Lanka Will Subsist On A Diet Of Perpetual Debt: The Permeance Of Global Debt

By Kumar David –NOVEMBER 1, 2020

Prof. Kumar David

The thesis of this essay, conveyed within my 1700 word-mandate, is that the world economy has entered a phase of near universal debt. Lanka’s inexorable overload of domestic and foreign debt is part our own making part footnote of the global story. Everywhere, mighty USA and European Union included, the state is mired in debt that will not vanish so long as Finance Capital (FC) rules the world. The surpluses created by economic activity are amassed a few institutions and individuals. Thomas Piketty drew attention to inequity of wealth and income. The market capitalisation of the world’s largest 2000 companies is $100 trillion, but the value of all the property (land, houses, other fixed assets) of the poorer 50% of the world’s population is just $10 trillion. The heft of bank balance sheets, private-equity, mutual and hedge funds, pension & social welfare coffers, sovereign wealth funds and holdings of personal wealth, leave one dumb struck by their magnitude. FC rules the world.

Recently, post the 2009 recession, Central Banks including especially the Fed in the US expanded money supply not by billions but by trillions. Governments issued bonds, that is borrowed from FC’s (money-market) gigantic holdings to splurge on fiscal deficits or “sold” Treasury Bonds to Central Banks, which printed money (electronically) to “buy” on never-never terms. Debts to Central Banks will never be repaid, simply rolled over in perpetuity. Central Banks also ‘Quantitative-Eased’ hundreds of billions to banks and private funds to lubricate asset purchases (equities and property) which merely ballooned an asset price bubble and exacerbated wealth inequality. I don’t want to stud this piece with statistics which readers will find easily enough on the Internet and will limit myself to three numbers. The US national (government) debt of $26.5 trillion exceeded US GDP during 2020 and will not decline in the foreseeable future – in Japan it’s 230%. Second, global government debt is $60 trillion but global GDP in nominal (not PPP) terms is $75 trillion. The third point is that the total debt of non-financial corporations, globally, is about 95% of global GDP according to the IMF.

This essay is intended for my non-specialist readers and the data gives a broad idea of magnitudes and distributions. It is not easy to gauge indebtedness of financial institutions as reliable data is hard to come by. And it is meaningless to tot up household debt globally because $1000 has a different meaning for say the denizens of the USA as against an Indian or an Indonesian. The idea I would like you to take away is not only that states and Corporations are deeply mired in debt, but more important things will get worse not better in the 2020s decade. This is commonplace in countries where productivity is low and which will never export enough to cover imports plus investment for capital projects plus surpluses to accommodate graft for the political classes. But I put basket cases to a side to deal with chronic diseases of the mighty. I cannot within the confines of this essay deal with the US, the EU and China, the big three whose capital shapes the world, and I have to limit this essay mainly to the US

Classical Keynesianism held that when demand and employment were low and economic activity in decline, the state should intervene and prime the pump with monetary and fiscal injections. ‘Monetary’ means to hold interest rates down and lend (print) to would-be investors; fiscal stimulus is big spending by governments to build infrastructure and create employment. Roosevelt’s New Deal helped but it was really WW2 (capitalism loves wars, armaments production and sales) that did the trick. In theory, economic revival should allow the government to recoup its outlay via higher taxes and duties. The “Keynesian multiplier” was said to be greater than one. It worked in the glorious boom from 1945-1970 when capitalism shone and socialist ideas were put away in a dog-box. But Keynes-Thought lost its shine after the oil-shocks of the 1970s and welfare capitalism slumped into Stagflation – economic growth was stuck in the mud; high inflation could not be reduced and high unemployment persisted. The world did not learn a lesson and turn against capitalism. On the contrary, there came neoliberalism; Regan, Thatcher, Pinochet and JR slashing welfare, smashing trade unions, privatising and swinging political philosophy to the far right. Except Pinochet, mostly within the bounds of democracy unlike ultra-right populism today.

The gurus of neoliberalism like Heinrich Hayek, Robert Barro and Robert Lucas, theorised that the Keynesian-multiplier was less than one. Barro father of the now discredited ‘rational expectations theory’ said that if the state spent more, people will realise that higher taxes were on the way and would spend less, erasing the hoped for increase in demand. Nothing of the sort is happening today; reality has stood ‘rational expectations’ on its head. The US housing market is rising because of low interest rates (interest  rates are negative in Japan). Consumer spending remains undamped without engendering inflation because the US consumer is tapping into a global, mainly Asian, dirt cheap by US prices, one-billion worker labour-market churning out goodies for pampered North American and European consumers. Inflation in the Eurozone is negative; Japan is in perpetual deflation. Fifteen dollars per hour! An Asian or south of the US-border worker will be lucky to take home $15 (LKR 2800) a day. What Barro and his ilk failed to take into account was much-integrated global goods, services and labour markets. US inflation stays stubbornly low because producers for the US market de facto pay minimal wages to their producers (workers). In any case governments and Central Banks can’t stimulate the economy in perpetuity, you can’t defy gravity forever.

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