In today’s complex economic landscape, excessive private debt poses significant challenges, especially in major economies like the US and China. Richard Murphy argues that this type of debt is a primary catalyst for financial crises. With private debt levels in both nations nearing 200% of GDP, it raises alarming concerns. Notably, PlutoniumKun suggests that China’s private debt may be even more severe than reported, potentially exceeding Japan’s high levels from the late 1980s real estate and stock market peak.
The risks extend beyond private debt; government and corporate borrowing in foreign currencies also adds to financial instability. Jomo has highlighted ongoing concerns about debt crises in numerous countries within the Global South over the past year.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
In a recent article in the Financial Times, John Plender questions whether public debt in the developed world has reached an “unmanageable” level. His argument is structured as follows:
- Debt levels are increasing.
- Economic growth remains sluggish.
- Interest rates have risen.
- Demographic challenges persist, and
- Inflation can no longer be relied upon to reduce liabilities.
From this, he predicts that stringent bond-market discipline is imminent.
However, this conclusion is not only misguided; the article itself presents evidence contradicting this stance yet ultimately draws the opposite inference.
First, Plender identifies a savings glut and criticizes governments for absorbing it, noting weak growth, excess savings, demand deficits, and rising public deficits. What he fails to acknowledge is that the private sector is not investing sufficiently.
Corporations are stockpiling cash, wealthy households are accumulating financial assets, and pension funds demand “safe” investments. This savings glut necessitates offsets through deficits elsewhere. If the private sector is unwilling to spend, the government must fill the gap. Therefore, public debt is not a sign of irresponsibility but a vital mechanism to prevent systemic collapse. Wynne Godley’s work in the 1990s illustrated this clearly, suggesting that FT writers have overlooked this insight. The increasing government debt resulting from private savings is misrepresented as a problem when it is, in fact, a solution to a failure of private sector investment.
Second, what Plender misses is that the savings glut directly relates to inequality. While he discusses demographics and politics, he sidesteps the pivotal issue of inequality.
When wealth and income concentrate at the top:
- Money ceases to circulate meaningfully.
- Consumption declines relative to output.
- Investment shifts from productive to speculative.
- Demand diminishes, prompting
- Governments to step in to stabilize the economy.
Governments often face accusations of burdening future generations, as Plender suggests, utilizing a household analogy. However, this perspective misrepresents causality. Public debt does not cause stagnation; it results from an economic structure that concentrates income at the top. The real burden is inequality. Debt serves merely as a temporary management tool for its macroeconomic repercussions.
Thirdly, in this context, interest payments effectively incentivize inaction and exacerbate the issue. Plender laments rising interest costs as an external pressure, overlooking the fact that these payments reward those holding surplus wealth who choose not to engage in productive investment. Their inaction leads to a scenario where states reward them for maintaining inactive financial assets instead of investing in housing, energy, transport, or productive capacities.
This presents a core contradiction in Plender’s analysis. Governments are criticized for rising debt while simultaneously expected to pay income to those whose lack of investment necessitated that debt. He fails to recognize that interest payments are not neutral; they facilitate a transfer of wealth, enhancing the savings glut, perpetuating inequality, and ensuring that debt escalates further.
Partly, this misunderstanding arises from Plender’s assumption that markets dictate interest rates. They do not. His conclusions rely on the belief that the markets ultimately establish discipline through yields, which only holds true if central banks choose not to intervene. Government policies set parameters:
The objective is to stabilize yields. Quantitative Easing (QE) demonstrated this, and yield curve control exhibits it daily in Japan. Rising yields do not reflect market judgments; they are policy choices disguised as inevitabilities. Categorizing this as “discipline” is a political decision rather than an economic principle.
Interestingly, Plender references post-1945 Britain’s debt reduction as evidence of market discipline. However, the factors contributing to that decline were:
- Economic growth resumed.
- Inflation reduced real liabilities.
- Interest rates were maintained at low levels through institutional design.
The welfare state did not hinder this; rather, it facilitated stability. The takeaway is not that markets should dominate, but that governments can define the framework guiding debt evolution. Plender overlooks this crucial point.
Ultimately, the pressing issue is not that public debt is unmanageable; rather, it is an economic system where:
- Excess private saving is regarded as positive.
- Inequality’s role as a macroeconomic force is neglected.
- Massive hoarding, coupled with underinvestment, is rewarded with interest payments, and
- Democratic governments are told they must cater to market demands.
The FT article does not portray a crisis of public finance. Instead, it uncovers a deeper crisis in our economic narratives, which insist that governments are the source of the problem, while conveniently ignoring the evidence that highlights the necessity of government intervention.
Plender concludes with a warning about the potential for a crisis akin to that of 1929 due to government debt. While I concur that a crisis may be on the horizon, he misattributes the causes. We face a crisis because the detrimental aspects of neoliberal capitalism have reached a dead end, failing to provide solutions, just as Plender has failed. Unless we redefine the economic narrative and acknowledge the crisis neoliberalism is perpetuating, debt will continue to rise—not due to government recklessness, but because we avoid confronting the underlying issues that Plender articulately highlights but does not fully recognize.
