Cassandra on World Debt


This week on Facebook: I am repeating myself here, in my 2011 post with the title ‘A Universal Debt!’ I recalled, “That someone looked into world indebtedness and facetiously drew the conclusion that The Earth must be in debt to the rest of The Universe. This was because every country in the world had an external debt load (barring about three). Obviously the earth is not in debt to someone else in the universe — unless you are a conspiracy theorist — but it is true that there is a global indebtedness.  What really matters, is not the debt, but the ability to pay off the debt with the interest that the debt accrues and the consequences of any inability to do this.” [sic]

All classes alike thus build their plans, the rich to spend more and save less, the poor to spend more and work less. John Maynard Keynes (1919)

For those of us living in the Western world global debt is something that the majority of its citizens do not take seriously as no end is foreseen to the ever increasing economic growth of the Western world. Today global debt is increased and the global citizenry has increased along with its indifference to deficit finance becoming the norm. Matt’s following cartoon repeats that joke, but as Yanis Varoufakis writes in his book ‘Adults In The Room’, politicians and their financiers are using world debt to ensnare us all in a global plutocracy.

Matt money

If you want to know the size of the world debt: click image

Taxation and an inflated currency are eventually used pay for this massive increase in world debt. Nevertheless, politicians, financiers and others with substantial wealth, will pay a lot less tax and have proportionally more discretionary income to spend than those with less wealth. Those that may not be paying any tax at all feel the effects of this fiscal policy in the welfare that they may receive (assuming that they receive any all).

The State can only raise its revenue through taxes, the issue of government bonds (gilts) and the regulation of the monetary policy, including quantitative easing and the privatisation of public assets. The ever increasing world reliance on a deficit financed economy¹, not only increases world debt but shows a negative correlation on the economic growth of the State².

The cake [wealth] was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of to-day but for the future security and improvement of the race,—in fact for “progress.” If only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labours. Keynes (1919): Functional Gilded-Age Inequality

“We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment” James Callaghan 1976: Labour Party Conference

The present mess is the result of decades of institutionalized monetary debasement and the accumulation of public debt. These policies have left us with bankrupt welfare states and overstretched banks, yet none of this has diminished the enthusiasm of politicians and bureaucrats to give us more of their medicine. Big Brother Loves You! Detlev Schlichter 2012


1. Global debt — Why has it hit an all-time high? And how worried should we be about it? Up to a point. The economic function of debt is to allow economic actors to spend more today than their incomes would otherwise allow. Households and firms borrow in order to finance consumption or investment. This can be a good idea if their income is temporarily restrained and spending more today will increase their welfare.

2. IMF issues warning on global debt: On governments, the IMF says, “Decisive action is needed now”. It argues that by improving their finances when economic performance is strong, governments will have more scope to use tax cuts or increases in public spending to combat a future downturn. Acting now also means they are less likely to have difficulty borrowing the money they need when the economy weakens.

3. The $247 trillion global debt bomb: Households, businesses and governments borrow on the assumption that they will service their debts either by paying the principal and interest or by rolling over the debts into new loans. But this works only if incomes grow fast enough to make the debts bearable or to justify new loans. When those ingredients go missing, delinquencies, defaults and (at worse) panics follow.

4. A Debt Crisis Seems To Have Come Out Of Nowhere: Of the 59 countries the IMF classifies as “low-income developing countries,” 24 are now either in a debt crisis or at high risk of tipping into one. “That’s 40 percent of poor countries and it’s nearly double the number five years ago. Those in most trouble include two countries that have already defaulted on some of their loans, they are already unable to pay the interest on their debt or to keep to the repayment schedule they had agreed to.

5. World is drowning in debt and it spells disaster for everyone: The entire planet is swimming in debt, yet no one seems to criticise the system itself as being fundamentally flawed. “A man in debt is so far a slave,” American essayist Ralph Waldo Emerson once reportedly said. In light of this statement, I contend that I don’t need to have a college degree in economics to tell you that our current financial system enslaving the entire world is not sustainable – and headed for one hell of a spectacularly ugly crash.


Referenced Articles & Books:

  • A text subscript above and preceding the title here, refers to a book or pdf (usually free), or simply a url that may sometimes link to a download that is also usually free.
  • A superscript on the brackets following the title here refers the articles (1-5) that it can be found in.
  • Occasionally an especially long url read is included below where the text superscript is preceded by an asterisk.
  • Sometimes a link to JSTOR is used, this lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.

¹The Real Effects Of Debt (pdf): At moderate levels, debt improves welfare and enhances growth. While the attention of policymakers following the recent crisis has been on reducing systemic risk stemming from a highly leveraged financial system, the challenges extend beyond that. Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth.

²Public Debt and Economic Growth: Is There a Causal Effect? (pdf) The current empirical evidence linking public debt and economic growth in advanced economies can be summarised as follows:

(i) there are many papers that show that public debt is negatively correlated with economic growth;
(ii) there is no paper that makes a convincing case for a causal link going from public debt to economic growth;
(iii) our paper suggests that such a causal link may not exist.

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This site was created for members and friends of My Telegraph blog site, but anyone is welcome to comment, and thereafter apply to become an author.

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Join our monthly competition and share story ideas...

The Real Economy

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Public Law for Everyone

Professor Mark Elliott

Bleda

Am I my Brothers keeper?

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