That’s a big number. Probably too big for anyone to comprehend. It’s more than three times global GDP.
And it’s the amount of outstanding global debt – governments, corporations and households combined. In so-called ‘mature economies’, debt is now a staggering 390 per cent of GDP. Debt growth continues easily to outstrip GDP growth. Our economies are running on air.
Now, debt is not always a bad thing. Without debt, companies would not be able to make investments to improve output and productivity or enter new markets. This sort of debt may rightly be considered an investment that generates a return – at least sometimes.
Governments have taken the same view. Borrowing for ‘investment’ is considered acceptable. The trouble is that return on investment is much trickier to evaluate for government spending – in spite of all the cost-effectiveness models that many economists employed. Much unproductive and current expenditure can be disguised as ‘investment.’
Similarly, individuals and households may consider some of their debts to be ‘investments’. Housing and education might be perceived to fall into this category.
But, worryingly, much of the increase in debt is not for investment. It’s to finance spending that we cannot afford.
It goes without saying that these levels of debt, and the rate of debt growth, are probably unsustainable and will lead to another almighty financial crash – maybe bigger and deeper than the last one. But there are three issues with trying to bring debt under some sort of control.
The first is that debt has become embedded in our culture. It started with the home ownership boom. Taking on massive amounts of debt to ‘own’ one’s home started to make it seem as though this was not real debt. After all, the money had been converted into an asset that would always be worth at least as much as the debt burden. Repeated housing crises have shown this to be a lie. Yet everyone still believes it. Or at least they believe that they are not the ones who will be caught out.
Then came the explosion of ‘hire purchase’. Take on debt for the purchase of goods that would start depreciating the moment they left the showroom.
Then it was the credit card boom. Buy things in a way that, psychologically, it doesn’t even seem like one is actually spending real money at all. Just a magic wave of a bit of plastic.
Then came the debt associated with tuition fees. Yet more normalisation of the debt mentality in the early years of one’s adulthood.
All this has now firmly embedded a culture of debt in our collective mentality. We have all been led to start believing not only that debt is not a bad thing. It’s actually a good thing – especially in times of high inflation – if anyone remembers those.
The next problem is the financial services industry. Banks are, today, allowed to create money at will. And their best way of making money is by encouraging ever more debt. And competing between themselves to attract ever more debt consumers. They do not much care whether the principal is ever repaid. All that matters is that interest payments keep, by and large, flowing in.
Returns from issuing debt have dropped in these low interest times. But that only creates an incentive to issue more debt – make up for lower returns by increasing volume. Or by trying to improve returns by tightening on loans and overdrafts and shifting customers onto credit card debt where they can be fleeced with much higher rates.
Finally, there is the political unattractiveness of reducing any form of debt. Everyone is tired of seemingly endless austerity and there is growing political pressure to turn on the taps. The trouble is that the taps are not connected to any real water. So it will need to be manufactured under the pretence that it all represents ‘investment in our economy’. That every penny will magically generate a return many times over. Well, it might certainly pay back a political return. But an economic return?
And we don’t see much evidence of policy interest in controlling debt issuance by banks. As far back as 2003, the Bank for International Settlements started warning about excessive levels of debt. They were roundly ignored. And the inevitable crash followed. This year, they have again been warning that something must be done to wean the world off cheap debt. That is translation for what they actually said which was for central banks to put “less weight on inflation and more weight on the longer-term effects of monetary policy through its impact on financial stability.” (Yes, I know. They’re not trying to speak in words that carry the risk that mere mortals might understand).
Has the issue of debt become much too large to be correctable in any orderly fashion? Do we just need to be prepared for the next collapse? And the one after that? And the one after that one? Some have argued that debt has become the Hotel California of our economies.
Politically, maybe the best response comes from Jean-Claude Juncker’s now famous statement: “We all know what needs to be done. But we don’t know how to get re-elected once we’ve done it.”
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