I was looking for a chart of private debt by year for the USA. (Why? Watching The Flaw on Link TV they had it, and I think there is something important in what it says…)
But I haven’t found that chart yet. (Though I only looked for a little while).
Instead, I found one that illustrates another rather important part of the Global Economic Problem:
There are a couple of interesting things that can be seen in this chart. The most striking, in my opinion, is that long top bar of Japan. Haven’t heard about Japan as part of the “Debt Crisis”, have you?
Scan on down to Ireland and it has a longer bar, in total, but the blue part at the start of the line, that government part, is smaller. Much smaller. In fact, most of the debt for Ireland comes from the Financial Institutions and Non-Financial Businesses. Typically ‘leverage’ to make money via business is given more ‘slack’ than government debt. Government debt is typically used for consumption (and a lot is wasted or redirected to private pockets…) while private business debt is typically expected to earn more than it costs.
So why is Ireland one of the PIIGS? Largely due to two causes. First, and most obvious, is that when the “Sub-Prime” mortgages-on-nearly-nothing-down bubble collapsed, that “Financial Institutions” part became a threat and burden rather than a profit maker. While the private sector Household debt is also high (too high) and tends to exacerbate the risk to financial institutions, I think that isn’t the biggest “2nd Factor”. Japan has their own currency. They can just print more via an easy money policy to keep interest rates down. Ireland does not.
So for Ireland, as with Portugal, Italy, Spain, and even Greece, their real problem; THE thing that prevents them from managing their debt, is there membership in the Euro Zone. Ireland was able to “clean up” their Financial institutions, so are somewhat off the chopping block with the EU. For the rest of the PIIGS, they have a relatively high public sector debt. More than the UK (though not exceptionally more) yet far less than Japan. The UK and Japan are not seen as major “problems” despite both having total debt bars (as percentage) larger than anyone but Ireland. But both have their own Central Bank and their own currency.
You could argue the case that Greece, with such a small Financial sector debt and with very low non-financial zone debt, is likely “under invested” in productive capacity. That the Public Sector is overwhelming the Private Sector. (The classic Socialism Death Spiral). There’s much to be said for that. Yet it’s pretty clear that, as debt levels go, Japan makes them look irrelevant. Both in percentage levels as shown here, and certainly in absolute levels where the Japanese Yen is a large international currency.
Oddly, on this chart, the USA is hard to distinguish from Germany. That great bastion of Fiscal Responsibility and source of Slush Fund Money in the EU. Spain and Portugal, as well, are completely nondescript. France is in about the same, or worse shape, on the basis of this data.
It is always risky to use one chart, one axis through a single data set, to reach any large conclusions. A whole lot of other things really ought to be looked at. Things like “What is the instantaneous national income?” and “What is the return on capital stock?” Basically, “Is the economy making money and productive?”. Clearly part of the problem with Ireland is that their emphasis on a Financial Industry put them in a big bind when Finance became a dirty word and income to service their debt became an issue. Also, similarly, Greece looks to have too little productive investment to support their public sector. Yet that still leaves France vs Spain and Germany vs The USA as curious examples.
While it’s a ‘bit of a leap’, I think there are two conclusions that can be (tentatively) drawn from this chart.
1) There are a lot more countries with lousy debt postures than just the PIIGS and the global economy is really sick.
2) It’s Good To Own The Bank! Japan, UK, USA… we all have our own currencies. The Central Bank can buy up all the government debt possible and float more currency. There’s never a need to default, and you can set the interest rates nice and low, if desired, to keep debt service costs at any desired level. (Yes, there are other consequences… just not debt service and ability to fund issuance of more debt.) In the EU, someone controls the bank and someone else wants the money. That doesn’t work so well. I would suggest that internal EU political dynamics are more important to the PIIGS crisis than any actual monetary / economic / national debt issues. France and Germany run the EU. Gee, isn’t it amazing that THEY are not among the PIIGS?…
So why am I not all warm and fuzzy about just letting that central bank game play out? Have the PIIGS get their own currencies so they can have the same virtues as the UK, USA, and Japan?
Because I’ve got this creepy feeling that it’s just an extension of time on life support, not a cure.
In just the last few weeks, we’ve had statements from all of them that we’re going to have a lot, and I do mean A LOT, of “quantitative easing”. Japan has been in a stagnant economic state for what, 20 years now? 30? Between 0% and 0.5% interest rates. Lots of “easy money”. Yet they still stagnate. “Easing” has NOT ‘stimulated growth’.
Basically, the real physical economy and ‘facts on the ground’ trump money games.
So now we have the EU, UK, Japan and the USA all taking actions for yet more easy money and Quantitative Easing. Given the Japan precedent , why would we ever expect this to work? It looks to me like we will all just become Japan (those of us with some real productivity) or Argentina (for those without).
Overall, the impression I get is that there are Money Games being played. Either from a sincere belief it will fix things it does not fix, or “for effect” in that someone makes money on this, even if it doesn’t work.
My conflict here is that there’s a lot of “Consensus Economics” that says easing stimulates economic expansion. Yet my core beliefs are that the real economy trumps that in the long run; and we have the Japan experience… If it was as easy as “just set rates low and let The Fed buy bonds” to get economic growth, then any country in the world could have massive growth overnight. Just issue bonds and go…
So, with no more than that as basis (and it is way too little basis) I have this strong suspicion that the new round of “Easing Everywhere Easing For All” is not going to work. That, on a global basis, we’re going to be more like Argentina than Japan, but neither one is a very good model.
We could add another layer to this. Private income rates, and disparities. (The thesis of “The Flaw” and based in part on the Marxist doctrine of the fundamental contradiction of capital; that wealth disparity rises until the poor can’t consume, then the system collapses into the People’s Revolution.) We could ask: “Are we just running out of people with enough money to consume goods?” leading to stagnation of economies. It’s clear that there is a large FUTURE planned expenditures way in excess of the income to support that expenditure.
Those unfunded pensions, unfunded government obligations. We are expecting to consume far more than our income supports. It’s also clear that at present the lower and middle classes are NOT able to buy more (and stimulate the real economy with actual growth producing demand). We’ve been busy supporting our current livestyles on the credit card, then on the home mortgage cash out, and now moving on to a ‘third party via the government’. But that game is reaching an end. The credit cards are full, the house is ‘under water’, and the government is already “levered up” (see chart above…)
So WAS Marx right? Are we reaching that end point of the “contradiction of capital”? Is this what it looks like? Or do we just have a Ship Of State run by a ship of fools, doing Keynesian Easing for way longer than he said it would work (during a crash, not during a recovery) and making non-financial rules that are so stifling that it kills the real economy?
My emotional reaction is that it’s the latter. We’re just strangling the private enterprise system in an effort to turn it into Socialism Lite. Central Planning via massive “Thou Shalt NOT!” regulatory sets that must be massive to define what one thing you are allowed to do by declaring all the others off limits. A “self fulfilling prophecy” by the Progressives / Socialists as they “transform” Government and the economy to their ends.
Yet can it really be that way, given that the same end game seems to be unfolding from Japan, through the EU, to the USA? While I hate to think it, to accept it, I have to allow that it might be possible that Marx had a point. That “graph I can’t find” shows a rise of the percentage of income by the top 1% of the population. It has a strong peak at about 25% just before The Great Depression. Then a drop and it hangs out near 10% through most of the “Glory Years” of the USA, and starts rising again in the late ’70s – 80s and is now back at 25-30%. So if you have 1/3 going to The Rich and another 1/3 going to total government, it doesn’t leave a whole lot to run the economy…
So I’d add Smith’s Corollary to Marx on Capital: BOTH the rich capitalists AND the Government contribute to a crisis of capital by taking large shares, to the point where the economy slows, eventually to stagnate, or decay into revolution.
This captures reality a bit better than Marx, IMHO. Does it really matter if I can’t start my new, novel, Widget Company due to The Rich Evil Bastard owning the bank and the competition and not letting me have room to breath; or if I can’t because the Government Evil Bastard makes regulations that block my ability to breath; or if between them they both just suck up all the money to the point where my customer just can’t buy one anyway and I can’t get money to build a factory?
To my way of thinking, it doesn’t really matter if it’s an EU Regulatory Burden, a Japanese Keiretsu, or a USA Capitalist Monopoly Pig that squashed me and my potential customers. I’m squashed in any case.
What was relatively unique about the big growth times was the lack of large Evil Bastards sucking the air out of the room. Not too big a share to the rich, not too big a share to Government, not too much regulation. In Japan, the Keiretsu system let things be large enough to compete on the global scale, so they grew fast for a while; but the end game is no room for the new kids and new ideas. An ossification once they’ve occupied the space. Similarly, the EU is ossifying under regulations to strangle a moose. The USA is having a “two way” with 2/3 (or more) of the “pie” being split between Government and The Rich, leaving little for everyone else. Basically, the problem is DIS-economies of scale writ large and “Monopoly Power” in organizations. It doesn’t matter if the TooBig Fat Evil Bastard is a Capitalist Pig, a Japanese Keiretsu, or a Socialist Commissar; or even just a fat Ministry Of Central Services. They ALL squash and suppress the emergent behaviour of the “Self Organizing System” of entrepreneurship. Of small business.
And no amount of Quantitative Easing can fix that.