Newsnight a couple of days ago had a discussion with Gillian Tett, Ann Pettifor, and Louis Cooper. Linked to the discussion were a dozen charts by top economists, which they thought described the current situation. I want to highlight three of these charts.
The first chart is that, which Ann Pettifor focussed on. It shows the extent of Private Sector debt in the UK. For nearly two years, all we have heard from politicians, and from the media is a discussion about how bad Public Sector Debt in the UK is. In fact, as I pointed out a long time ago - UK Debt The Facts - at around 70% of GDP, Public Sector Debt is not at all at historically high levels. During other periods, when the economy needed to invest large amounts to build infrastructure – for example during the Industrial Revolution, when it was necessary to build roads, canals, etc., and after WWII, when it was necessary to nationalise core industries, and set up the NHS – the Debt to GDP ration rose to 250%, and was paid back out of the subsequent growth of the economy.
What Pettifor's chart shows is that the real problem is not Public Debt, but Private Debt. The Chart shows total private debt standing at 450% of GDP. It is divided into three components. It shows the debt of non-financial companies as equal to around 100% of GDP. In other words this is the debt of companies producing goods and services. Given that large companies tend to raise most of their requirements for longer term Capital via the issue of Shares and Bonds, and given that many large companies actually have built up considerable cash balances on the Balance Sheets over the last couple of decades, we can guess that most of this debt is owed by small and medium sized businesses, who will be the first to get squeezed as the economy contracts under the weight of austerity measures, and rising inflation due to excessive money printing by the Bank of England.
Secondly, the figure for household debt also stands at around 100% of GDP. This is debt built up in mortgages, Student Loan debt, Credit Card Debt, Store Card debt, and it seems increasingly debt owed to usurers involved in providing Pay Day Loans. As with the non-financial business debt, this hides a division. At the same time that there is this huge amount of debt, there are other households with savings. The average household savings in the UK is around £30,000, and approximately 30% of the population have net wealth of more than £500,000. Of course, it is possible within a single household for their to be both debt and savings. A household may have a mortgage, and yet have savings in ISA's etc. Yet, its likely that a large part of this debt will be held by people who have little in the way of savings, as a buffer to use if the need to cover this debt arises. In fact, given that its reported that around 3.5 million people are likely to resort to Pay Day Loans to cover their expenses over Christmas, and many are known to roll over these loans at rates of up to 4,000% p.a. we can also guess that a much larger number than this are barely managing to cover their expenses using more normal forms of credit. The data on the number of people whose income runs out before the end of the month, backs up that assumption.
Its clear to see then why the Government has been so keen to keep interest rates low. A huge overhang of household and small company debt threatens to engulf the economy. In the same way that Greece faces insolvency, because its assets and income is not sufficient to cover its debts, and because austerity is making that worse rather than better, as it causes the potential for income growth to fall, so a huge number of households and small businesses face insolvency for the same reasons. But, the debts of the latter make the debts of Greece pale in significance. The only thing preventing these households and small businesses collapsing into insolvency, is the fact that the majority are holding on to some income, and because the interest rates they face on their debts are at unsustainably low levels, and in part, this is made possible by borrowing against property, whose real value is also in a massive bubble. Any change in any of those factors threatens to create an unstoppable avalanche of debt. I have already set out in previous blog posts why the property bubble is set to burst. House prices could fall by anything up to 80%, when it does. Indeed, if IMF Chief, Christine Lagarde is right, in her recent pronouncements that, if current policies persist, the world faces a 1930's style Depression, then they could fall even more than that.
Once house prices start to fall dramatically – selling prices are already about 30% below asking prices, and have themselves fallen by around 10% in the last year – then Banks will stop being as lenient on arrears as they are currently. Forced selling will produce a rapid collapse as it has done in the US, Ireland and elsewhere, where prices fell by more than 60%. Any possibility of borrowing against those assets will cease. But, also given the size of that collapse, and the amount of debt outstanding, it will be the Banks and Building Societies themselves that will find that they are simply unable to recover the money lent. That is why, the Credit Ratings Agencies almost every week bring out another list of Banks that they are downgrading, as they have done in the last couple of days. The importance of that can be seen by the third component of the chart, which is the debt of the financial companies themselves.
Again, this has a two fold character. On the one hand the debts of the household and non-financial business sector will show up as assets of those Financial Companies, but in the modern economy, the lending undertaken by the latter is not done out of deposits by savers. In previous decades, in order to get a mortgage, it was necessary not only to show that you had sufficient income to pay back the loan, but that you were able to save from that income. To be granted a mortgage Building Societies required that you had saved with them for several years, and had a reasonable amount of around 20%, via such savings to put down as a deposit on the house you were buying. After the deregulation of Financial Services by Thatcher in the 1980's, that all changed. In order to compensate for falling wages, as a means of keeping up the level of consumer spending, people were encouraged not to save, but to borrow. Thatcher's Government, from the late 1980's on, began to print large amounts of money to satisfy the demand for all this credit. A policy that all subsequent Governments continued, and which stoked the current property bubble. But, the other side of this is that without large amounts of savings out of which to provide these loans and mortgages, the Banks and Building Societies are themselves dependent upon borrowing money in the Money markets in order to be able to lend it out again. This is what brought down Northern Rock, and then the US banks during the sub-prime crisis.
As the chart shows this debt amounts to around 250% of GDP. The cascade effect is clear. If households and businesses begin to default on their debts, then the Banks and Finance houses that have made these loans, will then begin to default on their debts too. Yet, as Ann Pettifor said, this much greater threat to the economy from Private Sector debt is rarely mentioned by Government or the media. The focus on Public Sector debt is clearly ideological. In fact, rather than attempting to reduce this Private Sector debt, the Government is busy trying to bolster it. It is encouraging students to take on vast amounts of debt, which current patterns of Graduate employment, and unemployment, suggests they will never finish paying back. The Government's recent measures in relation to housing are also designed not to address the real problem of the housing bubble, to encourage first-time buyers to go into further debt in order to buy massively over-priced houses.
The other two charts show just how significant this is. The second chart shows that one of the fundamental requirements for people and businesses to be able to pay back that debt is missing. Just as Greece, and other economies need strong economic growth, to be able to have any chance of repaying their debt, so, individuals and firms need strong growth in order that they can see their incomes rising. But, contrary to the Governments assurances that its austerity measures would see a rush of Capital into the private sector, creating rapid economic growth, the reality is that, as in most other economies where austerity has been adopted, the opposite is the case. The only economy where growth looks likely, where austerity measures have been implemented is Ireland. But, its growth is despite the austerity not because of it! The austerity measures there also tanked economic growth. Growth is now recovering in Ireland for the simple reason that it has a reasonably large sector of its economy that has been modernised, that is involved in high-tech, high-value production that is globally competitive. Had it not already had that, it is unlikely that investors would have flooded to establish such businesses, in a climate of economic retrenchment.
In fact, what this chart put forward by Andrew Lillico demonstrates is that the trend growth rate of the UK Economy looks set to decline sharply even from its historic average!
Lillico comments that the message of the chart is that the UK economy will struggle to grow by more than 1% p.a. over the next decade. If that were to be the case, then the consequences are pretty dire. Historically, productivity in the UK has risen by around 2% p.a. In addition, we know that the UK population is rising. If the economy were to grow by only 1% p.a. then unemployment would be set to rise by more than 1% p.a. over the next decade! But, such a low level of economic growth would mean that large numbers of those small and medium sized businesses with large debts, would find it impossible to grow their earnings at anything like the rate necessary to service them, given the inevitability that rising inflation, will at some point mean that interest rates have to rise. More immediately, not only will sharply rising levels of unemployment mean that large numbers find their household debts rising quickly – I saw a headline recently that said that the City Council's Rent Debts had doubled! - but, such slow growth will mean that household incomes will be severely restrained, meaning that a further downward twist in bursting the property bubble is inevitable.
The final chart, demonstrates just how imminent that might be.
This chart put forward by Louise Cooper from BGC Partners shows that Credit Crunch 2 is already upon us. As she says, it shows that it is now costing Banks a full 1% more to borrow short term in the markets than it was in the Summer, up from 0.2%. Yet, as she continues, even at these rates, many banks cannot find anyone to lend to them. So, whatever, the bank of England, or other central Banks decide in relation to official interest rates, the reality is that the Banks and finance Houses themselves are facing a Credit Crunch. That is at a time when they are also being told that they have to bolster their Core 1 assets, which means that they will provide less liquidity to households, and businesses, and will sharply increase the interest rates on the loans and mortgages they have already provided.
So, both households and businesses, who are both massively in debt, and whose debts make the Public debt look minor, are facing a double whammy. Increasingly squeezed income as a result of the effects of austerity, and higher interest rates on those debts, as a result of the Credit Crunch, and level of indebtedness of the banks and finance houses themselves. Moreover, as I have pointed out before the nature of private debt is much more serious than Public debt. State's own printing presses, which mean they can simply print money tokens with which they can repay their debts – and at some point, the markets will force the ECB to do that too, whatever Merkel's current opposition – but households and businesses cannot do that. Their only alternative when they can't pay is to go bankrupt, which then threatens to bankrupt those to whom they owe the money.
In his analysis of the crises of 1847 and 1857, Marx demonstrated that the crises were being caused by the implementation of a wrong and damaging policy by the Bank of England. That policy determined by the 1844 Bank Act, once suspended saw the crises quickly ended. It is quite clear that the austerity policies being adopted in the UK by the Liberal-Tories, and foisted upon the economies of Greece, Spain, Portugal, Ireland, Italy and elsewhere, as well as being proposed by the Republicans and Tea Party in the US, are equally wrong and damaging. Even in the terms of Capitalist rationality they are irrational. As Lagarde says, if the current policies are continued then, at least Europe, including Britain, faces a 1930's style Depression.
It is no task of Marxists to advise the Capitalists on the policies they should adopt. Whether, they adopt Keynesianism or Monetarism, fiscal expansion or austerity, the basic contradictions of Capitalism will remain, and a crisis resolved or avoided today will re-appear as a more severe crisis at another time. Our solution is neither form of Capitalist solution, but the overthrow of the existing chaotic, and crisis ridden system of capitalism, and its replacement with Socialism, based upon a Co-operative Commonwealth in which the means of production are directly owned and controlled by the workers, who organise production to meet the needs of society rather than for the sake of profit. But, until that time, we are not indifferent as to which solutions the capitalists adopt. Marx and Engels described this approach in their writings on the question of Free Trade v Protectionism. In his Introduction to the pamphlet they wrote on this issue, Engels wrote,
“That was the time of the Brussels Congress, the time when Marx prepared the speech in question. While recognizing that protection may still, under certain circumstances, for instance in the Germany of 1847, be of advantage to the manufacturing capitalists; while proving that Free Trade was not the panacea for all the evils under which the working class suffered, and might even aggravate them; he pronounces, ultimately and on principle, in favor of Free Trade."
As Marx makes clear, the best conditions for workers, is when Capital is expanding. It is during those times that the demand for Labour Power rises, and where, therefore, workers are able to secure higher wages, are better able to focus and rebuild their organisations and so on. These are vital conditions for workers in preparing to put forward their own forms of property, their own democracy, their own State as an alternative to those of the bosses. We cannot, therefore, be agnostic in these issues. Our focus has to be to help the workers to resist austerity, and thereby make that option less appealing to Capital, and the bourgeois politicians. At the same time, we should illustrate that the bourgeois politicians claims that “There is no alternative” are wrong, even within the terms of the existing system. That does not relieve us of the duty to explain to workers that such solutions are only palliatives, it does mean we are not left in the position of mere revolutionary phrase mongers, whose only solution is always “Revolution Now”.