Unsustainable debt

the burden of debt

the burden of debt

Islam and Judaism warned against debt. It was seen as exploitation.

In the Middle Ages a Jubilee Year, every Seven Years, debt was written off.

Today, debt is fuelling three types of activities:

  • investment and expansion
  • consumerism
  • everyday living

You borrow money to invest in the manufacture of widgets, you sell more widgets, the debt is paid off.

This is seen as good debt. But is it?

Let us assume all debt is good debt. You borrow at 10% interest to make your widgets. You will have to grow in excess of 10% to repay the interest, as will everyone else. But the economy is not growing at 10%, thus the debt is not repaid, cannot be repaid. More money may be borrowed to service the debt. Borrowing more money, only makes sense if there is a temporary hiccup in the growth, but if widgets no longer in fashion, fewer people buying widgets, it simply transfers to the future. If the debt unpayble, either there will be a default and the debt written off, or assets of the debtor are seized.

Borrow to consume, is seen as bad debt. There is no contribution to the economy, other than output is being consumed.

Many people are now in the third category, less than minimum wage, unable to pay for food or rent or heating, they are borrowing to pay their everyday living expenses, often at extremely extortionate interest rates of 5,000% a year.

In the 1960s, household debt in the UK was 25% of household income, currently it is 150% of household income, by 2020 it is forecast to rise to 180% of household income.

Government debt is also rising, as is corporate debt.

Debt is used to subjugate countries as we have seen with Greece.

Bank rate as set by Central Banks is at a historical low. What happens when it rises?

Quantitative Easing failed, it had little impact on the real economy, it went into the pockets of the rich and inflated the already obscene bonuses of the bankers.

Handing money to the rich has little impact on the real economy, they do not spend money, they hoard money, or they lend it to the poor.

50 year long Kondratieff Wave. In the first 25 years growth, investment in industry. In the second 25 years, money is lent as debt, not invested. In the last 25 years, decline, economic crisis.

Growing inequality generates more debt, debt widens inequality.

We are now in the same situation we were before the banks collapsed in 2008, only now there is no money to bail them out. Worldwide we have been injecting trillions of dollars into the system, and it has made very little difference.

A car manufacture employs people to make cars. The workers are well paid. It buys from suppliers, they in turn employ people who are well paid.

If there is the demand, the car maker builds a second factory, employs more people, produces more cars.

The well paid people, spend their money, generating more employment.

We used to have a prosperous working class, skilled workers, they had money in their pockets. Henry Ford used to boast that he paid his workers sufficiently well that they could afford to buy the cars they made. Now we have zero-hours, minimum wage, de-skilled workers, who can only make do through tax credits, food banks and pay day loans.

A skilled worker, through his labour, contributes to the profit of his employer. A single mother reliant upon benefits, pay day loans, contributes more in profit to the pay day lenders.

We are now in a different ball game. The marginal cost of things is dropping to zero. The marginal cost of information, of software, of digital music, of e-books is zero.

I can cut and paste from an article, I can repost an entire article, I can copy software, music, a film. It has cost me nothing to do so.

Bandcamp turns this into a virtue. People can download for free, or if not, can share for free, pay what they think the album or song is worth.

If the demand for any of the digital goods increases, there is no requirement to employ more people. There is no requirement to build more factories, indeed we do not need any factories. All we need is a server.

Making money on information is also difficult. There is abundance, not scarcity, and it is only possible to make money by creating artificial scarcity through intellectual property rights, which stifle innovation and creativity.

The system functions, or malfunctions, by creating artificial scarcity out of what would otherwise be abundant, for example intellectual property rights or monopolies.

Sunshine is abundant, the marginal cost of capturing is zero, Big Oil, keeps us on fossil fuels.

Strawberry Fair, a folk song, no one owns, artists have adapted, modified, improvised.

If Jewelia records an album. Creative work has taken place, she may perform, work on editing, mixing, mastering, maybe employed facilities of a studio.

She then uploads to bandcamp. No matter how many downloads, free or paid for, Jewelia has to do no more work, other than maybe perform a few gigs on the back of her recording, keep her fans informed of future works.

We have hit the limits to growth.

We used to expand into new markets, through colonisation. We can through innovation. The iPhone created a market for smart phones, iPad for tablets.

We can enclose the commons, privatise what was a social good. Childcare used to be friends and family, now we pay. Women pay to have their nails painted in a nail bar rather than paint their own nails. We could make sex work socially acceptable, pay for what was free. Pay to walk the dog. Friends in the park pay each other to push their kids on the swings.

But ultimately, we hit a limit.

If we hit a limit to growth, then debt is unsustainable.


One Response to “Unsustainable debt”

  1. keithpp Says:

    Jeremy Corbyn: What’s his economic plan?

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