Gillian Tett has noted in the FT this morning that:
The Institute of International Finance calculates that total global debt hit a record $296tn at the end of the second quarter of 2021, up from $270.9tn a year earlier. Government, non-financial corporate, financial sector and household borrowing represented, $86tn, $86tn, $69tn and $55tn respectively.
As Tett notes, these are record sums, and she fears instability as a result. She rightly notes the concept of Jubilee, and David Graeber's discussion of it. But what she does not discuss is something just as important, which is to ask who owns this debt.
Accountancy does always require double entry. Tett is worrying about the size of the credit - as is so commonplace, based on government debt obsession - but the consequences of the debit - which represents the asset that ownership of debt represents - is just as significant.
Growing debt represents increasing wealth inequality. There is no widespread ownership of this debt, and nor is there widespread ownership of the legal entities that own that debt, such as banks. Pension entitlement is, for example, very concentrated.
Borrowing is required to provide access to funding for those without it. But that creates increasing wealth for a smaller number. In my opinion the issue here is not the debt as such. It is the increase in inequality that really matters here, I think, because that is the real cause of the stress Gillian Tett is worrying about.
How to tackle that? Additional taxes on wealth are one very obvious way to do this, not because we need the money to fund anything, but because inequality has to be reduced. It is time we recognised that.
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Many African countries owe a lot of money to China. At some point some of that debt won’t be repaid. So who has gotten wealthier and who has gotten poorer? The lender or the borrower.
A similar story in europe: Germany exported products to Greece via loans only to then forgive some of them.
You can be paper rich and still be poor in the real world.
I agree with that but also:
1) Let’s see a rise in real wages (to reduce the reliance on debt).
2) Let’s see if we can control the pricing of housing (to reduce the level of debt).
3) More stringent regulation of interest rates in the private sector for consumers (lower interest rates to put the cash rich off profit making from interest)
4) Let’s have specific interest rates for types of lending – lower for socially useful, higher for more speculative projects and the taxing of those profits.
I was speaking to an old colleague the other day who had retired. Her son – who had done well in the financial sector – all three of his kids went to private schools – had bought a 4 bed executive house in some home county – brand new, and even though he’d had all that money – had still had government help buying his house from the Tory Help to Buy policy.
It’s medieval grace and favours like this that boost the Tory party and keep them going amongst the monied.
I ask you. What sort of bloody country is this place when people are living bed & breakfast accommodation?
It beggars belief.
Not all debt is equal.
Government debt does not concern me particularly although that number presumably includes “sovereign” debt (debt issued by a country in a currency that is not their own) and this is potentially a problem.
Financial sector debt is probably OK; banks are pretty tightly controlled but I do worry that the risks have migrated to the shadow banking sector.
What DOES concern me is non-financial corporate and household debt. Excessive debt (and it IS excessive) means less resilience “in the real world” to shocks and if the last two years have taught us anything it is that we need better resilience in all areas.
It is a shame that all the huffing and puffing about excessive debt is directed at Government debt rather that the area where is really matters.
True
Sovereign debt refers to all government debt, not just debt issued by a country not in its own currency.
My point was to split debt Government debt into two types, one of which I see as less dangerous (debt issued in your own currency) , the other as potentially more dangerous (debt issued in (almost always) USD).
The market makes this distinction in its terminology. I have never heard a US Treasury trader called a “sovereign bond trader” – always a “government bond trader”. I have never heard the trader who trades USD denominated debt issued by non-US countries called a “government bond trader” – usually “sovereigns trader”. The jobs are quite distinct; one is trading interest rate risk the other is trading credit risk.
Good point
I appreciate the underlying point you are trying to make; but invoking a defining interpretation of “sovereignty” over money via the customary usage of terminology among traders seems to me very unsatisfactory and liable to confusion. The last thing we need is more confusion over sovereignty and money. I am reminded here of the Canadian NAFTA case where the arbitral tribunal “rejected the claim that judicial invalidation of patents constituted a breach of either Article 1110 (Expropriation) or Article 1105 (Minimum Standard of Treatment) of NAFTA, and awarded Canada legal costs of approximately CAD4.5 million. The claimant was also required to bear the arbitration costs of approximately USD750,000.” This is of concern because it implied that NAFTA rules could challenge the prerogative of Canadian courts to defend its own intelllectual proprty laws. This growing problem is not helped by silently acquiring and claiming established terminology long peculiar to states, for private acquisition and use. I trust my point does not appear too arcane, but there is the problem with which we are faced through this activity..
I disagree, financial sector debt is a problem and it can only be addressed by changing the understanding of what banks are there for.
Banks have commodified money and they are not tightly controlled as evidenced by the 2008 financial crisis. The bank I worked for was well aware of the risks undertaken by competitors but the government/BoE clearly was not. When they did clamp down all they did was make banks more risk averse and constrain access to borrowing to those with assets which is why borrowing has been pushed onto the private sector and the public.
I agree that 2008 showed there was excessive financial sector debt but since then, capital and liquidity regulations have made the system safer. Roughly speaking, for a given level of risk, there is now 3 times as much capital in the system.
Now, you are right to observe that this has made banks risk averse and this has knock-on problems but I guess what I am saying is that in is more likely that a debt crisis will be sparked by non-banks….
… cue Evergrande!!
And all who are over-leveraged like it thinking you can never go wrong with property – as if we had not been here before
It would be interesting to see what the global money supply total is. There was an article in the NZ Herald in 2016 that put NZ’s total debt at ~$500b. So I went to the Reserve Bank’s website to get the total money supply and it was ~$300b, which gives a debt-to-money supply ratio of about 1.7 .
The ratio in Canada at that time was about 1.5 . Isn’t the debt scam wonderful?
Here’s the link to that article: https://www.nzherald.co.nz/business/nation-of-debt-new-zealand-sitting-on-half-trillion-dollar-debt-bomb/AT25D65ULY6I2FWLA5N2UITPJ4/
I have not read the report but I somehow doubt it is useful unless it examines the nature of debt and the renewability of the assets that debt represents.
I also think that taxing to redistribute is also the wrong mindset. Time is a natural redistributor of debt and the role of a government should be to ease the impact of that on its citizens which is why tuition fees should never have happened.
I am wondering whether the insight condensed in the title of this article can be formulated even more succinctly. “Debt is never a problem, only inequality is.” Or something like this. A slogan could be nice to have.
I am writing from the point of view of somebody living in the US, the country that invented the debt clock and is obsessed with government debt. At the same time inequality and poverty are still not major topics.
I like it
I have not read the report but I somehow doubt it is useful unless it examines the nature of debt and the renewability of the assets that debt represents.
I also think that taxing to redistribute is also the wrong mindset. Time is a natural redistributor of assets and debt and the role of a government should be to ease the impact of that on its citizens which is why tuition fees should never have happened.
What still stuns me is what society thinks it is worth going into debt for?!!
Apparently spending money to save us from a pandemic or to the save the world is not worth it!
Anything that seems to benefit us collectively is frowned upon.
Personal debt is not.
But then you have this shame about not having enough money etc., when debt (like tax) destroys the value of money that you might have.
It’s a bizarre way to live.
The developments in ‘money’ are not and have not been instituted by economists, or even capitalists, but by lawyers; and it is lawyers who therefore understand the underlying real mechanisms, their purposes and consequences best. Thus the most incisive understanding of money and debt in the age of financial derivatives is now to be found mainly in the work of American legal scholars such as Christine Desan, or Katharina Pistor, whose book ‘The Code of Capital’ is a ‘must read’. Ch.4 is titled ‘Minting Debt’, and here is the powerful opening of Ch.4, p.77: “If there is one asset that defines capitalism, it is debt – not any debt, but debt that can be easily transferred from one investor to another, and preferably debt that is convertible into state money at any time on behest of its holders, the creditors”.
Convertibility is critical, but in private debt and in the private economy, convertibility is not always enforceable. When asset prices fall the dangers of large losses rise. Investors thus, as a matter of self-interest seek to secure themselves from these risks. Pistor goes on: “To lock in past gains, investors will try to convert their private assets into state money, the only financial asset that is guaranteed to keep its nominal value. The reason is that, unlike private entities, states do not have a binding survival constraint. They can print money and they have the power to unilaterally impose burdens on their citizens in the form of taxes or austerity measures, thereby ensuring their own survival.
When private parties run out of money, they may request help from their peers, but they cannot force them to deliver. If they fail to garner support, they face extinction; the only alternative is to go to the source of state money: the government or its central bank.”
I am playing a little online game with a contract system. You (=B) can sell something to A and be paid 20 days later and you can tell others that you have this contract and buy something from them (C) and pay them 20 days later as well. This is effectively a form of debt growth.
Let’s say D is the rest of the economy. The only reason why A doesn’t have enough money is that D is not spending its money fast enough (A,B,C are all waiting for money from D). If D decides to pay in 30 days then all contracts would have to be extended to 30 days. If D never pays then the contracts will have to be extended forever.
It would also mean that for the economy to continue for A, B and C they would have to create additional contracts meaning additional debt.
Well, since D isn’t spending it’s money fast enough it does appear plausible that wealth inequality is the problem but what form of wealth is the driver? Just plain old money on bank accounts? How do bonds and stocks enter the picture? Buying financial assets gives someone else money to spend. Does the recipient just reinvest the money with a delay? Why isn’t it reaching the economy?
I think you are confusing short term and long term debt