New Year Wishes – Part Two

In the second part of my New Year wishes, I ask for debt jubilees, ending austerity and getting China’s economic statistics to a realistic level.

Yes to a debt jubilee

Having diagnosed the debt problem, we should implement the cure; ultimately the most viable solution to the debt problem. I’d like to see governments and central banks – in the US but also in Japan, the UK and the Eurozone – pay out money to reduce private debt, and also quasi-private debt such as that owed by the governments of the Eurozone periphery. Some may think this is an act of bailing out people who only have themselves to blame, prohibitively expensive and utopian. I have two answers to these accusations: government and central banks.

To begin with, in many countries government policy to reduce regulation, to make lending more accessible, is what got debt to such high levels in the first place. Of course, no-one has forced people to borrow and consume but permitting repeated repackaging of debt (such as sub-primes in the US) or 50-year mortgages with inadequately regulated savings banks (as in Spain1) certainly encourages it. For some people this was their only way to buy a property. Given the sharp rise in prices in several countries – an 80% rise between January 2000 and January 2006 in the US; in Spain a huge cumulated growth of 232% between 1997 and 2007 – that has applied to an increasing number of people.

As for the argument of cost, the Fed’s version of Quantitative Easing – a vain attempt at stimulating the economy through buying up bonds – created liabilities of around USD 4.5 trillion off its balance sheet. If that had been converted into real money and shared equally between all US mortgage-holders, it would have resulted in a cheque for just over USD 55,800 arriving in each letterbox.

Calling such a move utopian doesn’t hold any water either. Debt jubilees have been tried and tested – from the first civilizations in Mesopotamia to, most recently, a year ago in Croatia where around 60,000 of its poorest, most indebted citizens had their liabilities wiped out by banks, telecoms and utilities operators. The overall cost of the Croatian example was estimated at just over USD 30.4 million, or 5 weeks’ bombing of Syria, according to the UK government’s costings.2

And the great thing is that everyone benefits – my colleague at IDEA Economics, Michael Hudson, has probably done more than anyone to prove that a functional economy, with a more equal share of the pie not only benefits the weakest in society but also produces greater wealth for the richest.

No to austerity

Along with that, European countries have to stop their austerity programmes. This is not even an option if we are to see signs of sustainable economic growth. Right now governments are cutting back on health services (for example, 13.6% spending cuts in Spain between 2009 and 2013), legal services (an 8% cut to the UK Ministry of Justice’s 2015/16 budget) and ministries (150,000 jobs cut since 2008 in France alone).

All this has taken place under the mistaken belief that government budgets should be run like company accounts. As my IDEA Economics colleague, Prof. Steve Keen, has explained,3 public debt is a sign of the state of the economy – not a cause. Trying to reduce the public debt removes spending capacity from private pockets and results in another unnecessary slump. The apologists of austerity continue to sow the seeds of the next great depression, financial crisis and global conflict.

As public services are reduced the population becomes poorer and public sector workers’ salaries are cut or they are made redundant; thus consumption is hit and the economy shrinks. The most sustainable way a government can cover its costs is through taxation – but taxation which targets surplus and idle capital and income – the only objections to steeply progressive forms of taxation are misguided ideology.

At a presentation called “WTF??”4 with Steve Keen and Richard Duncan, I cross-examined (in their absence of course) those individuals with the greatest apparent responsibility for causing the Global Financial Crisis. It would be too simplistic to pin all the blame on any one man but when primary responsibility attaching to Ronald Reagan’s advisor, Art Laffer was exposed,5 it’s fair to say that had he been anywhere in the vicinity of Sukhumvit that night lynching mobs and pitchforks would have gone some way to implementing street justice.

Putting this on a global scale shows the inequality cutting government services creates. Oxfam have just released a report which suggests that, in 2010, 388 people owned as much wealth as the poorest half of the world. The report estimates that number is now at just 62 people.

Can we handle the truth?

My final wish would be for government statisticians in Peking to take a truth pill, only partly because of the possibility that they might actually choke on it!

Official statistics had China’s year-on-year GDP growth at 6.8% for Q4 of last year; December exports fell by 1.4% compared with a year earlier – far less than expected; household and corporate debt are apparently at 38% and 125% respectively. Frankly, I’ve read Dan Brown novels which are more believable.

These figures may indicate a slowdown compared with recent years but they’re still quite good considering the intervention the Chinese government has undertaken in recent months.6 In fact the figures are just too good to be true.

Many economists consider the real GDP rate to be significantly lower than the government says – and this may have been the case for some time. If this is indeed the reality, consumption could also be well lower than published. Added to slower GDP growth caused by China’s attempts to move from an economy dominated by exports would represent a double blow to GDP.

And then there’s the debt. To start with, I’m convinced Chinese corporate debt is much higher than the official figure of 125% of GDP7 – I have it at between 140%-175% of GDP.8 A lot of this is in state enterprises, which presumably has a high proportion of non-performing loans within the banking system – of course we don’t know exactly what proportion. Added to that there is the large – and largely unquantifiable – shadow banking system which exists in China.

What we need from China is transparent data, so that we can trust what we see and act accordingly to avoid, where possible, another global financial crisis.

Leaving winter?

Taking all of these measures would provide a sustainable long-term structure for the global economy to grow. There will always be good times and bad times – or seasons as Kondratieff labelled them9 – but not as extreme as we saw in 2008 and could well experience in the not-too-distant future.

Footnotes:

1 Spain: The Bell is tolling but is anyone listening? MBMG Investment Advisory Update, August 2015, http://www.mbmg-investment.com/in-the-media/inthemedia/57

2 Estimated by UK Government at USD 291 million/year, http://uk.reuters.com/
article/uk-britain-osborne-syria-idUKKBN0TK4PH20151201

3 https://www.youtube.com/watch?v=Au2N07eHa-Q

4 http://www.austchamthailand.com/event-775828 &
https://www.youtube.com/watch?v=5wEZ6M-veMs
http://www.bccthai.com/BCCT/asp/EventDetail.asp?EventID=2253

5 Ibid

6 http://www.mbmg-investment.com/in-the-media/inthemedia/59

7 McKinsey Global Institute analysis

8 MBMG IA estimate, taking into consideration shadow banking and GDP overstatement.

9 https://northcoastinvestmentresearch.files.wordpress .com/2009/01/kondratieff-cycle.jpg