tag:theconversation.com,2011:/ca/topics/private-debt-5191/articlesPrivate debt – The Conversation2019-01-07T16:18:20Ztag:theconversation.com,2011:article/1056862019-01-07T16:18:20Z2019-01-07T16:18:20ZHow Universal Credit perpetuates the false equation between public and private debt<figure><img src="https://images.theconversation.com/files/251875/original/file-20181221-103660-161hsgw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What the 'credit' in Universal Credit actually means.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-women-worried-about-bills-789678214?src=yTFgisO_2_R7E_03ub5xaw-2-9">Fure/Shutterstock</a></span></figcaption></figure><p>The full roll out of Universal Credit, the government’s plan to collapse six welfare benefits into one, was <a href="https://www.theguardian.com/society/2019/jan/05/amber-rudd-to-delay-universal-credit-roll-out-pilot-study">delayed in early January</a>. This followed mounting concerns by MPs and months of trenchant <a href="https://www.independent.co.uk/news/uk/home-news/benefit-sanctions-universal-credit-dwp-report-study-no-evidence-a8577061.html">criticism</a> of its design, including from the <a href="https://www.ohchr.org/Documents/Issues/Poverty/EOM_GB_16Nov2018.pdf">UN’s special rapporteur</a> on extreme poverty and human rights. </p>
<p>These criticisms are warranted and important. Yet the concept of Universal Credit, and its approach to debt, reveals something wider about the UK’s current political moment.</p>
<p>Taken at face value, Universal Credit has a seemingly innocent meaning. “Credit” simply means a payment made to your account. “Universal” means that it replaces previously separate benefits payments with a singular one that should fit all requirements. On this <a href="https://www.gov.uk/universal-credit">official</a> reading, the concept may invoke positive connotations of efficiency and solvency. </p>
<p>But people generally associate credit with a form of borrowing, which produces an interest-bearing debt. Under this interpretation, the repayment of a debt is taken to be a moral obligation – and this is relevant to Universal Credit.</p>
<p>Some may argue that Universal Credit is not a loan: no interest is charged, no debt is created, no underwriting takes place. Yet it nevertheless establishes a loan-like relationship to recipients who will be <a href="https://theconversation.com/constant-anxiety-of-benefit-sanctions-is-toxic-for-mental-health-of-disabled-people-105067">sanctioned</a> if they fail to meet the conditions set up in the “claimant commitment” each recipient must sign. The conditions are all about finding as much work as possible quickly. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/universal-credit-is-built-around-flawed-incentives-that-are-doing-real-damage-fixing-it-is-essential-105202">Universal Credit is built around flawed incentives that are doing real damage – fixing it is essential</a>
</strong>
</em>
</p>
<hr>
<h2>Public services become conditional</h2>
<p>The “credit” in Universal Credit is then not about an actual loan of money. It’s rather about a relationship of discipline and punishment similar to the relationship of debtor to creditor – a relationship of unequal power which supposedly generates moral obligations. </p>
<p>The idea here is that if people receive money through Universal Credit they do not do so primarily as a right, but as a form of performance-dependent loan to help them become “fit to work” and to start working. In this morality story, taxpayers prepay for your benefits so that you can repay this figurative debt by becoming a working taxpayer yourself. If you fail to comply with your “claimant commitments”, you become unworthy of their support. Then your means for subsistence will be reduced or withheld. </p>
<p>But it is not only money that these “debtors” are supposed to eventually pay back by becoming taxpayers. They also repay by submitting to a way of living in which everything becomes secondary to gainful employment. </p>
<h2>Fixation on private debt</h2>
<p>The reason why the creditor-debtor relationship is used as the model for the obligations of those who receive Universal Credit lies in the grip which the logic of private debt has on British politics.</p>
<p>Private debt is rightly a worry for many Britons. Millions of UK households currently have negative equity or rely on credit card debt or overdrafts to pay for essentials. Unsecured consumer credit, the type that’s not related to mortgages, is fast <a href="https://www.theguardian.com/business/2017/sep/18/uk-debt-crisis-credit-cards-car-loans">on the rise</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/252639/original/file-20190107-32127-1y6knsd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Public and private debt: not the same thing.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/download/confirm/773824573?src=8KStCIohsomNgA8iNK62Lg-1-81&size=medium_jpg">John Williams RUS/Shutterstock</a></span>
</figcaption>
</figure>
<p>Public debt has been at the forefront of British politics at least since the onset of the recent great financial crisis in 2008. The austerity policies of recent UK governments were framed as a direct response to dangerous levels of public debt. The reduction of public spending was justified as necessary to avoid economic collapse. The consequences of these spending cuts are widely felt and <a href="https://www.theguardian.com/commentisfree/2017/mar/16/women-austerity-poor-vulnerable-gender-inequality">disproportionately borne</a> by the disadvantaged and vulnerable. </p>
<p>At the same time, there has been an equation of public and private forms of debt. This equation works via transferring the idea of overspending that causes life-changing bankruptcy from your own household to the nation. As the then deputy prime minister, <a href="http://www.libdemvoice.org/full-text-nick-cleggs-speech-to-liberal-democratautumnconference-21236.html">Nick Clegg, put it</a> in 2010: </p>
<blockquote>
<p>We can’t keep spending money as if nothing had changed … It’s the same as a family with earnings of £26,000 a year who are spending £32,000 a year. Even though they’re already £40,000 in debt. Imagine if that was you. You’d be crippled by the interest payments.</p>
</blockquote>
<p>With this equation, any pound spent on welfare is a pound added to the debt tally that urgently needs to be reduced. Under this logic, welfare payments should therefore be cut as much as possible. Any pound spent on welfare that cannot be cut should be tied to as strong an expectation as possible that it will be repaid – in some form or other – like a private loan. </p>
<h2>A misplaced equation</h2>
<p>But the equation hides the differences between public and private debt. States which have sovereignty over their currency such as the UK (and unlike members of the Eurozone) cannot become insolvent like private households. They can always issue more currency to remain solvent. Under some circumstances the issuing of currency can lead to inflation but that is a different question, to which a <a href="https://www.routledge.com/The-Philosophy-of-Debt/Douglas/p/book/9781138929746">more complex answer</a> than “balance the budget or go bust” is in order. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/two-real-life-accounts-of-the-effect-of-benefits-sanctions-46500">Two real-life accounts of the effect of benefits sanctions</a>
</strong>
</em>
</p>
<hr>
<p>The concept of Universal Credit illustrates the fixation on debt in current British politics. This fixation supports the ongoing shift from a period when public services were considered as a right, to the point where they are received conditionally, on “credit”. </p>
<p>To become free of this fixation, people should spend more time trying to <a href="https://www.luminosoa.org/site/books/10.1525/luminos.14/">understand public debt</a> and <a href="https://positivemoney.org/publications/#1504779308350-888031e1-fb67">money creation</a>. Doing so would not only be useful for assessing arguments for austerity and conditional welfare. It could also help expand the limits of what kinds of politics are “economically” possible after all.</p><img src="https://counter.theconversation.com/content/105686/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janosch Prinz receives funding from The Leverhulme Trust. </span></em></p>The concept of Universal Credit reveals something wider about the UK’s current political fixation on debt.Janosch Prinz, Leverhulme Early Career Fellow, University of East AngliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/420802015-05-20T15:18:40Z2015-05-20T15:18:40ZSyriza tensions reveal political stress in debt and social justice<figure><img src="https://images.theconversation.com/files/82438/original/image-20150520-11431-ygc791.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fighting the debt effect. Greece is struggling at every level.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/psyberartist/10055602935/in/photolist-byJ94S-5Kj1e7-dPfHwJ-qxvXVU-dWfqtG-iTx1HH-8dorLD-rQiHWt-9nBJUw-5LjXxK-9nyH7t-ghLpMb-iQLdCY-8douJa-gjzvxY-gjzAqp-8FhkoY-8e9uxd-nUJw41-2XRP4-2XSbo-nPTrF7-2XS3Q-r3JZdy-ofodMP-DTDpR">psyberartist</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Greece is back in the news (has it ever left?) with a new debt payment looming and the ruling Syriza Party increasingly marked by internal tensions. The call from some in the party to <a href="https://greekanalyst.wordpress.com/2015/05/18/call-for-rupture-now-by-the-political-secretariat-central-committee-of-syriza/">“rupture now with the lenders”</a> is in response to new rounds of payments due to service the loans absorbed by the Troika of the IMF, European Central Bank and European Commission. It is clear that even if the Greek government could cobble together the current instalment, the next debt payment, due at the end of June, cannot be met. </p>
<p>More cuts to government services (eliminating the <a href="http://www.ft.com/cms/s/0/9954a330-fa2b-11e4-b432-00144feab7de.html">insurance-pension system</a>), selling of assets (like <a href="http://www.wsj.com/articles/greece-to-proceed-with-piraeus-port-privatization-1423573999">Athens’s Port Piraeus</a>), or tax increases (<a href="http://www.aljazeera.com/indepth/features/2014/01/enfia-tax-greece-new-symbol-austerity-2014130124545458507.html">the ENFIA</a> and <a href="http://greece.greekreporter.com/2015/05/19/greek-govt-plans-radical-changes-in-vat-system/">VAT increases</a>) will still not be enough to squeeze another payment out of a small <a href="https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=sp_pop_totl&idim=country:GRC:PRT&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=sp_pop_totl&scale_y=lin&ind_y=false&rdim=region&idim=country:GRC&ifdim=region&hl=en_US&dl=en&ind=false">population of 11 million</a> that has already endured years of austerity.</p>
<h2>#DebtAction</h2>
<p>I have just returned from Greece as <a href="https://twitter.com/search?q=%23debtaction&src=typd">part of the #DebtAction Group</a>, a delegation that included academics, think-tankers, journalists, activists and a filmmaker, and which sought to explore the changing politics of debt in the Greek context. What we learned from the people we met in Greece is that there is a profound human and economic cost to pay for debt-led growth. When the good times roll and credit is plentiful the big banks lend without limit; however, when the banking crisis hits, as it did in 2008, it is the borrowers who bear all the downside risk.</p>
<p>Greece puts into sharp focus the real and long term costs of bank bailouts. The <a href="https://twitter.com/j_montgomerie/status/596973141269708800/photo/1">main delegation event</a>, at the <a href="http://www.nma.gr/index_en.htm">Numismatic Museum in Athens</a> drew a 100-strong crowd on a Sunday into a meeting room adorned with frescoes and rows of glass covered displays showcasing a trove of ancient Greek coins. The irony was clear for a country which now finds virtually all of its bank loans held by the Troika, and finds itself paying in growth. Damon Gibbon, Director of the Centre for Responsible Credit, highlighted the direct impact of austerity on the Greek economy: </p>
<blockquote>
<p>The Bank of Greece figures show debt payments are equivalent to 1.7% of GDP at the same time the Greek economy contracted by -1.8%, <a href="https://twitter.com/tzaf/status/599883845735940096">this is not a coincidence</a>.“</p>
</blockquote>
<p>Finance-led growth means that <a href="http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2Fquarterlybulletin%2F2014%2Fqb14q1prereleasemoneycreation.pdf&ei=XY1cVairFMezswG8-YBA&usg=AFQjCNEC40I_RsLixV-7vqDH8EnIWMnFzw&sig2=KNeYrpDqMBfP8wONQVxZpA&bvm=bv.93756505,d.bGg">private credit creation by banks</a> became both the source of growth in the short term – as <a href="http://www.positivemoney.org/issues/debt/">credit generates economic activity</a> – and the source of contraction in the medium term as interest payments on debt inhibit economic activity.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/82409/original/image-20150520-11456-3iq3p3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Banker. Chains. Greek flag. European Commission office. Point made.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/dropthedebt/6909170777/in/photolist-s9iZcn-juQ4GB-dFon4J-dsDU5J-bwxjG4-bwxiL6-bwxgQX-aBA6JJ-amqf3B-a1aEwm-a1aEbf-a1aDJ5-a17MLP-a17MnX-a1aCvy-a1aASm-a1aAp3-a17Jo8-a17HTP-a17HnF-a1ayaQ-a1ax2A-bwxhWe-a1ayxY-a1axu1-a1awG9-a1awcu-a1avVm-a1avqs-a1auW3-a1auhj-9WSnkL-8WmWvZ-8WpZAU-8WpYPY-5HjMoz-5Hp6x3-5HjLsE-5HjLnJ-5HfsGp-5HjLjf-Nnpih-5HjMpP-5HjMne/">Jubilee Debt Campaign</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The #DebtAction Group travelled to Greece specifically to learn more about household debt restructuring, a key proposal in <a href="http://www.syriza.gr/article/SYRIZA---THE-THESSALONIKI-PROGRAMME.html#.VVx1PvlViCQ">Syriza’s "Thessaloniki” programme</a>. <a href="https://theconversation.com/david-camerons-red-light-zone-is-closer-to-home-than-he-thinks-34333">Like in the UK</a>, and across Europe, household debt is the strategic silence in the endless noise about the public debt crisis. In Greece, private household debt is comparatively small at <a href="http://www.gold.ac.uk/perc/news/athens.php">€100 billion, equivalent to 15% of GDP in 2014</a>; the stock of debt might be small but its effects on households are tangible both economically and politically.</p>
<p>There is a growing consensus that Greece faces a <a href="http://www.huffingtonpost.co.uk/jo-simmons/austerity-greece_b_7313446.html">humanitarian crisis</a> because of austerity. When we look at private debt stocks we see that one in three households fear they will lose their house because they cannot service their accumulated financial liabilities (consumer debt, tax debts or mortgage). And at the same time, the number of vacant properties is increasing in step with homelessness. Community groups and activists have been forced to band together to <a href="http://www.demotix.com/news/4100532/activist-stop-foreclosure-house-greece/all-media">fight evictions and house auctions</a>.</p>
<p>Greece, like the UK, has a system of full-recourse mortgages. This means that the borrower must repay the full amount of the outstanding loan regardless of what the property sells for. So foreclosure makes a family homeless but still liable for the outstanding mortgage loan. This legal framework means banks assume very little downside risk in lending; however, when debt obligations are enforced by banks that received a direct bailout publicly funded bailout by the Troika, then the political response is obviously going to be volatile.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=231&fit=crop&dpr=1 600w, https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=231&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=231&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=290&fit=crop&dpr=1 754w, https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=290&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/82410/original/image-20150520-11440-17qho40.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=290&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Wrestling with stereotypes.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/59239214@N08/13476141903/in/photolist-5TDf1B-8Wmm5D-6cXCvZ-8SnDPH-8SqKv7-6cR7k5-8SqKDw-7AY1z6-8dnEb8-4n41t5-bAndNS-bPgTHt-bKPh4V-8WmnNr-bAnd4A-bPgUWH-bPgUai-bAnecG-bPgUyr-bPgTnt-bPgScX-3nsrqS-mwQKuc-mwQJPe-H2UEZ-8SnDEg-8SqKm3-9dpzNU-9dms86-cvFCRy-9ekBQk-s6mqc2">some guy called Darren</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>The term “personal” or “private” debt highlights how being indebted is isolating when compared to the shared debate about the “public” debt. Being unable to meet debt repayments has <a href="http://www.theverge.com/2015/2/2/7963911/greek-austerity-increased-suicides-financial-crisis-bmj-study">led to a rash of suicides in Greece</a> and in response, civil society groups and community organisations have started offering counselling and support to those struggling with stress, anxiety and depression because of the strain of meeting debt obligations. </p>
<h2>Shame and regret</h2>
<p>This personal shame of indebtedness is compounded by a damaging national context. Greeks are told it is their <a href="http://www.bbc.co.uk/news/world-europe-31803814">own cultural failings (laziness)</a> and <a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_13/06/2012_446876">bad public management</a> (failed modernisation) that got them into debt. This completely ignores the role of the European banking system in providing the means, opportunity and motive for banks to lend without reference to economic realities. Perhaps this omission comes about simply because it is the Greeks, not the banks, that must the pay the costs of boom years. </p>
<p>The stark reality is there is no future in debt-led austerity. Eventually the money will run out to service the debt stock. Perhaps Greece can make the interest payment to the ECB at the end of May, but it is very unlikely to make the IMF payment in June. It is hard to avoid the conclusion that both the Greek state and Greek households have ended up behaving in similar ways to meet their obligations: squeeze expenditure, sell assets and try to find some extra income. Live hand to mouth.</p>
<p>This is Greece now. You cannot pay with money you do not have and the call from within Syriza to effect a “rupture” with its lenders simply reflects this sentiment. To call this a radical left policy completely ignores the economic reality that austerity is not working anywhere in Europe: growth is always stalled, another financial crisis always looms and the spectre of a debt-deflationary cycle haunts the entire continent.</p><img src="https://counter.theconversation.com/content/42080/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johnna Montgomerie receives funding from the Economics and Social Research Council (ESRC) grant number ES/M006433/1 </span></em></p>A call to break with the leadership of Greece’s ruling party has highlighted the futility of debt-led austerity and the burden it places on people on the wrong side of a banker’s bad bet.Johnna Montgomerie, Lecturer in Economics, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/343312014-11-18T13:44:23Z2014-11-18T13:44:23ZHard Evidence: are we facing another financial crisis?<figure><img src="https://images.theconversation.com/files/64832/original/xw6bv3zr-1416308033.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cutting a dash. A 1957 Chevrolet</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/myoldpostcards/4229266345/in/photolist-7Vhu43-7rJ6xg-7oZyCT-7855oW-8aDW6P-8evM1p-6LG1iY-8C1iSM-8C1iwr-6R6LMt-7ZBPC9-7cDmCU-89PC1C-6Sppae-8chVUR-8aYtFE-781aPe-8zTK5V-8zTJHZ-6avAoG-8bhPeb-74PjY2-89PCwY-7mGhx8-6MtJBm-74Td3s-68MXMJ-7ewvrm-7VMDW1-8cmhbU-7jNiWi-7jSbuJ-8cNZ3k-7jgLrv-7jgMhx-7mGhpM-7a7NZf-7rJ7TF-7rJ7ev-6MpwhX-8imURZ-7X2AbR-6R6MD4-7cdJhY-8ez4BE-8iqaHG-65ifch-7c9SZ6-7NK5xi-4DtdMp">Randy von Liski</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Taken at face value, David Cameron’s <a href="http://www.theguardian.com/commentisfree/2014/nov/16/red-lights-global-economy-david-cameron">warning this week</a> about risks in the global economy sounds like it might be wonderfully prescient. Here’s the country’s economic chauffeur, carefully checking his instrument gauges, and sure enough, sees the same signs today that should have given us warning of the crisis of 2007-08. Time to apply the brakes.</p>
<p>There’s only one problem: the economic dashboard that Cameron relies upon <em>did not</em> warn of the crisis before it happened. Instead, that dashboard advised Cameron and other leaders around the world that everything was looking rosy, and that going full throttle was entirely safe. </p>
<p>The OECD’s Economic Outlook, published in May 2007, stated that its “central forecast remains indeed quite benign” as it predicted <a href="http://www.euractiv.com/euro/oecd-raises-growth-forecast-europe/article-164004">“a strong and sustained recovery in Europe”</a>. Some dashboard that turned out to be.</p>
<h2>Motor skills</h2>
<p>Politicians are fond of car analogies when talking about the economy, because they’ve actually driven cars, and they know how they work. Press the accelerator, you go faster; hit the brake, you slow down; the tachometer tells you whether the engine is flat out or idle; the fuel gauge tells you whether you need to call into a petrol station. Car controls work because they are designed by engineers who actually built the car in question, and the dashboard tells you all you need to know, with no serious omissions and no distracting false signals.</p>
<p>But the economic dashboard that Cameron relies upon today was horribly wrong in 2007: the signals it focused upon – mainly the rate of unemployment (low and falling), the rate of inflation (low), the government deficit (heading towards a surplus), and the rate of interest (low but rising to cool the economy down) – gave absolutely no warning of the biggest economic crisis in a century.</p>
<p>This mainstream dashboard gave no warning of the crisis because it was built by economists whose theories have more in common with Alice in Wonderland than with engineering. And one Mad Hatter assumption their dashboard makes is that the level of private debt can be ignored.</p>
<h2>Debt wish</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64833/original/d3fvwx9c-1416308892.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Questions for Bernanke.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/fordschool/8384644018/in/photolist-dLVuxU-dLPWoT-dLVv7u-dLPWHz-dLPVBX-dLPWrv-dLVwZL-dLVtFJ-dLVwv3-dLPXFB-dLPZgz-dLPYBr-------------dLVtwd-dLPXCi-dLPWLk-dLPXXF-dLVwnw-dLVv4b-dLQ1JF-dLPXj6-dLVxbj-dLVupQ-dLPYZ4-a5Tpoq-akrKqb-5sNWLd-5qaUiF-aE1CZp-dLKUBV-dLKUCZ-dLKUD8-dLKUzX-aG9mYB-feXDGC-7vqUDD-ddAgRS-aq2PTp-4dmrw5">Gerald R. Ford School of Public Policy, University of Michigan</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>If that sounds crazy to you, that’s because it is. Some influential economists argue that private debt has “no significant macroeconomic effects”, <a href="http://books.google.co.uk/books?id=Uo_OyKsfjxoC&pg=PA42&lpg=PA42&dq=bernanke+%22no+significant+macroeconomic+effects%22&source=bl&ots=Y6yJpgalYW&sig=GHixQiKDfPsHxEUK7PETBRFavmI&hl=en&sa=X&ei=fRxrVIWEAoXlaq7dgKgH&ved=0CC4Q6AEwAg#v=onepage&q=bernanke%20%22no%20significant%20macroeconomic%20effects%22&f=false">to quote Ben Bernanke</a>. Only mavericks who follow the then-ignored but now famous American economist Hyman Minsky disagree, and regard the level and growth of private debt as vital economic indicators.</p>
<p>I am one of those mavericks, and the signs I saw back in 2005 led me to be one of the handful of economists who <a href="http://www.voxeu.org/article/no-one-saw-coming-or-did-they">did warn of the crisis before it happened</a>.</p>
<p>Since then, the American philanthropist Richard Vague – who made his fortune in banking – has <a href="http://debt-economics.org/">examined all major economic crises</a> since 1850, and concluded that the two key signs of an imminent crisis are private debt exceeding 1.5 times GDP and that ratio rising by 17 percentage points or more over five years. Both those signals were clearly “flashing red” in 2007.</p>
<h2>Signals, noise</h2>
<p><a href="http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS">Private debt in Britain</a> rose from 135% of GDP in 2000 to 180% when the crisis began in August 2007 – a 45% rise in less than eight years. In the US, it rose from 125% to 160% – a 35% rise. Both these levels and the rates of change were unsustainable: the growth in private debt had to stop, and when it did, I expected that the biggest economic crisis since the Great Depression would follow – which is what actually happened.</p>
<p>So what are those reliable but neglected indicators telling us today? <a href="http://www.theatlantic.com/business/archive/2014/09/government-debt-isnt-the-problemprivate-debt-is/379865/">In the US</a>, private debt fell from 1.7 times GDP in 2010 to 1.45 times in 2014. It’s been rising since 2012 and was now growing at 5% of GDP per year in mid-2014, which is <a href="http://www.telegraph.co.uk/finance/financialcrisis/10817959/Household-debt-is-Britains-hidden-timebomb.html">spurring economic growth</a> – but the headroom for continued credit-driven growth is limited because the aggregate level is still so high. We are nudging back closer to Vague’s danger zone.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=463&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=463&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=463&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=582&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=582&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64835/original/xgn58v92-1416309496.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=582&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US Private Debt Level & rate of change.</span>
<span class="attribution"><span class="source">Federal Reserve Flow of Funds</span></span>
</figcaption>
</figure>
<p>In the UK, private debt peaked at more than twice GDP in 2010. It has fallen to 170% today, but between 2012 and 2014 it rose – stimulating economic growth. Now it is falling again – by as much as 5% of GDP a year. That implies that a credit contraction – however welcome it might be in stopping at least one warning light flashing – is likely to reduce British economic growth in the near future.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=486&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=486&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=486&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=611&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=611&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64830/original/nhn4kd3m-1416307721.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=611&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>So Cameron is right to worry, but he’s worrying about the wrong thing: panicking about a rising level of government debt, when at 91% of GDP, it’s 80 percentage points below the level of private debt. If Cameron thinks reducing government spending when private credit is contracting is good economic policy, then he’s ignoring the biggest car crash in economic history – the European Union, where government austerity turned the crisis into <a href="http://news.bbc.co.uk/1/hi/business/8242825.stm">a second Great Depression</a>.</p>
<p>The key indicator I use to anticipate where the economy is headed is the acceleration of private debt. Just as the rate of change of private debt indicates what’s going to happen to the level of economic activity, the acceleration of debt indicates whether activity is likely to rise or fall. That indicator, which was trending up from mid-2010 until mid-2012, has been headed down ever since. <a href="http://www.debtdeflation.com/blogs/2011/08/28/updated-credit-accelerators/">Debt acceleration</a> was strongly negative as of mid-2014, running at minus 10% of GDP.</p>
<p>That, combined with Richard Vague’s indicator that crises occur when private debt exceeds 150% of GDP (tick at 170% in mid-2014) and has grown by 20 percentage points or more over five years (in fact it’s shrunk by 30 percentage points since 2010), points to stagnation rather than crisis being the likely outcome for the UK economy. </p>
<p>In this scenario, an attempt to pare government spending back could make the stagnation worse – just as it has done across the Channel.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=524&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=524&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=524&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=658&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=658&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64831/original/kzxsvhwm-1416307840.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=658&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>All in all, I would recommend Cameron gets his economic dashboard fixed, or he risks steering the UK in the direction of Europe. </p>
<hr>
<p><em><a href="https://theconversation.com/uk/topics/hard-evidence">Hard Evidence</a> is a series of articles in which academics use research evidence to tackle the trickiest public policy questions.</em></p><img src="https://counter.theconversation.com/content/34331/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Keen has received research funding from the Institute for New Economic Thinking (<a href="http://www.ineteconomics.org">www.ineteconomics.org</a>) and has consulted to the Governor's Woods Foundation (<a href="http://www.govwoods.org">www.govwoods.org</a>). He is affiliated with IDEA Economics (<a href="http://www.ideaeconomics.org">www.ideaeconomics.org</a>).</span></em></p>Taken at face value, David Cameron’s warning this week about risks in the global economy sounds like it might be wonderfully prescient. Here’s the country’s economic chauffeur, carefully checking his instrument…Steve Keen, Head of the School of Economics, History & Politics, Kingston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/286842014-07-02T15:36:05Z2014-07-02T15:36:05ZHow Thames Water will pay next to nothing for a £4 billion tunnel<figure><img src="https://images.theconversation.com/files/52807/original/jkswgbxw-1404240484.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The people's water?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/loopzilla/5428001893/">loopzilla</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>London’s Victorian sewerage system is creaking and in dire need of renewal. The proposed solution: a 25km “super-sewer”, the <a href="http://www.thamestidewaytunnel.co.uk/">Thames Tideway Tunnel</a>, running from west to east across the capital at an estimated cost of £4.2 billion. </p>
<p>Thames Water wants to build the tunnel, but its owner, an international consortium of investors led by the Australian bank, Macquarie Group, has encountered a slight hitch: there’s not enough money to fund the upgrade. It seems there is too little equity left in the business and too much debt – the company has been leveraged up to the hilt, to the extent that it wants someone else to pay for the tunnel. </p>
<h2>Can’t pay, won’t pay</h2>
<p>In common with other investment consortia <a href="http://money.aol.co.uk/2013/05/21/who-really-owns-our-water-companies/">that own much of the water industry</a> in England, Thames Water has been loaded up with debt since privatisation. The debt is now some £8 billion, amounting to around four-fifths of the business, a <a href="http://www.investopedia.com/terms/g/gearing.asp">gearing</a> of just under 80%.</p>
<p>In itself, such high leverage is not necessarily a problem, unless, that is, you want to borrow more money. Then you run the risk of damaging your credit rating. But the investors <a href="http://cjres.oxfordjournals.org/content/6/3/419">have a plan</a>. </p>
<p>They’ve set up a separate business, a <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/305191/ttt-consult-sum-resp-201404.pdf">special-purpose vehicle</a>, to deliver the tunnel, neatly sidestepping any credit rating concerns. But the cost of the tunnel renewal is to be effectively funded from household water bills, meaning <a href="http://www.independent.co.uk/news/business/news/thames-water-calls-for-11-price-hike-to-pay-for-super-sewer-8979455.html">an 11% increase for Thames Water’s 14m customers</a>, up to 2020.</p>
<p>So, because it doesn’t have the money, Thames Water wants its customers to help pay for the super-sewer. </p>
<p>This is odd, perhaps, when you come to think about it. The privatisation of household water was sold to us in the 1980s as part of the wider Thatcherite drive to address the inefficiency of the public-sector providers by opening utilities to private-sector finance and management. The private sector was not slow in accepting the invitation. So what happened to all the finance and management?</p>
<h2>Same water, different shareholders</h2>
<p>In some ways, the water industry in England and Wales today looks much like it did at the time of privatisation in 1989. But after 25 years, only the trading names remain the same as before, with the public as a shareholder increasingly displaced by global consortia, pension and other specialist infrastructure funds. </p>
<p>Behind the familiar company logos, the companies that run Thames, Anglian, Southern and Yorkshire Water have led the way in engineering water bills for financial gain.</p>
<p>The asset that interests them, however, is not actually water, but people: households with the ability to pay water bills on a regular basis for the foreseeable future. </p>
<p>In the hands of a Macquarie-led consortium, such a guaranteed revenue stream presents a <a href="http://www.investopedia.com/ask/answers/07/securitization.asp">securitisation</a> opportunity, that is, a means to package up a debt with the prospects of future revenue. Leveraging debt through securitisation allows revenue streams from underlying assets, in this case, Thames Water’s bill-paying customers, to be packaged together, bonds issued against them, and then sold on to investors.</p>
<p>Crucially, securitisation represents a claim against the cash that flows from household water bills in the future – a guarantee of money which customers have yet to be billed. It is a form of refinancing that leaves Thames Water’s balance sheet short of equity, but with a mound of leveraged debt.</p>
<h2>Siphoning off profits</h2>
<p>Of course, this debt could be used to lower household water bills or finance infrastructure development. But it may also be used to pay higher shareholder dividends. </p>
<p>Companies such as Thames Water, it turns out, have been <a href="http://www.independent.co.uk/news/business/storm-over-thames-water-dividend-1256608.html">paying out in dividends</a> far more than they actually earn from their cash flows and using the borrowed money to fund substantial dividends for the <a href="http://cjres.oxfordjournals.org/content/6/3/419.full.pdf">best part of a decade</a> – money that could have been used to finance the Thames Tideway Tunnel. </p>
<p>The structuring and crafting of such deals like this are a relatively new development, one which arrived after the onset of privatisation and which left the water regulator <a href="http://www.ofwat.gov.uk/">Ofwat</a> in a position of having to adjust to the new financial reality. </p>
<h2>Ring-fenced politics</h2>
<p>Ofwat operates a regulatory ring-fence. So long as the water companies don’t allow their debt liabilities to interfere with their core water business, it’s pretty much left to them as to how much debt they take on. But the ring-fence, in the case of Thames Water, is looking as leaky as its decaying sewers.</p>
<p>The mound of debt taken on by Thames Water now means that it can’t raise the money to renew its infrastructure. Someone else – probably its bill-paying customers – will have to take on that burden. </p>
<p>If the political spotlight focused a little more brightly on the new financial reality of privatised water, you might get a reaction of the kind that has taken place in Berlin or in Copenhagen. The former has seen a <a href="http://www.reuters.com/article/2013/09/10/us-veolia-berlinwasser-idUSBRE9890OC20130910">re-municipalisation</a> of water utilities, the latter <a href="http://cphpost.dk/news/2-500-protest-against-goldman-sachs-deal.8473.html">protests</a> against the machinations of Goldman Sachs in the Danish energy market.</p>
<p>We could do worse than take a look at <a href="http://www.dwrcymru.com/en/Company-Information.aspx">Welsh Water’s not-for-profit model</a>. With no shareholders, the money from household water bills goes towards financing new infrastructure development and, if there’s a surplus, towards the payment of an annual customer dividend. Thatcher, we suspect, might even have approved.</p><img src="https://counter.theconversation.com/content/28684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>London’s Victorian sewerage system is creaking and in dire need of renewal. The proposed solution: a 25km “super-sewer”, the Thames Tideway Tunnel, running from west to east across the capital at an estimated…John Allen, Professor of Economic Geography, The Open UniversityMichael Pryke, Head of Geography, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/212012013-12-10T14:40:33Z2013-12-10T14:40:33ZTime to stop inflating the household debt bubble<figure><img src="https://images.theconversation.com/files/37262/original/f4q2w828-1386620563.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will the credit card cover this?</span> <span class="attribution"><span class="source">ben_osteen</span></span></figcaption></figure><p>Household debt in the UK recently hit a record high, surpassing the previous peak reached in September 2008. That was the month when Lehman Brothers collapsed, sparking off the global financial crisis. This time round, although it’s helping economic revival in the short term, rising personal debt could be destined for another “correction” which the government doesn’t seem able or motivated to fix.</p>
<p>Continued growth in UK household borrowing is the only way to get people spending again, when real incomes <a href="http://www.bbc.co.uk/news/business-23655605">remain stagnant</a> after a long fall. But our level of household debt invites an unflattering comparison with US economic policy, and shows up a persistent problem that could undermine our recovery. </p>
<p>US household debt peaked at just below 100% of GDP in early 2009, and has since fallen sharply, dropping below 80% by late 2012. This year’s continued fall, to pre-recession levels, enabled one official to <a href="http://www.smh.com.au/business/us-economy-turns-the-corner-on-privatesector-debt-20131028-2wbzy.html">declare</a> “de-leveraging” complete. </p>
<p>Americans have reversed the heavy private borrowing that amplified growth before the “credit crunch”, and then worsened the downturn that followed. Total US debt –- adding households’ debt to that of corporations and government –- is relatively modest, at <a href="http://www.sheffnersweb.net/blogs/accuratemaps/news/debt-at-500-of-gdp/">around 350% of GDP</a>.</p>
<p>By contrast, in the UK household debt alone has stayed stubbornly at the 200% of GDP that it reached in 2007. As well as adding to their debts, British households have <a href="http://news.sky.com/story/1176798/households-raid-savings-at-record-rate">run down</a>) their savings, withdrawing £23 billion in the past year. Total debt remains <a href="http://www.economist.com/blogs/graphicdetail/2012/09/global-debt-guide">around 500% of GDP</a>. </p>
<h2>Private problems</h2>
<p>High private debt is not inherently bad as long as it is more than matched by private assets, and that is largely the case here. Business debts are secured against plants and equipment that are unusually profitable in the UK, and almost 90% of household debt is <a href="http://www.ons.gov.uk/ons/rel/was/wealth-in-great-britain-wave-2/the-burden-of-property-debt-in-great-britain/sty-household-debt--for-theme-page-.html">secured against housing</a>. </p>
<p>Yes, rising living costs and falling incomes have forced many UK households into borrowing at high interest rates from “payday” and other <a href="https://theconversation.com/let-them-eat-credit-payday-lending-is-a-sign-of-the-times-19863">emergency lenders</a>. But for the rest, taking on new debt was simply a logical response to record low interest rates, ensured by “quantitative easing”. When saving is pointless and money is cheap, why wouldn’t you get into more debt?</p>
<p>However, when combined with rising government debt, the continued refusal of household debts to fall poses both political and economic problems for the Chancellor. </p>
<p>Economically, it suggests that low interest rates have boosted the wrong parts of the private sector: cheaper money has funded household borrowing for property investment, rather than business borrowing for productive investment. </p>
<p>Buying houses may add to individual wealth, but it does little to boost overall national income. In fact, increased home ownership may even constrain growth as rising accommodation costs <a href="http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/1013bp_homeownership.pdf">limit labour mobility</a>.</p>
<p>Some recovery in house prices was needed to raise highly indebted home-buyers out of negative equity and get them spending again. But the economy is not yet “rebalancing”; property investment is still picking up while business investment keeps falling (<a href="http://www.ons.gov.uk/ons/rel/bus-invest/business-investment/q3-2013-provisional-results/stb-business-investment-q3-2013-provisional.html">down almost 4%</a> from last year). </p>
<p>Politically, households’ and businesses’ refusal to lower debt is a potential embarrassment as the government has not been doing it either. The deficit may be <a href="http://www.bloomberg.com/news/2013-11-21/u-k-budget-deficit-narrows-as-sales-taxes-stamp-duty-increase.html">narrowing</a>, but until it is closed, public debt will keep growing. It is already at <a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23102013-AP/EN/2-23102013-AP-EN.PDF">90% of GDP</a> and could climb to 100%.</p>
<p>On the basis that we’re “all in this together”, the coalition believed early action to curb government borrowing would help households do likewise. Instead, public and private debts are now rising simultaneously, pushing the UK towards a total debt matched only by <a href="http://www.cnbc.com/id/100954843">Japan</a>. </p>
<p>This makes for a fragile recovery. The IMF <a href="http://www.bbc.co.uk/news/business-24444134">foresees</a> US growth accelerating next year, while the UK’s stays well below trend.</p>
<h2>Could have been us</h2>
<p>The comparison with the US will hurt the Chancellor. The Obama administration took over after an equally bad housing and stock-market crash, with proportionally more American households on irredeemable “sub-prime” mortgages. But Obama deliberately raised public borrowing, with large “stimulus” spending on infrastructure, to deliver a swift return to overall growth. Without this growth household incomes can’t rise, and private debts can’t be repaid.</p>
<p>A quicker and stronger recovery has accordingly brought down American household debt: despite <a href="http://www.bloomberg.com/news/2013-11-14/household-debt-in-u-s-climbed-1-1-in-third-quarter-fed-says.html">fluctuations</a>, it is still US$1.4 trillion dollars lower than its 2008 high. </p>
<p>The two-year interruption to UK growth in 2011-12, soon to be forgotten amid the pre-election recovery, could return to haunt whoever is elected in 2015. Growth first stopped in 2008 because a fall in house prices undermined households’ ability to repay loans, and banks’ ability to go on making them repay. That stumble became a dive when the “credit crunch” amplified things, causing a slump in private consumption and investment that might have been far deeper without a rise in public debt. </p>
<p>The problem for Osborne (and his successors) is that on present trends, private and public debt will not have been brought back down before interest rates start rising. The house-price and private spending recovery could encounter a second reversal. And this time, caught with its debts up and its credit ratings down, the government may lack the capacity to counter the downturn the way the Americans did.</p><img src="https://counter.theconversation.com/content/21201/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Household debt in the UK recently hit a record high, surpassing the previous peak reached in September 2008. That was the month when Lehman Brothers collapsed, sparking off the global financial crisis…Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/198632013-11-06T06:31:07Z2013-11-06T06:31:07ZLet them eat credit! Payday lending is a sign of the times<figure><img src="https://images.theconversation.com/files/34462/original/qmm2rfhf-1383673650.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Chocolate credit crunch cake?</span> <span class="attribution"><span class="source">StephenMcleod</span></span></figcaption></figure><p>The age of austerity exposes the severe failings of British commitment to growth dependent on the financial sector, in particular the problems created by excess indebtedness. Of course, the coalition government in the UK takes every opportunity to point out the inherent economic problems associated with high public debt levels, evoking metaphors of the household “living beyond its means” or “<a href="http://speri.dept.shef.ac.uk/2013/02/13/blaming-bankers-accepting-austerity/">maxing out its credit card</a>”.</p>
<p>Yet, for all the political theatrics about public borrowing, the government seems perfectly content for its citizens to borrow ever more (at much higher cost) in order make up a difference brought about by cuts to public services and the rising cost-of-living. Apparently we must borrow to push and pull the economy out of the doldrums, because government and industry will not.</p>
<p>Payday lending is the quintessential example of the failures of the British political elite to understand (let alone do something about) the scale and scope of the problems facing the economy. The astronomical growth of the industry since the onset of austerity is perhaps illustrative enough.</p>
<p>Admittedly, the re-branded Financial Conduct Authority (FCA) is proposing modest new regulations to curtail the worst practices of this industry. A very small step in the right direction. However, light touch regulation of financial services is seen as a <a href="http://www.cityoflondon.gov.uk/business/support-promotion-and-advice/Pages/supporting-city-competitiveness.aspx">cornerstone to national competitiveness</a>, which is why the FCA is tasked with changing the culture of banking rather than <a href="http://www.fca.org.uk/news/firms/consumer-credit-detail">regulating their business models</a>. </p>
<p>Therefore, the FCA will not commit to an interest rate cap on payday lending. It instead advocates more robust affordability checks and a greater role for debt advice charities before an individual takes out a payday loan. More concrete proposals limit the number of times a payday loan can be rolled-over (with the same provider) to two and the ability of lenders to take money directly from customer bank accounts. </p>
<p>This is a sensible start but simply not enough. The Office for Fair Trading (OFT)‘s <a href="http://www.oft.gov.uk/shared_oft/Credit/oft1481.pdf">report on payday lending</a> along with <a href="http://www.amazon.co.uk/Loan-Sharks-Rise-Payday-Lending/dp/1907720545">multiple other accounts</a> already demonstrate how out-of-control the payday lending industry is in the UK.</p>
<h2>Grassroots fightback</h2>
<p>A recent event hosted by the Centre for Economic and Social Inclusion (CESI) brought together key stakeholders and advocacy groups, along with the FCA, to discuss the <a href="http://www.cesi.org.uk/takingonlenders">future of payday lending in Britain</a>. CESI director Damon Gibbon explained how his organisation has been working on the problems with high-cost credit for 15 years with little by way of actual changes to show for it. </p>
<p>Rather than wait for the powers that be to take notice, the CESI event sought to work from the ground up. Civil society groups, trade and credit unions, looked at co-ordinating their work to provide bottom-up alternatives to high-cost lending. </p>
<p>Credit unions offer more socially conscious high-cost credit products. However, too often they are the ambulance sent to rescue the failures of retail banking industry. One representative of a Birmingham-based credit union lambasted the strict regulations that limit their ability to lend to the poorest — especially compared to their payday lending counterparts.</p>
<p>These regulations mean that promoting credit unions will not put a dent in the rapid growth of payday lending; instead what is needed is a real alternative to high cost credit for those without access to mainstream finance.</p>
<p>What is becoming clear is that the fight against payday lending should not only focus on the national financial regulator, especially one designed for light touch regulation. It also needs to involve a coalition of social actors like credit unions, trade unions, charities and church groups as well as free social service providers like the Citizens Advice Bureau and, most importantly, Local Authorities. </p>
<p>The problem so far is not a willingness to do something about payday lending. Rather, it is the hope that someone else will do the heavy lifting. </p>
<h2>Poverty drives demand</h2>
<p>Of course the elephant in the room when debating the minutia of local planning laws and national financial regulation of the payday lending industry is the poverty and desperation <a href="https://theconversation.com/politicians-go-wild-in-wongaland-but-there-are-bigger-fish-to-fry-19089">driving the demand for payday lending</a> in the first place. It is clear it is intimately linked to economic stagnation and the politics of austerity.</p>
<p>However, rather than develop a comprehensive set of policies to get the economy out of the doldrums and provide <a href="http://www.amazon.co.uk/Precariat-New-Dangerous-Class/dp/1849663513">new opportunities for the Precariate</a>, the coalition government supports more high-cost credit for those unable to make ends meet. Essentially, we are seeing debt promoted as a safety-net. </p>
<p>The <a href="https://theconversation.com/short-of-cash-rent-and-food-britons-in-dire-financial-straits-16379">poorest and most desperate Britons</a> are borrowing for food, shelter and basics, and being charged thousands of percent interest rates. Meanwhile the major retail lenders enjoy zero interest rates (sometimes negative rates in real terms). It’s a clear moral outrage, but the coalition government refuses to address the issue in any meaningful way. </p>
<p>On the contrary, while it derides its own borrowing, the government seems perfectly content for society to borrow itself into oblivion.</p><img src="https://counter.theconversation.com/content/19863/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johnna Montgomerie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The age of austerity exposes the severe failings of British commitment to growth dependent on the financial sector, in particular the problems created by excess indebtedness. Of course, the coalition government…Johnna Montgomerie, Lecturer in Economics, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/132452013-04-10T20:41:39Z2013-04-10T20:41:39ZThe truth behind our ‘dangerous’ public debt levels<figure><img src="https://images.theconversation.com/files/22215/original/wdhcvvxx-1365477788.jpg?ixlib=rb-1.1.0&rect=16%2C70%2C950%2C820&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While the Coalition has criticised Australia's public debt levels, it is the country's private debt that is the big issue.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent <a href="http://mpegmedia.abc.net.au/newsradio/audio/20130404-robb.mp3">ABC radio interview</a>. During the interview, Robb claimed growth in public debt was excessive and unsustainable, and accused Treasurer Wayne Swan of improperly representing the government’s current position on the public debt.</p>
<p>That public debt may constitute a problem is a familiar refrain from the conservative side of politics and economics. Many no doubt remember Howard and Costello’s incessant criticisms of the Keating government’s management of public finances when they took power in 1996, blaming them for being bad economic managers. The Coalition government certainly hasn’t let Labor forget this.</p>
<p>When discussing public debt, it makes sense to compare it to the size of the economy, or GDP (Gross Domestic Product). Quoting absolute figures is not sufficient to understanding the scale of any debt (see here for a <a href="http://www.brisbanetimes.com.au/opinion/politics/cure-for-a-bloated-public-sector-20130404-2h9f8.html">bad example</a>). GDP represents the size of a country’s income, though, of course, governments can only commandeer a portion of that income through taxation. The following figure displays the commonwealth government’s debt since Federation.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>In its first decade, the government had no debt before piling it on to finance Australia’s involvement in World War I. The period 1914 to 1918 represented the largest growth period by far in federal government debt (the second largest occurred in 2009 to combat the effects of the Global Financial Crisis). Interestingly, debt decreased between 1931 and 1937 in absolute terms, certainly the incorrect policy response to an economic depression.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The ratio jumped once more due to World War II, to a record peak of 104% in 1946. A combination of solid repayment and strong GDP growth resulted in the rapid fall of the ratio to a low of 7% in 1974. The ratio would’ve likely fallen even further if not for the mid-1970s recession, requiring the government to debt-spend. The same again occurred during the early 1980s recession.</p>
<p>During the late 1980s, a massive commercial property (land) bubble formed, primarily in Melbourne and Sydney. It burst in 1989 due to the rapid escalation of interest rates to a nominal 18%. The resulting recession forced the Keating government to engage in a spending spree in an attempt to reduce the high unemployment during the early 1990s. Commonwealth debt peaked at 21% in 1996.</p>
<p>Once the Coalition gained power, again a combination of debt repayment and strong GDP growth saw the ratio fall to the lowest point on record, to 5% in 2007 (the Rudd government managed to lower it by a tiny fraction in 2008). Since the onset of the GFC, however, public debt expanded again under the Rudd and Gillard governments, to 16% in 2012.</p>
<p>A better measure of public debt is net rather than gross debt. The federal government doesn’t have liabilities alone; it also owns the debts of others. Subtracting this debt from the government’s shows net debt, which is always smaller than gross debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>An even better indicator of the government’s debt position is its ability to service the debt - the net interest repayment burden - again expressed as a percentage of GDP. The gross or net debt to GDP ratio is not a perfect reflection of the government’s ability to finance its debt due to changes in interest rates at different times.</p>
<p>The following figure shows the net interest repayment burden peaked at 1.7% of GDP in 1987 and 1996, even though the gross and net debt to GDP ratios were higher in 1996 than 1987. The difference is due to higher interest rates during the 1980s.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>What matters for countries with high levels of government debt is how high the net interest repayment burden is. This separates the US and Japan – countries with a relatively high level of government debt – from the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain).</p>
<p>The federal government is currently in an excellent financial position. Even if the gross and net debt to GDP ratios were to rise, this does not necessarily translate into higher net interest repayments if the RBA further cuts interest rates from already historical lows and purchases government bonds. The federal government has one of the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/nationaldebt">lowest debt burdens</a> in the world.</p>
<p>Similar trends to the federal government public debt to GDP ratio is found in aggregate state and local government debt. From the 1850s through to 1890, colonial governments used debt to finance the construction of infrastructure. Tax revenue comprised a paltry amount of public finance (from 2% to 5% of GDP).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The surge in the ratio from 1890 onwards was not so much due to state and local government spending to offset the effects of the depression, but rather due to falling GDP. For Australia, this depression was economically worse than that of the <a href="http://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf">Great Depression</a> of the 1930s. A similar spike occurred during the 1930s.</p>
<p>Unfortunately, data on aggregate state and local governments were not continued after 1982 in the sources used to compose the figures. Parliamentary Library <a href="http://www.aph.gov.au/binaries/library/pubs/bn/eco/grossandnetdebt.pdf">analysis provides</a> some data on current state and territory net debt, again showing the debt burden is certainly not onerous. Gross foreign public debt <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/MSB/65">sits comfortably</a> at 20.7% of GDP.</p>
<p>Currently, public debt at all levels of government is tiny by historical standards and is certainly sustainable. The fashionable idea often repeated these days that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WWII era, governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt.</p>
<p>The real debt problem Robb has ignored is the colossal levels of debt that now saturates every part of the private sector. Private debt as a proportion of GDP is overwhelmingly larger than public debt. Personal debt is 9%, mortgage debt at 84%, and non-financial business debt is at 50%, for a total of 143%. A McKinsey and Co report estimates the <a href="http://www.mckinsey.com/insights/global_capital_markets/uneven_progress_on_the_path_to_growth">non-banking financial sector</a> debt at 91%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Private debt is different to public debt. The historic record shows it is often used to speculate on assets prices, typically stocks and real estate, creating one bubble after another. Both the 1890s and 1930s depressions were caused by bursting commercial property bubbles, reflected in the sharp rise in the business debt to GDP ratios in the decade before both depressions.</p>
<p>A primary cause of the mid-1970s, early 1980s and early 1990s recessions were the bursting of smaller commercial and residential bubbles, financed by rising business and mortgage debt. The total private debt to GDP ratio reached a historical high of 158% in 2008, on an immense rise in household debt (mostly mortgage debt), driving the <a href="http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/">largest housing bubble</a> on record.</p>
<p>Australia’s history shows increases in the public debt to GDP ratio have two causes: World Wars (1914-18 and 1939-45) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008.</p>
<p>An interesting point to note is the Coalition’s criticism of the rise in public debt that occurred under the Labor governments during the early 1990s and today. If the positions were reversed, we are supposed to believe Coalition governments would sit on their hands during a recession and GFC while unemployment and underutilisation increases, risking votes and consequently their power. In this scenario, Labor would then be denouncing the Coalition for being bad economic managers.</p>
<p>Economist Stephen Koukoulas has noted almost <a href="http://www.marketeconomics.com.au/2024-labor-or-liberal-government-debt">$40 of the $96 billion</a> in debt inherited by the Coalition in 1996 was a leftover from the Fraser government in the early 1980s, when John Howard was treasurer. The recession during this period necessitated an expansion of government debt, though it was hypocritical for the Howard government to criticise Labor for its expansion of public debt when the Coalition acted no differently during an economic downturn.</p>
<p>That public debt has risen once again by a small margin since the onset of the GFC is not sufficient grounds to label it as excessive as Robb has. Thus, these criticisms over public debt have nothing to do with either political party being good or bad economic managers, but rather, is the result of cheap political point scoring, hoping the public doesn’t do its research. </p>
<p>Ultimately, the focus of concern should not be upon the government’s historically and internationally low position of public debt, but upon the immense burden imposed upon the Australian economy by private debt. Once the housing bubble begins to deflate and citizens reduce consumption to focus on debt repayment, the federal and state governments will have no choice but to go deeply into debt to ameliorate falling taxation revenue and higher unemployment.</p>
<p>There is no intrinsic problem with either public or private debt. Both need to be carefully considered to ensure efficient allocations into productive activity. Public debt is not a burden if it is used to produce an income stream to pay down the resulting interest or to enhance productivity, for instance, if invested in infrastructure, health, education, or research. It becomes a problem, however, if used to finance excessive defence spending, bank bailouts, pork-barrel projects and middle-class welfare.</p>
<p>The same goes for private debt. As long as debt finances production, the resulting income streams will be more than enough to pay down the debt. On the other hand, if private debt is used to speculate on stocks and real estate - as has occurred many times in the past - it simply results in a zero-sum game where speculators transfer assets among themselves without enhancing productivity.</p>
<p>Unfortunately, the discourse over debt is almost entirely focused upon public rather than private debt. There is no reason for concern over our relatively low federal or state debt. The real problem is in the major rise in the private debt, primarily within households. This is what commentators should be focusing upon.</p><img src="https://counter.theconversation.com/content/13245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent ABC radio interview. During the interview, Robb claimed growth in public debt was excessive…Philip Soos, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.