The business panel of the German Tories couldn't have put it any more clearly: Greece needs to impoverish its citizens if it wants to win aid. And that, my friends, is what debt crises are all about - attacking workers and the poor. The whole carnival of media frenzy and rating agency warnings has nothing to do with the fundamental economic problems faced by Greece, still less with debt, it is about generating an argument to justify a particular set of policies.
Let's take a look for a moment at the Greek "debt crisis". First of all, the whole discourse is embedded in a bias about public vs private debt. While it's true that the accumulation of debt is an indicator of something being out of balance in a national - or international - economic system, it is simply not the case that public debt is worse for an economy than private sector debt. Both, at a certain point, act as drags on further investment and consumption in an economy. But they are only symptoms of a deeper problem having to do with the aging of the system and the long crisis that began with the end of the post-war boom.
To really get a picture of the health of an economy (from the perspective of debt) you have to look at total debt as a percentage of GDP, which is not significantly different between, say, Greece and the USA or Italy and the UK. And when you do this what becomes clear is that there is an inverse relationship between public sector debt and private sector debt. What I mean is that - all things being equal - the elimination of debt in one sector simply moves it to the other sector. These fascinating stats (PDF) from the European Union demonstrate higher rates of savings and household investment in Europe where public sector spending is higher, than in the US. Savings rates and investment rates drop once the austerity budgets post-2008 kick in - simply put, government transferred its debt obligations onto the backs of its private citizens. That's what is at stake in Greece and Spain and Italy and... Toronto. Your tax bill may go down but your service charges go up and there is a net downward pressure on wages, benefits and conditions across the economy as a whole when government lays the boot in to public sector workers.
But this strategy for economic management doesn't work on two fronts. First of all, we - the majority - end up poorer and more indebted. And secondly, in a situation of depressed consumption and weak investment, the government ends up attacking consumption and investment. Even if this ultimately solves underlying "structural problems" - usually code for good wages and benefits - and makes the economy more competitive, this will only happen after a lag period between the end of one form of spending and the entry of private sector spending (assuming, in a situation of high private debt that companies and individuals don't simply pay down debt as opposed to investing). In that gap productive capital - not to mention skilled and experienced workers - are left to rot, unproductive. It can make a downturn even worse than it needs to be - it's like helping a drowning man by pushing his head underwater.
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What is the only method of money-creation in the modern international financial (central banking) system? Debt. How do you pay the debt? With more money. How do you get more money? From even more debt.
Sure you can get the money from someone else, but then that someone is left holding the ever-increasing debt bag. Compound interest is the most powerful force in the universe, and it's working for the big commercial banks. The international economic system is working as designed, an exponential curve just takes some time to get going.
At some point no one wants to lend to a government deeply in debt because they lose trust that they will be repaid.
And that's where these theories that government debt is nothing to be concerned about fall down. The private lenders turn off the taps, and suddenly the government does not have the funds to cut a cheque.
ah, but there's the rub isn't it, Rabbit - the banks won't lend to the governments that don't do their bidding. However, when the banks go belly up because their business practices are corrupt and incompetent - as was the case with the insanely arcane and deeply corrupt shadow banking system that included all sorts of exotic products, derivatives and credit swaps - then governments are expected to pump cash in by the boatload - preferably without any regulatory interference. The same, of course, was the case with the auto manufacturers, etc. Then nobody was worried about government profligacy. So, it's driven by the most astounding hypocrisy imaginable, to say the least.
But there is a deeper issue that I've hinted at but not really developed here for lack of time - and that is the question of why there has been such an increase in total debt over the past forty years. Swapping public for private debt and then back again over and over doesn't get at the problem and merely delays the day of reckoning. The short answer is that the rate of profit - the return on investment - in productive industries has been relatively stagnant since the 1970s and profits have only been bolstered by an increasing turn to debt on the one hand and speculative investment (gambling) on the other. But this saps the strength of the system further and becomes a self-reinforcing cycle that can't be broken by tinkering with the system. In my view, a cataclysmic resetting of the system will be necessary. That will either be on the terms of the producers - i.e. the working class - or it will be on the terms of the ruling class. And we know what their "resetting" of the system looks like - massive pauperisation of working people (as the German Tory bosses argue in the link I've provided), war, imperialism and other forms of destruction of capital to create the space for further expansion. It wouldn't be the first time...
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