Wednesday, November 03, 2010

The party's over? Living on credit

So just how big is one trillion dollars? If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.
Over the last few months, I've been starting to get a sense of the significance of a debt-based economy and why it is such a ludicrously bad idea. Effectively, living on credit only makes sense if you are confident that the future will be (economically) bigger than the past. This has proven to be true for the last sixty years (and especially for the last thirty, which is when the credit society has really got going), and yet the comforting image of year-over-year global economic growth has been fuelled by the creation of ever larger mountains of debt. Check out the linked article to get a sense of the scale of the issue in the US, though remember that many other countries have debts of proportional size (or larger).

While the bet we've been making with the future has held up so far, what was revealed in 2008 is the downside of this scenario. If we don't keep piling up more debt, we face a very nasty period of deleveraging, which could make the Great Depression look like a party. But the higher the debt levels get, the worse the hangover when we stop drinking from the debt bottle.

If infinite growth were actually possible, then perhaps this wouldn't be a problem (though it would still face the risk of systemic shock being made much worse by all the debt hanging around). But infinite economic growth on a finite planet is not possible. We are betting against the future and keep doubling down, making our ultimate inevitable loss many times greater.

I am not an economist nor an economist's son and perhaps I'm missing something crucial, but this doesn't really sound like good news to me.


byron smith said...

"GDP has risen by 1,300% since 1971, while total US debt has risen by 2,600%. Now for the kicker. Real GDP has only gone up by 292% since 1971. This means that 1,000% of the increase in GDP was from Federal Reserve created inflation. Over this same time frame, real wages have declined by 6%, from $318 per week in 1971 to $299 per week today. Inflation has been the American drug of choice to commit suicide over the last 40 years. It is stealthy, seemingly painless, and deadly."
From here.

James Ferguson said...


I tend to agree that the scale of debt is unsustainable and the political temptation to keep increasing the scale of the debt is very bad.

However, one of the articles linked from the one you link to is clearly overdoing things, and the claim of bankruptcy is over the top.

Very late in the article they finally provide the context that the US Federal Budget is around $4 trillion. So debt is 3.5 times income, which is like someone on $100k having a $350k mortgage. It's a big debt and a lot to pay back, but not the end of the world.

The other important question is what is the debt being used for. If a (mature) business uses debt to pay its employees it is either going through a recession or in decline. But if it uses debt to buy new factory equipment, new technology etc it can reasonably expect that investment to pay back the debt.

Lastly, the trick when it comes to US inflation is that many, many countries back their own currency with US dollars. So when the US Fed prints more money they actually devalue everyone's currency, not just their own.

So it's both more sustainable than it seems and more exploitative than it seems. The US can essentially tax the subjects of its empire in a politically acceptable way by this means.

Jon said...

I think the other aspect of this, which doesn't necessarily contradict you argument, is that the concept of "economy" is a slippery thing. If we mean an industrial economy, one which turns raw materials into things like cars and fridges, then yes, infinite growth is not a possibility. But actually the economy measures this activity, plus provision of services (eg education and health) which don't primarily rely on physical resources, plus the use of recyclable or renewable materials (like textiles, for instance). The question is whether we can do more of the second and third sorts and de-emphasise the first.

byron smith said...

James - Yes, the article may be inflating things. I am not competent to judge and so am hesitant to provide such links. In one sense, I am aware that many commentators make a big deal of this issue but I am unsure what place to assign it in an assessments of societal threats.

That said, there must be some limit to the scale of the national debt that is possible to carry. At some point, other countries start to doubt your ability to repay your debts and so raise their interest rates to reflect this perception of increased risk of default (which, in turn, of course increases the likelihood of such default). Each stimulus package thus gives decreasing marginal returns: the same amount of stimulus provides less of the benefits it is intended to bring.

I also appreciate that debts can be used for more or less responsible things. A debt incurred to increase long term quality of society is less irresponsible than a short term splurge on something with little long term benefit. Worst of all would be going into debt to finance activities that contribute a net decrease in social goods. Some forms of economic activity may well fall into this category. Arguably, some of the more ecologically destructive activities may well end up costing more in the long run than their immediate benefit.

Further, there are various entities in debt. The US federal government debt often receives a lot of attention, but then there are also state debts and then corporate and personal debts. My impression is that the proportion of debt to income in each of these cases has been increasing for much of the last decade (or perhaps three decades). This trend is clearly a problem, even if things might not go into meltdown tomorrow, especially when there are few signs of this being reversed anytime soon (for all their noise about cutting government spending, the Tea Party are (as far as I am aware) yet to produce a credible budget showing where such cuts would occur on a scale commensurate with the size of the issue. Given that they also speak frequently of lowering taxes, this becomes even more problematic).

Jon: you are right to point out that the economy does not consist entirely of extractive industries, which is one way of talking about those whose activities rely on depleting a finite supply of some resource. This includes not just mining but also the lion's share of contemporary agricultural practices, which are effectively mining the soil. And this means that even service-based economies are based on extractive practices (since teachers need to eat). And all parts of the economy rely on energy, which means huge amounts of fossil fuels.

I agree that a greater emphasis on aspects of life other than consumption of "stuff" would go a long way towards addressing this issue, but I am yet to see anyone seriously being able to argue that this would do anything more than push the issue a few years into the future without revolutionary changes to our economic practices and assumptions (and sources of energy).

byron smith said...

Telegraph: "Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise. If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US."

byron smith said...

And the global picture from the WSJ: "$10.2 trillion: The amount of money advanced-nation governments will need to borrow in 2011. As the debts of advanced countries rise to levels not seen since the aftermath of World War II, it’s hard to know how much is too much. But it’s easy to see that the risk of serious financial trouble is growing.

"Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output. [...]

"But as the IMF warned in a report this week, the chances that investors will balk at lending to governments “remains high for advanced economies.” That’s a highly undesirable outcome — picture a financial crisis in which governments can’t step in to help, because government finances are the problem. We can’t know how close we are to such an outcome, and the need to keep the recovery going would make cutting back now a risky move. Ultimately, though, we’re heading in the wrong direction."

byron smith said...

This is one the most coherent accounts I've come across of the debt issue, is on the "deflationary" side of the debate (which, in my very limited understanding, is more persuasive to me than the (hyper)inflationists) and, best of all, address the Australian situation and why Australia largely avoided the GFC (so far...).

Doug said...

Byron - was at an interesting debate last night as to whether this house believes Scotland will have a sustainable national infrastructure by 2035.

Sadly, both before and after the debate the audience opposed the motion - more so after it!

The Chair, a past president of the Institution of Civil Engineers, talked about growth. Whilst he didn't phrase it in the context of a finite planet, he did state that growth is't a good thing if we use it selfishly for another TV etc... but should be distributing that wealth.

It made me think of this post.

byron smith said...

Which way did you personally vote before and after the debate?

byron smith said...

US debt visualised.

byron smith said...

AlterNet: The 6 biggest lies about US debt.

byron smith said...

AlterNet: If the rich paid taxes...

byron smith said...

CD: War is debt, a second look at the cuts to military spending in the debt deal. "The military budget has ballooned so much over the last decade that even if it was cut in half tomorrow the U.S. would still spend more than it did in 2001. [...] Factoring in interest payments for past military expenditures, spending on veterans' care and other defense-related items not included in the Pentagon budget, economist Robert Higgs estimates the yearly grand total spent on the military is $1 trillion or more, with over half of the federal income tax going to the military. And that massive national debt that's being used to justify cuts in social spending? Nothing has contributed to it more than the dramatic rise in military spending over the last decade, a factoid you might have missed if you get your news from a television."