The If Only Theory of Contemporary Capitalism

 

According to the International Energy Agency (IEA), the closure of the Strait of Hormuz has precipitated “the largest oil supply disruption in history”, eclipsing the oil shocks of the 1970s in severity.

We are like the characters in the film On the Beach (about Australians waiting for the radiation from a nuclear war to reach them), biding our time before the effects seep through. Clearly, not only industries that directly consume oil will be affected. As fertilizers rely on natural gas for their production, decimated crop yields and ensuing food shortages – in addition to flight cancellations and severe inflation – will become the norm.

Bankers JP Morgan predict global oil inventories will hit “Operation Floor” – when oil production stops functioning – in September.

Already faced with 1970s-style stagflation (weak GDP growth and inflation), economies will soon have to deal with slumpflation (falling growth and inflation) says economist Michael Roberts.

This will happen regardless of whether there is a “final agreement” with Iran.

But doom-laden concentration on the inevitable effects of war clouds our judgement. It leads to the feeling that if only these random geopolitical shocks didn’t happen, everything would be fine.

But maybe, rather than being the root cause of crisis, a ‘shock’ like the closure of the Strait of Hormuz is merely exposing fault-lines that were already there.

And maybe there’s a mutually reinforcing dynamic at work. In that the weakness of the economic system generates geopolitical responses which have the effect of further enervating the economy.

Looking again at the oil shock of October 1973 – up until the halting of shipping in the Strait of Hormuz, the worst disruption of the global oil industry in history according to the IEA – is instructive. This older shock involved an oil embargo on countries like the US and UK and a fourfold increase in the price of oil.

Unquestionably this ‘triggered’ a financial crisis and a recession in 1974-75, the first year-on-year fall in output in the West since the Second World War.

But if the problem was merely external (a large increase in the price of oil) once it abated, things should have returned to ‘normal’ i.e. steadily increasing growth and prosperity. But that’s not what happened.

According to historian David Gibbs, the crisis resulted decades’ long flat productivity growth in the US and impaired economic performance in most of the rest of the world

“If you look at long-term rates of GDP,” he says, “it was quite high up until 1973 and in 1973 you see a big drop. And rates of economic performance have never fully recovered from the earlier period.”

It was “a historic break point”.

The same illusion of the primacy of the external cause can be seen in attitudes towards the Global Financial Crisis of 2008. The crisis was caused, so goes the official story, by reckless bank lending leading to a seizing up of credit that the rest of the economy relies on. Now those causes no longer apply, businesses can get credit and the big banks, largely thanks to huge doses of Quantitative Easing, are no longer insolvent.

But if you look at UK economic growth in the pre- and post-crisis period, it is clearly debilitated, less than half as strong. In the 18 years since the 2008 crisis, the economy has grown by 22% compared to 53% growth in the 18 years before it.

Why should this be? Why, once the causes of the crisis are dealt with, should the crisis linger on, not in full-on crisis mode but in enfeebled performance?

Possibly because there was far more to the crisis than revealed by its surface ‘causes’.

To take medical analogy, if a person survives a heart attack but goes on to suffer worsening heart failure – not being able to walk far with running out of breath – the underlying problem should obviously be put down to heart disease, not sought in the particular circumstances that brought on the original heart attack.

But we do precisely this with the economy, continually, as economist Harry Shutt once said, mistaking symptoms for causes.

The former head of Goldman Sachs says he can “smell” a new financial crisis in the offing. This won’t happen, 2008-style, through the banks but in the burgeoning private credit industry where companies, such as private equity firms, lend to other companies.

If it does erupt, what will provoke this crisis will be a rise in interest rates to try and tamp down the inflation caused by the closure of the Strait of Hormuz.

According to chief economist of the World Bank, “the war is hitting the global economy in cumulative waves: first through higher energy prices, then higher food prices, and finally, higher inflation, which will push up interest rates and make debt even more expensive.”

But the external cause won’t explain the crisis. To do that we first need to explain why the global economy in the 21^st century is so much more dependent on trade (i.e. globalised) than it was 50 years ago. Trade now represents about 60% of world GDP compared to 25% in 1970.

Then we need to consider the fact that the economy is much more deregulated than last time, a process which is ongoing. Finally, we need to factor in that the economy runs on huge levels of corporate and personal debt, which makes it so much more susceptible to any increase in the cost of debt (i.e. through higher interest rates).

And these causes are in turn related to the ending, caused by the oil shock of October 1973, of the “thirty glorious years” of strong economic performance after World War Two, and why that turned out to be a “historic break point”.

You cannot understand external shocks like the interruption of the ‘life-blood’ of oil supplies without also understanding how, internally, we are more vulnerable to their effects.

Manchester United and the malaise of our time?

 

What do Manchester United and English water companies have in common? Not a great deal you might say beyond being not very successful at what they do. Once a football titan, Man U is now a has-been. Twice a recent winner of the Champions League and regular semi-finalist, the club now struggles to get out of the competition’s group stage. The winner of 13 Premier League titles since 1992, it now cannot compete with its rivals across the city of Manchester, not to mention numerous other clubs.

English water companies, meanwhile, are notorious for not doing their basic job of ensuring clean water in rivers and seas. Despite it being a legal requirement, they have not invested in infrastructure, preferring to pay out enormous dividends to their investors. And the real level of the pollution may be much higher than the firms admit.

But delve a bit deeper and there is something else that unites these two apparently disparate ‘businesses’*. They are both creatures of private equity (PE). Private equity is where a firm is taken off the stock market by a takeover. The new owners borrow the money to acquire the target company in what is called a ‘leveraged buyout’, in the process loading it down with massive debt. Once acquired, along with interest payments on the debt, large dividends are prioritised, either solely for the owners or for their investors/clients.

A family club

Manchester United, for example, had been a public limited firm (i.e. anyone could buy shares in it) from 1991 until 2005 when it was taken private by the Glazer family in a £790m leveraged buyout. Virtually debt-free since 1931, the club’s net debt now stands at £500m and has been much higher. Man U pays over £18m in annual interest on that debt and, unusually for a football club, £32m in yearly dividend payments to the Glazers.

Private Equity ownership is now more common for football clubs (think of Chelsea) but Manchester United provides an opportunity to observe the effect of PE ownership over time – and the picture is not a good one. This is not a financial crisis, which football clubs are especially susceptible to, but the mature consequence of a particular type of financial regime. No wonder fans are desperate for the Glazers to sell up.

Now consider the ten English water companies, all but three of whom have been taken off the stock market by their private equity owners. The commonalities with Manchester United are striking. When Thatcher privatised the ‘industry’ in 1989, it had its existing £5bn debt written off. Since then the debt pile has mushroomed to £60bn. The debt of the largest water company, Thames Water, rose from £3.4bn to £10.8 billion after it was acquired by Australian investment bank, Macquarie, in 2007 and now the firm is in danger of bankruptcy. Since privatisation, over £70bn in dividends has been paid out while bills have increased by 40%, while increases of a similar scale are forecast to deal with the sewage spills that have been allowed to happen.

In either case, what you might think of as the primary function – winning trophies or ensuring clean water – has taken a back seat in favour of maximising returns to the owners.

‘Public’ versus Private capitalism

Maximising returns, you might say, is simply what capitalism does and you’re not wrong as Walter from The Big Lebowski would doubtless attest. However, as English academic Carolyn Sissoko argues, the ‘old fashioned’ way of maximising returns through ‘public’ corporations at least sometimes had a collateral benefit in the shape of capital investment leading to products that people wanted to buy. What happens under private equity capitalism is an entirely valueless process in which the only beneficiaries are extremely rich people becoming even richer. Actually it’s worse than that. Private Equity destroys value for everyone else – consumers, workers, supporters, target companies – apart from the owners who make out like bandits.  As Sissoko puts it:

Whereas the corporate form is a win-win for the economy when it is used to facilitate the raising of funds for large projects that could not otherwise by completed such as railroads or trans-oceanic cables, the corporate form is transformed into a win-lose for the economy when it is used to impose huge debt burdens on otherwise successful corporations.

And this particular form of capitalism is on the march. According to Sissoko, private equity now controls more than 10% of the US stock market, up from 0% 40 years ago. And she says it is “positioned to continue displacing the public corporate form at a rapid pace”.

Where America leads, Britain dutifully follows and PE on these shores is, in the description of advertising sultan Martin Sorrell, “rampant”. Supermarkets such as Morrisons and Asda are PE-owned as was Debenhams before its demise. And in addition to water companies, many care homes have been taken over by private equity firms.

It is important to stress here that the critics of PE are not merely saying the practice is perverting organisations that have – or should have – a social purpose at their heart. It is doing that obviously but by loading down for-profit companies with huge debt – procured in order to take them over – PE is, in a supreme effort of self-destruction, warping capitalism itself. The frighteningly large level of global corporate debt, which has increased by double the rate of personal and financial debt since 2007 (which have also risen exponentially) can be attributed, at least in part, to the modus operandi of private equity. And while this debt mountain may have been manageable in the context of rock-bottom interest rates, as rates have risen, the debt-ridden concoctions of PE are – as shown by the travails of Thames Water – becoming more and more exposed.

No paradox

This is not a new problem though one that hasn’t been around for a while. In the 19^th century, Karl Marx bemoaned the existence of ‘usury capital’ – money lent purely to maximise the interest paid to the lender. This was in contrast to ‘industrial capital’ which had a social purpose in that it purchased shares in – and thus financed – enterprises which made new products or changed the way they were produced. The former, he said, “does not alter the mode of production, but attaches itself as a parasite and makes it miserable. It sucks its blood, kills its nerve, and compels reproduction to proceed under even more disheartening conditions.”

For usury capital in the Victorian age, read Private Equity today.

Brett Christophers, the Sweden-based academic and author of the exposé of PE, Our Lives in their Portfolios, has previously noted the interesting fact that Adam Smith – the darling of the Right and father of market economics and Marx – the pre-eminent left-wing critic of capitalism – shared “the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox.”

And we are now in an era where value, once again, is not being created. As contemporary economist Michael Hudson has documented, PE is just one of several ways that ‘activist shareholders’, hedge funds and banks have, since the 1980s, increased looked upon public listed companies as cash cows to be looted regardless of the long-term consequences. Illegal until the Thatcher and Reagan eras, share buy-backs are now commonplace for corporations. In the US, Apple, IBM, Exxon Mobil, and Proctor & Gamble are some of the most famous exponents. In the UK, recent practitioners include BP, Shell, Diageo (Guinness, Smirnoff etc.), HSBC, and Unilever.

Share buy-backs are often undertaken under pressure from large shareholders and the company will, not infrequently, swallow a “poison pill” (in Hudson’s words), placing itself in severe debt to purchase its own stock. The effect of a share buy-back is to reduce the overall number of a company’s shares, thereby increasing capital gains and dividend pay outs to its existing shareholders. But its side-effect is to shrink the amount of capital the company has to invest in research and development and growing its own business.

But some companies, says Hudson, have stubbornly resisted the trend and concentrated on building up their business. He cites the example of Google, which, at least in its early days, aimed to use “corporate profits to expand the business rather than giving quick hit-and-run returns to the wealthiest One Percent.”**

Capitalism will eat itself

But this highlights a fatal flaw in the arguments of those who criticise private equity – and kindred financial innovations – for subverting capitalism. Google may have defied the financial bloodsuckers and concentrated on R&D but the effect of this, although good for Google’s health as a business (it’s worth over $1 trillion now apparently), cannot be classed as beneficial for society as a whole. Its innovations have consisted in myriad ways to beguile the attention-spans of billions of people so that they can be exposed to more advertising. If this is a “win-win”, in Sissoko’s description, I think we need to re-define what we mean by winning.

Google is also an intimate part of the whole Big Tech social media revolution which, because it is founded on getting people to compare themselves to others, is having a corroding effect on mental health. From 2018 to 2023, Norway, for example, fell from 3^rd place in the world happiness league table to seventh because of a decline among its young people. And – an assiduously cultivated – addiction to social media also certainly lies behind that.

Likewise, if oil companies want to buy back their own shares rather than putting all available resources into drilling for oil and gas deposits, thereby intensifying global warming, why should we try to talk them out of it?

Why, this time around, should we be the ones – in erstwhile Keynesian fashion – to ‘save capitalism from itself’?

It is a good question.

To be continued

* H/T to a friend who pointed out the link

** Quote from Hudson’s Killing the Host which is well worth reading

'To every one who has, more will be given'. Can Quantitative Easing last?

Austerity and Quantitative Easing, the two signature economic policies of the second decade of the 21^st century, possess an uncanny symmetry. The former was a brutal snatching away of funding from the poorest in society such that life expectancy was diminished, while the latter, despite the free market rhetoric, was – and is – a massive unconditional subsidy to the richest.

Both are profoundly ideological. Austerity was presented as a penance for the sin of previous overspending, a rooting out of waste and inefficiency and a long overdue imposition of “tough love” on the unemployed and disabled. Quantitative Easing (QE) was framed as a vital injection of liquidity into a flagging economy, technocratic medicine that, according to the BBC, encourages “people to save less and spend a bit more”.

Both conceptions are utterly misleading. The UK was never on the verge of becoming financially like Greece after the Eurozone debt crisis, and years of austerity failed to even make a dent on government debt. The huge rise in government borrowing precipitated by the Covid pandemic – more than £300 billion – and last year’s £16 billion hike in defence spending have both materialised without the gods of the market punishing us with financial ruin.

QE, meanwhile, was never about encouraging banks to make loans, companies to invest or consumers to spend money. Interest rates – the cost of borrowing money – are already so low as to provide adequate incentive for the taking out of loans or consumer spending in preference to saving. If people aren’t doing so, there must be other reasons for their reticence. “Think about it:” write the authors of Do Central Banks Serve the People? “if investors are reluctant to invest in the real economy with interest rates already at the zero lower bound, under what circumstances, if any, would extra liquidity be sufficient to change their mind?”

Thus the “extra liquidity” of QE, one must conclude, has remained within the financial system. The creation of $834 million dollars an hour by the world’s central banks has fuelled asset bubbles – in company shares, property and, after at first freezing in the wake of the pandemic, in corporate mergers and acquisitions. “Dealmakers”, it is comforting to know, “are having a record year”.

The classic explanation for inflation is too much money chasing too few goods. If the staggering amount of money created by central banks had really been “pumped into” the economy, as the bedtime story tells us, it would show up as inflation. Undeniably inflation is rising but not by anything like the level implied in the standard narrative of QE.

This indicates a crucial difference between austerity and QE. Both are ideological constructs but austerity has a placebo quality – its purpose lay entirely in the perception that it was necessary. QE – actual, real-world QE – by contrast really was, and is, necessary.

The Long 2010s

Government cannot go bankrupt, the gurus of modern monetary theory assure us. But the private sector definitely can and ever since the demise of Lehman Brothers in 2008, governments around the world have strained every sinew to ensure the contagion of insolvency doesn’t spread. The initial bank bail-out was followed by successive batches of QE around the world. The US Federal Reserve increased its balance sheet in the first tranche of QE by $4.5 trillion. The Bank of England has resorted to QE every time the economy has hit turbulence – after the credit crunch, after the Brexit vote and now during the pandemic.

It is commonly accepted that QE works to ensure, artificially, a low effective interest rate (whilst increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets). So-called zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on thanks to rock bottom interest rates. It is estimated that a fifth of US and European companies are zombies.

The silent assassin

Interest rates are a potentially devastating tool of government policy. When she first gained office in Britain, Margaret Thatcher hiked interest rates. They peaked at 17% in late 1979 and didn’t drop below 10% until 1983. The ostensible aim was to bring down inflation but the side effect, many think consciously pursued side effect, was to send countless companies to the wall – the UK’s manufacturing sector, which contained many unionised firms, shrunk by a quarter in the first wave of Thatcherism and unemployment rose to more than four million.

This mirrored what was happening in the US where a doubling of the interest rate – dubbed the “Volker shock” after the head of the Federal Reserve, Paul Volker – also precipitated a wave of bankruptcies and send unemployment soaring. The Volker shock also caused international interest rates to spike, triggering many developing countries to default on their loans and sparking the so-called Third World Debt Crisis. Mexico was the first to default in 1982 and others followed. Countries were forced to go cap in hand to the IMF which imposed free market structural adjustment programmes as a condition of support. Thus the worldwide market fundamentalism of today can plausibly be traced back to a massive rise in interest rates four decades ago.

So, for a seemingly arcane financial instrument, interest rates can have shattering consequences. And as a general rule, high interest rates cause bankruptcies while low interest rates preserve companies that would, under free market conditions, go under.

The Janus Face of Interest Rates

It might seem therefore that today’s ultra-low interest rates are a good thing – the government’s bank rate is currently 0.1%, the lowest for hundreds of years – because they stave off suffering both personally and for the economy as a whole. But it’s not that simple. Low interest rates, because they make the cost of borrowing so low, encourage speculation which is exactly the flaw in the economy exposed by the financial crisis and which has only got worse since. They also make it easier to be indebted.  In late 2020 non-financial corporate debt hit $11 trillion and for the first time exceeded global GDP.

Near zero interest rates thus have to remain incredibly low in order to make the debt they encourage manageable. But if, for example, inflation takes hold, higher interest rates may become necessary to combat it by damping down demand the economy. And inflation, it should be stressed, doesn’t just affect creditors and the wealthy. By making basic goods and outlays like rent more expensive, inflation makes life harder for most people.  Thus policymakers are in a quandary.

Low interest rates also seem to require endless QE, a perpetual subsidy to the wealthiest, to remain low. Obviously there is more than one kind of interest rate. The official bank rate, set by the Bank of England, is augmented by countless other interest rates –for example, the rates given or charged by commercial banks or mortgage interest rates. They will usually roughly follow the bank rate.

According to economist Harry Shutt, if markets were “undistorted” (i.e. didn’t have QE), banks and others would refuse to hold the huge debt of corporations without demanding a much higher interest rate. “Rates would have rapidly risen to unaffordable levels, probably 10 per cent or more,” he writes, “thus precipitating mass bankruptcy in both public and private sectors.”

Destined to Repeat it?

Clearly markets, notwithstanding the propaganda, aren’t suddenly going to become undistorted.  Authorities will use every weapon in the arsenal – no matter how much they contradict free market doctrine – to ward off systemic market collapse. They have also, one would assume, learned the lessons of the recent past. The 2008 Financial Crisis had its proximate cause in the steady raising of interest rates by the Federal Reserve (mirrored by other central banks). They rose from 1 per cent in 2003 to 5.25% in 2007. As a result US mortgage interest rates increased and holders of sub-prime mortgages began to default, leading to a nationwide collapse of the housing market.

So central banks will not willingly hike interest rates or end QE unless compelled to do so. They can, it might be assumed, continue to follow the example of Japan, which pioneered QE and has taken it further than anyone else. This is a world of low growth, low interests rates and low inflation – unequal, rigged and immensely unfair – which nonetheless persists for fear of the alternative. Or the pain of the real economy, probably exacerbated by inflation, could compel the authorities to change tack.

At present, the financial system and the economy most people actually inhabit seem to exist in near total isolation from each other. The former prospers while the latter suffers. If their fates realign, things could get very interesting.

You can read part one of this article here

 

 

 

 

 

The bazookas won't be enough

There is an erstwhile, familiar, right-wing canard that ‘you can’t solve a problem by throwing money at it’. Well, that particular piece of wisdom is now going to have to be reversed because you can’t solve the Coronavirus depression that is now coming down the pipe by throwing money at it. No matter how huge.

And the sums are huge. Over $600 billion in Germany, £330 billion (in loans!) in Britain, €300 in France, $700 billion in Quantitative Easing in the US.

But according to James Meadway, former chief economist of the New Economics Foundation and ex-Labour party adviser it won’t be enough:

Thing is: there is no, as in none, as in it doesn’t exist, amount of money at a macro level that can solve this economic crisis. We need to reorientate how stuff is produced: pouring money into markets that are getting to the point of being unable to function will not work.

— James Meadway (@meadwaj) March 18, 2020

The problem is not simply that pubs and restaurants fold as their customer base vanishes as people stop going out. There will be an unavoidable knock on effect on their suppliers and their suppliers and so on. Unemployment will starting rising. Household debt – estimated at £119 billion – is huge and if people’s income collapses in the context of a paucity of savings, there will inevitably be mass default on debts. This will damage, perhaps fatally, credit card companies and banks. But that is not all. Corporate debt, after years of low interest rates, is enormous in Britain and globally. If business bankruptcies happen, defaults on that debt are inevitable.

In the words of labour economist, Guy Standing:

These indicators may not mean much to most non-economist readers. But they indicate incredible economic fragility, especially as private and corporate indebtedness are characteristic of every national economy.

According to one estimate, UK GDP will drop by 15% in the second quarter of this year – compared to, for example, 4.1% in 2009, at the height of the last recession. A French economist, Pierre-Olivier Gourinchas, has suggested that coronavirus containment measures reduce economic activity by 50% and 25% for the month after that. “We are about to witness a downturn that could dwarf the Great Recession,” he says.

It’s possible that the virus will recede in the spring, allowing containment measures – social distancing and not going out – to be lifted and the economy to resume, if not unscathed, at least in recognisable shape.  Possible but unlikely. ‘Suppression’ as it is called, is posited to go on for 18 months, punctuated by month-long pauses, the earliest in July. This is necessary to allow a vaccine to be safely produced.

I don’t believe it is possible to ‘mothball’ an economy for a year and a half, possibly longer, no matter how many bazookas in your armoury are fired. There will have to be, in Meadway’s words, a reorientation of “how stuff is produced”.

One immediately necessary reorientation is the introduction of unconditional basic income for all those who need it – the newly unemployed, poor, self-employed or anyone showing symptoms – for example. This would enable them not to go to work if they were ill, maintain some level of demand in the economy and limit defaults.

But the task of the Left is not merely to insist on its introduction – other people, including the DUP, are calling for it and Johnson is ‘considering’ it – but to ensure it is not temporary. That we never go back to the DWP dystopia of mass sanctioning and the imposition of destitution as a matter of government policy.

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.