The FT is worrying about government debt levels this morning. It published this chart:
As it notes:
Unprecedented government interventions to offset the economic impact of Covid-19 have driven the level of global debt close to the peaks seen in the second world war, according to Goldman Sachs.
Economists say this raises big questions about how the burden of servicing the debt mountain will be shared; how the related surge in bond issuance will affect markets; and what the long-term impact on growth will be.
But they do add:
In recent years, several economists – among them Atif Mian, Ludwig Straub and Amir Sufi – have argued that financial crises are not the only risk posed by high levels of debt, relative to GDP. Huge debts are also a drag on economic growth, because borrowers who pay the interest and the lenders who collect it use their money differently.
I have to say that this is hardly economic rocket science but at least the FT has noticed. They added:
Borrowers tend to be less wealthy, so when they receive an incremental dollar, they tend to spend it. This creates demand, and stimulates investment to meet that demand. Lenders are generally the wealthy, or governments of countries with excess savings such as Germany and China. Such lenders tend to save dollars they receive – adding to the global savings glut, rather than stimulating demand or investment. This has the effect of driving down interest rates, which encourages yet more borrowing. And so the cycle continues: debt rising, demand dwindling and growth falling.
There are, of course, numerous things that can be done about this.
First, income from wealth needs to be taxed much more. I have been writing about this in the Tax After Coronavirus (TACs) series. The reason for doing so is not to raise revenue: revenue-raising is never the reason to tax. Rather it is to redistribute this income - and tackle the exact problem that the FT identifies.
Second, intervention to keep interest rates as low as possible has to happen. This will require more QE, amongst other measures.
Third, the borrowing relationship needs to be eliminated: government needs to take direct action in the economy without using tax (which suppresses economic activity, which we definitely will not want) or borrowing, which has the unfortunate effects noted. So direct money funding for investment is required. That's Green QE, of course, which I last wrote about here and which probably needs updating now.
I welcome the fact that the FT see that the problem with rising debt is not the debt, as such, but the distributional consequences. Next, it needs to realise that there's are ways of tackling this.
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Doesn’t the FT realise that the period 1945 – 1970 when the huge WW2 debts were highest was also the highest period of economic expansion ever?
Memories are short
As you have noted in other posts, reasonably wealthy people have been saving and paying down debt in recent times, helped by not having so much to spend it on. The middling and poorest elements are much more likely to be stuck in cycles of debt. It seems to me that policy makers believe that personal debt is absolutely necessary and should be a normal part of life. The truth is that most people do not want to be in debt and feel ‘bad’ for not being able to manage it. It is time, I think, to address this – not in a way that leads to use of loan sharks, although I think this will become more prevalent as lenders tighten up – but by increasing education opportunities on money management (CAP [Christians Against Poverty] have some good programmes).
I guess this is where e.g. Sure Start, could and should have been expanded rather than closed down. I understand there is plenty of evidence that good interventions early on make for a better outcome – Resilient Children in US seems to be another programme that reaps good results.
So, I guess, that alongside GND, I am suggesting that we need much more input into the social sector – reopening youth clubs, parenting classes/support, personal finance education usw.
A Care New Deal is also vital
Care is broadly defined
Partly relevant to this blog, but much more to your 18 May blog (that I missed) on: “The way to tackle the ‘how are you going to repay the borrowing?’ question”.
Isn’t the conceptual device which makes MMT easier to understand simply to regard money as ‘power to command resources’ that serves in everyday life to control how much of that power each of us can exercise. Government is the ultimate supervisor of that power. It can redistribute it as well as increase or decrease it in total – giving it and taking it away through taxes, benefits, and creating more or less of it through QE, government debt etc, depending on whether or not the economy has spare resources. Like the analogy of ‘money as fuel’, power is used/exercised, but we don’t think of it as having to be repaid.
Thinking of money to command resources also demystifies how people end up with such hugely different amounts of that power – they have positions of strength to amass that power for their own use. The problem is surely that when not understood as power over resources, money becomes something mysterious that most of us feel is too difficult to understand except in terms of household accounting. Or am I badly misunderstanding?
No, you’re not at all
That is how Stephanie Kelton views it, for example, in her new book
I think of money creation as “signalling power” with that creation split between “sovereign government financing” and “non-government bank financing.” Clearly a society that wants to promote well-being for all needs a government that has good control over both and wise enough to know when to exercise that control.
To get an inkling about the desperate and urgent need to ‘redistribute the income’ and to see how inequality is arleady spreading and having a real impact on the lives of many people in the UK, here’s a tweet from Marcus Rashford:
https://twitter.com/MarcusRashford/status/1272302819819823105
In his Open Letter to All MPs in Parliament, he talks about the Universal Credit Scheme, level of unemployment, the end of furlough and the actual levels of poverty in the UK.
He’s calling for the govt to reverse it’s decision not to provide free school meal vouchers during the summer.
https://www.bbc.co.uk/sport/football/53042684
On what basis can the goverment refuse and deny to step in?
He’s doing a great job
On what basis?
Conviction born of ignorance born of ideology – nothing else.
The three steps you describe above Richard are rational which means that expect zero take up from this nastiest of nasty Governments!!
I am not sure how to read this. Are you / the FT claiming that rising government debt levels lead to higher inequality. I am fairly sure this isn’t the case! Indeed rising government debt levels DECREASE inequality, not increase it.
If you take the two extremes:
1) No government debt…gold standard economics / pure libertarian / game of monopoly. Eventually the rich 1% get all the gold, the rest of us starve. Inequality = ∞
2) No private debt…only government spending. / Pure communism, no one can get loans, Highly regulated financial system, only spend what the government gives them. No rich, no poor. Inequality = 0
Both these extremes are unacceptable.
Now travel from one extreme to the other, with government debt progressively increasing (and private debt decreasing due to sectoral balances), then inequality progressively falls.
For the FT to say that high government debts lead to inequality, is wrong. Maybe its based on the false reasoning that rich private investors decide what interest the government pays, and so can hold the government to ransom. In reality, the government pays what ever it likes on the debt it has…. If it wants to make a highly unequal society, it just decides to pay much more interest to rich investors, or vice versa. Rich investors do not get to choose!
There is a massive amount of implicit subsidy for wealth in the issue of debt
There is interest paid of course
And security provided
Plus a secure asset created that only a few have access too
And right now more will be demanded as the best off save
I am not saying the debt creates inequality but it certainly maintains it
Hence my suggestion to cut out the debt
Just to add to this Stephanie Kelton on page 135 of her book “The Deficit Myth” makes the point that country’s like Germany pursue the Neo-Liberal policy of “structural reform” which is a euphemism for holding down wages and pensions in order to help competitiveness in global markets. This in effect is a continuation of the old Gold Standard policy of choking off demand in your own country by raising interest rates in order to keep the gold peg value of your currency.
Clearly we can now look at the Eurozone and see that its 3% fiscal collar has been pursued at the price of high unemployment in some of its member countries. That price has now become too high to pay because of the fear of social unrest due to the continuing effects of the GFC, unfair global trading and now potentially the Corvid-19 pandemic economic retrenchment. Accordingly the undemocratically regulated ECB is now loosening the purse strings or rigid fiscal collar.
Meanwhile the crazy British plough on with their five decades long policy of house price hyper-inflation the opposite of Germany’s holding down wage costs and of course destabilising to the pound’s value over the medium to long term.
Indeed
I ought to have included her precise killer line which is:-
“Essentially, it means that a country use weaker labor as a substitute for a weaker currency. When it comes to this strategy, Germany is Europe’s poster child.”
In Britain we ought to be very much aware of this manipulation game, sadly few are!
One thing that seems to get very little discussion is the increasing gap between the minority and the majority.
According to Oxfam, in 2008 the richest 1% had 40% of global wealth. They now have over 50%. This pretty much explains the ‘global recession’.
The definition of a recession is one region struggling whilst another prospers. Therefore a global recession is actually impossible unless we are competing with aliens!
What is also worth taking into account is the huge surge in wealth of footballers, pop stars, film stars and celebrities during this period of time.
What is also worth taking into account is that working hours are being reduced as technology takes over more and more.
We need to address this greed because whilst many of us worship the greedy, many of us are struggling as a result.