You don’t need to be an economist to see what’s coming


So the emperor’s not wearing any clothes.  Everyone in the crowd can see it but no few are saying it.  The US Federal Government is skint (broke, if you are not British).  The Fed  owes an eye-watering US$17.3 trillion to banks, sovereign states and pension funds.  It receives only US$ 2.7 trillion in tax revenue and spends US$3.5 trillion, exceeding income by US$0.8 trillion a year (almost 30% of its income).  The debt to income ratio is 6:1 and increasing. You can read all the approximate numbers on the US Debt Clock website.  I don’t think you need to be an economist to see what’s coming.  

The next debt ceiling crisis is due to hit the US government between March and June this year.  Economists are asking each other “what will happen, how will it all end?”  Will America ever balance the federal budget?  Will the government raise the debt ceiling again, asking the world to lend the US government more money?  Will institutions still lend money to such an indebted nation?  When will tax receipts exceed spending enough to reduce debt? Will this happen before the next recession?  America is effectively bust yet it is in no one’s interest to let it go bust.  The nation will have to be propped up, somehow, or everything everywhere goes pear-shaped.  Economists will have to do all sorts of circus tricks to make it work.

It is too late now, the horse has bolted, but the biblical principle of Jubilee would have helped avoid the scale of the problem.  We can learn lessons from the bible and from history.  In Leviticus 25 we see a newly forming nation-state concerned with controlling debt by making debt forgiveable.  No debt was to be made which could not be paid off before the year of Jubilee.  If someone did fall into unpayable debt, he had to work it off as a bond-slave, but if he had not finished paying the debt, he was set free at the year of Jubilee.  Debts had to be small enough to be cancelled.

The problem of US Federal debt is a cumulative one, there has been no Jubilee.  Excessive bank lending based on rising capital values created a false housing and property market which imploded leaving millions with large debts which had to be paid, cancelled or passed up the chain.  They were passed up the chain.  Many banks then failed so the US Federal Government became the lender of last resort; the US Treasury borrowed over US$400 billion to keep failing banks, insurance groups and companies from going bust.  The US government has been left holding the ticking bomb in a dangerous game of pass the unmanageable debt.

Quantitative easing is one economic circus trick which has maintained asset prices when the real market vanished.  Then the US and other governments in similar situations have tried to keep their economies growing by borrowing to spend.  Cumulative debt has risen to the surface, like bubbles in a bottle of Coke, and there it has consolidated in government bonds.  And so, right now, no one knows how to pay down US Federal debt.  The pressure is building and the cap on the bottle is ready to blow right off.

The lender of last resort is bust but keeps increasing the debt ceiling in the hope that folk will continue to lend.  Where, now, can the debt to go?  What will happen?  Who knows? Whatever happens, I hope that we’ll learn that the accumulation of large, unpayable debts must not be allowed happen again.  We need some form of biblical Jubilee built into the financial system to control debt.  Banks should only lend what can reasonably be expected to be paid back through earnings not capital growth, and debts must be forgiveable on certain date if they turn out to be unpayable.

This is not easy in a world of banking because banks break relationships between lenders and borrowers.  For debt to be forgiveable there needs to be some sort of relationship between the borrower and lender.  Banks are simply agents.  Savers are not inclined to forgive the debt of a third-party stranger.  And being declared bankrupt, with little consequence, means debt defaulters have little conscience when taking money off a third-party saver.  We are all inclined to see the bank itself as the lender or the institution which owes me interest on my savings.  Without a direct relationship we find lenders without pity and borrowers without conscience.

In the mean time, we’ll wait to see where the debt goes.  It can’t just vanish, someone must pay.  It will cost someone dearly, but who?  The pesticide DDT passed up the foodchain until the birds at the top of the chain died.  The debt problem is like DDT, in which case our endebted nations will die.

PS. The UK debt scenario is serious but not as serious as the US when considered in terms of debt to income ratio.  The UK government owes £1.3 trillion, with £612 billion in tax receipts and a budget of £720.  Debt to income is therefore 2:1 and is increasing by £108 billion this year, which is 17.6% of income.

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