Debt: The Last 30 Years

We are marginally less constipated than before. Ideologically speaking. Thanks in large part to Jeremy Corbyn British politics has begun to move on from the mendacious obsession with public debt being the cause of the last financial crisis (and the harbinger of future ones).

Political conservation has started to appreciate the seriousness of enormous levels of private debt, which was always the elephant in the room. The Bank of England has warned of a ‘spiral of complacency’ about growing household debt, while the IMF has cautioned that the ‘rapid growth in household debt – especially mortgages – can be dangerous’. Anthropologist David Graeber says ‘the household sector is a rolling catastrophe’. Around 17 million Britons have less than £100 in savings.  And with the BoE making noises about raising interest rates from rock bottom levels, there are worries that some mortgage-holders could default, precipitating a US-style sub-prime crisis.

The problem is that all attention is directed at one kind of private debt – personal debt. And while its seriousness should not be minimised there are other sorts of private debt that merit just as much, if not more, concern:

Personal debt is not the most extreme form of private debt

Private debt can be divided into three types – financial sector debt (i.e. banks & insurance companies), corporate debt and personal or household debt. All three have grown exponentially since the start of the 1990s. According to economist Michael Roberts, what he terms ‘global liquidity’, a combination of banks loans, securitized debt and derivatives, mushroomed from 150% of world GDP in 1990 to 350% in 2011. And while in some countries, colossal financial sector debt has declined to a degree following the financial crisis, and household debt levels fell before rising once more, corporate debt, nourished by near zero interest rates, has just snowballed over the last nine years.

According to figures released by management consultants McKinsey in 2015, all forms of private debt have grown since 2007 but corporate debt has increased by double the rate of both household and financial debt, which nonetheless rose but in a more subdued manner than before the crisis (see the graphic in this article). Government debt has also exploded as financial debt was transferred to state coffers. “Nonfinancial corporate debt remains the largest component of overall in the advanced capitalist economies at 113% of GDP,” says Roberts, “compared to 104% for government debt and 90% for household debt.”

The forms that corporate debt takes vary but one of the most common is for companies to use debt to buy back their own shares. This practice, which was illegal in the United States before 1982, increases the firm’s share price in a totally artificial manner, giving the appearance of financial health and success in the marketplace. Frequently, it also personally benefits the corporate executives who authorise it as they are paid partly in stock options. In fact the corporate sector has been the main buyer of US equities since the market meltdown of 2008, engaging in what has been described as ‘the greatest debt-funded buyback spree in history’. It was estimated that in 2017 the largest US companies would spend a record $780 billion on share buy backs, though, in reality, the forecast bonanza has apparently hit a snag.

Or possibly corporate debt takes the form of shareholder loans, the practice by which one company deliberately loads another company that they own (they are the main shareholders) with huge amounts of debt which the captive company is then obliged to pay back at high rates of interest; 15 or 20% for example. The Financial Times recently highlighted the case of Arqiva which owns 9/10ths of the UK’s terrestrial TV transmission networks and, in the three years to June 2016, paid around £750 million in interest to its controlling shareholders, payments financed by borrowing.  It is now £3 billion in debt. And that’s just one company.

Household debt did not cause the 2007-8 Global Financial Crisis

What household debt did was light the touch-paper. The nationwide implosion of the housing market in America after interest rates were raised signalled the demise of all those mortgage backed securities and collateralized debt obligations but the reason it proved so devastating for the US economy and spread the crisis around the world was because of the fatal combination of household debt with gargantuan financial sector and corporate debt. The Global Financial Crisis was sparked in August 2007 (‘the day the world changed’) when French bank BNP Paribas froze its funds because of its exposure to the mortgage backed securities of the US sub-prime market. The problem wasn’t defaulting French mortgage-holders but the effects were being felt by a French bank. BNP was one of three major French banks who were collectively overleveraged to the tune of 237% of French GDP. That level of indebtedness caused the crisis to spread to Europe as hugely indebted, and now effectively insolvent, European banks called in the loans they had made to southern European governments.

Nobody can say with any assurance what the trigger will be for the next financial crisis. It might be heavily indebted US college graduates or UK credit card borrowers or Australian consumers or Dutch mortgage holders (a country which has the most indebted households in the euro area).

But it’s equally possible that the fuse will be lit from another sector of the economy entirely – massively overleveraged corporations being unable to repay their creditors when interest rates rise, for instance. In that case, households will simply be spectators to the unfolding events.

All the focus is on personal debt because it represents a morality play

In Debt: The First 5,000 Years David Graeber points out that in Sanskrit, Aramaic and Hebrew ‘debt’, ‘guilt’ and ‘sin’ are all the same word. In modern German, the word for ‘debt’ – schuld – also means guilt. “If history shows anything,” Graeber writes, “it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt – above all because it immediately makes it seem that it’s the victim who’s doing something wrong.”

The existence of enormous level of personal debt in advanced capitalist countries is a sure sign that the individual freedom these societies claim to uphold is skin deep. In reality, they are founded relations of coercion and control. To be in debt is to have someone’s boot on your neck. In the UK, high rates of personal debt are intimately related to the fact that real wages are 10 per cent lower than a decade ago. Rising personal debt is also strongly correlated to mental health problems like depression and anxiety.

From another perspective, personal debt is the symbol of our fatal addiction to consumerism, the consequence of an all-embracing need to maintain a modern lifestyle, decorated with the latest products, no matter what the cost to ourselves or the environment. Either way, personal debt unmistakably says something about the current state of society – what drives it and who is in control.

Corporate and financial sector debt, by contrast, is not only opaque, it is frightening neutral. Debt has simply become the way of doing business over the last 30 years. Debtors are frequently also creditors and companies may simultaneously indebt themselves and hoard cash. Indeed, increasing ‘leverage’ (to use the technical term) or loading debt onto captive companies (as in the Arqiva case) is often the primary means by which profits are made. No sense of shame or ‘doing something wrong’ attaches to it.

The question that should arise is why the corporate sector – financial and otherwise – has become so addicted to debt? Why is old-fashioned investment in new products or new technologies comparatively shunned?

It is possible to reduce personal debt but corporate debt is far more of an intractable problem

Theoretically it is possible to cut personal debt to more manageable and less dangerous levels.  Ending austerity, strengthening trade unions, instituting rent controls and directing efforts to raising the level of real wages should see the rates of payday loan and credit card debt diminish. I say theoretically because, interestingly, some of the highest quantities of personal debt, as a proportion of GDP, are in Scandinavian countries – nations that have impressive rates of trade union membership, collective bargaining and high personal incomes. However, those in debt in Nordic countries tend to be higher earners. In the US and UK, by contrast, personal debt often afflicts people much lower down the income scale – people who are much more likely to default given a slight change in the economic winds.

Corporate debt is a different matter entirely. The massive government bail outs of 2008 only succeeded in transferring debt from the financial sector to the state and, even then, only denting marginally the indebtedness of the banks. Corporations, whose debt had risen markedly over the previous twenty years, merely took advantage of the lower interest rate environment, to become even more indebted.

The writer and broadcaster Paul Mason says governments have to do something ‘clear and progressive about debts’. He advocates a policy of ‘financial repression’ – that is stimulating inflation and holding interest rates below the rate of inflation for 10 or 15 years as a way of writing off debt. But we can see the problems that a mild rise in the rate of inflation to the historically low level of 3% is currently causing people in the UK, with wages unable to catch up. Deliberately stoking inflation for a decade or more would surely precipitate the household debt defaults that so many people are warning about – inflation would erode the total amount of people’s debt but interest payments would still need to be met as real incomes plummeted. And if interest rates are below inflation – as they are now – the incentive for corporations to take on more debt is still there.

It is difficult to imagine how this system can gradually and progressively resolve its problems without provoking the economic collapse that everyone is so desperate to avoid.

Addendum

It's probably worth re-emphasising that when I speak about corporate debt, I'm not referring to the borrowing a company naturally needs to do to keep going and expand its operations. See - https://www.touchfinancial.co.uk/knowledge-centre/blog/4-reasons-why-successful-businesses-borrow-money

What's happening now is massive borrowing to either appear successful (share buy backs) or invest in debt to make more money. They're nothing to do with how capitalism is meant to function in the textbooks.


 

Is the world getting richer?

There’s a Twitter hashtag called #firstworldproblems. Your WiFi packs up, a fat person sits next to you on the train and talks into their phone for the entire journey, Waitrose runs out of Italian Prosciutto slices forcing you to buy ordinary ham. Mildly irritating events that appear all-consuming, prompting you to take to social media to vent your frustration and simultaneously display a mature self-awareness that your petty grievances are as nothing in the scheme of things.

For accuracy although not brevity, #firstworldproblems should be rebranded #firstworldproblemsofthereasonablyprivilegedindevelopedcountries. A tweet complaining, ‘Had to wait 1 ½ hours for baked beans & noodles at the food bank today! #firstworldproblems’, doesn’t sound right.

Is, though, economic stagnation and decline a ‘first world problem™’? The 2008 Global Financial Crisis had, as its name suggests, a world-wide impact but has been felt most severely in developed economies. The UK’s economic ‘recovery’ disappears into thin air when GDP is calculated per capita – ie per person, taking into account the increase in population over the last six years. Europe has suffered two recessions since 2008. The near zero interest rates in evidence throughout the developed world betray the fact that no real economic recovery has taken place. If it had, borrowing by companies to invest would have pushed the price of money – the interest rate – upwards. This hasn’t happened.

By contrast, consider China. The Chinese economy has slowed to a growth rate not seen since the last year of the 20^th century. But, at 6.8%, it still stands at a level that makes developed economies green with envy and represents a record of economic growth they have rarely equalled at any time in history. Per capita income in China grew fivefold between 1990 and 2010. In advanced economies, the story is the opposite. Between 2005 and 2014, real incomes were flat or declined for two-thirds of households in 25 rich economies.

Elsewhere, India, now the world’s seventh largest economy, has achieved an average of 7% annual GDP growth for the last two decades. The Turkish economy has grown by nearly 4% a year since 1999.  So is the malaise of weak economic growth, halting business investment and dwindling wealth limited to developed economies? Is it a first world problem?

Paul Mason, in his book Postcapitalism, marshals the evidence to suggest it is. According to him, the era of globalisation (the late 1980s onwards) has witnessed a palpable growth in the incomes of two-thirds of the world’s population. In terms of GDP per person, the developing world, he says, has grown by 404% since 1989, a spurt of economic expansion that outpaces even the post-Second World War boom, which was centred in Europe and the US.

In contrast, the people who have decidedly not benefited from globalisation live in the developed world. “They gained almost nothing from capitalism in the past twenty years,” Mason writes. “In fact some of them lost out.” The losers of globalisation include “black America, poor white Britain and much of the workforce of southern Europe”.

Branko Milanovic, a World Bank economist, argues that while the global 1% and the middle classes of so-called ‘emerging market’ economies have been the main beneficiaries of globalisation, they are not, by far, the only ones. The poor have also got decidedly less poor. “The surprise is that those at the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%,” he says. It is this rise in wealth at the bottom of the ‘global pyramid’, claims Milanovic, which is responsible for the startling fall in the ranks of the world’s ‘absolute poor’ over the last 20 years.

Milanovic does not spare the hype, calling this change, ‘probably the profoundest global reshuffle of people’s economic positions since the industrial revolution’.

Have the poor inherited a bit more of the earth?

But is the hype justified? Are we in the West largely blind to the material progress that has been made in other parts of the world? One reason, however, to remain sceptical of claims of mass global enrichment is that it rests heavily on poverty reduction in one country alone – China. Home to 1/5^th of the world’s population, China has been responsible for more than three quarters of global poverty reduction. Without China, whose internal political economy is configured very differently to the market triumphalism dominant in most of the world, the World Bank’s poverty figures would look markedly less impressive.

Another reason for distrust is that world GDP statistics don’t bear out the world-bestriding optimism. “The relative stagnation of the economy since the mid-1970s is a global phenomenon,” insists US Marxist economist Andrew Kliman. He argues that slowdown in economic growth that has taken place in the US since the 1970s is “somewhat less drastic” than that of the rest of the world (advanced and developing countries alike). After 1973, says Kliman, the growth rate collapsed by more than half in Africa, Latin America and the Caribbean, as well as in Europe and Japan. Remove China and India from the mix and the Asian growth rate shows a similarly sharp contraction.

But the claim that globalisation represents ‘the greatest economic event in human history’ does not rest on development since the 1970s but since the late 1980s and, in particular, the early 2000s - when Mason’s figures show growth as particularly marked. But even here Kliman dissents, arguing that “for the period since 2000, World Bank figures indicate that growth of real GDP per capita accelerated only minimally.” According to Kliman, world GDP per capita stood at 1.3% between 1990 and 2000 and at 1.6% between 2000 and 2008. Far from earth shattering and nothing like the 3.2% global growth that occurred in the decade between 1960 and 1970.

You can balk at the notion of using GDP growth as a surrogate for people’s average incomes. GDP growth per capita (per person) does reflect the reality better than bare GDP figures, as the UK’s experience shows, but it is far from perfect. If GDP represents national income, it offers no clue as to who, within the nation, receives that income. So a country with modest GDP, could be internally egalitarian and effective at reducing poverty. Left-leaning Latin American countries such as Uruguay, Bolivia, Venezuela and Ecuador may fall into this category. But GDP still gives a broad indication of how rich a country’s inhabitants are.

You might also have suspicions about the insights of an avowed anti-capitalist like Kliman. Consider then those of Ha-Joon Chang, an ‘institutional economist’ who believes capitalism to be the “best economic system humanity has invented”. According to Chang per capita income growth in the developing world stood at 3% in the 1960s and ‘70s. But it fell by nearly half, to 1.7%, for the two decades from 1980. Income growth did rise in the 2000s, says Chang, bringing the growth rate up to 2.6% for the entire 1980 to 2009 period. This is still, though, below the pre-1980s record, and much of that growth has depended on the commodity boom which Chinese economic growth hugely stimulated. With the Chinese slowdown, the commodity boom has ebbed as well. The South African economy, the 2^nd largest in Africa, is ‘in crisis’, the government there admits.

The growth rate for particular regions illustrates a downward trend, hardly commensurate with the greatest spurt of development in human history. Latin America, notes Chang, grew 3.1% in per capita terms in the 1960s and ‘70s. But between 1980 and 2009 at a rate of barely one-third that level – 1.1%. Per capita income growth in Sub-Saharan Africa was 1.6% in the 1960s and ‘70s but only reached 0.2% between 1980 and 2009. For many years in the 1980s and ‘90s African growth, under the tutelage of destructive Structural Adjustment Programmes, was actually negative. According to the NGO, Global Justice Now, in 2008 there were 562 million people living on less than $2 a day in Sub-Saharan Africa, a figure almost double 1981’s 288 million. The overall population of Africa has also increased since the early ‘80s, “but even proportionally, there has been almost no improvement in poverty rates in sub-Saharan Africa since 1981,” the NGO says.

Paul Mason claims that during the post-war boom capitalism suppressed the development of the global south and that “unequal trade relationships forced much of Latin America, all of Africa and most of Asia to adopt development models that led to super-profits for Western companies and poverty at home.” The coming of globalisation “changed all that”.

This is only partly true. Exploitation by the West intensified in the 1980s and ‘90s, and globalisation, for most countries, has not really remedied that disadvantage. So while some large non-western countries, specifically China and India, have grown spectacularly (although poverty reduction is much more marked in China), the great ‘global reshuffle’ is much less profound for most of the world’s population.

Basic income versus the economy of coercion

 Proving basic income is affordable is merely the first skirmish in long war

In 2015, an academic from Birmingham University asserted that, contrary to the beliefs of sceptics, basic income was eminently affordable. Using Canada as his example, Richard Pereira quantified the likely effects of savings from the abolition of existing social security benefits, reductions in bureaucratic costs, a smaller burden on public health care and a crackdown on tax avoidance and evasion. His conclusion was that you could introduce a basic income at a ‘decent level’ without additional personal taxes. In fact, basic income might even enable reductions in personal taxes.

One of the priorities Pereira identified in making basic income affordable was plugging ‘tax leakage’ by multinationals and the rich. “Vast wealth is channelled away from public goods though … shady and secretive offshore jurisdictions,” Pereira wrote. “Some of the largest multinational companies are paying zero tax and receiving tax refunds and subsidies simultaneously.”

The release of the Panama Papers has lent Pereira’s claims about the affordability of basic income a distinct air of, to use a contemporary political buzzword, credibility. According to the Tax Justice Network, global offshore wealth amounts to $21-32 trillion. Get hold of that vast wealth and the whole political landscape shifts. Austerity loses its justification and basic income becomes a feasible aim. “Some may disagree with the notion of an unconditional cash grant, or object to it going to everyone. Just don’t say we can’t afford it,” noted one Panama Papers post-mortem.

The realisation that a colossal trove of wealth exists to fund basic income is coupled with a growing awareness that punitive welfare systems don’t even succeed in meeting their most elemental aim – that of saving money. All that checking on people’s fitness to work and whether they have applied for 47 jobs that week as they promised in their job search agreement, costs an inordinate amount of money. According the UK’s National Audit Office, the cost to the taxpayer of the private contractors carrying out fit to work tests is at least £600 million more than the government is forecast to save in benefits reductions. The ‘age of austerity’ should be renamed the ‘age of needless pain’.

But there is a danger that basic income advocates are lulled into the belief that all they need to do is rationally convince the public and policy-makers that a basic income is affordable, will lighten the burden on multiple public services and vastly increase personal freedom. People will slowly see the light.

This, however, is less than half the battle. A great many, very powerful people will not want basic income regardless of how affordable it is. They will fight against it mercilessly precisely because it will vastly increase individual freedom, and their entire worldview rests on human subjection.

The great German psycho-analyst and socialist Erich Fromm advocated a basic income sixty years ago his book, The Sane Society – he called it a ‘guaranteed subsistence minimum’. After refuting the idea that basic income sounds too ‘fantastic’ to be affordable, Fromm was less sanguine about convincing everybody that a basic income was necessary and right. “However, the suspicions against a system of guaranteed subsistence minimum are not unfounded from the standpoint of those who want to use ownership of capital for the purpose of forcing others to accept the work conditions they offer,” he said.

Even more than in Fromm’s day ownership of capital is now overtly predicated upon forcing people to accept the work conditions that are on offer. Economic recovery after 2008 rests upon low wage, insecure service sector work. According to economists, all the net growth in jobs in the US since 2005 has been in ‘alternative work arrangements’, such as contract and temporary posts. In Britain, zero hour contracts have mushroomed during recovery from recession, while other forms of flexible work contract have proliferated. In continental Europe, massive political weight has been expended to make it easier for employers to fire workers. In France, the Nuit debout protests are against a planned labour reform that would place the country’s entire labour laws up for negotiation with employers, including the 35 hour week.

All these changes are inherently about increasing coercion. “The labour market is never free,” says Paul Mason is his book, Postcapitalism. “It was created through coercion and is re-created every day by laws, regulations, prohibitions, fines and the fear of unemployment.”

The rise in sanctioning people on benefits in Britain for not looking for work with sufficient ardour and the hounding of sick and disabled people is not primarily about saving money because, as is evident now, money is conspicuously not being saved. The reason is to force people to take work at wages they can’t live on, make life on benefits so astoundingly awful that zero-hour contracts seem attractive, and to sound a clear warning to those in work that they need to knuckle under and obey. “Economics is the method,” said Margaret Thatcher. “The object is to change the soul.”

By contrast basic income threatens to undo all the hard work of neoliberalism in shoring up the power of employers. At present, as one basic income advocate says, “all negotiating power is in the hands of those offering the jobs and not those looking for them”. Basic income will grant palpable bargaining power to individuals in the labour market, and, for the first time, allow genuine personal choice. Erich Fromm thought basic income would be the beginning of real freedom of contract between employers and employees. Work will have to be interesting, or well-paid enough for people to want to do, or will be automated because no-one will.*.

But to the rulers of our societies this represents, not a dream of liberation, but a nightmare of the collapse of social coercion. Who knows where such a society will lead. Marilola Wili of the Swiss group, Generation Basic Income, contends that basic income will “unpredictably set human forces free in ways one may have never thought about”.

“Work for a salary is the bedrock of the system,” says Paul Mason. “We accept it because as our ancestors learned the hard way, if you don’t obey, you don’t eat.” Basic income will loosen that bedrock and quite possibly, in time, smash it completely. For that reason, many people at the summit of society will do anything to ensure it doesn’t come to pass. Let’s not kid ourselves, achieving basic income will be an almighty struggle. But it’s a struggle we need to embrace.

*Automation represents another danger basic income might pose to capitalism. According to Karl Marx, ‘the most fundamental law of capitalism’ is the tendency for the profit rate to fall as machines replace human labour, which is the ultimate source of value. If basic income cause a spurt in automation and a reduction in labour intensive employment, as unpopular jobs are increasingly mechanised, then profit rates may well, in time, crumble. Capitalism in the West has become reliant on low-wage, low productivity but labour intensive service sector jobs, which do not have to be done by people and in the future almost certainly won’t be, regardless of whether basic income is adopted. But basic income will accelerate that process. Human, sweatshop labour in China and East Asia has provided an enormous boost to profitability for multinational corporations, but that source of profit is drying up as the Chinese economy, and thus globalisation, slows. It is also true that, according to Marxian economics, various forces counteract the tendency for profit to fall, such as increased wages boosting consumer spending. Basic income could also be an offsetting force to falling profits, so its economic impact may be complicated.