Investment markets have been unsettled of late, resulting in the worst quarter for major American stock indices since 2008. Are European G20 leaders correct in declaring there is too much debt in the world? Or is President Obama’s team right in pushing for more stimulus? Who holds the real economic insights? Those who say we must borrow our way forward to recovery? Or those who believe a new day of financial austerity looms?
What does it mean to say there is too much global debt? In what circumstance is there too much debt when one person’s obligation to repay principal and interest is not only the legal basis of another person’s capital but also the prospect for making that capital grow at a compounded rate? Does it matter what form capital takes? Does it matter how capital ownership is distributed? Are there limits to the economic constructiveness of one person’s debts being an essential component of another person’s assets?
In saying there is too much debt in the world there is a tacit admission that it is foolhardy to have the bulk of the world’s debt owed to a tiny percentage of the world’s population. Amassed paper capital does not always stimulate growth of infrastructure and developed wealth. Speculative capital invested to generate more of the same may not be much when denominated in JOBS. In today’s world the rich take their capital and invest it in betting pools where they hope investment demand will cause it to appreciate (inflate). Hence, our “jobless recovery” — the trickle-down theory now shown to be an emperor without clothes. Indeed, the theory ceases to work in the public interest once greed overpowers the desire to invest wisely for a better world. But in a world where profit demands trump visions of goodness, what can we expect? Profit is measured on a quarterly basis: Goodness is realized across decades!
Working class people of the world have insufficient purchasing power left by which to keep economies growing after servicing their debts. People’s growing costs of living coupled with their debt service obligations undercut their confidence to spend. In a sense, the wealthy have taken fuel from the hearths of producers — the fuel in hundreds of millions of private fires that must be kept burning brightly to keep the global economy healthy. This piggishness of the speculatively rich undercuts the virtuous cycle of a fair return of capital to labor — a critical breakdown when corporations are more profitable than ever before. If this wasn’t enough, injury is added to insult as big political parties exchange largesse for votes, further undercutting the rewards of productive contribution (merit).
Aggregate demand in developed economies is burdened by the overwhelming debt loads of consumers, governments and businesses. The discretionary spending power of consumers is curtailed by the encumbrances inherent in heavy principal and interest payments. If the global debt of the bottom 90% was cut in half, the value of equity in the hands of the bottom 90% would rise in its purchasing power. The middle class would be back on their feet as consumers and capital holding market competitors. Unfortunately, justice would not be served because a large part of consumer and mortgage debt reflects irresponsibility. (The most responsible persons in the American middle class — often the least indebted persons — would be shortchanged.) Debt problems cannot be fixed through class-based redistribution when financial immorality cuts across class divisions. A merit based system is called for.
Governments worldwide cannot raise taxes much lest they damage economies already made fragile. Many American businesses cannot bring manufacturing home from Asia because they are overwhelmed with debt following Wall Street instrumented leveraged buyouts by private equity firms. They cannot lower prices because their structural equity was plundered by bandits playing a falsified game of capitalist investment. (See John Kosman’s 2009 book, “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis.”)
The world would be a much safer place economically (and thus militarily) if the central banking system had not lent its might to the creation of monetary policy by which the already wealthy could more effectively filch the ‘labor capital’ of working class people. Culture, of course, plays a role, as people can be seduced by inculcated norms to borrow and spend more than they should. But “easy money” lending for consumerism is also consequential as it provides an incentive for people to make errant decisions.
In a better world the total net worth of everyone would be far more denominated in sustainable equity ownership, not in the ownership of bonds and debt instruments. Sustainable equity can no longer be predicated upon growth, for population growth and natural resource consumption growth is not indefinitely achievable in a finite world. The growth model is rapidly becoming obsolete — along with its flawed religious and moral assumptions. Unfortunately, the world’s ponzi equity markets are predicated upon a demand/supply equation that requires growth to support historic valuations. At this stage in the maturation of the growth cycle, the growth model turns economically lethal.
The wealthiest 2% of the world have not yet realized they have acquired a larger slice of world wealth than is sustainable when the overhead costs of living have become so high for the working class. In addition to a very substantial tax load — some of it concealed in long-term inflation that reflects government debt growth — people must struggle to hold their place in life. Social mobility generally requires a decent car, an abode in a reasonably well-kept neighborhood, and costly commitments to health care, insurance coverage and educational services. Indeed, it is hard for college educated persons to be marriageable without shouldering a good deal of costs necessitated by social norms.
Regular folks are spending too much on the socially normed necessities of life to support the kind of debt they have acquired. Likewise, the rich have acquired the right to receive more income from other people’s debt payments than can be sustained. As governments borrow more and more they set new debt against existing debt in a competition for debt service. Before long it will begin to dawn upon debt instrument holders that their prospects of being paid in full are diminishing as the global debt pool grows. New debt is diluting the credit worthiness of established debt irrespective of debt ratings.
Once it becomes clear that there is not enough labor capital left to support the face value of capital denominated in debt instruments, interest rates will rise — with or without Ben Bernanke’s magic wand. Bond funds will get hammered as bond managers sell bonds into weak demand to meet redemptions. Stocks will be decimated alongside bonds and the entire world economy will have to be restructured while investment markets are shuttered.
If you think the collective knees of the U.S. Congress knocked in 2008 while the Treasury Secretary did his blackmail routine on behalf of Wall Street, wait until you see the weakness of the Congress when the U.S. Treasury cannot sell T-bills. Meanwhile, the current demand for treasuries by some elites is a maneuver to increase government’s dependency upon the continued goodwill of those holding the debt (i.e., willingness to continue rolling over the debt). This emerging “fiscal leverage” will doom the independence of federal government policy making.
Wall Street lobbying during the last number of years testifies that the speculative rich are very loathe to relinquish any part of their white-knuckled grasp on the world’s assets. But without realizing it, they fight against themselves. Too much of the world’s global capital is owed to them and owed by foolish governments. A better world cannot materialize — tikkun olam notwithstanding — because the distribution of wealth has become too imbalanced. True, the poor and middle class borrowed too much; nevertheless, the rich and influential used their corporate power irresponsibly to entice spiritually straying people and profligate governments into taking on too much debt. Thus, today’s banking reforms are just stop gap measures in an ‘Alice in Wonderland’ world.
In sum, the entire culture of the world is poised to undergo change whether people want it or not. There will be a few more years of herky-jerky political change. Not long afterward, something of apocalyptic stature will bring ‘change people can believe in.’ It is not unwarranted to hope that an era of peace and constructive progress will dawn thereafter. A meltdown of establishment power may give an emerging world the opportunity to implement the learning of a few thousand years.