Less private debt

Society should be less dependent on the creation of private debt and money. Credit regulation should aim to prevent over-indebtedness and credit-fuelled speculative bubbles.

What’s the problem?

Are you deep in debt? Do you know someone that is? Then you probably know that once debt gets beyond a certain point it can dominate and poison your life. Once it gets out of hand, debt overshadows how you live, how you sleep, how you work – it really limits your freedom to live as you choose. And eventually there comes a point when it can never, ever be paid back – someone will have to face a loss.

Something similar is true for the economy as a whole,  and right now overall private debt is unsustainably high. Whether it’s personal, household debt, or company debt – it’s all growing too fast. Unfortunately, in our current system nearly all the money circulating in the economy originates as private debt. This might explain why the graph of global private debt has shown a relentless upward climb for decades, with hardly a blink as chaos erupted around the collapse of Lehman Brothers and others in 2008. Global private debt (so not including government borrowing) is now around USD 100 trillion – even without counting the enormous debts between different financial firms. Basically that’s more money than you and I can ever imagine, and, like Hans Solo, you can probably imagine quite a bit. The system is set up to generate ever more money and ever more debt in pursuit of short term profits – but how long can we carry on like this?

 

What’s so bad about that?

Much like at the personal level too much debt limits our freedom. For example, a government that is always cutting expenditure to repay debt cannot invest in productive initiatives, or technologies to kick start an energy transition. It also leads to bubbles as debt grows in one area of the economy and a boom pushes prices up – very often in housing, as we saw before the crash of 2008. Housing bubbles tend to increase inequality as those with property get richer and those without lose out, and often have to move away from jobs and centres of activity in order to find affordable housing. Bubbles also have to burst at some point, which not only tends to hurt ordinary people disproportionately (the big boys typically get out before the end), but even international organisations like the BIS now say that boom and bust is a wasteful way to grow. Last but not least because the economy is growing more slowly than our debts, financial crises are all but inevitable: if the debts can’t be repaid someone has to take a loss. As the ancients knew, an over-indebted society cannot flourish for long.

It is in the interests of financial firms to create more and more debt. Private debt is now so large compared to our capacity to pay it back that it’s hard to see how it can ever be repaid. Ten years after the crisis we haven’t managed to change our financial system enough to prevent or prepare for such a crisis – the burden will again fall on ordinary people.

 

What’s the alternative?

We need to start by managing the debt descent, just as we are already adjusting to the energy descent. A first step would be to stop creating private debt at such a wild pace and to direct it better to where it is needed, not to fuel speculative bubbles but to invest in long-term infrastructure that sets us on the path to an environmental transition that serves the interests of everyone. We also need tools to regulate and guide credit that will allow us to keep debt at a manageable level and ensure that credit is sensibly allocated, as we have done in the past. Finally, we can go further and look for ways to create money without increasing private debt, an idea that many economists support.  

 

How will it help?

With less private debt, our economy would be fairer and less prone to bubbles and financial crises. It would help to provide credit where society needs it and stop it flowing where it does not. It would also slow the incredible growth of private debt and give us a chance of managing the debt descent as we develop a fairer, more sustainable and resilient economy.  

 

What steps could we take to get started?

  • Give policymakers powers to control the total creation of debt & bank credit money by commercial banks and explore sovereign money options.
  • Change where society lends and invests. Use regulation to incentivise and force lending and investments towards productive, long-term and environmentally beneficial projects and away from speculation.
  • Find ways, new and old, to provide for people’s basic needs without them having to use the private financial system – most importantly provide for housing, health, education & pensions. Find innovative new ways to mix public, co-operative and mutual systems of provision.
  • Remove the tax bias in favour of debt.
  • Fight for less financialisation.