Debt Fuels the Economy but Might Be Leading Us into Another Crash

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Though many people point to the UK as having made one of the strongest recoveries in the world following the financial disaster of 2008, others are taking the Chicken Little route and warning that another crash is just around the corner. Not to give short shrift to the optimists, but there’s something to be said about the sky-is-falling mindset.

American anthropologist, political activist and author David Graeber, formerly a professor at Yale and currently a professor at the London School of Economics, has declared that Britain is indeed headed for another crash. He says the beliefs that our economic growth is sustainable and that budgetary surplus will fix all our problems are “dangerous myths”.

Professor Graeber bases his reasoning on “simple maths”, economic principles that are in every economics textbook and that, he says, nearly everybody knows but nobody really wants to talk about. Graeber calls it the Peter-Paul principle: “the less the government is in debt, the more everybody else is.” It’s a matter of robbing Peter to pay Paul, in other words.

Graeber centers his argument on the relationship between the public sector balance and that of the private sector: when one goes up the other must necessarily go down. If the government – the public sector – says we must act responsibly and pay back the national debt, and then runs a budget surplus, the government is taking more tax money out of the private sector than it’s paying back in. The money must come from somewhere; accordingly if the government runs a surplus the private sector goes into deficit. As the government reduces its debt, the private sector – everyone from individual households to small businesses to giant corporations – must go into debt in exactly that proportion in order to balance their own budgets. Wealth is merely redistributed.

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From the perspective of the average person this is all made more troubling by the fact that when overall private debt goes up it doesn’t hit everyone equally – and who gets hit has very little relationship with fiscal responsibility. “It’s mostly about power,” Graeber says. The wealthy have many ways to get out of paying their debts and consequently, when government debt is transferred to the private sector, “that debt always gets passed down on to those least able to pay it: into middle-class mortgages, payday loans, and so on.”

Imagine a world without debt…

Some folks argue that in a perfect world there would be no debt; families, businesses and governments would balance their budgets and live within their means. Apart from this not being very realistic, Graeber explains that in such a world there wouldn’t be any money. “This is another thing everybody knows but no one really wants to talk about,” he says, explaining that money is debt and banknotes are just so many circulating IOUs. Pounds, he says, are either circulating government debt or they are created by banks by making loans. “That’s where money comes from,” he says, adding that if no one took out any loans at all there wouldn’t be any money and the economy would collapse.

Therefore debt is a necessity, and that debt has to be owned to someone. When governments run up large amounts of debt, this means their creditors hold a lot of government bonds, which pay low rates of interest – and the government taxes the rest of us to pay them off. If the government pays off its debt, essentially it is transferring that debt directly to us as mortgage debt, credit card debt, payday loans and so forth. The money is still owed to the same creditors, who can now collect much higher rates of interest. Unfortunately if all of the debt is pushed on to those least able to pay, something eventually has to give.

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What this means for the rest of us

Even if you don’t buy Graeber’s explanation of macroeconomics, his cautions about the possibility of another crash are worth considering. We’re hearing similar warnings from other experts and observers as well. No lesser entity than the International Monetary Fund (IMF) issued warnings earlier in October 2015 indicating that the world is headed for another financial collapse. But where does this leave the millions of individuals engaged in the day to day struggle just to sustain a decent life? Is the message here that we all need to go further into debt for the greater good or that paying off our own debts will collapse the economy? Of course not – if anything it means precisely the opposite.

You’ve no doubt heard this before, but the truth remains that getting your personal debts under control is one of the soundest things you can do for your own financial future. Sometimes debt is unavoidable, and acquiring credit or a loan can get you over a financial hump or can even help you improve your standard of living. The trick is to leverage debt responsibly and not simply accept it as a way of life for the long term.

One problem that may be obvious, particularly to those still trying to recover from the last crash, is that if one has a troubled financial history, obtaining new credit or some types of conventional loans can be difficult. Even so there may very well be workable options for you, perhaps a small short-term loan like the aforementioned payday loan that doesn’t require a credit check. This can be a good solution in certain circumstances. However it’s very important to research all of your choices and compare what is available so you can get the best rates. Consider what you can really afford and if you’re going to be able to pay it back within the allotted time.

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And then make up your mind to get out of debt as quickly as possible. We may or may not be headed for another crash, but if you get your own finances in order you will be better prepared to handle things no matter what happens.

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Mark

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