Dodging debt’s death-spiral is a vain hope

All countries except a few are in an inexorable and deepening debt trap

September 8, 2018, 5:37 pm 

Sri Lanka debt outstanding (lower part domestic, upper part foreign)Source: Central Bank https://asia.ub-speeda.com/en/country-report-2017-sri-lanka-the-dollar-hungry-nation/ 

Kumar David

The well-known American economist Irving Fisher wrote "The Debt-Deflation Theory of Great Depressions" in 1933; its full relevance is unfolding now. Though Fisher is deemed the founder of the now discredited theory of neoliberalism, this paper is seminal; debt today is an ubiquitous ailment. In mighty USA government debt is $18 trillion or 105% of GDP and rising, Japan (250%), Italy (130%), France (95%), UK (90%) and to a degree Germany (65%). Little Greece (175%), Lanka (78%, $55 billion) and a legion other miserable minions are in a deep hole. The few not afflicted by spiralling debt are China (20%), oil-rich kingdoms and sheikdoms of the Middle East, Taiwan (36%) and South Korea (40%). The national debt of Singapore reads 115% but that’s an accounting oddity since large sums are stashed away by foreigners in the city state. These few examples apart, all the world’s awash in debt.

An aside about Japan is that it is a "construction state" where politicians, criminal syndicates and bureaucrats coordinate to invest in exorbitant projects (some utterly inane like the "bridge to nowhere"). Projects are financed by debt funnelled from the public via taxes and mandatory savings at rock-bottom interest rates; everyone is required to deposit savings in accounts run by the post office. The huge debt overhang is all domestic, not foreign. Another useful bit of data to know is about foreign reserves. The top five are China ($3 trillion), Japan ($1.3 trillion), Switzerland ($700 billion), Saudi Arabia ($500 billion) and Russia ($450 billion).

Ok let’s get back to the debt-spiral. Fisher’s term of choice ‘debt-deflation’ was influenced by the circumstances of the Great Depression. Many have brought his concept up to date in the context of 21st Century economic trends (for example J is for Junk Economics, Michael Hudson, publisher SLET, 2017). I propose ‘debt-spiral’ as a more appropriate term for today then debt-deflation. The bottom line is this; if a country (or a person) sinks too deep into debt it’s a pit of no return. It is not possible in the context of current global realities to beat a return to growth and liquidity even with austerity and "wise" policy choices. Greece from 2012 to today is a living example; the road from hyperinflation to Hitler is history’s horror story. The ECB, Germany and the IMF drove policies that goaded Greece into crisis; more on that in a moment after a bit of theory.

A trivial version first: Say a country’s (or individual’s) debt is 100% of GDP and the average interest rate 5% but the growth rate only 4%. Indebtedness will rise by 1% and there will be no surplus to invest. Consumption has to decline and the government, say Yahapalana will be ostracised. Indebted countries face the mathematical terror of compound interest unless exports rise quickly enough to pay down foreign debt really fast - a Sanderatne El Dorado? At 6% compound interest debt doubles in 12 years and rises four-fold in 24 years. (A rule of thumb is 72 divided by the compound rate is the years to double. At 10% compound growth a quantity will double roughly in 7.2 years and double again every further 7.2 years. Use it, the 72-Rule is a useful guideline).

A complication is that when debt grows a stage is reached when one needs to borrow to meet interest on current liabilities thus pushing one ever deeper into the trap. This truism economic pundits pussy-foot around at seminars and in newspaper columns. There is no salvation but to write off debt, however creditors and global finance capital - the 1% - won’t stand for it. Lanka maybe faces an average interest rate of about 5% and US 10-year bond yield is about 2.5%. Furthermore, say a fiscal deficit (budget deficit) of 3% is also unavoidable (or do you want revolution?). This will add another percentage point or so to annual borrowing needs. This is a double whammy and descent into the spiral accelerates. US government debt is forecast by web-site ‘Statistica’ to rise to $34 trillion by 2028. The Congressional Budget Office says it will be 150% of GDP by 2048 and interest payment will be 6.3% of GDP. Trump’s recent corporate tax cuts would have eroded these numbers further.

This is not the end; there’s a third whammy. From 2008, central banks and Western governments have bailed out banks and bondholders with direct handouts and injecting huge sums - quantitative easing (QE) which has now reached a cumulative $3 trillion. QE is not to be confused with Keynesian state- led spurring of the real economy to raise production and employment. The beneficiaries of QE are banks, bondholders, property owners, stock-market investors and Ponzi operators. The 99%, the public, do not benefit from QE which is offered to finance capital and global Wall Streets at large. A similar story is true when interest rates are held down to the floor encouraging financial bubbles. QE has led to a boom in asset prices (equities and real estate) benefitting the 1% and impoverishing the 90% - the 9% in between has had mixed luck. Absurdly the US 10-year bond yield hovers below the rate of inflation providing the government with a temporary free-lunch bonanza till the Fed is compelled to raise rates. There is so much froth building in US assets that a stock-market bust seems very likely.

Interest payments and debt trimming diverts money from capital expenditure and from production and employment creation. The Troika, IMF, ECB and European Commission, bailed out no not Greece - perish that thought - but super-rich creditors and bank bond holders and equity owners. Greece was NOT bailed out, German and European finance capital WAS. Greece continues indebted to new overlords the Troika, instead of German and European financiers. Yes, "Haircuts" (reduction of interest on some debt was allowed) and complex repayment schedules were introduced. In exchange unbearable austerity was enforced. As James Galbraith noted "There is no rescue going on. What is going on is SEIZURE of assets owned by the Greek state, businesses and households. This has nothing to do with the recovery of the Greek economy".

Seizure? When an economy crashes, privatisation is enforced and finance capital grabs public assets for a song as in Russia in 1990-95. When a country is unable to deal with debt for reasons outlined before, the final denouement is to downgrade credit-rating and declare it credit unworthy. In quick order the economy collapses (Argentina, Russia in 1990-92, Greece, Mexico and Pakistan) and privatisation is enforced as Galbraith says. China’s grab of Hambantota Port in a 99-year lease is similar.

A bitter truth is that IMF insistence on austerity during economic downturns is counterproductive. Government spending in a downturn is vital stimulation; a prescription as old as the New Deal and Keynesianism – of course that spending must be wise. Austerity (conditionality) enforced by the IMF on near insolvent countries takes money out of the productive economy, QE injects liquidity into private money markets and rock bottom interest rates lubricate acquisition of public assets by domestic and foreign capital. The IMF, IBRD and ADB are conscious of their class motives; they are knowingly with the 1%. Nowadays they do not have to pretend to be much interested in the 99%.

Indrajit Coomaraswamy, bless him, his stalwart efforts notwithstanding, cannot stand against the tide of history. He is the uncle of my buddy Jayantha, a peripatetic preacher in Australia, who beholding all the world arraigned against his uncle is leading prayers and lighting candles for the salvation of his immortal soul. Bless them both but it’s a tough call when global finance capital stands against you. The bar-chart reproduced from Central Bank sources shows inexorable growth of indebtedness – I don’t have 2017 figures but the trend is unlikely not have reversed. The trend cannot be written off merely as Rajapaksa clan thievery. In a recent column I estimated the family’s global treasure at about $0.1 billion. Lanka’s indebtedness of $55+ billion is much larger and the trend more systemic than can be attributed to graft. Corrupt governance, illicit deals with the Chinese etc., but the underlying trend is global. Water flows downhill thanks to gravity; in Sri Lanka it went down with the sewage.

In ancient times, kings and emperors wiped all debt clean every so often, maybe every five to ten years or on some auspicious occasion like victory in battle or the birth of an heir. At the end of WW II all German debt was forgiven making possible the miracle German recovery. Wiping off debts of farmers and tradesmen in the ancient civilisations of Mesopotamia and Egypt let agriculture, handicraft and trade make a fresh start. The relevance to modern times is that now like then, debt is mounting inexorably from production cycle to cycle and cannot be cleared by intrinsic mechanisms. There has to be some debt write off. A laxative will relieve Indrajit’s constipation and ease Jayantha’s supplications.

Debt forgiveness is bitterly opposed by the 1% - bond holders - not only in the Greek case but everywhere; think Argentina and Africa. If all the world’s in debt, who are the creditor pray? There has to be someone on the other side of the balance sheet. Ha you’ve hit the nail on the head! It’s the 1% (or 10% depending on how you count the cash) which holds 80% (what did Piketty estimate?) of global wealth. Global state-debt may be $75 trillion, say four times US government debt (I am using the logic that US GDP is a shade below a quarter of world GDP). About a third of US government borrowing is from the Social Security Trust Fund and pension funds, nominally owned by the people. Likewise I conjecture the creditor of two-thirds of all global debt is global finance capital that is the 1%. My guess could be off by five or ten percent, but surely not more. The moral of my story is that the peoples of this planet are in eternal hoc to the super-rich, the super-swamp.