who can lend the most money against homes for new families wanting to buy a home? Well, the banks compete to lend so much money that if you’re a family buying a home, you have to borrow more money than your rival who’s borrowing from their bank, and the banks have just created a new real estate bubble. And that’s what we’re in now. The real estate prices have gone up so high, the rental price is so high that one of the byproducts of this is a rise in homelessness. And with all of this debt, somehow people don’t have enough money to buy goods and services, and standards of living have gone down. We’re living in a increasing third world austerity plan as a result of this upsweep in debt.
RADHIKA DESAI: No, absolutely. And you know, what you say reminds me that we’ve already said that one of the reasons why especially poor households borrow is because they basically cannot make ends meet. They have to borrow, and so they are becoming indebted.
But there’s another reason, and that is, you know, why has there in the neoliberal decades been such a huge explosion in student debt? It’s because government cutbacks have stopped funding universities to the same extent. So fees go up. And of course, the cost of living goes up for students because of course you can’t rent anything half decent, or even indecent, unless you pay a lot of money. And so all of these things drive up the cost of an education, which then means that students have to get a loan, and so on.
So essentially, cutbacks in social services, including, by the way, we haven’t talked about medical debt. A lot of the debt is incurred because people have to borrow money if they want to pay for certain medical procedures. So all of these things just goes to show that once again, under neoliberalism, it’s ordinary people, the working people, and the poor people who get really shafted.
There’s another way in which these people get shafted. When you have a low interest rate fueled competition for buying houses, buying homes, typically the sharpest competition is happening at the lower end of the market. So that the lower end market, that is to say the kind of houses and homes that first time buyers will buy, tend to see the most appreciation in prices as a result of competition among the lower end buyers. And this is what prices out so many people.
But a final thing I want to say is this expansion of debt is also interesting because it has taken place exactly in that era when the government, right at the beginning of the 1980s, committed itself to restricting money supply, it committed the Federal Reserve to restricting money supply in order to slay the dragon of inflation. But what that has meant essentially is to have an economy in which people are making less money but incurring more debt. And essentially debt becomes the way in which money is issued into the economy.
And of course the Federal Reserve itself has kept up a policy going back to 1987 where no amount of money creation is too much if it is to bail out the financial sector. So from 1987 onwards, when you had the 1987 crash, Greenspan first engaged in this kind of liquidity provision in order to bail out the financial sector. It was called the Greenspan put. Now over the years it has become a Federal Reserve put. And the result is, you know, we just showed you the chart of indebtedness. And according to the Federal Reserve, the total debt or non-financial debt in the United States is now close to three times U.S. GDP. It has doubled since 1980.
There is another point that is really interesting. These charts, the chart we showed you, does not include the vast amount of debt which the Federal Reserve has itself created in order to bail out the financial sector. And the top end of the corporate sector, starting in 2020, on which the financial sector relies for its best assets.
So essentially, and this was very surprising to me, in 2008, a scholar called James Falkerson from your university, Michael, from UMKC, showed that the Federal Reserve could not cope with the 2008 crisis by just playing its normal role of lender of last resort, by providing ample liquidity, slashing interest rates, etc. It slashed interest rates at that time from 5% to 0%. But this did not function to stabilize the system and even made it worse. And then, according to Falkerson, the Federal Reserve engaged in a host of unconventional measures, unprecedented in terms of size or scope and of questionable legality. They’re his words. And the goal of these was to explicitly improve market conditions. And this program, according to him, amounted to a total of 29 trillion dollars.
MICHAEL HUDSON: You’ve gone very quickly over that, and I want to show how revolutionary this was. Until from the founding of the Federal Reserve to 2008, there was a basic philosophy of central banks going all the way back to the Bank of England and to the rules that people discussed in the 1880s and 1890s. The idea of central banks, you use the word lender of last resort. That means everybody realized that sometimes when there would be a business downturn or a shift in interest rates, people would have very sound property. The buildings weren’t destroyed when they became insolvent. Companies weren’t destroyed. But the problem is there was a temporary downturn in the business cycle. So banks are supposed to only borrow for short term and at a high penalty rate. Every central bank in the world followed the policy. You don’t subsidize rates for credit for banks.
Since 2008, the banks have taken control of the U.S. Treasury and taken control of the Federal Reserve to get all the money that they want for nothing. Actually, they’re paid to borrow. After 2008, the Fed said, we’ve got to make bankers richer. Despite the fact that they’re paying themselves more than any other sector, they don’t have enough money to keep on lending. We will give them all the money they want. The way we’ll do this is the banks will make loans to corporations for takeovers, make loans for commercial real estate. They will transfer these IOUs to the Federal Reserve in deposits. The Federal Reserve will lend them money in exchange for this. The banks have put all of their bad loans and shaky loans into the Federal Reserve. The Federal Reserve pays them interest on these deposits. The banks make interest not from the corporate borrowers, but the Federal Reserve is creating the interest to pay the banks to make this huge upsweep in loans. You can look at that as an arm of Chase Manhattan and Citibank. Essentially, they’ve taken control of the Federal Reserve.
That’s really the libertarian ideal of a centrally planned economy planned by the banks. When the libertarians say, let’s get the governments out of business, let’s get the governments [to not] run a deficit, that means if the government doesn’t run a deficit, it’ll cut taxes, it’ll cut spending. That means that all the credit that people need, the economy needs, will be produced by the banks.
The Fed has said, now we’re going to really turn up the screws. We’re going to let the banks make 5% of the money. All of a sudden, this growth in the blue, the government debt that you saw, is going to soar. The interest rates are going to be such a large proportion of the government spending that they’re already talking about, we’re going to have to cut back Social Security and Medicare. That’s what Haley, the Republican nominee, says. The Republicans want to say, if there’s a choice between paying Social Security and Medicare or paying interest to the banks and bondholders, the bondholders come first because they’re our campaign contributors. You don’t get campaign contributors from people who are broke because they don’t have the money that the banks have. Of course, we’re going to bail out our campaign contributors. The government itself has been privatized. That’s what neoliberalism is. That’s what the anti-government libertarianism is. It means liberty for the banks and debt system for the population at large. That’s what these charts imply.
RADHIKA DESAI: Absolutely. I would say just one thing. Of course, most people will know this, but in case people don’t, the Federal Reserve is peculiar among the central banks of the world in being still privately owned. In that sense, I think that what Michael says is very relevant. Essentially, what the Federal Reserve has done is over the last many decades, it has transformed the U.S. economy into an economy in which the primary way, the best way, the fastest way to make money is by essentially speculating, not by investing in the production of goods and services that ordinary people need, but by inflating the value of goods and services already produced.
Those of you who know a little bit of Marxism might appreciate it, but if Marx was around, he would have called it a very peculiar form of necromancy. What do I mean by that? Because already produced goods and services contain the dead labor that has gone, it is now dead, it is no longer living, that has gone into producing it and you are inflating the value of that. Whereas, as you do that, you are disvaluing the living labor, much of which may remain unemployed, and all of which is necessary to produce the new goods and services which every year, in every period, ordinary people need. We need more food, we need more clothing, we need more transportation, we need more housing, etc., etc. And these are the things that are strangulated. Living labor is strangulated while dead labor goes up. Because there’s something very peculiar.
Remember, as Michael pointed out, and as I pointed out, a lot of this debt has been incurred. In fact, most of it has been incurred to speculate, to inflate the value of already existing assets. And there’s something very peculiar about it, because imagine a house that goes up in price by 30%, 40%, 50%. Nothing in it may have changed, but it goes up in price anyway. Nothing is produced, but it goes up in price. So, this is the kind of economy that has been created.
And I just also want to show you one other outcome, just my last point this time around, but one other outcome of this vast increase, this vast federal government program to bail out the financial institutions. So, you see here, this is a chart of the total assets on the Federal Reserve balance sheet. And you see here, from up until the 2000s, it was basically hovering at about just below one trillion dollars. In the 2008 financial crisis, it doubled, a little more than doubled actually, to over two trillion dollars. Then over the course of the decade that followed, thanks to quantitative easing in which the federal government essentially started a program to buy the worthless assets of the financial institutions for good money. This was quantitative easing, and so it piled on, it increased its own balance sheet while essentially making good the damaged balance sheets of the very financial institutions that had caused the 2008 financial crisis. And then it was beginning to reduce its balance sheet when 2020 came, the pandemic came, and then you see that you have seen an absolutely unprecedented increase to $9 trillion of assets in the federal government. And this is the result of that $29 trillion worth of effort that the Federal Reserve made to bail out the financial sector.
So, please, Michael, go ahead. Yeah.
MICHAEL HUDSON: When you use the [phrase] “worthless assets”, they weren’t exactly worthless if you could get 100% from the Federal Reserve. The word that was used by Marx and almost everyone in the 19th century and today was “fictitious capital”. In other words, all of these debts and bank assets were counted as an asset. If a bank makes a loan to a large corporate property owner in an office building, the bank has that as an asset. But as we’re seeing today, these asset prices can’t be realized. In other words, what if the bank said, okay, now your mortgage is just falling due because it’s a balloon mortgage, you have to pay that. Every few years, you have to pay the entire amount or re-borrow it. Well, all of a sudden, if it’s lent $100 million against an office building, and the office building is now worth $40 million, why would a bank lend $100 million to an owner of a $40 million office building? That’s the situation we’re in today.
Now, look at these two jumps. The first jump that you have after 2008, that’s the junk mortgage jump. All of these loans were against fictitious mortgages, mortgages that pretended that there was value there, but there were mortgages mainly to Black and Hispanic borrowers by banks who cheated them, who over-evaluated the prices. The banks in general discovered a new way of making money after about 2004. They could make money by charging racial minorities much higher rates, almost double the rates that they charged white people. There were whole banks and brokers that specialized in this, and this was basically the junk mortgage group. Countrywide, Financial was the most obvious beneficiary of this.
There were a number of notorious banks that ended up being merged. Bank of America was one of the crooked banks. Citibank was one of the most crooked banks, as has been very well documented. Randal Wray at the Levy Institute and Kansas City published a big explanation of who were these $29 trillion, $27 trillion of loans for. It ended up many of these loans were rolled over and reloaned, so the net amount was not $27 trillion, but that’s how much was given to the banks with this huge jump. Instead of sending the bankers to jail, they made them billionaires. They rewarded them. That was the Obama policy, and that is what makes them one of the most viciously racist presidents in modern American history. The Democratic Party became committed to returning to its pre-Civil War racist policies.
Well, the next group is you see in 2020-21, this huge jump in bank loans. What were they from? The Federal Reserve began to raise interest rates. When the Federal Reserve raises interest rates from less than 1% to 5%, this means all of a sudden debtors had to pay 10 times as much interest as they did before. What that did was that reduces the price of an asset. It’s an inverse proportion to the interest rate. All of a sudden, the stocks and the bonds held by the banks that went under were fictitious. In fact, although Silicon Valley Bank and New York Bank went under, all of the banks, especially Citibank and Chase Manhattan, had all of the loans that they had. All of a sudden, they were not worth anywhere near what they carried them on the books. The banks were insolvent.
Now, here was a wonderful opportunity. The Federal Reserve could have taken them over by the government and said, you’re insolvent. We’re going to wipe out the stockholders and the bondholders because you’ve made bad loans. Instead, the Federal Reserve said, well, instead of making the banks insolvent, let’s make the economy insolvent. That’s the policy we’re in today. This increase in Federal Reserve loans has been to support this upsweep of credit that is increasing the burden. All of this upsweep in credit is far in advance of the wages and salaries that people are getting. Somehow, all this increase in interest charges and amortization charges and penalty fees end up impoverishing the economy by leaving less to spend on food and clothing and other consumer spending. If consumer spending is going up, it’s because of the inflation.
RADHIKA DESAI: A small correction. This big increase, of course, was increased because the Federal Reserve started a new, massive liquidity provision program, quantitative easing program, when the pandemic hit. And the one that you’re talking about, where essentially they were bailing out Silicon Valley Bank, etc., this is the small increase here, which is what happened after interest rates started rising. But throughout this period, right up until about here, interest rates remained at historic lows.
And just one other thing I wanted to say about this before we close this chat, which is that, you know, around 2013, about here, essentially, the Federal Reserve decided that it was going to try to decrease the size of its balance sheet. So you can see, you know, it was still only about three and a half trillion, not the nine trillion that it is today. But you know what the financial institutions and the financial sector did? The financial sector at the time, in 2013, threw a “taper tantrum”. The Federal Reserve was threatening to taper its balance sheets essentially, you know, to decrease it. And they said, we’re not having it. You’ve got to keep supporting us and you’ve got to buy our assets. And so essentially, the Federal Reserve humored them in their tantrum and they continued to expand the balance sheet. And then, as we saw in the pandemic, did even more so, etc. So that’s the thing we’re looking at.
And the other thing I just wanted to point out, of course, is that, you know, I completely agree with everything that Michael said about just how racist the system is, because at the end of the day, you know, people think that debt is a market relationship. Debt is not a market relationship. It’s a relationship between, on the whole, relatively privileged people, one of which decides to lend money to the other. So the idea that somehow, by passing a piece of legislation, you can make the poor people of the United States, the black people of the United States, the Hispanic people of the United States into homeowners, this was always a bit problematic.
And in the end, the whole 2008 financial crisis, the vast buildup of debt that preceded it, only a tiny fraction, which happened towards the very end of that vast increase, was actually loans to subprime borrowers. The financial institutions only began lending to the subprime borrowers once they had filled the prime borrowers to the gills with all the debt they could take, and only then they moved. And so, in many ways, the subprime borrowers came last, and they were also, of course, the ones to suffer the most. So, yeah, I mean, I think these are really, so really we are living in an economy that is awash with debt, as we were just saying, and it really is the opposite of the sort of economy we ought to have.
And Michael, you know, one of the things about the whole classical conceptions of land and rent and interest and so on is, of course, that classical political economy always looked down on things like this, like interest and rent, because it saw it as unearned income, isn’t it?
MICHAEL HUDSON: Well, I could have a whole hour on that, but I want to follow up with some charts on the racial element of this. We’ve talked about how the volume of debt is too large to be paid, but I want to say there’s another aspect of debt, and if you could show the racial, that’s right, that chart is very interesting.
One of the results of debt is to create a bifurcated economy, and that means that we’re in a kind of apartheid economy. We’re in a financial apartheid economy. 10% of the population owns over 75% of the stocks and bonds in the population, and they’re almost entirely a white population. We’ve talked about mortgage debt being 80% of the overall debt burden. I want to show what has happened long before the chart begins in 2002.
I want to begin in 1945 at the end of World War II. That’s really when the houses had not been built during the Depression because people, there wasn’t a market for them. They weren’t being built during World War II because all of the raw materials were going to the war effort, and debt for the whole economy was very, very low debt in 1945 because there was nothing to borrow money for. You couldn’t borrow money to consume because everything was rationed anyway.
But finally, they began to make loans, and what had spurred the American takeoff and that of other countries. All countries of Europe, America, and elsewhere were rebuilding after the war, and most of this rebuilding was rebuilding for housing. That was when the great housing was taking place. Here in Queens, you had major developers, not only Trump’s father, but all the famous experiments and group housing were made.
There was only one thing. White people were able to buy houses for maybe $10,000 was a typical price of a house that now costs a million dollars. The problem is that banks would only, in order to buy a house, you had to take out a mortgage. Nobody has enough money to buy the whole value of a house, and if wages were maybe $3,000 or $4,000 a year back in 1945, you couldn’t even buy a $10,000 house. Nobody had that. You had to go to the banks. Banks, until about 2000, 2001, would only make mortgage loans almost entirely to white people, unless you were a very, very wealthy black person or a Hispanic.
What you created was a bifurcated society. The people who bought the houses in 1945—they returned from the war. They took civilian jobs. They bought a house, and many of them died of old age, but they left the houses to the children. And you had one generation after another generation of white people leaving the house to the children, leaving them enough inheritance to have a house of their own and an education of their own. So what you had was a home owning, educated white class, but this was not available to non-whites in this country. So what’s the depth of the restriction of credit to the prime human beings, not to the unprimed borrowers? We’re talking about a pretty racist policy. It was very responsible for the fact that you’ve had now 75 years—well, longer than that, 75 years since World War II—you have a disenfranchised, non-white class in the United States of hereditary homeowners who can get into college because their parents and grandparents went to an Ivy League university. And there’s a monopoly of housing and education and wealth at the top of the economic pyramid, and the rest of the economy is essentially disenfranchised as if we’re in our own financialized apartheid economy.
RADHIKA DESAI: Yes, and there’s a couple of other points. By the way, in this chart, I should just explain that the top line here is essentially showing the homeownership rates, that is about 75 percent, of non-Hispanic whites in the United States. The red line, which is at the bottom here, is of black people alone in the United States, and then the green line is of Hispanics of any race in the United States. So that presumably includes, for example, if you were a relatively white Hispanic, and they do a little bit better. But you can see that the rate of ownership of black people from the early 2000s till today has really not budged. If anything, it’s slightly worse today than it used to be back then, and became considerably worse just before the pandemic, reaching a very low level of below, like around 40 percent, in fact. So anyway, that’s the thing.
But in addition to these things, the kind of financialized economy in which we live, increasingly owning of houses and land, etc., does not necessarily, because of mortgages, the ownership of land or houses does not necessarily confer on you any privilege, because homeowners find that they are paying interest to banks, and even landlords typically are highly leveraged, so the bulk of what they are collecting in rent actually ends up as interest to banks. So in a certain sense, what we are trying to say is that the Federal Reserve has engineered an economy in which not only profits and wages have become essentially in hock to pay interest, are used to pay interest, but so is rent. So that interest has become sort of the prime form of income, at the top of the income pyramid, so to speak.
And this is a result of changes also in the tax structure. So for example, in the U.S. taxation system, earnings from interest and rent are treated a lot more softly, a lot more favorably than our earnings from work. This is a huge problem.
MICHAEL HUDSON: That sort of goes back to the value theory that I think requires a separate discussion altogether, because it’s so fundamental. The whole idea of classical economics and the free market was a market to be free from rent, rent being unearned income. Rent is what landlords make in their sleep. Rent is not created by labor, and most people don’t realize what’s called the labor theory of value that is based on Ricardo and Marx and the whole 19th century. The idea was to separate value, which is created by labor, from economic rent, which is created by hereditary, by privilege, by property ownership, by owner, by banking, and by monopolists, and by landlords who make their money, economic rent, by owning a rental property, or by lending money and making interest, or by having a company, a monopoly. And you just raise prices, and much of the inflation, as Radhika mentioned at the beginning of the talk, they call it profit inflation, meaning a company just decides, let’s raise the price of drugs.
For instance, my wife is on an employer, United Healthcare plan. The price that she has to pay, local drugstores went up quintupled on January 1st, because the healthcare insurer said, we can make money by quintupling the price. Drug companies have been raising the prices all across the board, not by producing more, not because their costs have gone up, which would be, ultimately, the cost would be a cost of production, labor, and materials, but simply because they’ve become a monopoly. And the Democratic Party has always been the great protector of monopolies, because they’re campaign contributors. And if you look at who heads the health committees and the others in Congress, related committees in Congress, their campaign contributors come from the pharmaceutical and drug industry. So you have the governments representing their campaign contributors, the military and state department desks at the Senate and House are subsidized and paid for by the military industrial complex, the health departments from the drug companies, and so on and so forth.
So we’re that part of the problem of what has made America a failed economy. And it’s a failed economy because of the austerity that this debt apartheid has created.
RADHIKA DESAI: And we should probably soon shift to talking about solutions. But let me just add a small point to what you were saying, which is that, of course, if you look at the US economy today, you will see that over the neoliberal period, what has happened is that it has become dominated, of course, by the financial sector, the so-called FIRE sector, finance, insurance, and real estate. And on top of that, if you look at what are the other sectors of the US economy, which are really important and lucrative, you will see that they are the military industrial complex, they are the big pharma, and they are information and communications technology.
And in pretty well all of these cases, these sectors are characterized by a high degree of monopoly, a high degree of rent-seeking in the sense that a military industrial complex, for example, essentially relies on vast government contracts, which are risk-free in which they get to mark up costs as much as they like. And big pharma and information and communications technology rely on intellectual property rights in order to secure their monopoly.
So in all of these ways, this has created an economy which is very undynamic, it is not very efficient, but at the same time, it is very lucrative for those who own it, which of course puts an added burden on ordinary Americans.
MICHAEL HUDSON: Well, one of the problems of it being undynamic is you’re having a decline in office space, in commercial real estate. We’ve been talking about homeownership rates and how unfair that is, but you remember back in 2008 when there was the property price crash, you had what was called “jingle mail”. You would have buyers, especially in Nevada and Florida, where there was a huge run-up in housing prices, they’d say, okay, I owe $500,000 for this house, but now the house just like it next door is selling for $300,000. I’ll just mail back the keys to the bank and say, okay, I’m defaulting, you can have the house, I’m just not going to pay, I’m going to take out a new loan and buy the house next door.
Well, that phenomenon is now happening for businesses. Apparently [only] 40% of the US commercial properties are occupied. In other words, since COVID, and most of all, since the economy began to shrink as a result of this debt deflation, businesses have been going out of business. Even those who are in business, you have people working from home. Now, if you have the average occupancy rate of buildings being only 40%, how is the owner going to have the money to pay for the bank?
Well, because the banks have lent almost 100% of the value of the building to the homeowner who’s willing to pay all of the rents as interest, rent is for paying interest, that’s the basic motto. What they want is the capital gain in the price of the building. They realize they’re not going to be a capital gain. This was all fictitious capital, it’s going down, we’re mailing our keys back to the bank and we’re walking away from the building.
This year and next year, there is such an enormous trillions of dollars of commercial real estate falling due, not only here, but in England and other countries, that the banks are all of a sudden going to be left with mortgages that are unpaid. Against these mortgages, they have liabilities to their depositors, to their bondholders, and most of all, they want to pay millions of dollars to the, I think Jamie, the head of Chase Manhattan, gets $29 million a year for running a company that’s gone bankrupt and is kept alive because he gives some of that $29 million to the politicians who continue to appoint Federal Reserve people who will bail them out. That’s what you call a circular flow.
What are you going to do when all of a sudden the banks should be going under? Well, normally, if they’ve made a bad loan, somebody has to suffer. Who’s going to suffer? As Bill Clinton said when he was told you have to do what Alan Greenspan says and support the banks, Clinton said, oh, it’s all about the bondholders. In 2009, when Obama came in and decided to bail out the banks, Sheila Baer, the head of the Federal Deposit Insurance Corporation, said, wait a minute, we have a crooked, incompetent bank. There’s one bank in America that’s more crooked than all the others and more incompetent. That’s First National City Bank. Let’s take it over. Let’s make it a public bank. You can’t let this bank destroy the whole economy by being so greedy that it makes loans way in excess of the value of property and keeps expecting to be bailed out so it can make more interest and pay its officers more. Let’s drive it under. And Obama and his Treasury Secretary, Tim [Geithner], said it’s all about the bondholders who own the bank.
So the question is, what will the banks do when all these mortgage loans go under? Well, wipe out the stockholders. But the bondholders are the wealthiest 1% of the population. They’re the ones who own most of the bank bonds. Who do you think the government is going to support? Is it going to support the economy or the stockholders or the 1%? That really is the way in which you should think about an economy being an apartheid economy, not simply ethnically and racially, but financially. That’s the real apartheid between creditors and debtors that I think all of our shows are examining from different perspectives.
RADHIKA DESAI: Well, I’d just like to add a couple of points to what you were saying, Michael. This is very interesting because if you look at commercial real estate, there’s no doubt for the last many months there have been headlines about how there is a collapse of commercial real estate prices. It’s coming. In fact, it’s already happening. As Michael says, the fall in the value of commercial real estate is already ongoing from what we read in the financial press. The really big prestige buildings may not be affected, but the next layer and down, all these buildings will be affected. Everybody who has walked around a big city in North America or for that matter elsewhere in Europe will see that commercial space is essentially going down. So many are boarded up. So many are empty and so on.
And according to one measure, about 10% of US bank assets actually rely on the value of commercial real estate. Now, Michael asks, you know, when the crisis comes, well, the crisis is already here. So who is the Federal Reserve going to help? But you know what, I’m not even sure. And the US government, who are they going to help? Who are US authorities going to help? I’m not even sure they’re going to be able to help them because the fact is that as the value of these assets decline, banks already have to report them if they are publicly listed on an ongoing basis, which means that their shares will already go down. And there is no doubt that a crash will come. And when it comes, yes, the Federal Reserve will once again, as you saw with the Silicon Valley Bank, essentially, in fact, there was another point that I wanted to make there. Essentially, Ms. Yellen stepped forward and said, we are going to guarantee all depositors, even if their deposits are higher than $250,000.
Now, you might think that this is somehow a very democratic thing. But on the contrary, if you look at what kind of bank Silicon Valley Bank was, essentially, it was like a club in which a select group of rich people who are all connected with one another lent each other vast quantities of money.
Now, what does lending mean? It means that I go to my friend and, you know, Silicon Valley Bank and say, you know, please give me $5 million. I’m going to have a startup. You don’t even look at whether my startup is worth supporting. You just say, okay, I’ll give you, I’m going to show a deposit of $5 million in your account. These are the deposits that Ms. Yellen was protecting.
This is not even the money that they have deposited in the bank. This is money that is in a deposit in my name because it has been lent to me. So, if you think about just how huge is the boondoggle that is protecting the interests of the tiny minority of the very wealthy, I hope in this program we’ve given you some idea of the lengths to which US authorities have gone to protect the wealth of this minority. And in our next show, maybe what we’ll do is we are going to devote it entirely to talking about what needs to happen if we are going to move away from this kind of economy.
MICHAEL HUDSON: That’s a good way to end it. There’s so much that it’s leading into. And the last thing that the Federal Reserve wants is for—what if banks reported the actual market value of their assets? When you have a balance sheet, assets and liabilities, they’re holding the assets at the price that they made the loan for, say $100 million for a building. But what if they reported their assets as only $40 million for the building? You would have bank assets here and the liabilities here. They’d look just like most people in America. 50% of Americans don’t have any assets, but they have a big debt. That’s an interesting bar chart to show, assets, liabilities. And you can look at it by income group.
The Federal Reserve does not produce believable statistics on debt as a proportion of income. If you look at the Federal Reserve statistics of debt to income by percentile, 10%, 20%, nothing has changed in the last 50 years. Nobody’s run into debt at all. Because they say, let’s assume that debt is constant for the last half century. The statistics are fictitious. And they’re fictitious because that protects the fact that most of this, what passes as bank capital is fictitious. I mean, we’re in a fictitious economy. It’s sort of like trying to read about international affairs in the New York Times. That’s about as realistic as the Federal Reserve statistics are.
RADHIKA DESAI: Exactly. I mean, it’s basically the rich people of the United States and the big financial institutions of the U.S. are in a situation in which, you know, they make a bad investment, they make a loss and they go, oops. And then the Federal Reserve, which is their sugar daddy, essentially comes and makes good all their losses. It gives them more money to plug the holes in their balance sheets that they have themselves created out of their own greed and misjudgment and bad judgment. So there we have it. It’s this kind of economy that, unfortunately, the United States is laden down with today. And so the question naturally arises, what kind of economy do Americans need in its place?
MICHAEL HUDSON: I want to add one point out there. The important thing is that these rich people who are not paying their debts do not have to pay penalty rates. The large businessmen who owe debts don’t pay penalty rates. You know that if you’re a family and you’re running a credit card debt, if you miss a payment in your electric bill or anywhere, your rate goes up from 19 percent to 30 percent or more. That’s not the case. If you’re rich people, there’s one set of interest rates and penalties for 99 percent of the population, another set for the wealthiest 1 to 10 percent of the population, and you’re not in it.
RADHIKA DESAI: And that’s what we call financial apartheid. So I think with that, Michael and I will say goodbye and hope to see you in a couple of weeks and we’ll talk about what kind of economy we need instead. Thanks very much for joining us and see you in a couple of weeks. Bye-bye.
The post Debt Makes the World Go Around first appeared on Michael Hudson.
The empire of lies (and its consequences)
Image by Gerd Altmann from Pixabay
“Let’s face it, the universe is messy. It is nonlinear, turbulent, and chaotic. It is dynamic. It spends its time in transient behavior on its way to somewhere else, not in mathematically neat equilibria. It self-organizes and evolves. It creates diversity, not uniformity. That’s what makes the world interesting, that’s what makes it beautiful, and that’s what makes it work.”
Donella H. Meadows, Thinking In Systems: A Primer
The Mont Pelerin Society was founded in 1947 by Friedrich von Hayek. The tenets of its faith can be described best in the words of David Harvey in his book ‘A Brief History of Neoliberalism’.
“Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade.”
Whilst it took a few decades for its proponents to win their arguments, since the 70s it has formed the backbone of political and economic thought that has driven public policy globally through national governments, and institutions like the IMF and the World Bank.
Mrs Thatcher was enamoured by Hayek and his book ‘Road to Serfdom’ which she read as an undergraduate at Oxford. It is reputed that at a Conservative party policy meeting, she took her copy of another of his books, ‘Constitution of Liberty’ from her bag, slammed it down on the table and declared, ‘This is what we believe’. From there, everything is history. Her insistence that ‘There is no such thing as public money, there is only taxpayers’ money’, provided the modus operandi for successive governments of all political stripes to implement policies that reflected Hayek’s political and economic beliefs.
It led to, as David Harvey also went on to say, ‘ the financialisation of everything … A power shift away from production to the world of finance’. It has overseen over those same decades the dismantling of public services, social security, deregulation and the breaking of labour and the unions, as well as huge increases in poverty and inequality.
Inevitably, this toxic philosophy has made the rich elite richer in what can only be described as an ongoing wealth grab. It has been responsible for the exploitation of some of the poorest countries in the world, who not only have had to watch as their own resources are plundered by Western corporations, but also have had to watch as their own existence is threatened by a climate crisis, not of their own making, but which keeps the profits of global corporations flying high.
Let’s fast forward to the present, where the consequences lie before us in all their horror. With a particular emphasis here on the UK and the effects of neoliberal dogma on the lives of citizens, which has resulted not just from decades of such policies, but the last 13 years of Tory austerity which have done so much damage to the public and social infrastructure meant to provide the foundations for a functioning economy and societal well-being.
Analysing the effects of austerity on the population, a study compiled by the Glasgow Centre for Population Health and the University of Glasgow (and debated in the House of Lords) ‘adds to the growing evidence of the profound and deeply concerning changes to mortality trends observed as a result of UK Government economic ‘austerity’ policies. These have slashed billions of pounds from our public services and social security system with devastating impacts. Without support, people have been swept up by a rising tide of poverty and dragged under by decreased income, poor housing, poor nutrition, poor health and social isolation – ultimately leading to premature deaths…’
The response to the pandemic which began in 2020, highlighted as nothing ever could, the effects of cuts to public spending on public health systems and social care services, and the inhumane effects of welfare reform on working people and some of the most vulnerable in our society. The human reality is shocking.
Last week’s Autumn Statement exposes not just that cruelty, but also highlights the false narrative upon which that cruelty is meted out by politicians, and the economic dogma which directs public policy and spending.
Jeremy Hunt was clear; ‘There’s no easy way to reduce the tax burden. What we need to do is take difficult decisions to reform the welfare state’. His Chief Secretary to the Treasury was even blunter, people must ‘do their duty’, get back to work, sick or not, or face the consequences, lose benefits. As if these were choices to be made by the sick or those struggling with their mental health, and not political choices borne of a political class that has lost its way.
As Ayla Ozmen at the Charity Z2K commented, ‘There is no evidence to support the idea that there are fully remote jobs available that are suitable for these groups. This is simply a cut for those of us who become seriously ill or disabled in the future and need the support of social security, and risks worsening people’s health and pushing them further from work.’
Frances Ryan, disability campaigner and journalist at the Guardian put it even more starkly. ‘The Tories are back monstering people on benefits.’ This was nothing to do she said, ‘with saving money’, but was, in fact, ‘performative cruelty’, ‘nothing more than a raid on the income of those who already have the least whilst being demonised by those with the most.’
We have, as she said, been here before. People died. It can be no accident. This is a deliberate choice by a currency-issuing government to inflict harm on those least able to defend themselves, and to be frank, those who have suffered more than their fair share of the politics of austerity and cuts to public spending.
The Spectator predictably chose a divisive headline for this month’s publication, ‘Britain’s welfare system is out of control,’ writing that, ‘the number of Britons claiming sickness benefits – 2.8 million – will still keep rising to 3.4 million by the end of the decade. Reversing this trend, it seems, is a political impossibility.’
The more accurate headline would have been, ‘Tory Government out of control’, since the reality is that government austerity lies at the heart of an ailing nation. A government displaying psychopathic tendencies couching its plans in the language of reducing debt, taking a responsible approach to public spending, and rewarding hard work. Language reminiscent of George Osborne in 2012 when he commented in a radio interview that it was, ‘unfair that people listening to this programme going out to work, see the neighbour next door with the blinds down because they are on benefits. The nasty party isn’t back, it never went away. It is depressing to note, equally, that the opposition, in its rhetoric about fiscal discipline and growing the economy to raise the revenue for public services, promotes the same lie that drives their proposed policies.
Household budget economics rules the roost. A narrative that is designed to deceive by shifting responsibility away from the government, to create an ever more divided society, whilst at the same time shovelling more and more wealth upwards as data published by Oxfam at the beginning of the year demonstrated. That the richest 1% of Britons hold more wealth than 70% of Britons.
This is a government already using its currency-creating powers to serve wealth, but covering its tracks by using a false narrative about how it spends, so it can justify cuts to spending on serving the public purpose. Whilst the poorest must ‘do their duty’ and sacrifice themselves on the pyre of austerity, this as the evidence shows, does not apply if you are wealthy, a corporation, or an arms manufacturer selling death and destruction. The, ‘there is no alternative’ slogan applies only if you are poor, hungry, homeless, old or sick. See the contradictions?
It’s not much better in the Labour camp.
Whilst Wes Streeting, the Shadow Secretary of State for Health & Social Care, on the same neoliberal wavelength, proposes an open door for the private healthcare sector, (ignoring the fact it’s been open for decades, in fact since Tony Blair), he claimed a few weeks ago that ‘the money simply isn’t there to continue NHS spending because the Tories have trashed the public finances.’
Streeting, like his Labour colleague Rachel Reeves, promoting the myth that there is a finite pot of money and the Tories have spent it all, which will require some fiscal discipline, which will in turn involve not being able to afford free school meals for all children, or a functioning NHS.
‘I’m not going to be able to magic money out of nowhere’, said Rachel Reeves with her serious, former economist at the Bank of England face. As if she couldn’t possibly know how government really spends. But in a horrible game of, ‘we’ll be fiscally responsible one-upmanship,’ she is effectively denying monetary reality and condemning people to more hardship. Well, not the corporations of course. They’ll come in for some star partnership treatment. Labour’s proposal for a ‘partnership’ with business, as if somehow it doesn’t have already the monetary tools it needs to create an economy that works for everyone, not just those that have sufficient power and influence to swing the rules in their favour.
Next up, we have Gordon Brown, a former Chancellor of the Exchequer for Labour, who just prior to the Autumn Statement, and in the same vein, advocated partnerships with big business and charities to address the growing poverty that has arisen out of the politics of Tory austerity and neoliberal dogma.
Heady words like Corporate Social Responsibility were banded about by the man who advocated deregulation and a light-touch government, praising the City of London for its achievements. All just before the financial sector came crashing down around our ears and the government was forced to bail it out, using those elusive currency-issuing powers the current government is denying long-suffering citizens. His light touch led to the politics of austerity by the Tory government, the dismantling of public and social infrastructure, cruel welfare reform, food banks and growing homelessness, all based on a false narrative of how government spends.
Dear Gordon, we don’t need big business or charity to sort out this avoidable disaster. With 3.8 million people, including one million children, destitute in Britain today, what we need is a government that is politically motivated to change things for the better to give people the tools they need to live productive lives that enrich their existence and not condemn them to a life of penury. We need politicians to embrace how money really works, not the lie that passes for reality.
While Gordon Brown calls on companies to step in, the new Chair of the Charity Commission vowed to crack down on ‘squeamish charities accepting donations’ and accused wealthy British citizens of ‘not pulling their weight when it came to charitable giving.’ A little bit of philanthropy does you good, apparently, not to mention reducing the tax bill.
Putting aside the proposed crackdown on squeamish charities in an era when ethical and moral considerations have been thrown out of the window by a political class more concerned with serving the dictates of the US hegemon and its corporate masters, anyone demonstrating such values should be praised not castigated.
As we have said many times before, charities are a failure of government. Their purpose is to mitigate a rotten economic system designed to exploit and impoverish some people and enrich others. Whether charities like the Trussell Trust feeding hungry people or the myriad charities supporting the homeless living in temporary accommodation or on the street, they function as an alternative to state involvement in serving public purpose. This was the point of Cameron’s ‘Big Society’ to shift responsibility into the wider society.
Such charities are now struggling to meet growing need as a result of government-imposed austerity that has ironically led to cuts in their funding. This is a government-created vicious circle deriving from the politics of austerity, the demonisation of deficit and public debt, and a market-driven neoliberal ideology that favours a small state, with charitable provision of welfare, and privatised public services acting not in the interests of citizens, but rather the state acting as a cash cow for private profit.
It also derives from a toxic ideology of personal responsibility designed to absolve the state from any duty of care for its citizens. This has involved blaming and shaming people for what we are told is personal failure. Just what the neoliberal doctor ordered to keep citizens poor, downtrodden, divided and struggling to survive by forcing them to sacrifice themselves to preserve the economic status quo for the already excessively wealthy.
A status quo which is transferring more wealth into the hands of corporations and wealthy individuals who, in turn, are then invited to do their bit and donate to charity. As if people are dependent on their philanthropy, their goodwill, on their largesse to keep body and soul together. A fabrication that rests on the false notion that the government needs taxes to spend.
This narrative is constructed on the lie that government spends like a household budget, that its sources of funding are taxation or borrowing. Economic well-being depends on neither. It depends on a government that puts the needs of citizens as a priority to create a functioning economy and a healthy, thriving society. That in turn depends on the political decisions a government makes as the currency issuer, imposer of taxes and legislator. Decisions about how real resources are distributed and to whom. In fact, we are talking here about the sort of society we as citizens want to live in.
Instead, we are told that our economic and social well-being is dependent on the state of the public finances, whether the economy is growing enough to afford public services, or for those on the left, how much we will need to tax the wealthiest to pay for public infrastructure.
We are living a destructive lie that is readily promoted by a self-serving media. The daily round of nonsense that passes as monetary reality.
Whether it’s Philip Inman in the Guardian suggesting that since the days of cheap investment credit are over, chancellors must find a different source of revenue, namely increased taxes, The Times implying that a lower borrowing bill will give the Chancellor some ‘fiscal headroom’, as if he’s suddenly found a few more quid in the pot to spend or deliver a tax cut because of it. Or indeed, Andrew Neil, who explained to his attentive audience in the Daily Mail, that ‘the bond markets are where governments go to borrow money from investors […] when their spending plans exceed the amount they are able to raise in tax.’ Apparently, we need to ‘free ourselves from their tyranny.’ ‘The era of big government, cheap money and untrammelled borrowing is over’ he said.
Presenting the public accounts as if the government were a business or private individual that has to cut back in hard times or borrow to fund its spending because it has a limited pot of money. The Treasury gnomes working hard to balance the books, find some spare money down the back of the sofa, rob Peter’s department to pay Paul’s, or beg the capital markets for a loan. All rubbish.
As Professor Bill Mitchell notes, ‘debt issuance is a redundant part of the process… a hangover from past currency arrangements.’ Clearly the media hasn’t caught up. This is the con that drives public policy decisions and leads people to believe that government’s primary role is to balance the accounts, rather than deliver a functioning, stable and sustainable economy, the corollary of which is societal well-being.
The bottom line is that lower interest rates for government borrowing make no difference at all to the capacity of government to spend, or indeed cut taxes.
The cost has been high and will continue to be. Neither of the main political parties frames its role as an initiator of public purpose, rather they think they are Dicken’s Mikawber borne again. We have two political parties obsessed with fiscal discipline, whilst at the same time aiming to shift responsibility into the wider economy and society through partnerships with business or charity. Full on neoliberalism. Full on Hayek vision for government and society.
This is how the government and ones in waiting, and media lackeys like Andrew Neil keep the public trapped in a lie about how government spends, by presenting government finances as a household budget. It serves as an ideologically driven justification for cuts to public spending, not because it’s necessary, but to keep the neoliberal stranglehold in place which is about dismantling public infrastructure and enslaving citizens. This is what Andrew Neil supports. This is the big lie that distorts reality and will ultimately be the death of us if we fail to grasp its fundamental importance to our survival.
According to this narrative, money is a scarce commodity. Which it is not. The role of government is not to balance the books, but to serve its citizens. To decide how real resources are distributed and to whom, through its spending, taxation and legislative policies. It should be pretty obvious by now, who the current beneficiaries are, the corporate estate, the military machine, and those with excessive wealth, power and influence.
This distribution is a political choice driven by ideological aims and it is regrettable that those seeking progressive change are still caught like rabbits in Mrs Thatcher’s headlights. There is a lot at stake. A liveable planet where world citizens have their needs met and crushing poverty and inequality cease to be the norm. When a Labour spokesperson justifies Rachel Reeves watering down her green transition pledges because of the state of the public finances, and that fiscal rules were more important than any policy, you know that without a doubt we are in serious trouble.
What happens in the wider economy starts at the top with the government and flows down resulting from its spending, taxing and legislative policies. We need to understand that the state of the public finances is an irrelevant sideshow and that the real test is what government has done to ensure a functioning and balanced economy, that respects the planet and the human beings that depend on it for their survival.
We need as a matter of urgency to understand what a functioning democracy, with an informed public no longer willing to throw themselves on the pyre of harmful austerity could achieve. The art of the possible to save humanity from a political class intent on serving the interests of a small group of people, not to mention their own interests through the revolving door. As Jason Hickel notes in his book ‘Less is more: How degrowth will save the world.
“When people live in a fair, caring society, where everyone has equal access to social goods, they don’t have to spend their time worrying about how to cover their basic needs day to day – they can enjoy the art of living. And instead of feeling they are in constant competition with their neighbours, they can build bonds of social solidarity.”
It is currently no more than an aspiration for change, but the struggle must continue to make it a reality for humanity.
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Economic delusions cannot save us from the climate crisis and societal decay
“Never forget that the economy is a wholly owned subsidiary of nature”.
Global Boiling – Kate Mackenzie and Tim Sahay
Image: Paul Walker/Flickr. Creative Commons 2.0 License
Many of us have grown up with the story of an arrogant ruler King Cnut, who placed his throne on the banks of the Thames, waiting for the tide to come in. As it did so he held out his hand and demanded that it recede. Predictably, it didn’t. What most of us don’t know, however, is rather than telling of a King’s hubris, it celebrates something quite different. An acknowledgement from Cnut that ‘All the inhabitants of the world should know that the power of kings is vain and trivial’. Whilst Cnut recognises a holy power, we might in these very different times acknowledge that far from humans controlling their environment, as we have the arrogance to imagine, it is instead the power of nature that dictates responses to our behaviour.
This arrogance is displayed daily by our politicians who seem to think they can put off action on climate change, citing economic credibility over scientific facts or putting the profits of the oil and gas producers above those of the health of the planet.
On the one hand, we have Sunak granting permits for more oil and gas drilling (whilst the industry continues to rake in huge profits), on the crazy basis that home-grown is better for the environment, which actually is not the case, as discussed in this Channel 4 Fact Check.
And on the other, Keir Starmer, fixated on household budget economics, reportedly thinks that ‘the hard grind of rebuilding economic credibility must come first, as opposed to Labour spending “vast sums of money”’. ‘Growth, investment and wealth creation will be, he said ‘the only show in town’ if Labour is to build a prosperous country with strong public services for the long term.”
At the same time, Rachel Reeves has postponed Labour’s green plan, and a few weeks ago also rejected the call to ditch the Tory imposed two-child benefit cap because, apparently, the ‘dire public finances’ means there will not be enough money to go around. Not only is the shadow chancellor intent on denying some of the poorest in our society the means to live decent lives, but also putting on hold urgent action on climate change. Here we have yet again, the eternal circus of blame which politicians indulge in (remember Liam Byrne) but which has nothing to do with monetary reality.
This is a neoliberal, monetarist pile of crock at a time of existential climate crisis and societal decay. Both the consequences of a destructive economic system which treats people and the planet as objects to exploit for profit.
We have a party opposition leader (and his shadow chancellor) dedicated not only to further economic decline, decay of public infrastructure and harm to citizens, who clearly thinks he can hold back the tide of ecological overshoot and climate change until the public finances are in good order.
Predictably King Cnut failed to hold back the tide, and now our own politicians seem to think that they can put off action because heaven forbid that we interfere with the profit streams of polluting industries or the god-like market. They talk about the economy as if it were separate from the sphere of people’s existence or the planet’s ability to sustain human activity. And with astonishing arrogance imagine that the great arrow of human progress will provide the solutions in the form of technology that is scarcely off the drawing board, or growing millions of trees (important though that is) and will save the day at some unspecified time in the future. Both questionable propositions and time is not on our side.
It surely is disturbing to be a witness to the fact that the emperor has no clothes and yet the entire political establishment fauns daily over a toxic economic system which has created vast poverty and inequity across the planet and is bringing an end to the world as we know it, to keep the consumption truck running and the profits flowing.
Then, at the same time as the media reports on the scientific evidence for climate change, and as we are witnessing the increasing incidence of damaging weather events from heat domes to drought, fire and floods which affect humans, destroy vital natural habitats and impact on food production, in the next breath is allowing politicians, government institutions, think tanks and its own journalists to reinforce the household budget narratives of how government spends.
We need a frank, public conversation about the future. As an article published in The Conversation makes clear, ‘The only way to keep humanity safe is immediate and sustained radical cuts to greenhouse emissions in a socially just way.’ The last part is key, not just from a domestic point of view but also how we address the vast western created inequity that exists in the Global South, and the ecological destruction and pillage of real resources that has occurred to serve Western consumption and reinforce the power politics of empire.
As it also points out, ‘Current net zero policies will not keep warming to within 1.5C because they were never intended to. They were and still are driven by a need to protect business not the climate’. In those few words, today’s reality is confirmed through government’s political priorities. It is time to see through the game and challenge those ideologically driven preferences.
As Jason Hickel, author of ‘The Divide; A Brief Guide to Inequality and its Solutions’ tweeted recently, ‘As climate-related damages hit, remember that this crisis is not due to generic “human activity”. Excess emissions are due overwhelmingly to the core states of the global North, and the ruling classes that control the systems of production, energy and national legislation.’
The time is now to deal with ecological overshoot and climate change in a socially just way. As GIMMS emphasises endlessly, the only way we can do that is to reject an economic system built on growth and endless consumption which benefits fewer and fewer people and destroys life, not to mention being at the heart of exceeding the planet’s ecological boundaries.
While politicians continue to count the pennies as in Labour’s abandonment of its commitment to a timeframe for spending the promised £28bn on a green transition, citing as it does the worsening financial situation, we are closing our eyes to the urgent nature of the challenge.
The question is not how we pay for it. The real challenge is to decide what our priorities are, draw up a strategic plan for achieving them and using the dual supports of legislation and tax policy to free up the real resources it will need to carry out those plans. Money in itself is never the consideration but politicians on both sides want us to believe it is. Truth is that we pay for it by spending the money. The only constraints to spending are real resources and decisions about how and to whom they are distributed.
We pay for it by spending the money - By Alan Hutchison
We need to start altering the discourse and the first candidates for change should be the phrases ‘taxpayers’ money’ and ‘government borrowing’. Taxpayers are not and never have been the source of currency. Similarly, government doesn’t borrow when it issues bonds; instead, it provides a safe place for us to store our savings.
The flat earthers need a lesson in monetary reality, to stop putting people’s lives on the line for a lie. In short, the government is the currency issuer. It spends the money into existence first, then taxes and plays the smoke and mirrors game it calls ‘borrowing’. Up until now, it has been the failsafe mechanism to keep the troops compliant and under control.
Whatever the future holds, it should be about our values which include respect for a life-giving planet and its inhabitants. Instead, and in reality, we have psychopaths in charge, prosecuting endless wars, advocating growth at any cost and, at the same time, proposing austerity (but not for the richest).
What we need now in these uncertain and unstable times is global cooperation, not a myopic focus on keeping the status quo in place for a lie, or to maintain the reins of global power.
Whilst what we face is a global challenge, we also can’t ignore what is happening at home to our own citizens as a result of short-sighted, market-driven solutions and the household budget economics that drives spending and policy.
Two articles in the Guardian in recent months report on the shocking exploitation of foreign care workers brought to the UK to plug the gaps caused by decades of government neglect, outsourcing and privatisation, and austerity in the form of public sector spending cuts. Shockingly, in the past year, the number of modern slavery cases reported within the UK care industry had more than doubled. Failures in duty of care has facilitated organised crime to exploit unfortunate victims who were desperate to find a better life but instead found slave-like conditions, long hours and below subsistence wages.
The solution is not to steal the valuable resources of poorer countries, but to bring social care back into public hands, invest more in social care provision and training, along with secure employment rights and fair terms and conditions and wages. The solution is for the nation to decide what its priorities are – more of the same contempt for citizens by its leaders, or something better.
Here, predictably we see again an economic ideology that puts private over public provision, all justified by the claim that we can’t afford better public services, or quality care for those who need it. An economic system which has taken precedence and is not fit for purpose, unless we mean the enrichment of those who benefit from government spending policy. All the government is actually doing is papering over the cracks it has caused, and the victims are both those using social care services and those persuaded that the good life awaits if they sign on the dotted line.
Again, the only constraints faced by government are related to how real resources are distributed and who benefits from that distribution. A stable and healthy society relies on government laying the foundations. However, successive governments have abdicated their responsibility and have increasingly shifted it to the corporate estate, along with public money. Whether it is the NHS, social care or indeed the many other vital public services which support citizens, all have been subjected to this false belief that there is no money, and that the private sector is more efficient.
Last week, the health minister Maria Caulfield defended Steven Barclay’s plans to use the private healthcare sector to deal with the long post-covid waiting lists, on the basis that it would provide good value for money for the taxpayer. If there are long waiting lists, this is not a new phenomenon. Prior to the pandemic in February 2020, there were 4.43 million people on a waiting list for care. The latest figures for May 2023 show that around 7.47 million people were waiting for treatment.
The fact is that the private sector is already operating in the NHS, taking public money to run health services with profit in mind. We now have a fragmented service where the word national is in name only and the NHS logo hides a myriad of private healthcare companies. From a publicly paid-for, managed, and delivered service to one that is now serving the needs of the corporate estate, where publicly paid-for means corporate welfare. If the NHS is broken, it broke as a result of the decades of reshaping it through the pursuit of an ideology that serves the neoliberal tenets of faith in markets and privatisation. When Blair said last month that ‘there should be complete cooperation between the public and private sector’, and Starmer in the Observer that we need to prioritise ‘radical reform of public services over reckless spending promises,’ the only thing to note is that they are all in it together. Blair and Thatcher’s legacy lives on.
MMT Verify: How We Can Staff the NHS Without Tax Rises - Neil WilsonSpending only happens if there was something to buy. If that spending is then deficit spending it has a lower inflationary impact than spending that is tax-matched.
Then as the Prime Minister seeks to blame striking NHS staff for record-high long waiting lists, this must surely be the final insult to a workforce that has been unfairly treated as a result of government policy and like many, struggling to manage the cost-of-living crisis on top of previous public sector pay squeezes. One minute we are being exhorted to clap for our dedicated nurses and doctors, and the next, government ministers are demonising them.
Neither health nor social care should be viewed as a business, and it certainly doesn’t involve being good value for the taxpayer, since taxes do not fund government spending. Let’s instead put the blame where it really lies. At the government’s door, resulting from a decade of cuts in real terms to spending (austerity), failure to train sufficient healthcare professionals, private sector for-profit involvement (which predates the Tories), and closure of hospitals, beds and even treatment options, all of which has been justified on the false premise of public sector unaffordability, and to push an ideological preference for private sector involvement. We can translate this as absolutely nothing to do with the state of the public finances, but rather as a political choice. The false narrative of monetary affordability constantly trumps delivery of public purpose, and when it comes to ethics, as in stealing the resources of poorer countries, as long as things can be done on the cheap, then it’s acceptable.
If we want better public services, health, and social care, it can only come through government which holds the power of the public purse. This is what we could have in a sane world where people matter more than a cruel ideology and profit. Instead, what we have is a shameless manipulation of a hapless public to justify what will be in effect more austerity, more ‘difficult decisions’ that can only cause more human distress and hardship, damage the life chances of our youngest citizens, and cause further decay of our public infrastructure.
And then, while the life-giving planet overheats because of human activity and the distribution of wealth becomes ever more unequal, last month the number crunchers at the OBR were ‘preparing to sound the alarm’ over the impact of rising interest rates on the public finances which, according to the Guardian, would ‘deliver a serious blow to the government’s scope for pre-election tax cuts.’ In its ‘Fiscal risks and sustainability report,’ it set out the impact of higher interest rates for the public purse. This would, it suggested, make it less likely that [the Chancellor] would meet one of its five key pledges – tackling Britain’s public debt. And no doubt such thinking will drive more damaging austerity thinking on both sides of the political spectrum.
Let’s be clear first, interest rates don’t hurt the public finances. Government as the currency issuer can always meet its liabilities. There are, instead, winners and losers in the private, non-government sector. The winners are savers, banks and holders of Treasury gilts, while the losers are those who will suffer the economic effects of higher interest rates which can filter through in higher unemployment and cause more pain for people struggling to pay higher rates on debt and mortgages.
Then in the same household budget vein, Chancellor Hunt, after checking thoroughly down the back of the sofa for a few stray quid, ordered his ministers to find £2bn savings for public sector pay rises. Not content with the nonsense claim that there is a threat of public sector wage spirals driving inflation, he then acts as if the government is short of money and must rob Peter’s pot to pay Paul’s.
What a choice! Taking steps to mitigate the human-induced existential threat of climate change, ecological overshoot, and growing poverty and inequality, or balancing the public accounts. While they tell the public about the hard choices and sacrifices to be made, there has been no problem finding the money for military support in Ukraine, £2.3bn in 2022 and the same for 2023, totalling an eyewatering £4.6bn.
There is no money for serving public purpose, helping people through these difficult times, feeding children or rebuilding our ailing public infrastructure, but there is an inexhaustible amount for waging war and killing people, bailing out banks, or contracts for dodgy PPE. Surely these contradictions must be hitting home by now, and the extraordinary con that is being practiced on citizens of this country with huge social and environmental costs.
The key to better public services, infrastructure, social security provision and a green transition is not growth, contrary to what politicians on both sides of the political spectrum would have you believe. It is, rather, something much simpler and direct, a political choice to deliver them.
Aside from the fact that taxes do not fund government spending (implicit in the belief in growth as the solution), faith in growth as a tool is misplaced in an uncertain, unstable and changing world in which we are currently in uncharted territory. We need action now. While politicians clearly have all had the ‘public finances are like a household budget’ briefing, and all sing from the same cruel hymnbook without question, aside from the human misery this narrative causes, it makes no economic or environmental sense.
Author Jason Hickle asked in 2021, ‘If our economic system actively destroys the biosphere *and* fails to meet most people’s basic needs, then what is actually the point?’
Time for the public to ask those same questions of the political class.
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A practical exercise for the reconstruction of the Left
By Carlos García Hernández
Originally published in Spanish on 1/7/23.
Definition of a State: a territory with fixed borders under a central authority with the capacity to issue national currency and to impose debts in that currency on all residents of the State.
Consequence I: the national currency takes its value from the need of citizens to settle their debts with the State.
Consequence II: before collecting the imposed debts, the State has to spend in national currency to make paying the debts possible.
Consequence III: the State gives rise to a market in which goods and services are bought and sold in exchange for the national currency in order to settle debts to the State, self-sufficiency and savings.
Consequence IV: the State can acquire on the market everything that is for sale in the national currency, since as a sovereign issuer it cannot run out of its own currency.
Consequence V: the State’s production possibilities frontier is limited by the real resources of the economy, not by the State’s financial resources in national currency.
Consequence VI: the State can increase its production possibilities frontier by importing goods and services from foreign markets.
Definition of economic policy: introduction by the State of endogenous and exogenous variables in the economic cycle.
Endogenous variables: variables introduced by the State that must be complied with by economic actors in order to participate in the national market (laws).
Exogenous variables: variables that the State allows to be decided by private actors participating in the national market during the economic cycle.
Proposals of fiat socialism:
I. Convert the following variables into endogenous variables of the economic cycle:
-
- Guaranteed and permanent full employment through job guarantees based on employment buffer stocks.
- Full and prudent use of natural resources.
- Guarantee to every citizen of food, shelter, clothing, health services and education.
- Social security in the form of pensions and subsidies.
- Guarantee of decent labour standards.
II. Allow citizens to decide which variables should be endogenous or exogenous in the economic cycle by democratically deciding the extent of private sector participation in the economy.
Practical Exercise:
Based on the above, consider what economic policy should be pursued by the Left. That is, which variables should the Left incorporate into the economic cycle as endogenous variables and which variables should be considered exogenous?
***
The proposals of the Spanish Left and of the Western Left in general coincide with the proposals of fiat socialism, except on the first, and most important, point; permanent full employment guaranteed by law. The Spanish economic cycle incorporates as endogenous variables the defence of nature (unsuccessful), the guarantee of food, clothing, health services (insufficient) and education (underfunded), social security in the form of pensions and subsidies (too low) and legislation (not complied with) on labour standards. Left out of the economic cycle are the right to housing and above all the right to guaranteed work.
Why does the Western Left not guarantee access to a job? Because of their inability to understand that the level of unemployment is a political decision, just like guaranteed education or healthcare.
The definition of a State, the consequences of this definition and the definition of economic policy referred to at the beginning of this article describe what is called the monetary economy of production. In this economy, what mobilises human and material resources to create consumer goods are debts to a central power that issues the money it demands is paid in the form of taxes. Consequently, and if we consider consequence IV, the State can acquire in national currency all unemployed labour in exchange for wage labour, so that everyone who is willing and able to work has a job and a situation of permanent full employment is reached. If, in addition, full employment is achieved through job guarantees based on employment buffer stocks, and floating exchange rates and permanent 0% interest rate policies are adopted, as the modern money consensus holds, the economy can be driven towards what fiat socialism has dubbed the Lerner point, an ideal state of the economy in which both inflation and unemployment are zero.
We have just hit the last frontier of capitalism. Grudgingly, during the 20th century, the workers’ movement progressively wrested access to social rights from the jaws of exogenous variables and introduced it into the realm of the endogenous variables of the economic cycle. Margaret Thatcher and Ronald Reagan were in charge of stopping this process of emancipation. To do so, they created a myth that the Western Left has accepted. This false and invented myth is called neoliberalism.
Neoliberalism changed the definition of the state and with it the consequences of the existence of states. In the neoliberal deception, public spending no longer precedes the collection of taxes, but it is taxes that finance subsequent public spending. Thus, it is no longer the State that chooses the level of employment in the economy, but the private sector that, through its investment decisions, decides the level of unemployment. This is how mass unemployment and not permanent full employment becomes an endogenous variable of the economic cycle. This is also how neoliberalism progressively denies access to social services and gradually returns this access to the realm of exogenous variables of the economic cycle.
The reconstruction of the Left must involve destroying the false myth of neoliberalism and turning both permanent full employment and universal access to the social services proposed by fiat socialism into endogenous variables of the economic cycle. To this end, the deception of tax-financed public spending must be discarded.
The recovery of monetary sovereignty is the first step to be taken by the Spanish Left. The spending and public deficit limits imposed by the European Union and the Euro are the most advanced expression of neoliberalism. Once recovered, monetary sovereignty must turn all the social rights of socialism into endogenous variables of the economic cycle and allow the citizens to decide the size of the private sector through their democratic participation.
You cannot rebuild what does not exist.
Euro delendus est
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The post A practical exercise for the reconstruction of the Left appeared first on The Gower Initiative for Modern Money Studies.
BBC Radio 3 Freethinking on Debt
Twas the night before Budget day and all through the house, nothing was stirring but BBC Radio 3 Freethinking and a very excellent discussion on ‘Debt, from the South Sea Bubble to Sunak’. As the nation waited for Chancellor Jeremy Hunt’s next moves on the UK’s crisis ravaged economy, Anne McElvoy hosted a high powered panel: Professor Kenneth Rogoff, Maurits C. Boas Chair of International Economics at Harvard University; Vicky Pryce, former Joint Head of the United Kingdom’s Government Economic Service, Dr Dafydd Mills Daniel, lecturer in Divinity from the University of St Andrews, and of course, your humble correspondent. It was a fun discussion – I hope you enjoy listening!
Where has all the money gone?
The collapse of Terra in May sent shock waves round the crypto world, triggering domino-like collapses of crypto companies. One of those companies was the investment fund Three Arrows Capital. At the time, everyone thought 3AC was a conservatively-managed investment company that was simply the unfortunate victim of an unforeseen event. If anyone was to blame for 3AC's collapse, it was Do Kwon.
How wrong they were. Since 3AC was ordered into liquidation by a British Virgin Islands court, more and more creditors have emerged from the woodwork claiming they are owed money. The liquidators have filed emergency motions to freeze 3AC's assets because there is evidence that funds are being moved out of reach. And 3AC's co-founders, Su Zhu and Kyle Davies, have done a runner, though Bloomberg says they are planning to set up shop in Dubai.
The liquidators applied to the Singapore High Court to have the BVI liquidation order recognised in Singapore. This would give them access to 3AC's premises and documents and allow them to subpoena key individuals to obtain information. In support of their application, they helpfully provided 1157 pages of evidence. Pity the poor judge having to plough through that!
I have ploughed through it. It's actually a bundle of documentation. Or, rather, a bundle of bundles. And it paints a revealing picture of the true state of 3AC. This was anything but a conservatively-managed investment company. It was so highly leveraged that it could not absorb the fall in crypto prices since last November. Even before Terra's collapse, it was concealing its true indebtedness from its creditors. And after Luna blew a massive hole in its balance sheet, it robbed Peter to pay Paul, lied to its customers and ghosted the creditors on whose loans it was defaulting.
The document bundle contains copies of 3AC's loan agreements, together with copies of the letters and emails that its creditors sent it when it defaulted on their margin calls and repayment demands. There are an awful lot of loan agreements, and many of the loans are for very large sums.
Bizarrely, among the lenders are the co-founders. Su Zhu claims to have lent the company some $5M, and Kyle Davies's partner Kelly Chen says she lent it about $65m. Su Zhu is a shareholder of both Three Arrows Capital Pte Ltd (Singapore) and Three AC Ltd (BVI), and Kelly Chen is a shareholder of Three AC Ltd (BVI):
Loans from shareholders are usually subordinated, but this pair don't seem to think normal financial good practice applies to them. They've listed themselves as senior unsecured creditors and are presumably expecting to claim a share of the remaining assets.
The most recent accounts are filed with the company's insolvency application. They are made up to December 2020, so are over 18 months old. As they reveal that 3AC's high leverage is of long standing. Here's the balance sheet:
This is by any standards highly leveraged. And the assets are held at fair value, so are exposed to fluctuations in market price. This would probably be ok if the assets were stable and low risk, but the majority are digital assets so are by definition volatile. 3AC was terribly exposed to adverse movements in crypto markets. Its entire balance sheet is a massive unhedged bet that crypto prices will always go up.
The cash flow strain is evident too:
The overall picture that emerges from this, together with the extraordinary series of loan agreements in the bundles, is of a company that was massively over-leveraged and had for some time been experiencing cash flow strain. It borrowed heavily to ride the wave of crypto appreciation during the pandemic. "The money will never run out" was its philosophy. But when the market turned and crypto prices started to fall, it had to borrow even more to maintain its collateral and meet its obligations.
Hyman Minsky called borrowing to obtain cash to meet existing obligations "Ponzi borrowing", because it depends on there being a constant supply of new lenders. This is ultimately unsustainable, of course, but it can be maintained for quite a while if the lenders don't know what is going on and there are no shocks to the system. And indeed, 3AC managed to conceal the scale of its indebtedness from lenders, customers and markets alike. But as the crypto winter deepened, it found it harder and harder to raise funds. Lenders demanded more collateral than it could afford to provide and better information than it wanted to give. One lender pulled out of a loan deal when 3AC refused to provide a balance sheet.
Terra's collapse in May 2022 was the last straw. Or perhaps the last thread. When it unravelled, so did 3AC's pile of ponzi loans. As crypto prices crashed, lender after lender demanded more collateral. But massively over-leveraged as it was, 3AC had no means of making these payments and no hope of borrowing the funds. So it defaulted on the margin calls. Rumours spread that it had a "liquidity crisis": but as is so often the case, the liquidity crisis turned out to be deep and long-standing insolvency. 3AC didn't fail because of Terra, it failed because of its insanely risky balance sheet and desperate lack of cash.
Defaulting on the margin calls made its financial situation infinitely worse. When a borrower fails to meet a margin call, the whole loan instantly becomes repayable. So 3AC was now faced with a massive steaming pile of demands for immediate loan repayment that it could not possibly meet.
What did it do? Nothing. Rather than admitting that it was insolvent and filing for bankruptcy, the co-founders ghosted their lenders. The bundle reveals that they didn't answer emails and didn't open letters. They ignored Whatsapp chats, text messages and contacts via other apps. And the phone went unanswered.
On 24th June, DRB Panama ('Deribit') applied to the High Court of the BVI to place 3AC into liquidation. Deribit's filing shows that 3AC had failed to meet margin calls and its collateral balance was far less than that required to repay the loan. As at 20th June, 3AC owed it over $80m.
It's evident from Deribit's filing that it had no idea of the true scale of 3AC's indebtedness. It knew about Voyager's loan and "monies owing to cryptocurrency platforms such as BlockFi and 8 Blocks Capital". But there's no mention of the rest of the lenders. In particular, there is no mention of Genesis Global Trading, by far 3AC's biggest creditor. It seems 3AC's game of blind man's buff with its creditors was all too successful.
Deribit complained that 3AC was ghosting it. And it expressed concern that the company appeared to be selling crypto to pay off other loans, transferring crypto to unknown addresses, and continuing to trade crypto. One transfer it identified, for $31.6m, was to a Cayman Islands company controlled by Su Zhu and Kelly Chen, though the funds were subsequently moved out of that company and Deribit was unable to find where they had gone.
On 27th June Voyager Digital, which had lent over a quarter of its entire asset base to 3AC, filed a notice of default. As a direct consequence of 3AC's default, Voyager itself filed for Chapter 11 bankruptcy just over a week later.
Also on 27th June, 3AC applied to the High Court of the BVI to place itself into liquidation, saying that because of cryptocurrency price fluctuations it was in default of its loan obligations and had received notices of default from a number of (unspecified) lenders, and had received a statutory demand for $10m from Bitget Singapore Pte Ltd. which it was unable to meet. But an affidavit filed by Kyle Davies revealed the true scale of its indebtedness. It said the company had 32 lenders, for whom the loan repayments outstanding totalled US$2.622bn, BTC 2,285.283 (worth approx US$ 46m at the time of filing) and ETH 17,231.77 (about $20.5m at the time of filing). Of this, approximately $2.3bn was owed to Genesis Global Trading. There was unpaid interest on these borrowings too.
The amount owing was partly offset by liquidated collateral of various kinds, including cash, BTC, ETH and, for Genesis Global Trading, shares in Grayscale Bitcoin and Ethereum Trusts. However, much of the borrowing was unsecured, and for the rest, the collateral was clearly insufficient. So it would appear that at the time that it went into liquidation, 3AC admitted to debts of over $2bn. Its real indebtedness was even higher.
Regulators come in for a lot of criticism, but where 3AC was concerned, one regulator appears to have been very much on the ball. On 30th June, the formidable Monetary Authority of Singapore (MAS) reprimanded 3AC for providing false information and exceeding its S$250m assets under management threshold. 3AC had transferred its investment management to the British Virgin Islands in 2021, but as far as MAS was concerned it was still under Singapore jurisdiction, because the Singapore-based 3AC and its BVI investment manager shared a director (Su Zhu).
The alleged breaches of the regulations had occurred in 2020 and 2021. But at the end of the reprimand, MAS added that "in light of recent developments that call into question the solvency of the fund managed by 3AC", it was investigating whether there had been further breaches of its regulations.
The co-founders knew the game was up. MAS was on to them. There was nothing more they could do but flee. And that's exactly what they did. On 1st July, 3AC filed for U.S. Chapter 15 bankruptcy protection. In an affidavit signed that day, the BVI liquidator Russell Crumpler observed that the co-founders appeared to be no longer in Singapore.
But although they were no longer in Singapore, the co-founders still had control of the funds. And Deribit's concerns proved well-founded. After declaring itself bankrupt, 3AC moved stablecoins and NFTs to unknown wallets via the KuCoin exchange. Blockchains reveal the address to which an asset has been moved, but they don't tell you who owns that address. Exchanges often do know who owns hot wallets, but KuCoin did not know these ones. And the trail can literally go cold if the assets are sent to an offline wallet. These assets may never be recovered.
To prevent 3AC's remaining assets being squirrelled away, the BVI liquidators appealed to courts in the U.S. and Singapore to freeze them with immediate effect, telling a New York Court that "there is an actual and imminent risk that the Debtor’s assets may be transferred or otherwise disposed of by parties other than the court-appointed Foreign Representatives to the detriment of the Debtor, its creditors, and all other interested parties." 3AC's assets are now frozen in both the U.S. and Singapore.
But it may be too late. Over two weeks elapsed between 3AC being ordered into liquidation by a BVI court and its assets being frozen. And 3AC's co-founders have not exactly been cooperative. At the time of the U.S. emergency motion, their whereabouts was unknown, though Bloomberg now reports that they are planning to relocate to Dubai. Emails attached to the Singapore petition show that they ghosted the liquidators, just as they had the lenders. It's not difficult to imagine what they were doing while the liquidators were trying to contact them.
I suspect that whatever assets 3AC still possesses are long gone. Where they have gone is a matter of conjecture. But there are plenty of countries in the world that will provide a safe haven for stolen assets and people on the run from U.S. authorities. A finer example of shutting the stable door after the horse has bolted is hard to imagine.
And this, I'm afraid, means that unsecured creditors are unlikely to get much of their money back.There is a massive and widening gap between the amount liquidators can recover and the amount 3AC is known to owe. A recent short affidavit from Russell Crumpler says that so far, $40m has been recovered. But known unsecured claims against 3AC's assets already total $2.8bn and Crumpler says he expects this figure to rise considerably.
The creditors have now formed a Committee to help the liquidators decide how to apportion the tiny pile of recoverable assets - or, if you prefer, to help them decide who should lose what. The Committee is made up of 3AC's largest creditors: Voyager Digital LLC (which is itself in Chapter 11 insolvency), Digital Currency Group Inc., Coinlist Lend LLC, Blockchain Access UK Ltd, and Matrix Port Technology (Hong Kong) Ltd.
Creditor committees (or Ad Hoc Groups, as they are often known) are a familiar sight in corporate insolvencies and sovereign defaults (for example, Argentina's holdouts, and Peru's Land Bonds holders). They serve a useful purpose, esepcially when there are disputes about the best way of resolving a failed institution and distributing its assets fairly. An Ad Hoc Group of creditors successfully challenged the Austrian government's proposals to resolve the bankrupt Hypo-Alpe-Adria Bank (HETA), eventually achieving 86.32% recovery.
In this case, a creditor committee is needed to force creditors to cooperate with each other. When a company is being liquidated and its remaining assets distributed to its creditors, claims ranked equal in seniority ("pari passu") must be treated equally. But several creditors, most notably Blockchain Access (now a committee member), publicly complained that 3AC was doing deals with other creditors while refusing even to talk to them, effectively subordinating their own claims.
The creditor committee can be relied upon to ensure that large creditors are treated equitably. But I'm not so sure it will necessarily act in the best interests of smaller ones. The crypto world has a tendency to decide that established rules and practices in traditional finance, such as creditor ranking and "pari passu", don't apply to them. So it's not difficult to imagine that the large creditors that make up this committee might try to cook up a deal that effectively subordinates smaller ones. It is to be hoped that the liquidators will prevent this from happening.
It is also to be hoped that liquidators will be able to argue that the assets of the co-founders (and in Kyle Davies's case, those of his partner) should be up for grabs. 3AC's organisation chart shows that the co-founders effectively controlled all the company's assets, including customer assets that were supposedly "under management". And documentation in the Singapore bundle reveals that they bought themselves valuable properties and made a down payment on a yacht. All of these assets arguably belong to their creditors. I also think that since Su Zhu and Kelly Chen are controlling shareholders, the courts might look sympathetically on an argument that their claims as creditors should be subordinated to those of other unsecured creditors. And they, along with Kyle Davies and possibly some of 3AC's senior management, may also face legal action for fraud.
But if the company's remaining assets and those of its co-founders have gone to safe havens beyond the reach of liquidators, and the co-founders have fled to a country with no extradition treaties, then creditors will receive little or nothing and legal action will be toothless. And since the failure of companies like Voyager and Celsius was at least partly caused by 3AC's collapse, it is their retail customers who will ultimately pay for Su Zhu and Kyle Davies's recklessness and extravagance.
Related reading:
Putting the Terra stablecoin debacle into Tradfi context - The Blind Spot
Are Concerns over Growing Federal Government Debt Misplaced?
If the global financial crisis (GFC) of the mid-to-late 2000s and the COVID crisis of the past couple of years have taught us anything, it is that Uncle Sam cannot run out of money. During the GFC, the Federal Reserve lent and spent over $29 trillion to bail out the world’s financial system,[1] and then trillions more in various rounds of “unconventional” monetary policy known as quantitative easing.[2] During the COVID crisis, the Treasury has (so far) cut checks totaling approximately $5 trillion, often dubbed stimulus. Since the Fed is the Treasury’s bank, all of these payments ran through it—with the Fed clearing the checks by crediting private bank reserves.[3] As former Chairman Ben Bernanke explained to Congress, the Fed uses computers and keystrokes that are limited only by Congress’s willingness to budget for Treasury spending, and the Fed’s willingness to buy assets or lend against them[4]—perhaps to infinity and beyond. Let’s put both affordability and solvency concerns to rest: the question is never whether Uncle Sam can spend more, but should he spend more.[5]
If the Treasury spends more than received in tax payments over the course of a year, we call that a deficit. Under current operating procedures adopted by the Fed and Treasury, new issues of Treasury debt over the course of the year will be more-or-less equal to the deficit. Every year that the Treasury runs a deficit it adds to the outstanding debt; surpluses reduce the amount outstanding. Since the founding of the nation, the Treasury has ended most years with a deficit, so the outstanding stock has grown during just about 200 years (declining in the remainder).[6] Indeed, it has grown faster than national output, so the debt-to-GDP ratio has grown at about 1.8 percent per year since the birth of the nation.[7]
If something trends for over two centuries with barely a break, one might begin to consider it normal. And yet, strangely enough, the never-achieved balanced budget is considered to be normal, the exceedingly rare surplus is celebrated as a noteworthy achievement, and the all-too-common deficit is scorned as abnormal, unsustainable, and downright immoral.
First the good news. The government’s “deficit” is our “surplus”: since spending must equal income at the aggregate level, if the government spends more than its income (tax revenue), then by identity all of us in the nongovernment sector (households, businesses, and foreigners) must be spending less than our income.[8] Furthermore, all the government debt that is outstanding must be held by the nongovernment sector—again, that is us. The government’s debt is our asset. Since federal debt outstanding is growing both in nominal terms and as a percent of GDP, our wealth is increasing absolutely and relatively to national income. Thanks Uncle Sam!
But the dismal scientists (economists) warn that all this good news comes with a cost. Deficits cause inflation! Debt raises interest rates and crowds out private investment! Economic growth stagnates because government spending is inherently less efficient than private spending! All of this will cause foreigners to run out of the dollar, causing depreciation of the exchange rate!
With two centuries of experience, the evidence for all this is mixed at best. Deficits and growing debt ratios are the historical norm. Inflation comes and goes. President Obama’s big deficits during the GFC didn’t spark inflation—indeed, inflation ran below the Fed’s target year after year, even as the debt ratio climbed steadily from the late 1990s to 2019. The initial COVID response—that would ultimately add trillions more to deficits and debt—did not spark inflation, either. (Yes, we’ve seen inflation increasing sharply this year—but as I noted, the evidence is mixed and many economists, including those at the Fed, believe these price hikes come mostly from supply-side problems.)
Interest rates have fallen and remained spectacularly low over the past two decades.[9] Anyone looking only at those 20 years could rationally conclude that interest rates appear to be inversely correlated to deficits and debt. While I do believe there is a theoretically plausible case to be made in support of that conclusion, the point I am making is that the evidence is mixed. And if you were to plot the growth rate of GDP against the deficit-to-GDP ratio for the postwar period, you would find a seemingly random scatterplot of points.[10] Again, the evidence is mixed at best.
Finally, the dollar has remained strong—maybe too strong for some tastes—over the past 30 years in spite of the US propensity to run budget deficits, and even trade deficits for that matter. Both of these are anomalies from the conventional perspective.
So, while there are strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, they do not hold up to the light of experience. When faced with the data, the usual defense is: Just wait, the day of reckoning will come! Two centuries, and counting.
[1] http://www.levyinstitute.org/pubs/ppb_123.pdf
[2] http://www.levyinstitute.org/pubs/wp_645.pdf
[3] http://www.levyinstitute.org/publications/can-biden-build-back-better-yes-if-he-abandons-fiscal-pay-fors
[4] https://www.forbes.com/sites/afontevecchia/2013/07/17/bernanke-to-congress-we-are-printing-money-just-not-literally/?sh=7271b3a8109b
[5] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf
[6] Kelton, S. 2020. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Public Affairs..
[7] https://www.tandfonline.com/doi/full/10.1080/05775132.2019.1639412
[8] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p.13.
[9] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p. 17.
[10] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p. 20.
Six Counterpoints about Australian Public Debt
In the lead-up to today’s pre-election Commonwealth budget, much has been written about the need to quickly eliminate the government’s deficit, and reduce its accumulated debt. The standard shibboleths are invoked liberally: government must face hard truths and learn to live within its means; government must balance its budget (just like households do); debt-raters will punish us for our profligacy; and more. Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services. And with Australians heading to the polls, the tough-love imagery serves another function: instilling fear that a change in government, at such a fragile time, would threaten the “stability” of Australia’s economy.
However, this well-worn line of rhetoric will fit uncomfortably for the Coalition government, given its indecisive and contradictory approach to fiscal policy while in office. The deficit has gotten bigger, not smaller, on their watch, despite the destructive and unnecessary cutbacks in public services imposed in their first budget. Their response to Australia’s fiscal and economic problems has consisted mostly of floating one half-formed trial balloon after another (from raising the GST to transferring income tax powers to the states to cutting corporate taxes), with no systematic analysis or framework. And their ideological desire to invoke a phony debt “crisis” as an excuse for ratcheting down spending will conflict with another, more immediate priority: throwing around new money (or at least announcements of new money), especially in marginal electorates, in hopes of buying their way back into office.
In short, the politics of debt and deficits will be both intense and complicated in the coming weeks. To help innoculate Australians against this hysteria, here are six important facts about public debt, what it is – and what it isn’t.
1. Australia’s public debt is relatively small
Despite annual deficits incurred since the GFC, Australia’s accumulated government debt is still small by international standards. Debt can be measured on a gross or net basis; gross debt counts total outstanding borrowing, while net debt deducts the value of financial assets which the government also possesses. Gross debt for all levels of government equaled 44% of Australian GDP at the end of 2015 (according to the OECD). That was the 5th lowest indebtedness of any of the 34 OECD countries (see table below), equal to about one-third the average level experienced across the OECD. Moreover, despite recent deficits, the growth of debt in Australia was considerably slower than in most other OECD countries. Of course, having low debt in and of itself does not justify increasing it. But given the universal fiscal challenges that have faced industrial countries since the GFC, Australia’s debt challenge is both unsurprising and relatively mild.
Australia’s Debt in International Context:
General Government (all levels) Gross Financial Liabilities (%GDP)
2015
10-yr. Change
Australia
44.2%
+22.4 pts
U.S.
110.6%
+43.7 pts
Japan
229.2%
+59.7 pts
France
120.1%
+38.3 pts
Germany
78.5%
+8.1 pts
Italy
160.7%
+41.8 pts
U.K.
116.4%
+60.3 pts
Canada
94.8%
+19.0 pts
OECD Average
115.2%
+36.3 pts
Source: Author’s calculations from OECD Economic Outlook #98, Nov.2015.
2. A government debt is matched by an asset
Australians aren’t “poorer” because their government accumulates a debt. Any rise in government debt is mirrored by an increase in some offsetting asset. This is true in both accounting terms, and in real economic terms. For example, government typically issues a bond (or some other financial instrument) to finance a deficit. But that bond also constitutes an asset in the investment portfolio of whoever lent the government money. Most Australian government debt is owned by Australians. In fact, investors increasingly appreciate the opportunity to invest in government bonds, because they are safer than other assets at a time of financial uncertainty. (That investor interest is one reason interest rates on government debt are so low.) So government debt translates into someone else’s wealth – usually someone in Australia.
This match between liabilities and assets is also visible in concrete economic terms – especially when new debt is issued to construct a real, long-lasting capital asset (like a road, a transit system, a school, or a hospital). In this case, the matching asset is owned by government itself, and so its own net worth won’t change much at all: it takes on a new debt, but also has a new asset. For budgetary purposes, the government must account for the gradual wear-and-tear of that asset (called depreciation), which appears as a cost item on the budget. But it hasn’t “lost” the money it raised through the new debt: it invested it, and that investment carries both financial and social value.
3. Other sectors of society borrow much more than government
Tired rhetoric about how governments need to act “more like households” is especially ironic, given that households are by far the most indebted sector in Australian society. Household net debts equal close to 125% of GDP – or around 4 times the net debt of government (all levels), according to data from the Bank for International Settlements. It is factually wrong to claim that “households balance their budgets,” and therefore governments must do the same. Households borrow regularly – and thanks to overinflated housing prices and stagnant wages, that borrowing is growing rapidly. The same is true of business: net debts of non-financial corporations are more than twice the net debt of government (see chart).
In fact, it is quite rational for households and businesses to borrow, when needed to fund purchase of long-run productive assets (like a house or a car for consumers, or a factory or new technology for a business). Business leaders know that rational, prudent borrowing will enhance the profitability of a corporation. Indeed, any CEO who said paying off all company debt was the top priority of the firm would be chased from office by directors and shareholders (who would understand the pledge was irrational and superstitious). Following exactly the same logic, government debt can be rational and productive – especially (but not only) when it is associated with the acquisition of long-run productive assets (like infrastructure). Close to two-thirds of the Commonwealth government’s 2015/16 deficit (projected to be $36 billion) is associated with capital spending, including $11 billion in capital transfers to lower levels of government and $12 billion in net investment in Commonwealth non-financial assets. Contrary to the rhetoric, Australians do largely cover the cost of current public services with their current tax payments. Government borrowing is primarily required to fund capital spending.
4. Interest rates are low, and falling
The cost of public borrowing has fallen dramatically as a result of the decline in Australian and global interest rates since the GFC (see chart). Indeed, the two factors are connected: large government deficits resulted primarily from underlying economic weakness (this is true in Australia, like elsewhere in the industrialized world), which in turn brought about low interest rates (via both central banks and private financial markets). These very low interest rates mean that the cost-benefit decision associated with any new government borrowing has been fundamentally altered, in favour of borrowing.
Current interest rates are likely to stay low for many years to come, given the continuing failure of the global economy to regain consistent momentum, the slowdown in China, and other factors. (In fact, it is possible that the Reserve Bank of Australia may soon cut its interest rate further, below its current record-low 2% level, due to weak growth and signs of deflation here in Australia.) Ten-year Commonwealth bonds can presently be floated to private investors for little more than 2% interest (close to zero in real after-inflation terms). If government can borrow for what is effectively zero interest, and put that money to work in the real economy doing useful things (including both infrastructure and public services), then it is irrational to let old-fashioned balanced-budget mythology stand in the way.
Even if current interest rates do not fall any further, the average effective interest rate paid on overall public debt will continue to fall for years to come. The current average effective rate paid on Commonwealth debt (about 3.5% last year) reflects the weighted average paid on all maturities of debt. As past debts come due, they are refinanced at now-much-lower interest rates (those prevailing on new issues of bonds). That will pull down the average weighted interest rate for several years into the future – even if the rate on new issues stabilizes or increases somewhat. Consider that new ten-year bonds can be issued for less than half the interest rate paid a decade ago. The refinancing of those bonds will generate enormous future interest savings for government (equivalent to home-owners who re-mortgage their homes to benefit from the decline in household lending rates).
This is why the economic burden of public debt servicing is not growing, even though the debt is. Government budget projections forecast debt service remaining at between 0.9 and 1.0% of GDP for the next 5 years, with the effect of rising debt offset by falling interest rates. And those government projections likely overestimate true interest costs (partly for political reasons). For example, the December 2015 MYEFO update assumes a significant increase in interest rates in the coming year (its near-term interest rate assumption was 0.3 points higher than the assumption used in last year’s budget); ongoing global and domestic economic weakness makes that highly unlikely.
5. The debt/GDP ratio is a more meaningful fiscal constraint than a balanced budget
Fear-mongers think that by talking about public debt in “big numbers,” the fright value of their dire forecasts can be magnified accordingly. But all macroeconomic aggregates are measured in big numbers. And what’s more important than the absolute size of debt, is the government’s capacity to service that debt. That, in turn, depends on the flow of government revenues, which in turn is driven primarily by overall economic growth. That’s why economists prefer to evaluate public debt relative to GDP (called the “debt ratio”). Even this ratio can overstate the real burden of debt, in times (like now) when interest rates are low and falling.
Avoiding a lasting, uncontrolled rise in the debt/GDP ratio is a more meaningful fiscal constraint on government, than trying to balance a budget in any particular year. Economists do not agree on a maximum “acceptable” limit for that ratio. But most agree it cannot rise forever. (Some economists argue that there is no limit on a government’s ability to issue sovereign debt denominated in its own currency, and the recent experience of countries like Japan – whose debt ratio is five times Australia’s – is consistent with that view.)
At any rate, Australia is far away from any feasible “ceiling” on public debt relative to GDP. And remember, like any ratio, the debt/GDP ratio has both a numerator and denominator: growing the denominator is as effective as shrinking the numerator, if the goal is reducing the value of the combined ratio. In this regard, the stagnation in Australia’s nominal GDP in recent years has been more damaging to the trajectory of the debt ratio, as has the addition of debt through continued deficits. The government’s policy focus should be on expanding economic activity (and the jobs and incomes that go with it), rather than suppressing the deficit with austerity measures (which have the unintended consequence of undermining growth and hence the economy’s ability to service a given amount of debt).
6. The government can incur moderate deficits every year, yet still stabilize its debt burden
A related and under-appreciated countervailing argument is to note that government can run a medium-sized deficit on an ongoing basis, and yet experience no increase in the debt/GDP ratio at all – so long as the economy is progressing at a normal pace. A deficit adds to the numerator of the ratio, while economic growth expands the denominator. So long as both are expanding at roughly the same rate, the ratio will not be changed. (Our reference to economic expansion envisions more jobs and incomes across the economy, including in the public sector, and with due attention to the need for environmental sustainability.) This basic arithmetic provides government with an additional degree of maneuverability in financing essential services and investments, without unduly increasing the debt ratio.
A simple numerical example helps to illustrate the point in Australia’s context. A healthy economy should be expanding by at least 5-6 percent per year in nominal terms: divided roughly equally between inflation (given the RBA’s 2-3 percent inflation target) and greater output of real goods and services (driven by both population and productivity). The Commonwealth’s current net debt ratio is slightly below 20 percent of GDP. With a healthy economic expansion, the government could incur an annual deficit of 1-1.25 percent of GDP (or close to $20 billion per year) but still stabilize the debt ratio below that 20 percent benchmark. And there is nothing magical about a 20% debt ratio; if Australians were willing to tolerate a larger steady-state debt ratio, then the size of this annual permissible deficit would be correspondingly higher. All this merely reinforces the need for government to focus on supporting job-creation and incomes, not balancing its budget – and confirms that ample fiscal space is indeed available for the Commonwealth to fund public services and infrastructure spending (with the fringe benefit of reinforcing strong job creation that should be their top priority).
The post Six Counterpoints about Australian Public Debt appeared first on Progress in Political Economy (PPE).
Why IPE Needs to Talk about Money: On Austerity, Financial Power, and Debt (Part 2)
Though Marx never developed a theory of the capitalisation of the state or of money creation, he did notice this relationship of getting something for nothing (that we discussed in Part 1 of this post) in the first volume of Capital: A Critique of Political Economy:
The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would…. It was not enough that the bank gave with one hand and took back more with the other; it remained, even whilst receiving, the eternal creditor of the nation…
And indeed, because our governments have been structured historically not to create money (with the exception of notes and coins in most instances), the public is forced to go into debt to private social forces. But the big question is whether this has to be the case? Why shouldn’t our democratically elected governments have the power to create interest free money rather than enter a debt relationship with private social forces who capitalise the production of money at interest? This latter process, as we have seen, leads to mounting ‘national’ debts, the primary justification for the policies of neoliberal austerity.
Of course, because of years of misleading propaganda on the riddle of inflation combined with the popular denigration of public servants and institutions (stronger in some countries than in others) many would react in horror to the proposal that governments should be in control of the production of new money. There are undoubtedly real and perceived challenges to overcome when considering sovereign money but the alternative is to let the bankers continue to create new money out of thin air and profit from the interest. But there are indeed proposals to create sovereign or public money that avoids inflation and at their centre are two simple propositions: 1) money should be produced interest free and in a planned and democratic way; and 2) this new money should be spent on productive activities that benefit society and urgently address climate change and the need for renewable energy among defeating other unnecessary social ills like homelessness, poverty and hunger.
If you think that this is impossible, consider the fact that Switzerland will be holding a referendum on whether to stop private banks from creating new money while putting the control of new money creation solely in the hands of the Swiss National Bank. The elected government will then instruct the Swiss National Bank how it should spend new money into the economy, closely monitoring the effects of new money creation.
Today, much of the new money created by banks has gone into speculative asset inflation, particularly in real estate and the stock markets of the world. And this brings us to some of the key consequences of allowing commercial banks to issue the majority of the money supply and to charge interest for it. We can list them as follows:
- Democratic governments are not in control of most of their money supply and are structurally forced into debt to a minority of private social forces who profit from this relationship. The fact that the state has the power to tax the population allows for private social forces to capitalise on this power process and direct a stream on income to themselves through government securities. As Creutz pointed about long ago, it is a mathematical certainty that due to the ownership of government securities (the minority) and the payment of taxes (the majority) more money will be received by the minority of the bondholders from the majority of taxpayers. See also the forthcoming book from Sandy Brian Hager on Public Debt, Inequality and Power in the United States of America;
- While governments do set spending, distribution and allocation priorities based on a budget, it is largely commercial banks that set allocation/distribution priorities for society given that they are the primary institutions of new money creation. Banks need not create money for productive purposes and can create money to speculate on securities and real estate;
- There is always more debt in the system than the ability to repay. This is because when banks create loans they do not create the interest. For example, a US$100 dollar loan at 10% interest will mean that the borrower has to repay US$110 to discharge the loan. But the bank creates only US$100, not US$110. The money has to be obtained from elsewhere, which is also a key trigger for the need for economic growth and the greater commodification and monetisation of nature;
- The sabotage of the possibility of public or sovereign money and the private ownership of the capacity to create new money leads to an inevitable need for credit/debt when incomes do not meet spending expectations or a desired lifestyle. For example, most people are forced into debt if they want to buy a home or car. But as Susanne Soederberg points out in her wonderful book Debtfare States, many low income groups have been turning to consumer credit just to make ends meet; and
- Money/debt is based on creditworthiness and tied to assets and income, hence the already rich can borrow more money, leading to greater inequality. For example, hedge fund managers can typically leverage their assets by about ten times, meaning if they have assets of US$1 billion, they can borrow another US$10 billion from commercial banks to speculate on income-generating assets. We have to recall that a 5% return on US$10 billion is far greater than a 5% return on US$ 1 billion! Hence, the proliferation of hedge fund billionaires;
- The owners of banks essentially profit from a fraud. Fraud is typically understood to be a deliberate deception in order to secure an unfair gain or advantage. Since the banks create new money and do not act as intermediaries between savers and borrowers, they are indeed deceiving the public and certainly are securing unfair financial gains. There is a reason why the banking sector is the most heavily capitalised sector of the global economy each year and that an orgy of bonuses and luxury spending follows each fiscal year. See below:
- Interest on money/debt is a key driver of differential inflation. Interest is a cost to business and gets pushed on to consumers. So consumers not only pay for the base costs of a good or service, but also a portion of the interest the business owes to the banks as well as whatever mark-up on costs the business feels it can get away with. This is interest inflation and profit inflation. Just so that we’re clear that most businesses to do not finance their expansions out of their retained earnings, here’s the level of non-financial corporate debt in the United States (and we assume a similar trajectory in capitalist economies):
- Government fiscal policy is incredibly important and has more to do with monetary policy than the monetary policy of central banks – which basically regulates the inter-bank market. This is so because should an economy stagnate with low or negative growth and high unemployment then it is only the government that can help create effective demand by spending into the economy. The only problem with this solution is that, at present, thanks largely to Keynes’ denial of sovereign money, governments are forced into debt at interest to do so when they need not be;
- There is another consequence for entrepreneurs who may have a great idea but not enough money to invest in their business to make it viable. Since banks typically do not lend to new small businesses without collateral or some other guarantee, this means that entrepreneurs have to turn to venture capitalists and the like for an investment and therefore give up equity in their companies; and
- We need to abandon the notion that savings lead to investment. This is false. No saving has to take place before new money can be issued. Furthermore, more saving means less money in an economy, not more.
There is considerably more to debate and discuss, but I hope this blog post is enough to encourage scholars in IPE to talk more about money – particular before the next crisis hits, debt mounts and politicians cry out for balanced books and more austerity. When we learn that the current system is a historical legacy/creation and in no way a natural or inevitable one, using debt as an excuse to make certain political choices that ultimately benefit the 1% and undermine the public will hopefully be a non-starter.
Democratic societies should be in control of their own money supply, not a minority of private bank owners and their functionaries who profit enormously from capitalising on everyone else paying interest.