David Buik is a stock broker / wealth manager with whom I have occasionally debated during broadcasts on LBC. I like him. As a person he's charming, intelligent and fun. But he does suffer from the blindness that afflicts those in his line of business. Take this tweet as example:
As at 31/12/19 - GLOBAL DEBT WAS $253 TRILLION!! - That an average of $32k per 7.5 billion on this planet - I venture to suggest unsustainable and there will be worse to come!
— David Buik (@truemagic68) May 12, 2020
David does not ask if that is gross or net of QE.
But much more importantly, he's blind to the basic fact within the economy that for every credit (which the debt that he refers to is) there must be a debit. In other words someone must own that debt.
David says that this level of debt is unsustainable. With regard to the debt of many governments that is nonsense. And their debt is, anyway, simply them providing a savings facility for the world's wealthy who want to deposit funds with them despite incredibly low interest rates. There is no problem with that.
But there is debt we do need to worry about.
There is the massive pile of corporate debt that has been very largely created to fund share buy backs and excessive dividend payments to drive share prices ever higher over the last decade, which has now left large numbers of companies deeply vulnerable to corporate failure, but made David's job so much easier during that period. That debt is an absolute scandal.
And then there is the personal debt that carries exorbitant interest rates and has accumulated because far too many people in average wages saw no improvement in their position since the crisis of 2008 when those with wealth very definitely did, not least from enjoying the benefits of these interest charges via the shares that they own in the financial institutions that levy them.
David is right to say that there is a debt crisis.
But he should have criticised financial capital for overburdening both companies and so many of their employees with that debt with the goal of increasing, enormously, the wealth of a few. That is the crisis. And the legacy of those failings are the issues that we face.
The problem is not then so much the one David, so typically, spotted. The problem is the other side of the accounting. And that he ignored. And that, in itself, is an indication of the problem that we face.
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David Buik is a shill for the financial sector. I have no idea why he would peddle the debt issue like this,seeing as he represents institutions that make a living selling us the debt.But as far as private and public debt goes, the more the merrier as far as the like of him is concerned.
If that is also mixing private and public debt in one lump figure, it’s like comparing apples and pears,it means nothing.
I’d be more suspicious of what he is driving at, as he will no doubt have investments on the other side of what he is telling us we should do.
Prof Richard Werner gave him an eduction in banking/debt here;
https://www.youtube.com/watch?v=fglStqKJH_E
As you say, Government debt and Private (corporate/individual) debt are totally different beasts.
You are correct to identify over indebtedness (excessive leverage) as a key problem for companies. If this were merely a problem for the company’s shareholders and creditors we could walk on by…. but in the 21st century it IS a problem for us all. Could the non-financial corporate sector take some lessons from the banking industry??
For millennia it was recognised that banking regulation by the state was critical. Banks’ importance in credit provision, their highly leveraged nature and their maturity mismatch mean that they are fundamentally unstable without close regulation. Perhaps we forgot that lesson in the 1980s and ended up with 2008. Since 2008, the pendulum has swung sharply the other way. Banks have more equity capital in the business (and tighter controls on liquidity positions). Regulators demand it because we, the people, carry the can if they fail; bankers push back because more capital means a lower return on capital. As a rule of thumb, for a given level of risk you now need 3x (or more) as much capital as you did in 2007 and 2 months ago the FCA demanded that no dividends be paid to (potentially) protect the public purse. In short, bank shareholders (and debt holders, to a degree) are in a much better position to absorb losses in a crisis than they were 12 years ago. This is a result of strong state intervention and international cooperation. Sure, there is still much wrong with banking but (so far) their solvency has not been questioned during the pandemic and I would argue that (in narrow terms) this has been a success story…. and the fact that bankers bleat about it merely reinforces this view.
So, if it works for banks why not companies?? Yes, a huge undertaking but we can’t afford to let companies ride roughshod over the interests of broader society.
Clive
With colleagues at Sheffield and Copenhagen Business School I hope to publish a significant paper on this next week….
Brains have ached on this issue
I think you will like the result given what you have just said
Richard
It has intrigued me for some time that, with interest rates at near zero, interest on credit cards – of which the debt I know is unsecured – is at astronomical levels; and large numbers of people pay it. This can only be banks making ridiculous profits or covering the huge losses they have on non-payers. Can you explain why this is? Our grandparents – and my parents – didn’t need credit cards. I don’t use them to borrow as I’m sure many others don’t. Is it just that as a society unsecured debt has become accepted as the norm or is there another reason?
I am always shocked to learn of people who owe £20,000 and more on credit cards
And you know such people
The pressure to consume is the driver of this debt servitude