29 November, 2020

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Idiot’s Guide To Global & Domestic Debt

By Kumar David

Prof. Kumar David

“In light inaccessible hid from our eyes”, is a line from an 1867 hymn set to the tune of a Welsh ballad; it is not a quip about the mystery of global debt but it could well be. Economists don’t enlighten you on the nature and ubiquity of debt because they are muddled themselves. The eclectic hither and thither is recounted in The Economist’s ‘A new era of economics’ – 25 July 2020. There is no shared paradigm, laymen have to cogitate and pick up as best they can. Scientists, finnicky about cause and effect cannot suppress the need to frame things in intelligible terms; see if you can pick up anything useful from this idiot’s guide to the ubiquity and explosion of global and domestic public and private indebtedness. Public or national refers to central and local governments. Private is corporate, non-central-bank bank and household borrowing; the last includes mortgages, personal overdrafts and credit-card indebtedness.  

The ratios vary from country to country. In the US Public Debt is about 100% of GDP but semi-Public Debt is small while Corporate and Private Debt are roughly 50% and 70% of GDP. In China Public Debt is not large (48% od GDP) but Provincial Governments have run wild with infrastructure and waste, which summing up with household debt to over 200% of GDP. In Japan government debt is 230% of GDP but corporate debt is below 10% and household debt is minimal. For Sri Lanka the big item is Public Debt; nearly 90% of GDP. It doesn’t sound bad, comparatively, but we don’t have the resources to service it.

There have been four stages in economic theology since the 1930s. The Keynesian gambit, the neo-liberal (Friedman-monetarist) nightmare and the two post-2009 phases. Yes, two phases, the first till about 2018 and the second thereafter which accelerated with covid-19. I say little on Keynesian macroeconomics or neo-liberalism; the former reigned from the Great Depression till the 1970s when it was invalidated by stagflation, and the latter, that is the neo-liberalism of Pinochet-Regan-Thatcher-IMF, gripped the world by the throat till the 1990s. The last nail in the coffin of dying neo-liberalism was the Great Recession (GR) of 2009-10; the last captain of that sinking ship Tony Blair earning himself the epithet Blatcherist. GR proved that unchecked free-market capitalism contained the germs of its destruction in its own DNA, collapsing under its own rationale.

A feature of the global economy since the 1990s is mounting debt, now astronomical public plus corporate debt, and in the run up to GR acute household mortgages. Strangely, no one asks: “If all the world is in debt, who is the creditor? Who owns the loot? What the source?” Leaving aside the printing press, a substantive topic of this essay, there are two tangible sources; the enormous wealth accumulated in the hands of the ultra-rich (the “One-Percent”) and public savings in provident funds, social-security coffers and in Japan Post Office Savings accounts. The former, is the surplus created by social labour appropriated by capital or siphoned into institutions called private equity, mutual and hedge funds and into mighty investment banks. Maybe half Lanka’s foreign debt is owned to these money-market funds, the other portion to multi-lateral agencies IMF, ADB and World Bank and foreign governments, mainly China and its state banking arms. The point I am driving is that the people of the poor half of the world are deeply in hock to the moguls of international finance capital, including the mighty One-Percent. 

The first period of the post-GR phase which lasted for a little less than a decade was characterised in metropolitan centres by measures intended to revive economic growth. Credit was created by central banks (US Fed, EU’s ECB, Japan’s BoJ and limping along, the Bank of England) by the shipload and pumped out to Treasuries, or by purchases of corporate bonds, or shoved into bank vaults. The hope was that there would be investment, growth and employment. It fell flat on its face. Though employment did pick up a bit for reasons too long to detail here, production-capital did not take the ball and run. Instead finance took the money and put it into shares (equities), commercial property and Treasury Bonds, creating an asset bubble. 

Central bank money did not go into economic activity; it was siphoned through the ultra-rich into the asset bubble; that is the rich got richer. For this reason, demand for goods and services did not grow (how many bottles of Premier Cru can a millionaire imbibe?). Sans demand, economic growth did not take off in the US, Europe or Japan, hence inflation was stuck below 2% and the economy did not fire up (if inflation escalates, the economy exudes full employment and output is near capacity-output they call it “heating up”). Economic misery in the lower orders created anger and populism (Occupy Movements and radical fundamentalisms).  Outrage at the rich getting richer and everyone else getting poorer also triggered the Trump Base, the grip of Marine Le Penn, the popularity of Nigel French, Brexit, near fascists Hungary’s Victor Oban and Poland’s Andrzej Duda, and Hindutva’s Muslim-hating Amit Shah and Narendra Modi. In sum the first phase of post-GR intervention was neither an economic success nor was it politically soothing, it was a failure. 

Enter the second post-GR stage starting in 2018 but fouled up and drowned by Covid-19. The world’s ruling powers had to take note that growth was not picking up, political resentment was swelling, inflation doggedly low and interest rates peering into the moat of negativity. Then corona hit! It summoned gigantic “stimulus” packages; in the domain of economic theory four schools of were jostling for space.

MMT (Modern Monetary Theory)

MMT is really odd in the eyes of regular economists; I too find it difficult to digest. Were I to exaggerate but only a bit, the theory says print money, print as much as you like, it won’t and it can’t do harm. Governments should not break their heads about deficits, central banks should not let inflation fears hold them back, they should create stimulus money by the bathtub and pour it into investment markets; household should party late into the night. The argument is that by turbo charging the economy with cash, productive activity will take off and rising output will defeat the demon of galloping inflation. The more serious-minded supporters of this school want to keep it going only till inflation and growth pick up and unemployment falls sufficiently, then slacken. But I am not persuaded. When inflation hits it hits fast and hard. Governments and the unwary, soaked in debt, will be overwhelmed by rapidly rising interest rates which will drive them to bankruptcy. Going in search of a free lunch is never unproblematic.

Fiscal splurge driven strategies (FS)

The more conventional last-ditch efforts are Fiscal Splurge (FS) and Monetary Control (MC). The former is the de facto method employed, whether consciously named FS or not, in broke, crisis driven, debt wracked or plain basket economies. While these pejoratives do not all apply to Lanka, some do. The bottom line is that in poor countries with high populist expectations, or enjoying electoral democracy that can oust politicians, governments if they wish to survive, have no option but to resort to fiscal deficits. That is spend more than their revenues to keep the masses stoned; an alternative opiate to religion. In a debt-intoxicated country this means monetary policy and fiscal policy have to merge, the former becomes a service provider to the latter; Prof Laxman transmutes into front office receptionist for President and PM. In the long-term fiscal profligacy has disastrous consequences that are so well-known that I don’t need to dwell on the it here.  

Monetary control and manipulation (MC)

This is typical of the EU; the US is a mix of FS and MC. With MC power rests in the hands of the central bank not government, finance ministry or treasury – FS is the other way round. The prime example of MC is the European Central Bank, I dare say with the Bundesbank breathing down its neck, which drives a chariot whose lowly drays are individual EU governments. BOJ too is not a sub-contractor of the Japanese government. The Reserve Bank of India tried to talk big in the era of Raghuram Rajan but Governors and the Bank have since been cut down to size. Central banks in dominance use interest rates and money supply to manage inflation with an eye on the side turned towards employment and growth. 

Restructuring (social concern or state-led)

This is an outlier in a discussion of how capitalist economies (including Scandinavian version) are struggling to cope with explosive debt, income and wealth gaps, and retain social instability.  The two key concepts in understanding this fourth option are restructuring and involvement of the state. State-led, but market sensitive and capitalism-accommodative, one party China seems an obvious prototype but it is not an exemplar because this essay is focussed on capitalist (the majority) nations of the world. An imagined President Bernie Sanders Administration in the US is a hypothetical example of this option. I don’t need to explain how this will be different from the US we know, but the point of this essay is that US national debt is large and will be larger in the hypothetical case. At the moment in the debate about coping with a belly-up economy, staggering stimulus packages are on Congress’ table – the Republicans want to cap it at $2 trillion, Democrats to push it up to $3 trillion. Hypothetical Bernie and his Squad will make it larger.

Whatever the version, stimulus money will be part channelled to government (Treasury Bond purchase) and a comparable sum will be siphoned into corporate bonds and private assets. Soaring debt will undermine faith in America’s ability to measure up to its commitments and will damage faith in the dollar as the as the world’s reserve currency. Debt has come to stay in every corner, an unwelcome guest determined to hang on till there is a global transformation. Sri Lanka is a footnote to the story.

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Latest comments

  • 2
    1

    Don’t you worry Shavonda Silva will sort it out

  • 1
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    Old Codger

    Here is an interesting discussion on the budget 2020:
    https://www.youtube.com/watch?v=Xhis6P2Ob1k&feature=youtu.be

  • 0
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    Watch this interesting youtube video on impending great reset

    https://www.youtube.com/watch?v=tTL2DenFBRg

  • 4
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    Nigel French?
    Did you mean Farage?
    *
    Brexit was partly manipulated by a planned campaign of misinformation.
    Thatcherism outlived Thatcher’s term in office and after thanks to Blair.
    European ultra right and its fascist accomplices were on the rise in the 1990s and had significant support in several EU countries, especially Italy, Austria and France.
    The roots of this fascism were less in the resentment of the rich getting richer but the notion that the darker skinned immigrants were stealing their jobs. Its growth in the 21st Century was influenced by uneven distribution of wealth. But nothing stopped fascists from bonding with the neo-liberal right when opportunity came.
    *
    Hindutva was long time coming. It missed its first few opportunities when thr Congress lost credibility by 1990. The LTTE did the Congress a favour by killing Rajiv Gandhi. The left-of-centre coalition that could stop Hindutva was bedevilled by petty squabbles and opportunism.
    Lumping Third World fascism with European fascism is not very scientific.

  • 2
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    This comment was removed by a moderator because it didn’t abide by our Comment policy.

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    • 1
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      a14455

      Could you interpret SJ’s rant.
      We know SJ is a confused Sinophile.

    • 1
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      Thanks for making it short 😎😎😎😎😎😎😎😎😎😎😎😎😎😎🤩🤩🤩

  • 1
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    a14455

    Could you interpret SJ’s rant.
    We know SJ is a confused Sinophile.

  • 0
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    “Soaring debt will undermine faith in America’s ability to measure up to its commitments and will damage faith in the dollar as the as the world’s reserve currency.”
    In economics, theories are welcomed. Denouncing anything is not easy too. Scientific-precise measurements are not there. Many assessed only by simple observation. So, many of them remains as hypothesis only, not proved or rejected, yet a Nobel Prize is delivered to the proponent. Thomas Malthus’s theory is one of them. In 1790s he said soon the human race would be facing severe food shortage and would face massive deaths for food-nutarians related problems. Nobody has proved him wrong, though what he predicted didn’t happen. Will that, then, in future happen? Yes, there is good chance his prediction coming true even in these scientific centuries.
    The law of obtaining loan is, if the return on the investment is better than the interest, then borrowed. When to stop borrowing? Say interest function is f(i) and return on investment is f(r) then f(i)/di= f(r)/dr. Until that happens, the loan improves the borrower’s wealth.
    QE is not considered as a failed attempt. It is in contrast treat as produced what was expected form it. It restored assets values and helped economies to come out of GR. Asset price inflation was suggested. But we don’t know if that is right or wrong.

  • 0
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    Two things 1) remember? everything balanced by demand and supply. Share price is based on ultimately how much income it can produce. If large investors, helped by government, buy lot of shares and small investors see it is worthless to put money on that share any more, then a market correction will happen. 2).On the other side, all money put through QE has to be taken back. That is supposed to force the market correction at the end of the say, is the assets are overvalued.
    Dollar can lose its “gold standard” status, but need not to be because of American government’s borrowing. Countries can even go out of this “Standard Currency” based exchange system. To cite one side of the power of the Dollar, we can look at a Indian Programmer and US programmer (Now very few get employed as programmers in US outside of IT companies) salary. The salary difference is telling natural wealth behind the dollar. An Indian programmer earns $20,000(very hard in reality) but an American programmer, to match his peers, he/she needs to earn $75,000. This is the situation back up dollar as “Standard” rather than the government borrowing (though it too an element).

  • 0
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  • 0
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    Prof. Kumar is seeing money printing and borrowing as same things. In reality they are complementary. In the borrowing, created money is extinguished when the loan has earned its value and loan settled. So, in a well-planned budgeting, this is less likely to cause inflation. But to give a direct fix to over printed money, Central Bank has to recall money and destroy them. In countries, invest in out competition, white elephant projects with borrowed China loans, then that White Elephants story is different. So comparing others (government of private) borrowing with Lankawe’s China loan is completely meaning less. China lend to Lankawe is only to control it. Now the rubber factory drama is only old wine, it is coming the bottle Hangbangtota port sales, which Ganapathillai said Lankawe is bound to give one millions visas to China to work on the industrial zone. Loans can cause bankruptcy, but by centuries of experience many safety valves are in place that not to happen.

  • 0
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    Finding ways to drain the budgeted funds.

    “‘President Gotabaya Rajapaksa is to take over as the Minister of Defence and a newly created Ministry of Technology shortly. A new subjects and functions Gazette was issued by the Prez, bringing several institutions under these ministries while a new Ministry of Public Security too”

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      Burt

      “Finding ways to drain the budgeted funds.”

      We should start worrying about corrupt fascist tendencies using imagined security threat (perhaps paranoia) as excuses to go shopping for most ridiculous unnecessary expensive , high commission yielding defense systems, …. when Gota is confident Buddha’s relics protect the country. Many believe they have lost their freedom to ease themselves in open field since the introduction of Shavendra’s Drone spy in the sky system. Some believe drones can be abused watching people having intimate moments through their windows or doors. Gota may use his Morality cap to justify his perverse desires.

      Watch out for Basil’s desire to take over the nationwide food and essential supply chain. He knew how to make commission on large scale expenditures, now he has devised plans to exercise control over food production, purchase, distribution, …. and retail outlets, under the guise of streamlining and helping the young entrepreneurs and producers. His brother declared open the first Q- Shop at the State Commercial Corporation, another state owned retail chains similar to Sathosa, Laksala, Malasala, …. (PM opens first ‘Q-shop’ – http://www.dailynews.lk/2020/11/21/).

  • 0
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    That is why we should all join the GOSL and contribute to make her deliver better. That was the purpose of the democracy/that was the purpose of all those Soldiers dying to give the Nation back to the people so they can shape a democratic process to deliver all the things you lovingly write by pulling our weight together??

  • 0
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    Prof. David, You have misunderstood MMT. Proponents of MMT emphasize that the theory is particularly relevant to countries with reserve currencies. They have not said that any country can adopt this technique. In the US, proponents of MMT advocated this theory against those who argued that universal healthcare runs into resource constraints. MMT disproved that fallacy. You seem to take a rather simplistic view of MMT.

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