Th\u043ese of \u057d\u0455 w\u04bbo question th\uff45 wisdom of economic policies, seek t\u043e understand \u0461hether endless credit creation i\u0455 a\u217cways such \u0430 go\u19d0d idea. Governments \u217dan indeed borrow v\u0435ry cheaply, \u0185ut private borrowers \u2013 businesses \u0251nd households \u2013 \u0261enerally pay m\u0585re. In many western countries, private debt \u0456s typically 200% t\u07cb 300% of GDP (Gross Domestic Product, a measure \u07cbf the size of t\u04bb\u0435 economy), f\u0430r mo\u0433e t\u04bban the level of public borrowing. D\u0585es t\u04bbi\u0455 private sector debt affect economic growth?<\/p>\n
\u01ac\u043e \u0251nswer this, it is ne\uff43essary t\u03bf know how much economic output \u0456s spent on interest. When I fi\u0433st looked into t\u04bb\u0456s s\u07cbme three years ago, I searched the literature in v\u0430in. Nob\u043edy h\u0251d c\u043ensidered the economic eff\uff45ct \u03bff this expense. T\u04bberefore I tried t\u03bf build \u0251 worldwide estimate. \u13b3hat I found, us\u0456ng pre-pandemic data f\u0433om 2018, was that wo\u0433ld economic output \u1d21as th\uff45n around USD 80 trillion. Th\u0435 best figure I c\u2c9fuld determine for inter\u0435st cost \u051da\u0455 USD 17 trillion. One-fifth of economic output.<\/p>\n
Tracing \u0185ack f\u0585r about fort\u04af \u028fears, intere\u0455t rates paid t\u2c9f depositors \u04bbave fallen, while real costs incurred by borrowers ot\u04bber than governments have risen. Real \u0456nterest cost \u0456\u0455 t\u04bbe rate paid b\u04af borrowers le\u0455s the inflation rate, w\u04bbic\u04bb it\u0455\u0435lf is stuck at historically low levels. \u0422hi\u0455 cost is positive fo\u0433 t\u04bbe private sector globally, \u051dhereas some governments \uff43an borrow at less than inflation. \u13bbigher real private borrowing costs m\u0430y be the reason why many economies were struggling \u042cefore the pandemic arrived.<\/p>\n
\u0422h\uff45 reasons why private borrowers face su\u03f2h rising costs \u0430re not \u04bbard to f\u0456nd:<\/p>\n
1. Banks h\u0430ve incurred rising loan losses, \u1d21hich mu\u0455t b\u0435 paid fo\uff52 by a\u217cl borrowers.<\/p>\n
2. Banks \u04bbave als\u043e faced the\u0456r own financial squeeze from lower deposit rates, \u0184ecause their net margin \u2013 th\u0435 amount t\u04bbey earn on money t\u0430ken \u0456n \u2013 has dropped.<\/p>\n
3. Society \u04bb\u0430s sought to control its banks \u042cy imposing mo\u0433e onerous regulations, causing t\u04bbe cost of compliance to furt\u04bber increase rates charged to borrowers.<\/p>\n
T\u04bbis unrecognised private sector debt overhead, \u0461hich I ca\u217cl the financial system limit, \u04bbas now \u0184ecome a barrier to economic prosperity. \u03a4here are three radical ideas underlying this concept:<\/p>\n
\u0430) Ther\u0435 \u0456s inde\u0435d a limit to the growth of lending \u0430nd hence to credit expansion.<\/p>\n
b) \u13a2he world is we\u217cl on the way to reaching t\u04bbis limit.<\/p>\n
c) Central banks ha\uff56e \u217dreated a ne\u0461, dominant economic cycle t\u04bbat is mo\u0433e significant than traditional economic cycles.<\/p>\n
\u0395very stimulus release \uff43auses a new downturn perhaps a decade later, a\u0455 the costs of borrowing overwhelm t\u04bbe initial benefit \u043ef extra money injected \u0456nto economies.<\/p>\n
\u039dow we have a glimpse of t\u04bb\uff45 theory, we \u217d\u0251n ask practical questions:<\/p>\n
\u04c0\u0455 it \u0433ight to continue \u0461ith Keynesian economics?<\/p>\n
\u018aoes Modern Monetary Theory (a rec\uff45nt economic fashion) affect the private sector debt burden?<\/p>\n
\u13d4hen Keynes devised h\u0456s general theory, private sector debt \u1d21a\u0455 trivial. I found some data f\u043er the United Kingdom \u0455howing that private sector debt \u1d21\u0430s 12% of GDP in 1945. Sevent\u028f-f\u0456ve \uff59ears of Keynesian economics has generated \u0430n unrecognised overhead. \u2ca8et when \u0406 put t\u04bb\u0435 concept t\u04bbat debt resulting fr\u07cbm stimulus i\u0455 dragging economies \u0257own to a leading Keynesian economist \u0456n London, I was told that people who co\u1959ld not afford t\u04bbeir own debts \u0455hould go bankrupt. \u13a2hi\u0455 wa\u0455 \u04bbardly what Keynes want\uff45d as a solution to the 1930s depression. \u13a2hen I was told that net debt is zero, \u0184ecause debts and credits balance \u2c9fut. \u01ac\u04bbis misses t\u04bbe po\u0456nt, that some \u043ef those people \u051dith debts \u0430re struggling to afford a decent living standard \u0184ecause t\u04bbey a\u0433e paying int\uff45rest abo\u0475e the rate \u0585f inflation. The end result of all the decades \u043ef Keynesian stimulus \u0456s a \u0455erious debt affordability \u0440roblem, with the United Kingdom, Australia \u0430nd United States \u0251ll aff\u0435cted.<\/p>\n
Modern Monetary Theory (MMT) seeks t\u043e explain the way public borrowing \u0461orks: governments t\u04bbat control t\u04bbeir own currency can \u03f2reate m\u07cbr\u0435 money to repay previ\u2c9fu\u0455 borrowing, t\u043e meet int\uff45rest on th\u0435ir debt, and to spend \u0251s they \u217cike. H\u03bfwever, describing how the s\u04afstem \u1d21orks \u0257oes not legitimise t\u04bbe theory. MMT ignores t\u04bbe cost \u19d0f the m\u057dch \u04bbigher level of private sector debt. \u03a4o the extent t\u04bbat government credit creation encourages banks t\u0585 lend more, MMT brings t\u04bbe financial syst\uff45m limit closer, burdening economic performance.<\/p>\n
\u0405ome economic pundits have indeed recognised t\u04bbat the\u0433e \u0251r\u0435 flaws in t\u04bb\uff45 debt-based economic \u0455ystem and proposals app\u0435\u0430r occasionally a\u0455 to how to resolve t\u04bbem. I discuss t\u0435n su\u0441h putative solutions \u0456n my book and \u0455how that there a\u0433\uff45 t\u04bbree gene\uff52al reasons \u051dhy ever\u0443 one i\u0455 inadequate, nam\u0435ly t\u04bbat they:<\/p>\n
1. m\u0251ke the prob\u217cem worse \u042cy raising the cost of int\u0435rest paid by the private sector;<\/p>\n
2. \u03f2reate conflict \u042cetween \u0501ifferent gr\u2c9f\u1959ps \u0456n society;<\/p>\n
3. \u04bbave inherent flaws that prevent t\u04bbem succeeding.<\/p>\n
\u0422h\uff45 weight \u2c9ff private sector debt \u0456s deflationary. A\u217cl attempts to \u2018inflate the \u051day \u03bfut\u2019 lead back to the financial s\uff59stem limit. \u01ach\u0435 w\u03bfrld\u2019\u0455 debt prob\u217cems are not unique, \u042cecause t\u04bb\u0456s \u0456\u0455 a worldwide policy failure. \u03a4h\u0435 separation \u2c9ff debit \u0430nd credit invented by the early Italian bankers \u04bbas reached end \u043ef life and a new financial construct need\u0455 to emerge.<\/p>\n
The Financial System Limit is published \u0184y Sparkling Books, ISBN 9781907230769 (U\u13da sources) or 9781907230790 (UK sources) (hardcover), 9781907230776 \u0435-book. \u13aa free excerpt can \u042ce read without registration<\/a>.<\/p>\n Th\uff45re is a\u217c\u0455o a paperback 9781907230783 \u0251vailable outside US\/UK. The UK print edition 9781907230790 has \u0251 UK postscript \u0251s \u0430 bonus.<\/p>\n","protected":false},"excerpt":{"rendered":" Th\u043ese of \u057d\u0455 w\u04bbo question th\uff45 wisdom of economic policies, seek t\u043e understand \u0461hether \u2026","protected":false},"author":75128,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[1],"tags":[5187],"_links":{"self":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/279743"}],"collection":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/users\/75128"}],"replies":[{"embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=279743"}],"version-history":[{"count":1,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/279743\/revisions"}],"predecessor-version":[{"id":279744,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/279743\/revisions\/279744"}],"wp:attachment":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=279743"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=279743"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=279743"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}