You are here: Members » The problem is private debt
Since I am still sick, I am going to do a series of short posts until I feel well enough for longer-form stuff.
Here I just want to mention the Paul Ryan budget, which looks to balance the US budget via budget cuts. Now I get the ideological bias against big government and the corollary that government spending should be held in check for this reason. That’s a philosophical or ideological view. I get that. But what is always disconcerting for me is how it’s not the ideological point that leads. Rather it is the false economic narrative.
Why does the federal government need to balance its books? Where does the money come from that the government spends? Whose income gets cut when spending gets cut? These are a few of the questions we should be asking when thinking about cutting or raising taxes. My view is that government deficits should be economically endogenous, meaning that they are the outcome that results from private sector savings and investment decisions and public sector policy choices. The deficit is not a goal. Making it a goal of policy makes policy an exogenous variable and brings uncertainty and pro-cyclicality into the business cycle.
Moreover, private debt is the real problem in Europe and North America. What has happened over the last generation is that households and businesses loaded up on debt as interest rates declined. Policy makers did not allow this increase in debt to fully unwind during cyclical downturns, and this created a secular increase in debt levels throughout most private sector economies in Europe and North America. The result now, with interest rates at their lowest levels, is that there is no room for maneuver. Either private debt level have to rise more for the credit accelerator to boost economic growth or the government takes up the slack or we simply don’t grow.
Just as targeting deficits amplifies business cycle volatility, setting policy to counteract deleveraging also has distortionary effects by socialising losses and loading up what was private debt onto the public sector. Call it an non-target specific catch all bailout because the effect is the same as targeted bailouts in that private debtors are relieved of their debt burden by government’s taking it over. Now some of this is inevitable as the private sector net saves and induces a public deficit. However, a lot of it is unnecessary because the answer lies in reducing private debt via writedowns, defaults, debt forgiveness or debt jubilee. Debts that cannot be repaid won’t be and there is no sense in trying to repay them. It’s better to clear the decks and move forward.
That’s my general comment here. The reason I make it is because that’s not how these things are likely to get solved. We are likely to continue to see loss socialization, bailouts and deficit fetishism for some time to come. And the result will be low growth and susceptibility to recession until the private debt levels have been reduced to less systemically challenging levels. This is the backdrop for a secular bear market, not a secular bull market. So I do expect multiples to expand now during the cyclical upturn as they have done. But I also expect the next downturn to have an unusually severe negative impact on multiples, bringing stock prices down by a considerable amount.
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
Like us on Facebook
Follow Edward on Twitter
- When do we decide that Europe must restructure much of its debt?
- How to look at the Greece bailout deal
- Negotiating strategies and political constraints regarding Greece
- A decision-tree framework for thinking about the Greek – Troika negotiations
- Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece
- Syriza and the French indemnity of 1871-73
- Gauging the financial crisis end game
- Why quantitative easing and negative interest rates will fail
- Pie in the Sky
- Yanis Varoufakis on fiscal waterboarding and Ponzi austerity
- The convergence of safe asset yields toward zero
- Interview on Chinese CPI and PPI data for December
- Russia, Oil, China and the Dollar
- A Brave New World
- My reading of the FT on China’s “turning away from the dollar”
- How might a China slowdown affect the world?
- Consumption taxes, inflation and low wage growth in Japan lead to recession
- Central banks, inflation, currency wars and the Japanese experiment
- Banks, Japanese trade, the currency wars and deflation
- Abenomics 2.0 – Just What Are They Trying To Achieve?
-  Boom Bust on the FREAK bug, Tinder, Apple Pay and Sling TV
-  Eichengreen, Galbraith on the Fed and the US economy
-  Infrastructure spending in America and trouble in Ukraine
-  On Net Neutrality and ‘the arrogance of the Federal Reserve’
-  Greece is the perfect example of debt deflation
- Jim Rickards on currency wars and QE
- Richard Werner on quantitative easing and central banks
-  Galbraith, Magnus: Greece cannot pay debts, Europe ad hoc + dysfunctional
- Warren Mosler on Greece
- Marshall Auerback on Greece and Japan