The IMF published a new report yesterday which attracted a lot of attention for suggesting total debt in the world may now be $152 trillion, which could be near enough double world GDP. This they see as a risk to society.
I have scanned much of the report. Broadly speaking their concerns are based on some pretty conventional analyses. The first logic they use is that debt creates situations of potential instability in society when situations where mass default is a risk and the stability of lenders is prejudiced. This creates banking crises of the sort seen in 2008.
Their second concern is that debt reduces the spending power of the too greatly indebted reducing the chances of growth. They think that this is a situation faced by too many households now.
I do not dismiss either of these concerns: they are real and appropriate. But I did look for, and did not get, what I was hoping for in the report. I will mention three things.
The first us that it is a mistake to categorise all debt as bad. Money is debt, for example and we definitely need money. Debt can also be a fundamentally useful way of distributing real wealth: the old style building society did that to enormous advantage. So debt is not all bad. We need some government debt. Asset financing can be useful. And short term liquidity will, every day, prevent crisis for millions. This has to be recognised.
What is really pernicious is debt that is either necessary to meet current needs or that is deliberately manufactured by the advertising industry to satisfy current wants out of resources the borrower cannot really hope to command and which will impose serious burdens on them in the future that they can only meet at substantial real cost. These are the debts that crush lives. This is the debt that must be addressed by income redistribution and by tackling the reckless abuses of an advertising industry whose sole goal is the spread of human unhappiness.
Third, the report only looked at who owes the debt. It did not look at who owns the debt, where and how accountable they are for it. This issue is real: it is the concentration in the ownership of debt, partly offshore, that causes so many problems, because debt imposes power. It is not for nothing that the word mortgage means 'grip of death'. This is a modern form of slavery that consigns many to lives of little choice where compliance with the requirement of unreasonable employers is guaranteed. So it is not debt per se that is the problem: it is the power relationships implicit in it that matter and the IMF needed to address that issue and did not as far as I can see.
Increasing debt is important then but the IMF needs to stop worrying about the symptoms and really address the causes. They are income inequality that forces many into debt reinforced by wealth inequality which growing debt exacerbates, and the power of manipulation from advertising that makes all these things worse, deliberately. For all these reasons the report falls well short of my expectations,
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Wonderful and thought provoking blog – neatly balanced. Thank you.
Richard, I was fascinated by Michael Rowbotham’s Grip of Death which highlighted the damage caused by having a purely debt based finance system: the inevitability of boom and bust, reliance on GDP growth to maintain living standards, trade viewed as a form of war to be won rather than a mutually beneficial exercise, reliance on wages of full time employment to survive, products deliberately produced to have a short life span. His suggestion was a compensating debt free money supply to free us from this over reliance on debt. CH Douglas and even Abraham Lincoln offered potential solutions along these lines. Do you have any thoughts on Rowbotham’s analysis of the problems caused by a debt based finance system and his suggested possible solution?
Money is and always will be debt based: the Positive Money approach is just bizarre
But can we better regulate money creation and use? Of course we can. I address the issue in both The Courageous State and The Joy of Tax
Hang on Richard-we’re getting our linguistic underpants in a twist here (again!).. we’ve has this incoherent discussion a number of time over recent years and it needs clearing up.
First point: I’m not (as you know by now) an apologist for Positive Money and although I think they have done a good job highlighting aspects of our monetary system I don’ agree with their solutions).
having said that, PM do NOT state that money not debt. The confusion arises because:
There is a conflation between the ISSUANCE of that money and the FUNCTION of money.
PM talks about the ISSUANCE not having a corresponding liability. That is, that Government spending (sovereign money) is a NET ASSET.
I agree that positive money itself does not express this very clearly and sows the seeds for this confusion. MMT is a lot clearer on this subject.
As I understand it, Rowbotham is saying something similar. I’m sure all agree that money is an I.O.U and operates in a bipolar debt/asset framework. It’s the fact that Government is the only agency that can create a net asset that matters here, in other words, it is the only agency that can issue without a corresponding liability. So it is the ISSUANCE that counts.
I think you’re being kind to PM
‘I think you’re being kind to PM’
You are probably right there. As I say there is a lack of clarity at times and I agree that the definitions often sow seeds of confusion. I’m sympathetic to PM as they were the organisation that ‘woke me up’ and educated me about the fundamentals of the monetary system. You yourself have, in the past, credited them with identifying the problem but not offering the right solution. In that respect you are in the company of MMT who tend to find PM’s definitions and analysis wanting-I can remember Randy Wray and Benn Dyson talking past each other because they were using different language frames.
Here’s a thread by Wray on the issue with PM: http://neweconomicperspectives.org/2014/06/something-rotten-state-denmark-rise-monetary-cranks-fixing-aint-broke.html
And I (FWIW) think you’re prejudiced.
I (whilst like Simon disagreeing with PM’s proposed solution – ie abolition of fractional reserve banking) share in his otherwise favourable view of PM’s contribution. And I would point out that notwithstanding your dismissiveness they have proved themselves very effective campaigners. Conceivably no less so than Fair Tax.
Do I detect a certain amount of animus on your part? (Perish the thought…)
No, I just think they’re horribly wrong about money
And that’s a pretty fundamental flaw in their ideas
There is no stock of many as they seem to think
Nor can it be ‘allocated’ as they wish
It’s just nonsense
Thought provoking. I will limit my comments to private debt as this accounts for 2/3 rds of the total at $100 trillion, and is also the part most liable to default, which is what really concerns the IMF.
There are three ways that private business can finance expansion : retained profits, new share capital, and of course debt. Clearly only the World’s most profitable companies such as Google or Apple can finance their own expansion. Indeed the real social function of the banking sector has always been to provide capital for businesses to expand far more rapidly than would be possible if they had to save up for new projects, or rely on wealthy individual backers.
This then raises the question why the balance of investment has shifted so far from share capital (where investors take the risk, and know they will loose their stake if the company fails) to loan capital which now seems to rule the World. Part of the explanation may be the expectation that loans must be repaid at all costs – and that if this becomes impossible then the state is expected to bail out the banks responsible for making irresponsible loans in the first place. Every academic understands the moral hazard which this creates, yet we seem incapable of doing anything about it.
It strikes me that first of all we need to move back to a system where investors know that their capital is at risk, and that if a business goes bad they will loose their money. This just seems like the basis of responsible lending to me, but perhaps I am missing something here. Please let me know.
A key part of this is to address international systems to deal with bad debt and bankruptcy in a fair and equitable way which protects the “greater good” of society over and above repaying the capital of investors. Stiglitz has written on this, highlighting that in the USA legislation actually moved in the opposite direction, making it harder for those in bankruptcy to escape their debts while giving creditors unprecedented powers to pursue them for years afterwards. What we need is a system that forces investors to write off bad debts after a sensible length of time, which in turn will encourage them to only lend responsibly in the first place. If the IMF wants to reduce risks in Global fianancial markets perhaps they should start by focusing on a mandatory legal framework for managing defaults and bankruptcy.
‘No, I just think they’re horribly wrong about money
And that’s a pretty fundamental flaw in their ideas’
Which aspect of ‘money’ are you referring to, Richard? I really don’t think, for the reasons given above, that they view money (in its everyday function) as debt free.
Whey you say: ‘there’s no ‘stock’ of money, I’m not sure what you mean. In an abstract sense there is no ‘stock’ just as there is no ‘stock’ of goals/cricket runs (to use a well worn MMT analogy) but there is a stock once money starts functioning and Government spends and taxes (adding and reducing stock). Again, maybe this is a linguistic issue.
I refer to their model to replace our current banking systemn: it implies there is a ‘stock’ of money
That is just not true
One think I think PM should be credited with though, Richard, is years of campaigning and informing the public about QE and asset bubbles. They have been writing to M.P’s for years, raising EDM’s via M.P’s and now May raise it at the conference – only pressure has achieved this and much of it came from P.M. So, whilst I share some of your reservations, they have achieved significant things as a campaign group.
Except they also have QE wrong
It’s bizarre
And they also came very Kat to that scene – after Labour were already on the case
Richard:- “For all these reasons the report falls well short of my expectations”.
Doubtless – but were those expectations realistic? What you criticise the report for, it seems to me, is for failing to cover aspects of the problem about which the IMF doesn’t consider itself required to be concerned.
If anyone should doubt that to be so, another report recently published by the IMF “Greece: Staff Concluding Statement of the 2016 Article IV Mission (September 23, 2016)” will brutally demolish any doubts. Prof. Bill Mitchell’s absolutely blistering critique of that report, which can be read here
http://bilbo.economicoutlook.net/blog/ under the apt heading “The planned destruction of Greece continues …”
makes sobering reading indeed and constitutes a devastating indicment, on all counts, of the part being played by the IMF – still, to this day – in the Greek tragedy.
It’s blindingly clear from this (it was already anyway) that the IMF is part of the problem not of the solution.
Mitchell’s analysis is, to my mind, particularly illuminating regarding the route by which the IMF from having originally been designed to be a purely instrumental, subordinate, agent of the Bretton Woods exchange-rate system morphed instead in obedience to thinly-veiled US direction (when that original remit became defunct in 1971) into a primary global enforcer (in more ways than one – see this eye-opener:-
https://www.youtube.com/watch?v=yTbdnNgqfs8&NR=1 )
of the Washington Consensus – ie into active agent-in-chief of the neoliberal project for global domination.
It’s made very obvious in Mitchell’s critique of the role it is playing in regard to Greece that that view of its function is very much the one which it still seeks to implement.
To expect the IMF to display the slightest concern about the societal consequences of its actions would be to believe that the leopard can change its spots
I have to believe that is possible
Why not?
The IMF has admitted a great deal of late we would never have expected of it
I refuse to be closed minded
I admire your optimism.
But have you read Bill Mitchell’s critique of the IMF’s handling of Greece? Because if you have, I think you should if you want an insight into what sort of animal the IMF actually is. That critique will disabuse you of any idea that it can change itself, and acquaint you with what sort of mindset you’re up against if you cherish any hopes in that regard..
It is, after all (and has been ever since 1971), the US government’s creature and there’s currently no chance whatsoever of any foreseeable prospective Administration abandoning the neoliberal policy-agenda. Now, if Bernie Sanders had continued his campaign for the presidency who knows what might have become possible? But he didn’t.
Bill has always made me look like the calmest man on earth
I am not
But I find a lot of what Bill says to be a) hard going b) not always credible as a result
sorry, I meant “…if you haven’t…” of course
So do I (find it hard going, that is, and not infrequently a bit over the top).
However in this particular instance the case he puts for the prosecution seems to me to be unanswerable and, in my mind at least, damns the IMF irredeemably. I can’t find one single mitigating circumstance for inflicting the misery and degradation on the Greek people which they have (with the other two mwmbers of the Troika), in slavish obedience to neoliberal dogma and based upon their own repeatedly-falsified forecast outcomes.
And that’s without even mentioning their complete contempt for democracy.
I have been a big critic of the IMF over the years
But I have to believe in change or why do I campaign for it?
To me the IMF are playing a game which I think is a product of La Garde’s thinking (it is almost typically French and no less effective for it either).
Yes they are indeed not really being helpful to the Greek people and there is no doubt that the country is being used as a whipping post by the EU if not the world. And it is not right I agree. Disgusting.
But the Greek government is just as culpable and that is whom the IMF are really pointing their finger at. The Greek people are collateral damage. It would be much better however if the Greek judicial system took its leaders to court like they did in Iceland for listening to dodgy advice from private investment banks. Who should also be in court.
On the other hand, the IMF are appearing to be quite progressive in other areas. This duality is deliberate. If the IMF over play their progressive hand I think they would just be marginalised. I’m sure that La Garde knows this.
We must also consider the fate of her predecessor – Dominic Strauss Khan – a seemingly flawed character but one whose pronouncements about the 2008 crash were spot on in my view. Yes the man seems to have brought himself down but he did not entirely do it by himself. Would Khan have been more vociferous about global financial sector reform? I think he would have been.
The context to that episode (widely avialable on line to read about) and the IMF now is that we must never underestimate the power of the top 1% and the financial network that keeps them there.
The IMF realises this and therefore plays the game. And it’s a big boys game too.
“The report only looked at who owes the debt. It did not look at who owns the debt, where and how accountable they are for it. This issue is real: it is the concentration in the ownership of debt, partly offshore, that causes so many problems, because debt imposes power”
I’ve been asking this question since 2008. To whom do we owe the debt? Both Government debt and private debt. Those who own the debt have enormous leverage over soverign nations and individuals. Such power ought to be challenged.
I’ve been reading an excellent book by Prof. Andrew Sayer of Lancaster University called “Why We Can’t Afford the Rich” (Policy Press, 2015). Despite the biased title, this is an excellent book for challenging the economic status quo and raising questions about the words we use to describe economic activity, words that often hide corruption.
I agree: it is a good book
Flippin’ heck…………anothert book. I can’t keep up. Especially my wallet!
Still some confusion here on the positive money front, as per others I don’t agree completely with PM and am closer to MMT but they have been valuable.
Richard is correct that money is always debt but PM are also correct that a sovereign currency does not have to borrow to issue. They can spend directly into the economy and you can describe the flip side as pending taxation. So effectively the debt element is owed by the population to the state. The negative being risks of inflation and hyperinflation. But I follow the idea that as long as you have excess of either material or labour then that risk doesn’t exist.
Hope that makes sense at least that’s the understanding I get from Steve Keen and co.
I agree with it
You know I get the impression that this is another area within which the ‘astroturfers’ have been active. I read so many blog and comment sections where money and debt are misrepresented I don’t even attempt to correct anymore. Whether it’s fans of fractional reserve, PM or gold bars, you’re never going to change their minds. You usually just get responses that include a mix of:-
The leftist/socialist magic money tree – they seem incapable of recognising that not only does money not grow on trees it is an entirely imaginary invention
Hyperinflation re Weimar and Zimbabwe – you can explain the differences, and how it doesn’t mean the money taps are on permanently, until you’re blue in the face, it won’t sink in.
National debt and deficit – first you need to explain the difference between the two, then you need to get them to understand that national and household are very different. If you can achieve those two, near impossible dreams, you can maybe start to explain more…good luck with that.
Debt – WE DO NOT BORROW FROM THE FUTURE – there are no time machines we can only utilise the resources we currently have, the materials energy and labour. I tire of the constant mantra of mortgaging our childrens/grandchildrens futures. This is a nonsense excuse for why people should accept a crap deal in the here and now. The same people dishing out the crap deals fully expect their own descendants to be doing the same to ours in future generations.
We need banks – NO we need a retail banking system, RBS taken into full state ownership would do fine. The rest of it is of no consequence, or at least none positive, for the average person.
Maybe we need to teach money on schools as I know very few people that actually understand it and how it works.
Agree with the last
And that this is an impossible area to comment on
Oh and I always think it worth a reminder that the triumvirate of material/labour/capital contains two real elements and one imaginary one that we made up to keep score.
A sovereign state running out of money could be described as a deficit of imagination.