13: MAKING THE CASE AGAINST DEBT
From whatever side of the specific arguments around monetary reform we may come there will be a general agreement in these pages that debt levels are grossly excessive.*
We may of course continue, as a small group in our mutual, yet often very cerebral, lamentations over this state of affairs whilst the world of politics and high finance passes us by. If our position is to be translated into practical politics which will catch the eye of a wider audience there we must be able to present soundly based models of the true cost of debt.
The growing signs that the housing market has, once again, reached its tipping point may present such an opportunity.
Private secured and unsecured debt now exceeds £1 trillion. Government debt is over £300 billion whilst there is another £70 billion of PFI debt which will fall on the public purse. Then there is corporate and external debt. The amassing of these debts has played an important part in Gordon Brown's efforts to convince us that we have entered the great never-never land from which the boom-bust cycle has been forever banished.
It is little wonder that Gordon Brown is so eager to move next door. For there must be a stage at which, for a given level of GDP, national asset valuation and interest rates, it be- comes impractical to expect people and institutions to take on ever greater debt to keep the system afloat. There must be a point when debt can expand no further and the card castle of debt and inflated asset values begins to implode. Yet remarkably, and after all the booms and busts there have been in the past, there appears be no model in any system of economic theory as to how debt interacts with other factors and what a prudent maximum level of debt across a given economy might be.
Perhaps some might argue that provided asset values keep rising so the countervailing quantum of debt can keep rising also more or less continuously. Yet the externalised costs of this debt will rise also.
For example as land prices rise so the cost of government will rise with the increased cost of providing public assets, housing benefit and 'affordable' housing. As the value of commercial land increases so the profit expectation from that land will increase either placing an upwards pressure on prices and/or a downwards pressure on wages. And it stands to reason that if people are having to spend ever greater amounts on servicing debts over an ever greater part of their lives they will have a correspondingly diminished share of income to devote to their pensions.
If for example we take as a baseline, the property market at the bottom of the post Lawson bust around 1993, what is the real cost to the average family in higher taxes, prices and/or lower wages, and lost pension opportunities of land price inflation since? It could be £3000, it could be £10,000. We seem not to know. Perhaps that is because certain vested interests don't want to know. In that case it is down to awkward souls such as ourselves to tell them.
The challenge to economic reformers is now to make the practical case against the debt economy. To do that we need good quality economic modelling. Are there any offers?
[* Those arguing for 100% ‘debt-free’ money – spent, not lent, into circulation – regard any significant/long-term debt as destructive and unnecessary. –BL]