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Debt. We love debt. Money is created by issuing debt. Our monetary system is debt-based. And because we measure economic growth in monetary terms, growth comes from debt. There is a direct relationship between rising debt, rising money supply and rising GDP. To reduce the burden of debt, and stop it building up again, would mean curing ourselves of our love of debt. And that has enormous social and political implications. It is by no means cost-free.
Globally, debt has increased since the 2008 financial crisis. Much of this is in developing countries – in corporations and governments. China’s debt burden, both public and private, is already huge and still growing. Will its bubble burst? What would be the consequences? We don’t know. But other developing countries also have large debt burdens, especially in corporations. The extent of developing-country debt, both government and corporate, is becoming a matter of considerable concern to economists and policymakers.
In developed countries, household debt remains a huge problem. In some countries, households are still deleveraging, preferring to pay off debt rather than spend. This puts a dampener on economic growth.
In other countries, households have repaired their balance sheets, but are now reluctant to borrow. Though the lack of lending is not entirely due to households: in some countries, lending standards are now so tight that many households and smaller businesses can’t borrow at all.
But there are some countries where households are borrowing wildly. In Sweden, debt secured on property is rising rapidly, fuelled by very low interest rates. Economic projections from the OBR forecast similar borrowing increases for UK households, though as yet there is little sign that UK households are willing or able to comply. But if they do not, the UK’s economic performance will disappoint.
High and rising household debt backed by property creates financial instability. So does high and rising corporate and government debt, especially in foreign currencies. By encouraging borrowing against property and across borders, we may gain a little more economic growth – but at what price?
Increasing the global debt burden in pursuit of economic growth will inevitably lead to another financial crisis somewhere in the world. It is not sustainable. But despite the risk that rising debt poses, those who wield power in our current political and social systems have no real interest in reducing the global debt burden.
This is because the other side of debt is wealth. And we love wealth. the other side of debt is wealth. And we love wealth.
Increasing wealth requires that a large (and growing) part of the world’s population is indebted. When one population reaches debt saturation point – they cannot or will not take on any more – those who want to create financial wealth move on to another, less indebted population. Rising debt for many, rising wealth for a few. Rising inequality. Globalisation reduced inequality between countries, but not within them. Within countries, inequality both of wealth and income is rising. And recent research shows that widening inequality harms both growth and prosperity.
If we are to create a more equal world, and reduce the risk of financial meltdown, we need to cure ourselves not only of our love of debt, but of our love of wealth.
Wealth concentration and dispersion
At a recent conference in Iceland, Harvard economist Carmen Reinhart called for a globally coordinated write-down of debt – a debt jubilee. She reminded us that the great economist John Maynard Keynes had called for such a write-down after World War I. But it took until 1934 for the debt bonfire to take place. And by that time, the world was already well down the road to World War II.
Debt jubilee seems an attractive idea. Why not just write off all the debts, wipe the slate clean and start again?
The problem is the fear of loss. If you write off debt, you also write off the associated wealth. And people who own wealth are very afraid indeed of losing it.
“So what?” I hear you say. “Soak them. They have more than they will ever need”.
This is a fair point. As inequality rises, wealth concentrates in the hands of a few. The global 1% control a large part of the world’s wealth.
But the very rich hold the balance of power. While this remains the case, debt jubilee is politically out of the question.
And even if the very rich could be soaked, there is a bigger problem. The rise of the middle class means that a majority now own some wealth. And they will not easily give it up.
Middle class wealth owners fear loss far more than the very rich. And with reason. For them, a fall of – say – 30% in the value of their house is a considerable hit to their net worth, as argued by Atif Mian & Amir Sufi in their book House of Debt. It can completely wreck their plans. They may find themselves unable to sell if the value of the house is less than the mortgage. And if they were expecting in future to sell their house, move somewhere smaller and use the proceeds to supplement their pension, they may end up materially poorer in retirement. Similarly, if pensions and savings fail to deliver the returns they expect, they can end up poverty-stricken in old age. Understandably, they fear this fate.
In general, older people tend to have assets, younger people tend to have debt. The assets of the old are the debt of the young. This is pretty obvious if you look at pensions, which are largely invested in corporate or government debt, the returns from which are paid from the earned incomes of working people. It is perhaps less obvious in relation to property: but rising house prices mean younger people have to take on much higher mortgages than their parents.
It would be a mistake to see this as an intergenerational problem, though. It is actually a class problem. The asset-less have no assets to pass on. Their children inherit nothing, and in turn pass on nothing. In contrast, the children of the asset-rich inherit wealth they have not earned, and in turn pass that on to their children. The divide between those who have wealth and those who do not is set at birth and remains for life. If wealth holders were a tiny proportion of the population, then democratic pressure might be enough to end this injustice. But now they are a majority, democratic pressure reinforces it.
Since the financial crisis, the UK government – fearful of the voting power of older people – has propped up property prices, increased state pensions to unaffordable levels, pumped up equity and bond prices, and offered savings vehicles at above-market rates to pensioners. All of these giveaways to well-off older people have been paid for by younger people, in the form of larger mortgages (or inability to buy a house at all), stagnant incomes and benefit cuts.
But they solve nothing. They fail to address growing wealth inequality or the rising debt burden. They lock the younger & poorer into debt bondage. And when the elderly middle-class can pass their wealth on to their children with little or no penalty, debt bondage extends down the generations.
If we are serious about reducing wealth inequality, we could think about very high taxes on top incomes, and perhaps wealth taxes. And if we are serious about reducing income inequality – from which wealth inequality ultimately stems – we could think about a universal basic income coupled with a land value tax and a progressive income tax system. If we want to break the cycle of wealth inequality down the generations, we could impose very high inheritance taxes, perhaps as much as 100%, on unproductive assets such as residential property. And if we really want to end the dominance of debt in our monetary system, perhaps we should be looking at forms of money that are not backed by debt.
These are radical ideas. They will inevitably be fiercely resisted by those with high incomes and significant wealth.
However, reducing inequality by redistributing wealth and income can only go so far. It is human nature to aspire to a higher income and more wealth: if there is no possibility of achieving either, why would anyone bother to take risks? Risk-taking is the foundation of economic prosperity. If no-one will take risk, there can be no returns. So although research shows that redistribution mitigates inequality, we don’t want to completely eliminate wealth and income differentials. We want to leave open the possibility of benefiting from taking risks. That’s how our economy grows.
What we don’t want to do is pay the sort of returns on unproductive “safe” investments such as property that should only be available to those willing to take risk.
The desire to save is human nature. We “put by” funds to support us when we can’t work, or when there are exceptional expenses. Most of us see these savings as sacrosanct: we do not want to accept the risk of loss. Indeed, we cannot afford to. For most of us, losses on savings can never be recovered.
Increasingly, people have come to rely on property as their main “safe asset”. But property is not a “safe asset”. A house is first and foremost a place to live. It should not be a primary store of value. But that is what it has become.
The value of housing needs to be allowed to fall to an affordable level. One way of achieving this less painfully than abruptly removing all support for the housing market and causing a price crash would be to tax away all gains due to house price rises. A land value tax would achieve this, or capital gains taxes on primary residences.
To replace the illegitimate use of housing as a store of value, government should provide safe assets for long-term saving. Government debt is the best and safest asset for its own citizens. When the proceeds of government debt issuance are invested in infrastructure, innovation and skills development that create a thriving economy for the future, it is far more productive than property. And when it is properly backed by a trustworthy central bank, it delivers complete safety. A credible central bank working in partnership with a responsible fiscal authority can always set the price of its own debt. We do not have to be beholden to markets.
It is the duty of government to ensure that everyone has the basic means to live. It is also the duty of government to keep wealth and income inequality within bounds. And it is the duty of government to enable people to save safely, without fear of loss, while simultaneously supporting the risk-taking that is the source of economic prosperity. Successive governments have stepped away from these responsibilities. It is time to hold government to account for them. For only by removing the fear of loss can we hope to cure our love of wealth, and of the debt that creates it.
This contribution was part of the Beyond the Zombie Economy conference hosted by the Political Economy Research Centre at Goldsmiths, University of London, and funded by the ESRC, for more details visit perc.org.uk
Part of the Anti-Austerity and Media Activism series with Goldsmiths.