By Kumar David –
The thesis of this essay, conveyed within my 1700 word-mandate, is that the world economy has entered a phase of near universal debt. Lanka’s inexorable overload of domestic and foreign debt is part our own making part footnote of the global story. Everywhere, mighty USA and European Union included, the state is mired in debt that will not vanish so long as Finance Capital (FC) rules the world. The surpluses created by economic activity are amassed a few institutions and individuals. Thomas Piketty drew attention to inequity of wealth and income. The market capitalisation of the world’s largest 2000 companies is $100 trillion, but the value of all the property (land, houses, other fixed assets) of the poorer 50% of the world’s population is just $10 trillion. The heft of bank balance sheets, private-equity, mutual and hedge funds, pension & social welfare coffers, sovereign wealth funds and holdings of personal wealth, leave one dumb struck by their magnitude. FC rules the world.
Recently, post the 2009 recession, Central Banks including especially the Fed in the US expanded money supply not by billions but by trillions. Governments issued bonds, that is borrowed from FC’s (money-market) gigantic holdings to splurge on fiscal deficits or “sold” Treasury Bonds to Central Banks, which printed money (electronically) to “buy” on never-never terms. Debts to Central Banks will never be repaid, simply rolled over in perpetuity. Central Banks also ‘Quantitative-Eased’ hundreds of billions to banks and private funds to lubricate asset purchases (equities and property) which merely ballooned an asset price bubble and exacerbated wealth inequality. I don’t want to stud this piece with statistics which readers will find easily enough on the Internet and will limit myself to three numbers. The US national (government) debt of $26.5 trillion exceeded US GDP during 2020 and will not decline in the foreseeable future – in Japan it’s 230%. Second, global government debt is $60 trillion but global GDP in nominal (not PPP) terms is $75 trillion. The third point is that the total debt of non-financial corporations, globally, is about 95% of global GDP according to the IMF.
This essay is intended for my non-specialist readers and the data gives a broad idea of magnitudes and distributions. It is not easy to gauge indebtedness of financial institutions as reliable data is hard to come by. And it is meaningless to tot up household debt globally because $1000 has a different meaning for say the denizens of the USA as against an Indian or an Indonesian. The idea I would like you to take away is not only that states and Corporations are deeply mired in debt, but more important things will get worse not better in the 2020s decade. This is commonplace in countries where productivity is low and which will never export enough to cover imports plus investment for capital projects plus surpluses to accommodate graft for the political classes. But I put basket cases to a side to deal with chronic diseases of the mighty. I cannot within the confines of this essay deal with the US, the EU and China, the big three whose capital shapes the world, and I have to limit this essay mainly to the US
Classical Keynesianism held that when demand and employment were low and economic activity in decline, the state should intervene and prime the pump with monetary and fiscal injections. ‘Monetary’ means to hold interest rates down and lend (print) to would-be investors; fiscal stimulus is big spending by governments to build infrastructure and create employment. Roosevelt’s New Deal helped but it was really WW2 (capitalism loves wars, armaments production and sales) that did the trick. In theory, economic revival should allow the government to recoup its outlay via higher taxes and duties. The “Keynesian multiplier” was said to be greater than one. It worked in the glorious boom from 1945-1970 when capitalism shone and socialist ideas were put away in a dog-box. But Keynes-Thought lost its shine after the oil-shocks of the 1970s and welfare capitalism slumped into Stagflation – economic growth was stuck in the mud; high inflation could not be reduced and high unemployment persisted. The world did not learn a lesson and turn against capitalism. On the contrary, there came neoliberalism; Regan, Thatcher, Pinochet and JR slashing welfare, smashing trade unions, privatising and swinging political philosophy to the far right. Except Pinochet, mostly within the bounds of democracy unlike ultra-right populism today.
The gurus of neoliberalism like Heinrich Hayek, Robert Barro and Robert Lucas, theorised that the Keynesian-multiplier was less than one. Barro father of the now discredited ‘rational expectations theory’ said that if the state spent more, people will realise that higher taxes were on the way and would spend less, erasing the hoped for increase in demand. Nothing of the sort is happening today; reality has stood ‘rational expectations’ on its head. The US housing market is rising because of low interest rates (interest rates are negative in Japan). Consumer spending remains undamped without engendering inflation because the US consumer is tapping into a global, mainly Asian, dirt cheap by US prices, one-billion worker labour-market churning out goodies for pampered North American and European consumers. Inflation in the Eurozone is negative; Japan is in perpetual deflation. Fifteen dollars per hour! An Asian or south of the US-border worker will be lucky to take home $15 (LKR 2800) a day. What Barro and his ilk failed to take into account was much-integrated global goods, services and labour markets. US inflation stays stubbornly low because producers for the US market de facto pay minimal wages to their producers (workers). In any case governments and Central Banks can’t stimulate the economy in perpetuity, you can’t defy gravity forever.
Demand is slack in advanced countries because the 1% rich can only splurge that much on consumer goods and prefer to invest in assets, and secondly production companies are risk-averse in the face of Asian competition hence domestic investment in manufacturing remains weak. The pre-COVID picture was bleak since state revenue was slack in the rich world due to slow growth, and it was falling in the US thanks to Trump’s tax handouts to the rich. Post-COVID expenditure has risen even further due to large expenses on medical and subsistence grants and unemployment payments. Hence pressure for trillion-dollar stimulus packages. The end point is that substantial fiscal deficits have become a permanent feature. In the US for example the fiscal deficit for 2020 and 2021 taken together will be three to five trillion dollars. There is no way out except to borrow-print-hold interest rates low or negative, and live with debt for eternity. Eurozone stimulus will be hundreds of billions per years for many more years. This nexus of extra-loose monetary policy and unescapable fiscal deficit blurs the divide between monetary and fiscal policy; they merge. Government borrowing without constraint has got a new name, Modern Monetary Theory (MMT). Adherents of MMT dismiss concerns that excess borrowing will induce inflation or will bring countries to the brink of an abyss. They have no fear that if interest rates go up governments will have to default or that the financial system will die in convulsions.
I need to repeat the thesis that underpins my essay before moving on: The world economy has entered a period of universal debt – government, corporate and household. I now need to say a few words about high-finance in China; I am avoiding the term finance-capital (FC) when dealing with China because how financial interactions will unfold in the context of a state-led economy cannot be foreseen yet. High-finance is moving into China on a not insignificant scale. I am on tenuous ground, but I make a ball-park guess that about 10% of global high-finance is networked with China – add 5% to 10% if Hong Kong is included. True, New York, London, Tokyo and Frankfurt dominate bank, investment-fund and equity-market capital. High-finance however is on the move; asset managers (BlackRock and Vanguard), giant investment banks (JP Morgan Chase) and others are setting up shop in China (HSBC is already there), and Ant Group’s Hong Kong stock market launch later this year will be the largest ever IPO, eclipsing Saudi oil giant Aramco’s recent listing. Let us imagine that global high-finance has a quarter of its roots in the PRC by 2030. Remember that China took over as manufacturing workshop of the world in 20 years from 1980 to 2000; finance is a great deal more fluid than industry.
High-finance will be affected if the reach of China’s financial sector becomes even half as big as its global manufacturing. Some of the influences that will underpin change in the decade of the 2020s are easy to discern. The stranglehold of the US dollar as world reserve currency and mechanism of payment will need to be broken. Within five years an alternative global payments system and a currency based on two or three of the following, gold, yuan, yen, Euro and US$, will need to be initiated. (The US is the only country that can run eternal deficits, print mountains of money and export its economic problems because the world remains hungry for dollars till the value of the dollar declines). Second, the world needs other payments mechanism to overcome the US stranglehold known as sanctions – Cuba, Iran, Hong Kong, China, Venezuela, Turkey and Russia are among affected countries. Third, Belt & Road expenditure will be facilitated by an alternative global currency and banking and payments mechanisms.
A few words about Lanka before I sign off. The merging of monetary and fiscal policy is already advanced. Prof Lakshman’s task is to stay on the phone borrowing from whoever will lend and burning the midnight oil ensuring that the printing presses keep rolling. We are familiar with Lanka’s Central Bank borrowing billions again and again from China, India, the IMF or money-markets to repay China, India, the IMF or money-markets, again and again! Debt keeps growing as interest compounds while capital indebtedness persists. The balance of payments will remain in the red if not forever, for the foreseeable future. I don’t know it can be reversed both because governments need to survive politically and there is no big-enough feasible economic strategy. I am certain China, India, Japan and the US will not let us sink on the balance of payments issue since none of them wants a chaotic and anarchic country in this geographic location. For this reason I do not see sudden collapse but slow irreversible decline.
This essay has turned into heavy reading; I feel sorry for myself. No one pays attention to well researched stuff that is not simple to skim and digest. Anything on the Sinhala-Tamil brawl or derogatory of persons, regimes or regime-opponents draws stampeding crowds. Oh well, what to do!