It's what's left unsaidAll the talk from politicians, economists and even most journalists is of government debt to GDP ratios. All of the problems of the Eurozone can be solved by bringing down these ratios, or so they tell us. In the UK ours is about 80%. This is high but not disaterous. However what no one is talking about is household debt at 100% of GDP, and private setor debt at 450% of GDP. I want to briefly try to show why this is a much more serious problem.
Imagine the debt market is like a carpark. During the debt fuelled boom of the last few decades since governments deregulated the banks, the loan carpark has been filled up with cars. In order to fit one more car in, we have to wait for one to leave. We can only expand the carpark by building on productive farm land. This is the situation the banks are in now. During the boom they outrageously over-sold loans so that now business generally is far too indebted. Now they are waiting for businesses to pay back loans, though many who borrowed in the artificial boom are failing to pay back in the slump and going bankrupt. While there are some businesses that need venture capital the overall situation means that bank lending interest rates are high - they can't really afford to push the debt levels in the private sector up.
Pumping up a broken systemSo really it won't matter for many years how much money we give banks. They can't rationally ramp up lending. They have to wait for for private debt to come down. How much down? I'm not sure, but something considerably less than 100% of GDP I imagine. If the private sector were to pay back 10% of what they owed per year (which would be 45% of GDP, so it's unlikely to be that high) then after 10 years the would still carry debts of about 175% of current GDP. This is about the level of private debt that existed in the USA on the eve of the First Great Depression.
Meanwhile the banks are happy to accept cash gifts from the government because it helps keep the share holders happy, and the pay the enormous remuneration packages that they offer for driving our economy into a ditch.
Government debt levels in the UK are only about 1/6th of private sector debt. We can of course wait for this debt to be paid off, or for businesses to go bankrupt. But it's going to take an awfully long time. Japan have not yet recovered from their bursting debt bubble of the 1990's. Indeed twenty years later Japan has rising unemployment despite a falling population! We could be looking at a generation of depression.
On it's own this is scary. But even scarier is that non-orthodox economists are pointing to parallels with 1930's Germany and the rise of fascism. The socialists might have won the recent French election for example, but the far-right Front National won a share of the vote which was comparable to the beginning of Hitler's political career. I don't know about anyone else, but looking at Greece I cannot foresee any positive outcome for them. Europe is bailing out Spain's banking system, but nin fact the Spaniards were quite fiscally responsible. Their problem too was massive private sector indebtedness.
Fortunately economists like Steve Keen and Ann Pettifor are talking this problem up and offering solutions. Unfortunately the rescue measures that might make a difference require politicians who can think outside the Neo-Classical box, and who have the courage to stand up to the banks. Such politicians are thin on the ground. However we can take some heart from the sucess of Ann Pettifor's Debt Jubilee for developing nations which enabled £350 billion of debts to be written off. But the future looks very uncertain at present, and can only get worse in the short term.