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William White: Is our "macroeconomic ammunition" used up? (Ueli Hiltpool Fotograf)


“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” according to William White, former chief economist at the Bank for International Settlements in an interview for the Daily Telegraph on January 20. According to White, “the situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.”

White’s pessimism chimes with warnings from Goldman Sachs last year. Andrew Wilson, chief executive of one of its fund management businesses, was reported on May 26, again in the Daily Telegraph, as saying that excessive debt represents “a risk to economies” and is a “major issue”. Specifically, in mature industrial nations populations are ageing and the proportion of working-age people to the total population is falling, presenting “us” with the question of how “we” are “going to pay down the huge debt burden”.

The combination of the Bank for International Settlements, Goldman Sachs and the Daily Telegraph ought to be intellectually overwhelming. But they have indulged in rhetoric and used words sloppily. To whom does “us” refer? Who exactly are “we”? And, although the image of “the world drowning in debt” is often invoked, what is it supposed to mean?

The world is usually understood as Planet Earth: with some land, more ocean and a population of over seven billion. Rather obviously, the world in this sense — the world in its entirety — cannot be in debt, let alone drowning in the stuff. For that notion to stack up, the world would have to be in hock to other planets. But, science fiction apart, no creditors live on Mars or Venus, or anywhere else in “our” galactic neighbourhood. “We” — meaning the Earth’s population — cannot pay down “our” debt burden to financiers elsewhere in the solar system.

The first-person plural is being used in a mischievous and lazy way, as if from a pulpit, to make “us” (that is, everyone) feel guilty. In this context it is a logical impossibility for everyone to be guilty. Yes, some people have debts. But it then follows — necessarily, inevitably, logically — that other people have assets which are claims on the people with debt. For the world as a whole, the debts and the credits cancel out, and no net debt is owed. The world’s population consists of debtors and creditors.

Companies and government have debts, but all companies are legal contrivances with identically equal assets and liabilities, and a solvent corporate sector has no net obligations. Governments may borrow and have large debts to the citizens, but citizens are also taxpayers and are therefore responsible for paying the taxes that are needed to honour the debts. Viewed in the round, bondholders’ claims and taxpayers’ obligations cancel out. To sum every sector’s debt and then to lament the “massive” debt of the nation is a blunder arising from grotesque double-counting. 

Let it be immediately conceded that the equivalence of debts and credits does not mean that debtors can always pay creditors in full. Abundant evidence is available to show that societies with large public debts can have difficulty raising taxes to meet bondholders’ claims. Less than four years ago the Greek government reneged on its bonds, in the largest sovereign default in history. But even in Greece the nation’s true wealth — its land, its people, its infrastructure and dwellings, its plant and equipment, its magnificent ancient culture and less magnificent modern institutions — remains very much in being.

The debt doomsters go too far. Totalling the debts of the economy’s sectors to arrive at a figure “we” owe to outer space is nonsensical. It should instead be emphasised that rising ratios of debt to national output are experienced  in all free-market nations as their economies become more developed. When private sector agents borrow, their main purpose is sensible: to acquire an asset from which they expect to enjoy a healthy return. Debtors are in a sustainable position if the value of their assets is a multiple of the amounts they have borrowed. Critically, national wealth in a typical European nation is six, seven or eight times national income, whereas the ratio of household debt to income is generally under two.

Further, the ability to service debt from income — in other words, to pay the interest on the loans — depends on the rate of interest as well as the level of debt. Although the ratio of public debt to national income has risen in most countries since 2007, the ratio of debt interest to national income has fallen practically everywhere. The world as a whole is not “drowning in debt”, and the Bank for International Settlements, Goldman Sachs, the Daily Telegraph and far too many others should stop scaremongering about the subject.


 
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Postkey
March 6th, 2016
10:03 AM
"Governments may borrow and have large debts to the citizens, but citizens are also taxpayers and are therefore responsible for paying the taxes that are needed to honour the debts." Do taxes pay debts? “Here is a graph of the difference between cumulative tax revenue and cumulative federal spending in the US since 1789. The US started to run fiscal deficits systematically in 1931 and since then has run deficits 85 per cent of the time. Every time they had tried to run surpluses a recession has followed. Note the gap widens after the early 1970s, which of course is when the Bretton Woods system of convertible currencies and fixed exchange rates was abandoned and the US government adopted a fiat currency system. It seems that public spending is not paid for by taxes over a long period of time. Funny about that!” http://bilbo.economicoutlook.net/blog/?p=29761#more-29761

Postkey
March 6th, 2016
10:03 AM
" When private sector agents borrow, their main purpose is sensible: to acquire an asset from which they expect to enjoy a healthy return." Agree. However, this assumes that the pursuit of 'private interests' {profit} is socially beneficial? I would have thought that the results of 'unregulated markets' post 2007-8 would indicate the contrary? Prof. R. A. Werner believes that the 'man-made problem' was the issuing of the 'wrong' type of credit. There is 'productive' and 'unproductive' credit. “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power - something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.” http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

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