Frank Taylor

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?

Frank Taylor

[* Those arguing for 100% ‘debt-free’  money – spent, not lent, into circulation – regard any significant/long-term debt as destructive and unnecessary. –BL]

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