Michael Hudson: debts that can’t be paid, won’t be

JisforJunkEconAnother excerpt in this occasional series from Michael Hudson’s heterodox ‘dictionary’ J is for Junk Economics (2017, p.72):

“Debts that can’t be paid, won’t be”: Over time, debts mount up in excess of the ability of wide swathes of the economy to pay, except by transferring personal and public property to creditors.

The volume of debt owed by businesses, families and governments typically is as large as gross domestic product (GDP) – that is 100%. If the average interest rate to carry this debt is 5%, the economy must grow by 5% each year just to pay the interest charges. But economies are not growing at this rate. Hence, debt service paid to the financial sector is eating into economies, leaving less for labor and industry, that is, for production and consumption.

Greece’s debt has soared to about 180% of GDP. To pay 5% interest means that its economy must pay 9% of GDP each year to bondholders and bankers. To calculate the amount that an economy must pay in interest (not including the FIRE* sector as a whole), multiply the rate of interest (5%) by the ratio of debt to GDP (180%). The answer is 9% of GDP absorbed by interest charges. If an economy grows at 1% or 2% – today’s norm for the United States and eurozone – then any higher interest rate will eat into the economy.

Paying so much leaves less income to be spent in domestic markets. This shrinks employment and hence new investment, blocking the economy from growing. Debts cannot be paid except by making the economy poorer, until ultimately it is able to pay only by selling off public assets to rent extractors. But privatization raises the economy’s cost of living and doing business, impairing its competitiveness. This process is not sustainable.

The political issue erupts when debts cannot be paid. The debt crisis requires nations to decide whether to save the creditors’ claims for payment (by foreclosure) or save the economy. After 2008 the Obama administration saved the banks and bondholders, leaving the economy to limp along in a state of debt deflation. Economic shrinkage must continue until the debts are written down.

*Finance, Insurance and Real Estate

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Modern Monetary Theory and disguised unemployment

Thomas Palley, a post-Keynesian economist, here provides a critique of recent policy proposals by US Democratic politicians employing some ideas from Modern Monetary Theory. They variously want to fund programmes such as universal healthcare and a ‘Green New Deal’, financed to a large degree by increased government borrowing.

MMT, as a set of ideas, is an offshoot of post-Keynesianism, but is perhaps more straightforward to grasp when it comes to budget deficits and its opposition to austerity; hence its current popular appeal. Continue reading

Why US debt must continue to rise – Michael Pettis

Donald Trump’s signature policy of 2017, the so-called Tax Cuts and Jobs Act, cut taxes sharply for the richest earners and corporations. As so often in recent decades, many Republicans claimed that this would pay for itself via the increased revenue generated by faster economic growth, which would incorporate higher investment and higher wages for ordinary Americans. There would therefore be little need to cut spending to prevent the deficit from rising.

Such supply-side policies are part of the essence of ‘trickle-down’ economics, which boils down to the argument that making the richest members of society richer will make everyone richer, including those at the bottom. As with previous such policies, this remains to be seen, but the signs are not good.

On the other hand the US budget deficit is rising and is set to rise further. The national debt is also now growing faster than previously. While growth has been stimulated for a while, perhaps more from the demand-side than the supply-side, it seems that it is now slowing once more. This is a long way from the vaunted economic miracle from the President’s State of the Union address. Continue reading