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'None of the
mainstream parties are offering any radical or innovative solutions to
deal with the root causes of chronic debt. They simply offer versions of
huge debt, carefully disguised in complex jargon.' Photograph: John
Kobal Foundation/Getty Images
Few people understand what debt is. We may understand the
scaled-down metaphors that politicians serve up – "household debt", or
"maxed-out credit cards". But the core issues relating to debt on a
larger scale – the interaction between public and private, its circular
and illusory nature, its connection to money creation – are too complex
for most people to get their heads around.
And yet, these are critical points in informing the debate of how to deal with debt. A recent ComRes poll revealed that only 6% of the public understand that Britain's public debt is continuing to rise – by £600bn during the course of this administration, to be precise – and is due to hit £1.4tn by 2015. By ignoring the real root causes, because they are too complex or esoteric or just plain boring, and focusing instead on fictional Romanian migrants and benefit fraudsters with drawn curtains, we deny ourselves any possibility of finding real solutions.
Fewer still seem to be asking the question: to whom do we owe this money, exactly? Even taking the government's "household in debt" comparison, any debt advice service would recommend making a list of creditors so that one may assess where high-interest urgent obligations are, the possibility of consolidation, restructuring or default, negotiated solutions – in short, an overview. Most importantly, such an overview would permit shrewd, critical analysis of how one ended up in this position and how to prevent a repeat. By avoiding the analysis, we condemn ourselves to sleepwalking into the next crisis and the one after that.
A global view is a good place to start in order to understand the illusory nature of debt. At the end of last year, according to the CIA factbook, the accumulated external world debt was $72.8tn. At the same time the gross world product (the total of countries' GDPs) was $71.8tn. Quite a milestone, you might think, all countries globally owing more externally than they produce. Yet, this is gross debt, meaning if A owes B $100 and B owes C $100 and C owes A $100, it shows as $300 cumulative debt when, in truth, it cancels itself out. On a broader view therefore, since all this money is owed to entities within this global community, it could just as credibly be said that "the world owes this money to itself", and so owes nothing.
This circularity is absolutely key to comprehending the root of the current crisis, and is replicated at national levels. An analysis of the interconnectedness of US and Japanese debt identifies Japan as one the US's largest creditors (almost 10%). Japan has the largest national debt-to-GDP ratio in the world – over 230%. It is heavily in debt, compared to its product, and yet in a position to lend to the world's largest economy. In fact, Japan's position is much more stable than countries with lower ratios. One of the key factors contributing to this stability is the fact that the vast majority of this debt is owed internally – it is Japanese citizens and companies who have been funding Japanese debt. Of what it owes externally, its largest creditor is – can you guess? – the US.
Identifying a country's creditors is, therefore, a key consideration. This is why scaremongering comparisons, between the UK and Greece for instance, are disingenuous and deeply unhelpful. Only about 30% of UK gilts (the IOUs issued by the government to generate extra money) are held by overseas investors, which is in fact down from a peak of nearly 34% immediately following the crisis. By contrast Greek government debt is overwhelmingly externally held – the minimum estimate is about 70% – especially so since the imposed haircut on private creditors. Greek bonds also attract vastly higher interest rates and have shorter average length to maturity. This means that more than 50% of the entire Greek budget goes to servicing debt in some way or another.
Nowhere is the ludicrous circularity of debt more starkly exposed than when looking at the domestic holding of UK gilts. The biggest single holder of UK government debt is the Bank of England, mainly through the programme of quantitative easing – which is essentially issuing gilts and buying them back from yourself with interest using imaginary money. Banks and other financial institutions are also in on the act. At its peak in the second quarter of 2012 their holding of UK gilts was worth £215bn. Simply put, this means that we borrowed money from the sector which needed bailing out and gave it back to them as a bailout. Not only have banks, including RBS and Lloyds, been buying gilts with the money we gave them, we specifically demanded that they do it, in order to detoxify their investment portfolio.
At this point, no doubt, some sage is already furiously typing in the comments section that we didn't just give them the money; we purchased shares in the companies. But as the sale price of Northern Rock and attempts to revalue and hurry the sale of Lloyds and RBS demonstrate, we will never make anywhere near the money we put in. So, at least some of it was a generous gift from all of us, including future "us", to the incompetent bank directors' bonus fund.
It is also important to note that while our governments are concerned about public debt to the point of hysteria, with moves afoot to even set G20 targets and limits, they are remarkably relaxed about private debt. The Office for Budget Responsibility (OBR) has revised its projection of UK household debt and now forecasts that it will rise from £1.5 tn in 2010 to £2.1 tn (or 173% of average household income) in 2015. This is a much more worrying set of figures than public debt – and much less sustainable prima facie. Still, government efforts are ceaselessly focused on encouraging consumer confidence, so that we go out and spend even more. Banks are being blamed for the lack of recovery for not lending freely enough.
In fact, if one were to look at total debt rather than just public debt and compare the UK and Greece, for instance, a staggeringly different picture emerges. It turns out that while each Greek citizen on average owes under $50,000, each Brit owes over $150,000. This is why Cameron's rhetoric of "you can't solve a debt crisis by borrowing more" rings so utterly hollow to anyone with even a basic understanding of how the system works. It creates a totally bogus consensus on debt. Because, within the current financial system that is both dependent on and addicted to debt, the only way to solve a debt crisis is precisely to borrow more.
Now there may be ideological arguments for maxing out individuals' credit cards at astronomical APRs rather than the state's at 3.5%, but nobody is voicing them. Instead we are debating a choice between debt or no debt, which is – duh – a no-brainer. It is also, unfortunately, fantasy. None of the mainstream parties are offering any radical or innovative solutions to deal with the root causes of chronic debt. They are simply offering versions of huge debt that are balanced differently between public and private and carefully disguised in complex jargon. Meanwhile our liabilities, both state and private, continue to balloon, lives are destroyed by a programme of ideologically driven austerity and nobody is looking at the underlying system.
The problem is by no means new. Thomas Edison summed it up very neatly in 1921: "[Henry Ford] thinks it is stupid, and so do I, that for the loan of $30m of their own money the people of the United States should be compelled to pay $66m – that is what it amounts to, with interest … It is absurd to say that our country can issue $30m in bonds and not $30m in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people."
Both at national and international levels, the focus continues to be exclusively on the irresponsible borrower, with complete immunity for the totally reckless lender or the enormous leech-like industry which continues to feed on the interest or "economic value" created by shifting fictional money around. On the contrary, we count such activity as growth. And things will not change as long as this industry continues to be shrouded in too-complicated-for-you-to-understand language. Because people will not feel informed, confident or courageous enough to question a fractional reserve banking system in which creating fake money, buying it from ourselves with interest and giving it away to private entities "too big to fail", is considered normal.
Instead, ideological entrenchment rules, almost creationist in its resistance to evidence. Rovers scour the surface of Mars for minerals and hadrons collide into each other in a vast tunnel underneath the Alps, while political theory and economics have seemingly advanced not one iota in 100 years. Labels like socialist, neoliberal, statist or libertarian continue to hinder the possibility of any real discussion and the identification of common ground which may lead to consensus. We all know vaguely what we are against, while having no idea what the hell we might be for. An age of "down with this sort of thing". The result is a complete absence of practical solutions to practical problems.
There is an old joke that goes: how many economists does it take to change a lightbulb? None. If the lightbulb needs changing, market forces will do it. We have given this idea its chance, for more than a century. We are still sitting in a dark room. Maybe all we need is one good electrician.
And yet, these are critical points in informing the debate of how to deal with debt. A recent ComRes poll revealed that only 6% of the public understand that Britain's public debt is continuing to rise – by £600bn during the course of this administration, to be precise – and is due to hit £1.4tn by 2015. By ignoring the real root causes, because they are too complex or esoteric or just plain boring, and focusing instead on fictional Romanian migrants and benefit fraudsters with drawn curtains, we deny ourselves any possibility of finding real solutions.
Fewer still seem to be asking the question: to whom do we owe this money, exactly? Even taking the government's "household in debt" comparison, any debt advice service would recommend making a list of creditors so that one may assess where high-interest urgent obligations are, the possibility of consolidation, restructuring or default, negotiated solutions – in short, an overview. Most importantly, such an overview would permit shrewd, critical analysis of how one ended up in this position and how to prevent a repeat. By avoiding the analysis, we condemn ourselves to sleepwalking into the next crisis and the one after that.
A global view is a good place to start in order to understand the illusory nature of debt. At the end of last year, according to the CIA factbook, the accumulated external world debt was $72.8tn. At the same time the gross world product (the total of countries' GDPs) was $71.8tn. Quite a milestone, you might think, all countries globally owing more externally than they produce. Yet, this is gross debt, meaning if A owes B $100 and B owes C $100 and C owes A $100, it shows as $300 cumulative debt when, in truth, it cancels itself out. On a broader view therefore, since all this money is owed to entities within this global community, it could just as credibly be said that "the world owes this money to itself", and so owes nothing.
This circularity is absolutely key to comprehending the root of the current crisis, and is replicated at national levels. An analysis of the interconnectedness of US and Japanese debt identifies Japan as one the US's largest creditors (almost 10%). Japan has the largest national debt-to-GDP ratio in the world – over 230%. It is heavily in debt, compared to its product, and yet in a position to lend to the world's largest economy. In fact, Japan's position is much more stable than countries with lower ratios. One of the key factors contributing to this stability is the fact that the vast majority of this debt is owed internally – it is Japanese citizens and companies who have been funding Japanese debt. Of what it owes externally, its largest creditor is – can you guess? – the US.
Identifying a country's creditors is, therefore, a key consideration. This is why scaremongering comparisons, between the UK and Greece for instance, are disingenuous and deeply unhelpful. Only about 30% of UK gilts (the IOUs issued by the government to generate extra money) are held by overseas investors, which is in fact down from a peak of nearly 34% immediately following the crisis. By contrast Greek government debt is overwhelmingly externally held – the minimum estimate is about 70% – especially so since the imposed haircut on private creditors. Greek bonds also attract vastly higher interest rates and have shorter average length to maturity. This means that more than 50% of the entire Greek budget goes to servicing debt in some way or another.
Nowhere is the ludicrous circularity of debt more starkly exposed than when looking at the domestic holding of UK gilts. The biggest single holder of UK government debt is the Bank of England, mainly through the programme of quantitative easing – which is essentially issuing gilts and buying them back from yourself with interest using imaginary money. Banks and other financial institutions are also in on the act. At its peak in the second quarter of 2012 their holding of UK gilts was worth £215bn. Simply put, this means that we borrowed money from the sector which needed bailing out and gave it back to them as a bailout. Not only have banks, including RBS and Lloyds, been buying gilts with the money we gave them, we specifically demanded that they do it, in order to detoxify their investment portfolio.
At this point, no doubt, some sage is already furiously typing in the comments section that we didn't just give them the money; we purchased shares in the companies. But as the sale price of Northern Rock and attempts to revalue and hurry the sale of Lloyds and RBS demonstrate, we will never make anywhere near the money we put in. So, at least some of it was a generous gift from all of us, including future "us", to the incompetent bank directors' bonus fund.
It is also important to note that while our governments are concerned about public debt to the point of hysteria, with moves afoot to even set G20 targets and limits, they are remarkably relaxed about private debt. The Office for Budget Responsibility (OBR) has revised its projection of UK household debt and now forecasts that it will rise from £1.5 tn in 2010 to £2.1 tn (or 173% of average household income) in 2015. This is a much more worrying set of figures than public debt – and much less sustainable prima facie. Still, government efforts are ceaselessly focused on encouraging consumer confidence, so that we go out and spend even more. Banks are being blamed for the lack of recovery for not lending freely enough.
In fact, if one were to look at total debt rather than just public debt and compare the UK and Greece, for instance, a staggeringly different picture emerges. It turns out that while each Greek citizen on average owes under $50,000, each Brit owes over $150,000. This is why Cameron's rhetoric of "you can't solve a debt crisis by borrowing more" rings so utterly hollow to anyone with even a basic understanding of how the system works. It creates a totally bogus consensus on debt. Because, within the current financial system that is both dependent on and addicted to debt, the only way to solve a debt crisis is precisely to borrow more.
Now there may be ideological arguments for maxing out individuals' credit cards at astronomical APRs rather than the state's at 3.5%, but nobody is voicing them. Instead we are debating a choice between debt or no debt, which is – duh – a no-brainer. It is also, unfortunately, fantasy. None of the mainstream parties are offering any radical or innovative solutions to deal with the root causes of chronic debt. They are simply offering versions of huge debt that are balanced differently between public and private and carefully disguised in complex jargon. Meanwhile our liabilities, both state and private, continue to balloon, lives are destroyed by a programme of ideologically driven austerity and nobody is looking at the underlying system.
The problem is by no means new. Thomas Edison summed it up very neatly in 1921: "[Henry Ford] thinks it is stupid, and so do I, that for the loan of $30m of their own money the people of the United States should be compelled to pay $66m – that is what it amounts to, with interest … It is absurd to say that our country can issue $30m in bonds and not $30m in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people."
Both at national and international levels, the focus continues to be exclusively on the irresponsible borrower, with complete immunity for the totally reckless lender or the enormous leech-like industry which continues to feed on the interest or "economic value" created by shifting fictional money around. On the contrary, we count such activity as growth. And things will not change as long as this industry continues to be shrouded in too-complicated-for-you-to-understand language. Because people will not feel informed, confident or courageous enough to question a fractional reserve banking system in which creating fake money, buying it from ourselves with interest and giving it away to private entities "too big to fail", is considered normal.
Instead, ideological entrenchment rules, almost creationist in its resistance to evidence. Rovers scour the surface of Mars for minerals and hadrons collide into each other in a vast tunnel underneath the Alps, while political theory and economics have seemingly advanced not one iota in 100 years. Labels like socialist, neoliberal, statist or libertarian continue to hinder the possibility of any real discussion and the identification of common ground which may lead to consensus. We all know vaguely what we are against, while having no idea what the hell we might be for. An age of "down with this sort of thing". The result is a complete absence of practical solutions to practical problems.
There is an old joke that goes: how many economists does it take to change a lightbulb? None. If the lightbulb needs changing, market forces will do it. We have given this idea its chance, for more than a century. We are still sitting in a dark room. Maybe all we need is one good electrician.
