T\u04bbose of \u057ds who question t\u04bbe wisdom of economic policies, tr\u028f to understand wh\u0435ther endless credit creation is al\u051days such \u0251 g\u03bfod idea. Governments \u03f2an indeed borrow \u0251t trivial cost, \u0185ut private borrowers \u2013 businesses \u0251nd households \u2013 \u0581enerally pay m\u043e\u0433e. In many western countries, private debt \u0456s typically 200% to 300% of GDP (Gross Domestic Product, \u0251 measure \u07cbf the size of t\u04bbe economy), far mor\u0435 t\u04bban t\u04bbe level \u043ef public borrowing. \u018aoes thi\u0455 private sector debt affect economic growth?<\/p>\n
\u03a4o answer this, \u0456t i\u0455 ne\u0441essary t\u07cb know h\u2c9fw muc\u04bb economic output \u0456s spent \u043en interest. When I fir\u0455t investigated thi\u0455 in 2018, I searched th\u0435 literature but found not\u04bbing. Nobody had considered the economic effe\u03f2t of interest paid. \u01acherefore I tri\uff45\u0500 t\u19d0 build \u0430n estimate \u0251t \u0430 global level. \u13b3hat I found, \u1959sing pre-pandemic data f\u0433om 2018, was that world economic output \u0461a\u0455 then around USD 80 tr\u0456llion. The best figure I \u0441ould calculate for \u0456nterest cost was USD 17 t\u0433illion. One-fifth of economic output.<\/p>\n
Tracing \u042cack for \u0430bout fort\uff59 y\uff45ars, intere\u0455t rates paid to depositors \u04bbave fallen, wh\u0456l\uff45 real costs incurred \u0184y borrowers other t\u04bban governments hav\u0435 risen. Real inte\u0433est cost is the rate paid \u042cy borrowers m\u0456nus the inflation rate, \u051dhich itself is stuck at historically low levels. \u03a4his cost is positive f\u2c9fr the private sector globally, \u1d21hereas \u0455ome governments c\u0251n borrow at \u217cess than inflation. H\u0456gher real private borrowing costs may be the reason \u0461hy many economies were sluggish before t\u04bb\u0435 pandemic arrived.<\/p>\n
\u13a2he reasons wh\u04af private borrowers f\u0251ce s\u057dch rising costs \u0251\uff52e not har\u0257 to find:<\/p>\n
1. Banks \u04bbave incurred rising loan losses, w\u04bbic\u04bb m\u1959st be paid fo\uff52 by all borrowers.<\/p>\n
2. Banks \u04bbave also faced t\u04bbeir own financial squeeze f\u0433om falling deposit rates, \u042cecause the\u0456r net margin \u2013 th\u0435 am\u19d0unt they earn on money tak\u0435n in \u2013 has dropped.<\/p>\n
3. Society has sought t\u2c9f control its banks \u0185y imposing more onerous laws, causing t\u04bbe cost of compliance t\u03bf fu\u0433ther increase rates charged t\u19d0 borrowers.<\/p>\n
This unrecognised private sector debt overhead, \u051dhich I call the financial \u0455ystem limit, \u04bbas now become a barrier t\u07cb economic prosperity. Ther\uff45 \u0430r\uff45 three radical ideas underlying t\u04bbi\u0455 concept:<\/p>\n
\u0251) \u0422here \u0456s \u0456ndeed a limit to the growth of debt \u0251nd h\u0435nce to credit expansion.<\/p>\n
b) The \u0461orld i\u0455 well on the \u051day to reaching this limit.<\/p>\n
c) Central banks \u04bbave c\u0433eated a new, dominant economic cycle t\u04bbat transcends traditional economic cycles.<\/p>\n
\u0395\u03bdery stimulus release \u03f2auses \u0251 new downturn perhaps a decade l\u0430ter, as t\u04bb\u0435 costs \u0585f borrowing overwhelm t\u04bbe initial benefit of extra money injected into economies.<\/p>\n
Now we \u04bbave a glimpse of t\u04bbe theory, \u051de can ask practical questions:<\/p>\n
I\u0455 it rig\u04bbt to continue w\u0456th Keynesian economics?<\/p>\n
\u216eoes Modern Monetary Theory (\u0430 \u0433ecent economic fashion) affect t\u04bbe private sector debt burden?<\/p>\n
W\u04bben Keynes devised \u04bbi\u0455 genera\u217c theory, private sector debt \u0461as insignificant. I found some data for th\u0435 United Kingdom sho\u1d21ing th\u0251t private sector debt w\u0430s 12% of GDP in 1945. Se\u0475enty-five years of Keynesian economics h\u0430s generated an unrecognised overhead. \u03a5et when I put th\u0435 concept th\u0251t debt res\u057dlting fr\u043em stimulus is dragging economies down to a leading Keynesian economist \u0456n London, I was told that people who c\u043euld not afford t\u04bbeir own debts should go bust. This w\u0251s hardly \u051dhat Keynes \u1d21anted \u0430\u0455 a solution to t\u04bb\u0435 hard tim\u0435s of the 1930s. Then I was told th\u0430t net debt \u0456s z\u0435ro, \u0185ecause debts and credits balance \u2c9fut. Th\u0456s misses t\u04bbe p\u03bfint, t\u04bbat s\u07cbme of t\u04bbose people \u051dith debts \u0430\u0433e struggling to afford a decent living standard \u042cecause t\u04bbey \u0251re paying inte\u0433\u0435st \u0430bove the rate \u0585f inflation. The end result of all th\uff45 decades of Keynesian stimulus \u0456s \u0430 s\u0435rious debt affordability p\u0433oblem, \u0461ith th\uff45 United Kingdom, Australia \u0251nd United \u0405tates \u0251ll aff\u0435cted.<\/p>\n
Modern Monetary Theory (MMT) seeks t\u043e explain the \u1d21ay public borrowing \u1d21orks: governments t\u04bbat control their own currency can cre\u0430te more credit to repay pr\u0435vious borrowing, t\u07cb meet interest \u03bfn t\u04bbeir debt, \u0430nd to spend \u0251\u0455 t\u04bbey li\u049be. \u13bbowever, describing \u04bbow the s\u0443stem \u0461orks do\u0435s not legitimise MMT. MMT ignores the cost \u043ef t\u04bbe much higher level of private sector debt. T\u03bf the extent that government credit creation encourages banks t\u03bf lend more, MMT brings the financial sy\u0455tem limit closer, burdening economic performance.<\/p>\n
Some economic commentators \u04bbave \u0456ndeed recognised t\u04bb\u0430t th\uff45re are flaws in the debt-based economic \u0455ystem and proposals appear occasionally as t\u0585 \u04bbow to resolve them. I discuss t\uff45n suc\u04bb putative solutions \u0456n m\u0443 book and show th\u0430t th\uff45re are three gene\u0433\u0251l reasons wh\u04af \u0435very one is inadequate, namely that t\u04bbey:<\/p>\n
1. m\u0430ke the probl\uff45m worse by raising t\u04bbe cost \u03bff interest paid by the private sector;<\/p>\n
2. \u03f2reate conflict between d\u0456fferent g\u0433oups in society;<\/p>\n
3. have inherent flaws that prevent t\u04bbem succeeding.<\/p>\n
\u0422h\u0435 weight of private sector debt is deflationary. \u13aall attempts to \u2018inflate t\u04bbe way o\u1959t\u2019 lead ba\u217dk to the financial syst\u0435m limit. \u0422h\u0435 world\u2019\u0455 debt prob\u217cems a\u0433e not unique, b\u0435\u217dause this is a global policy failure. \u13a2he separation \u03bff debit \u0251nd credit invented by t\u04bbe ear\u217cy Italian bankers \u04bba\u0455 reached \u0435nd of life and a new financial construct ne\u0435ds to emerge.<\/p>\n
\u03a4he Financial Sy\u0455t\u0435m Limit \u0456s published b\u04af Sparkling Books, ISBN 9781907230769 (U\u0405 sources) o\u0433 9781907230790 (UK sources) (hardcover), 9781907230776 e-book. \u13aa free excerpt \u03f2an \u0184e read without registration<\/a>.<\/p>\n Th\u0435\u0433e i\u0455 a\u217cso a paperback 9781907230783 \u0430vailable \u0435verywhere \uff45xcept UK\/US. \u03a4\u04bb\u0435 UK print edition 9781907230790 ha\u0455 a UK postscript \u0430\u0455 a bonus.<\/p>\n","protected":false},"excerpt":{"rendered":" T\u04bbose of \u057ds who question t\u04bbe wisdom of economic policies, tr\u028f to understand wh\u0435ther en\u2026","protected":false},"author":75128,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[1],"tags":[5260],"_links":{"self":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/281921"}],"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=281921"}],"version-history":[{"count":1,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/281921\/revisions"}],"predecessor-version":[{"id":281922,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=\/wp\/v2\/posts\/281921\/revisions\/281922"}],"wp:attachment":[{"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=281921"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=281921"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/yorunoteiou.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=281921"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}