The challenges within our economy and society can only grow as far as I can see. At the most basic level at some time soon we are going to face the problem of ‘peak stuff'. That is, the amount of physical consumption by people is going to start declining, at least in aggregate.
This has to happen. I would love to say that is because of a growing green awareness. That, though, is not true. The mountain of debt we now face will be what achieves this.
Nine out of ten new cars are debt financed. Indeed, new cars exist now to keep the finance industry going and not because we desperately need so many.
Household debt is around its peak again.
Last year UK households dis-saved for the first time since records began: that is, they borrowed more than they saved, overall.
And today we learned of the crisis of £19bn of unpaid household bills that are overdue for settlement.
I know debt is, for many, the cause for deep, gnawing anxiety. I also know many try to hide from that in more consumption, and alcohol, or worse. The personal consequences of what is happening are dire. But I will focus on the macro, if you will forgive me.
At a macro level this debt will implode. It has to. Some of it is unplayable. I have little doubt that those who are owed have yet to realistically appraise how much their debts will amount to because over the last decade accountancy has forgotten how to appropriately debt provision because the rules have not required them to do so. That's a contributory cause of this crisis that will have market repercussions.
More generally, there will also be a downturn. When the domestic credit line is finally maxed out (and this analogy works perfectly in this context) the spending has to stop. And it will. And that has ripple effects. Multipliers exist in the private as well as the public sector. Add this onto any one of a range of other potential tipping points, from Brexit onwards, and the risk of a recession, or worse, is high.
Peak stuff will have happened.
But don't heave a sigh of relief. Need will not have gone away.
Not all the households facing debt crises will formally restructure their debts. They will just struggle. And real needs will go unmet. That is, unless real action is taken.
I make the simple point that after peak stuff there will be enough for everyone in this country. As a whole we do not face a crisis. We are able to live to excess, if we ignore global warming that is. So no one need suffer if we hit a downturn. That they will is by choice.
That choice will be morally sanctified: it will be claimed no one had to take debt on and people must live with the consequences of their actions. I can hear the libertarians rolling out the excuses for their contempt already. But they are wrong. For many there was no choice. And those libertarians ignore the enormous effort put by the debt creators into distorting choice, from car manufacturer promotions to daytime television debt advertising onwards. So the libertarian claim is nonsense.
What can be done then? The answer is obvious. We need to prepare for redistribution. The savers will need to be the saviours. The simple fact is that we have massively skewed wealth distribution in the UK, and we have a tax system that massively favours those who earn income from wealth as opposed to those who earn income from working. Of course the two comments are not unrelated: under taxed income from wealth does, of course, get saved, in the main, so increasing wealth inequality exponentially.
In that case peak stuff has to be marked by two things. The first is increased taxes on income from wealth. I explain how, here.
And the second is wealth taxation. That could be by taxing property more effectively, both during life and on death. It could be by making inheritance tax work, which might well mean reducing many of the exemptions that mean that the very wealthy simply avoid the tax. And it could mean a new wealth tax to replace inheritance tax altogether.
But what we do not have is the option of leaving large parts of the country behind because they have been crippled by debt.
And nor am I making a special pleading for the goodwill of those with some wealth. The reality is that there is a risk, which I acknowledge, that they will be the largest gainers from such a programme. The reality is that if, collectively, those who owe (and there are many) are provided with the means to pay then those who are owed (and there are fewer of them) stand to gain.
Call it enlightened self-interest if you like, but the wealthy need to stump up to make the system work if they wish for it to act in their interests. The alternatives all look to be worse for them.
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Hmmm – more like ‘peak stuffed’!
That’s what we seem to be going towards.
Your second to last paragraph enunciates the inherent paradox in North American capitalism very well (capitalism that eats itself).
If the rich want their money to grow – they will need to turn some of it into transfer payments to keep the consumption side going.
Or to invest long term in policies and tech that will make life more sustainable. This will reduce their reliance on debt returns built up buying ‘stuff’ and broaden their income portfolio.
You do wonder if the wealthy have had any such advice along the lines of what you are talking about here.
I dislike David Cameron immensely but he was right (but did he know it?) when he said that ‘We are all in this together’. That is to say that buying, investing, saving behaviour affects us all through the hub called the economy.
How/where does the residential rental market fit in to this. Are there significant number of buy to let landlords that are overstretched? Are we likely to see further pressures on those renting as a result? If any downturn leads to an increase in repossessions and a slowdown in mortgage approvals we can be sure that those with financial clout will further consolidate their positions buy hoovering up even more properties.
Maybe
It might also lead to defaulting landlords and prices falling…
In another world that might be just the opportunity to start rebuilding the state owned social housing estate.
so those that did not get involved in borrowing to buy more “stuff” and instead responsibly saved now get to be taxed to bail out those who were reckless – not very fair
I’ve noted why it would be
They have been undertaxed to date
I think you ought to recognise that there is a significant body of people who are not in the 1pc but who live their lives prudently and who save for their future. They are not undertaxed, they are mostly paye and can not afford expensive tax avoidance schemes. Whilst your suggestions might resonate with those who see the 1pc abusing their position it alienates you from the squeezed middle. It would be nice if you stopped lumping this population together and recognise them separately.
The squeezed middle need to smell the coffee
They are those being aleanated
a)”The savers will need to be the saviours”
b)”They have been undertaxed to date”
a) They won ‘t. That clique as a whole is too powerful and effectively governs governments in most of the first world.
b) And who’s fault is that? Clearly laws on taxation as everything else are made by government and those of both hued during the last several decades if not centuries have allowed recurrent the laissez-faire tax situation to develop in favour of powerful money to the extent it is now ,I submit, largely irreversible in any meaningful measure.
I am an optimist
You are not
One of us is right
What we have had over the last 40 years is what one economist called ‘Privatised Keynsianism’ that is, aggregate demand proper up by bank lending-what Richard Wolff calls ‘bankers heaven’ where bank lending (unsecured) has filled the gap between wages and productivity, not to mention a benefit system that props up capital (tax credits, housing benefit to landlords).
Richard is right, it is unsustainable in nature.
Property prices need to fall and soon. Only credit controls combined with a massive social housing project and the installation of a Land Value Tax can accomplish this. Negative equity sufferers (not the leveraged speculators!) might need a bail out. The massive culture of the ‘piggy bank’ house must be wound down in an organised way.
From an MMT perspective, the main reasons for taxing the savers (rich on the whole) would be to create fiscal space for the spending that would relieve the debt of the main body of the populace as well as having a redistributive function. As Richard has pointed out many times it isn’t about ‘financing’ anything.
One ramification of the winding down of private debt by fiscal means would be that China, as the exporter of cheap , poor quality products, would be hit as people start to afford more durable, ecological products, it;s function as the provider of cheap goods to indebted consumers around the world would end. It’s economic focus would then have to turn to its domestic market.
[…] Cross-posted from Tax Research UK […]