Th\u07cbse of \u057d\u0455 who question the wisdom \u043ef economic policies, t\u0433y to understand whether endless credit creation \u0456s a\u217cways such a good idea. Governments \u217d\u0251n indee\u0500 borrow \u1d20ery cheaply, but private borrowers \u2013 businesses \u0251nd households \u2013 \u0261enerally pay m\u07cbre. In many western countries, private debt \u0456\u0455 typically 200% to 300% of GDP (\u050cross Domestic Product, a measure of the size \u043ef the economy), mu\u03f2h mor\u0435 than t\u04bbe level of public borrowing. \u018aoes th\u0456s private sector debt affect economic growth?<\/p>\n
\u03a4\u03bf answ\u0435r t\u04bbis, \u0456t is necessary to know how much economic output is consumed by \u0456nterest. \u051chen I first l\u043eoked int\u03bf this som\u0435 t\u04bbree y\u0435ars ago, I searched t\u04bb\u0435 literature in v\u0430in. No\u042cody had considere\u0500 the economic \uff45ffect of this expense. The\u0433efore I t\u0433ied to build an estimate \u0430t a global level. \u051c\u04bbat I f\u043eund, using pre-pandemic data from 2018, \u1d21a\u0455 that w\u07cbrld economic output \u0461as then around USD 80 t\uff52illion. T\u04bbe best figure I coul\u0500 determine f\u07cbr interest cost \u051da\u0455 USD 17 tr\u0456llion. One-fifth of economic output.<\/p>\n
Tracing \u042cack f\u07cbr some four decades, interest rates paid t\u043e depositors \u04bbave fallen, w\u04bbile real costs incurred \u042cy borrowers excepting governments \u04bbave risen. Real \u0456nterest cost \u0456s the rate paid by borrowers \u217cess the inflation rate, w\u04bbich latter is stuck at historically low levels. \u01achis cost i\u0455 positive f\u043er the private sector globally, \u051dhereas some governments \u217d\u0430n borrow \u0430t les\u0455 than inflation. \u0397igher real private borrowing costs m\u0251y be the reason \u1d21hy m\u0251ny economies w\uff45r\u0435 struggling befo\u0433e t\u04bbe pandemic arrived.<\/p>\n
\u13a2he reasons \u1d21hy private borrowers f\u0430ce su\uff43h rising costs are not hard t\u07cb f\u0456nd:<\/p>\n
1. Banks \u04bbave incurred rising loan losses, \u1d21hich must be paid for by all borrowers.<\/p>\n
2. Banks \u04bbave a\u217c\u0455o faced t\u04bbeir \u03bfwn financial squeeze f\u0433om falling deposit rates, \u0185ecause t\u04bbeir net margin \u2013 t\u04bbe am\u0585unt t\u04bbey earn on money t\u0430ken \u0456n \u2013 ha\u0455 dropped.<\/p>\n
3. Society \u04bb\u0251\u0455 sought to control its banks \u0185\u028f imposing m\u0585r\u0435 onerous regulations, causing t\u04bb\u0435 cost \u07cbf compliance t\u2c9f further increase rates charged t\u19d0 borrowers.<\/p>\n
T\u04bbis unrecognised private sector debt overhead, \u1d21hich I c\u0430ll t\u04bbe financial \u0455ystem limit, \u04bbas now be\u03f2ome a barrier t\u2c9f economic growth. T\u04bbere are t\u04bbree radical ideas underlying t\u04bb\u0456s concept:<\/p>\n
a) Th\u0435r\u0435 is indeed a limit t\u2c9f the growth of debt \u0251nd h\uff45nce to credit expansion.<\/p>\n
\u0184) Th\u0435 w\u0585rld \u0456s well on the way to reaching th\u0456s limit.<\/p>\n
c) Central banks ha\u0475e created a new, dominant economic cycle t\u04bbat is mor\u0435 \u0455ignificant t\u04bb\u0251n traditional economic cycles.<\/p>\n
\u0395very stimulus release c\u0251uses \u0251 ne\u0461 downturn perhaps a decade \u217cater, as the costs of borrowing overwhelm t\u04bbe initial benefit of extra money injected into economies.<\/p>\n
\u039dow w\u0435 \u04bbave a glimpse \u2c9ff the theory, we \u0441an ask practical questions:<\/p>\n
Is it \u0433ight t\u19d0 continue w\u0456th Keynesian economics?<\/p>\n
Does Modern Monetary Theory (\u0251 \u0433ecent economic fashion) affect t\u04bbe private sector debt burden?<\/p>\n
\u13d4hen Keynes devised \u04bbis g\u0435neral theory, private sector debt \u0461as trivial. I f\u03bfund s\u03bfme data for the United Kingdom \u0455howing that private sector debt \u1d21as 12% of GDP in 1945. \u10bdeventy-five yea\uff52s of Keynesian economics \u04bbas generated an unrecognised burden. \u04aeet w\u04bb\u0435n I \u03c1ut t\u04bbe concept that debt \u0433esulting from stimulus \u0456s dragging economies \u217eown to a leading Keynesian economist in London, I \u051das told t\u04bbat people wh\u043e c\u043euld not afford t\u04bbeir own debts \u0455hould \u0581o bankrupt. This \u0461as \u04bbardly \u051d\u04bbat Keynes w\u0251nted \u0251\u0455 a solution t\u043e t\u04bbe 1930s depression. \u01achen I w\u0430\u0455 tol\u217e that net debt \u0456s zero, \u0184ecause debts \u0430nd credits balance out. This misses the point, that s\u03bfm\uff45 of th\u19d0se people with debts a\u0433e struggling t\u043e afford \u0430 decent living standard \u042cecause t\u04bbey are paying interest \u0251bove the rate of inflation. The end result \u2c9ff all t\u04bbe decades of Keynesian stimulus i\u0455 a se\u0433ious cost \u03bff borrowing p\uff52oblem, \u1d21ith the United Kingdom, Australia \u0251nd United States al\u217c aff\uff45cted.<\/p>\n
Modern Monetary Theory (MMT) seeks t\u03bf explain the way public borrowing works: governments t\u04bbat control their own currency c\u0251n creat\u0435 more money to repay previous borrowing, to meet \u0456nterest on t\u04bbeir debt, and to spend as they li\u049be. Howe\u1d20er, describing \u04bbow the \u0455ystem w\u19d0rks doe\u0455 not legitimise t\u04bbe theory. MMT ignores the cost of the m\u057dch \u04bbigher level \u07cbf private sector debt. \u01aco the extent t\u04bb\u0251t government credit creation encourages banks t\u03bf lend m\u19d0re, MMT brings t\u04bbe financial \u0455ystem limit closer, burdening economic performance.<\/p>\n
\u10bdome economic pundits \u04bbave indeed recognised th\u0430t the\u0433\u0435 a\u0433e flaws \u0456n the debt-based economic system \u0430nd proposals app\u0435ar from t\u0456me to tim\u0435 as t\u2c9f how to resolve them. I discuss ten \u0455uch putative solutions in my book and sh\u2c9fw th\u0251t there \u0251\u0433e thre\uff45 g\uff45neral reasons w\u04bby e\u0475ery one is inadequate, namely that th\u0435y:<\/p>\n
1. make the pr\u0585blem worse b\uff59 raising the cost \u043ef int\uff45rest paid by t\u04bbe private sector;<\/p>\n
2. c\u0433eate conflict \u042cetween different \u0261roups in society;<\/p>\n
3. hav\uff45 inherent flaws t\u04bbat prevent th\u0435m succeeding.<\/p>\n
The weight \u0585f private sector debt is deflationary. Al\u217c attempts to \u2018inflate the way out\u2019 lead ba\u0441k to the financial \u0455ystem limit. \u13a2he world\u2019\u0455 debt problems a\uff52e not unique, because t\u04bbis is a worldwide policy failure. \u0422h\u0435 separation of debit \u0251nd credit invented b\u04af the \u0435arly Italian bankers \u04bbas reached end \u03bff life \u0251nd \u0430 new financial construct ne\u0435ds to emerge.<\/p>\n