Rather obviously, the world in its entirety cannot be in debt, let alone drowning in the stuff

Posted by Tim Congdon in Article Archive | 0 comments

debtDebts have continued to build  up over the last eight years and they have reached such levels in every part of the world that they have become a po- tent cause  for mischief,” according to William  White, former chief  economist at the Bank  for International  Settlements in  an interview for the Daily Telegraph on January 20. According to White, “the situation is worse than it was in 2007.  Our macroeconomic ammunition to fight downturns is essentially all used up.”

White’s pessimism chimes with warnings from Goldman Sachs last year. Andrew Wilson, chief executive of one of its fund management businesses, was reported on May 26, again  in the Daily Telegraph, as saying  that excessive debt represents “a risk to economies” and is a “major issue”. Specifically,  in mature industrial nations populations are ageing  and  the proportion of working-age people to the total population is falling, presenting “us” with the question of how “we” are “going to pay down the huge debt burden”.

The combination of the Bank for International Settlements, Goldman Sachs and the Daily  Telegraph ought to be intellectually overwhelming. But they have  indulged in rhetoric and used words sloppily.  To whom does “us” refer? Who exactly are “we”? And, although the image of “the world drowning in debt” is often invoked, what is it supposed to mean?

The world is usually understood as planet earth with some  land, more ocean  and a population of over seven billion. Rather obviously, the world in this sense—the world in its entirety—cannot be  in  debt, let alone drowning in  the stuff. For that notion to stack up, the world would have to be in hock to other planets. But, science fiction apart, no creditors live on Mars or Venus, or any- where else in “our” galactic neighbourhood. “We”—meaning the earth’s population— cannot pay down  “our” debt burden to financiers elsewhere in the solar system.

The first-person plural is being used in a mischievous and lazy way, as if from a pulpit, to make  “us” (that is, everyone) feel guilty. In this context it is a logical impossibility for everyone to be guilty. Yes, some people have debts. But it then follows—necessarily, in evitably,  logically—that other people have assets which  are claims  on the people with debt. For the world as a whole, the debts and the credits cancel  out, and  no  net debt is owed.  The  world’s population consists of debtors and creditors.

Companies and government have debts, but all  companies are legal  contrivances with identically equal assets and liabilities, and a solvent corporate sector has no net obligations. Governments  may  borrow  and have large debts to the citizens, but citizens are also taxpayers and are therefore responsible for paying the taxes that are needed to honour  the  debts. Viewed  in  the round, bondholders’ claims  and taxpayers’ obligations cancel out. To sum every sector’s debt and then to lament the “massive” debt of the nation is a blunder arising from grotesque double-counting.

Let it be immediately conceded that the equivalence of debts and  credits does  not mean that debtors can always pay creditors in full. Abundant evidence is available to show that societies with large public debts can have difficulty raising taxes to meet bondholders’ claims.  Less than four years ago the Greek government reneged on its bonds, in the larg- est sovereign default in history. But even in Greece the nation’s true wealth—its land, its people,  its infrastructure and  dwellings, its plant and equipment, and its magnificent ancient culture and  less  magnificent modern institutions—remains very much in being.

The debt doomsters go too far. Totalling the debts of the economy’s sectors to arrive at a figure “we” owe to outer space is nonsensical. It should instead be emphasised that rising ratios of debt to national output are experienced  in all free-market nations as their economies become more  developed. When  private sector agents borrow, their main purpose is sensible: to acquire an asset from which  they expect to enjoy  a healthy return. Debtors are in a sustainable position if the value of their assets is a multiple of the amounts they have borrowed. Critically, national wealth in a typical European nation is six, seven  or eight times national income, whereas the ratio of household debt to income is generally under two.

Further, the ability to service debt from income—in other words, to pay the interest on the loans—depends on the rate of interest as well as the level of debt. Although the ratio of public debt to national income has risen in most countries since 2007, the ratio of debt interest to national income has fallen practically  everywhere.  The   world  as  a whole  is not “drowning in  debt”, and  the Bank  for International Settlements, Goldman Sachs, the Daily Telegraph and far too many  others should stop scaremongering about the subject.

Published in Standpoint Magazine March 2016
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